Globalism, Colleges and the Compensation Principle

Given adequate funding, higher education is capable of playing a much greater role in helping displaced people retain their dignity and contribute to the future, argues Richard Romano.

December 5, 2016

The national discussion over the need for colleges and universities to produce better outcomes and be more inclusive is largely focused on the young people who enter the system. Yet we often ignore older workers whose skills are outmoded or no longer in high demand due to the changing economy -- and who are being displaced by technological shifts and the free flow of goods and services among countries.

While hardly anyone argues that improvements in technology should be slowed down, the same cannot be said for a greater integration of the global economy through freer trade. In particular, globalization and its impact on high-wage manufacturing jobs has become a key political issue in Western economies. It is evident that our country as a whole, as well as the higher education system, is doing a poor job of helping displaced workers reintegrate themselves into the economy. Given adequate funding, the system of higher education is capable of playing a greater role in helping them retain their dignity and contribute to the future.

Economists are in near-unanimous agreement that both free trade and technological change have raised the average income in the United States by shifting resources, including labor, from low-productivity industries into higher-productivity -- and therefore higher-wage -- industries and jobs. History shows that, over the long run, this movement of resources from agriculture to manufacturing and then to services has resulted in the gains in productivity that have led to higher living standards.

Writing for The New York Times, Javier Solana and Strobe Talbott also argue that international trade has been a major force in stabilizing world political systems since the end of World War II. To preserve this stability, they call for a restoration of “public support for free and fair trade … through better safety nets as well as ambitious and effective retraining opportunities.”

But the transition toward a more efficient use of world resources has seldom been a smooth one. It is certainly easier to divert steel from the production of tanks to the production of bridges than it is to convert coal miners into computer programmers. From the riots of the Luddites in 19th-century England to Brexit and the American election, it is clear that the increases in income and efficiency have produced both winners and losers. Those left behind are moving the political climate in Europe, and especially in the United States, into an antiglobalism environment.

In a special report on the declining support for internationalism, The Economist provides a spirited defense for the benefits of free trade but it also admits that globalism is on the run “because too little effort and money has been expended on taking care of those who have been hurt by the opening up of markets,” especially in America.

The Compensation Principle

If mainstream economics provides an argument for free trade, it also provides an argument for shifting some of the gains from trade from the winners to the losers. This argument is imbedded in the compensation principle.

That principle is drawn from the theoretical literature in economics that is concerned with advancing the overall well-being of society. It recognizes that the gains from any transaction can have both winners and losers. Improving societal well-being requires the winners to compensate the losers in some mutually agreeable way. The winners can have their gains, or at least most of them, as long as they are willing to support the losers in a way that leaves them the feeling that they are no worse off than when they started. These are people with dreams for their children and mortgages to pay, who have given up their jobs to market forces beyond their control.

That does not necessarily mean that all displaced workers would be restored to their former level of income. Some will not reach that level. Others might be willing to substitute leisure for income or take a less stressful job. And, yes, a few might even welcome the chance to study philosophy or art as they near retirement. For most, however, returning to the labor market will be of prime importance.

The principles laid down by the compensation theory only work if the winners and the losers have equal bargaining power. Since the winners would come out on top if bargaining were left to private markets or the courts, only the government has the ability to insist on a package of compensation that will adequately satisfy the losers. Using its power to tax and regulate, it can, and does, develop policies that transfer income from the winners to the losers.

That said, however, the volume of this transfer is inadequate in the United States, and a more equitable policy would involve a greater use of the higher education system. Not doing more to compensate those left on the sidelines by international trade risks a backlash that threatens our open economic and political systems.

The Organisation for Economic Co-operation and Development recently produced a comparative analysis of the “active labor market policies” of 31 mostly rich countries in its group. Analysis of the impact of these policies showed some success, particularly with younger and more recently unemployed workers. Examples of active policies included job-search assistance, education and training, public sector job creation, relocation allowances, and subsidized employment in the private sector. Each country was ranked according to the percentage of its GDP spent on policies that were designed to get people off benefits and back to work.

At the top of the list was Denmark, which spent 1.8 percent of its GDP in 2013 on active labor market policies, followed by Sweden and Finland. America was third from the bottom with 0.1 percent, ahead of only Chile and Mexico. Getting the United States to the middle of the pack would require us to make six times our current effort. That would place us equal to the effort found in Spain, a much poorer country.

Reaching the middle of the OECD pack, let alone the leaders, would come up against impossible political resistance in the United States. But if benefits were concentrated among those displaced by trade, there might be wider support. America took a stab at this with the Trade Adjustment Assistance (TAA) program enacted in 2002 and amended in 2009. But compared with the European effort, it was a small program with a limited reach. It should be expanded and more generously funded with a greater emphasis on education and training -- and involve a greater use of the higher education system.

Needed: Increased Education and Training

We have learned a lot from TAA and have found that workers benefited more when they sought out the education and training paid for by the program. Community colleges were the biggest providers of this education, and dislocated workers who participated in their programs achieved better employment outcomes than did those participating in other programs.

If America were to invest more in education and training, community colleges might be expected to carry a good deal of this load. But other possibilities exist. The range of possible training sites could be enlarged to include private and public employers. Wage insurance and other income subsidies to both private and public employers could help compensate displaced workers. Displaced workers could be given vouchers, much like Pell Grants, to use at approved training sites. Private employers might pick these up and develop on-site training and apprenticeship programs.

Including the private sector would contribute to the political support for such a program. For workers, the grants would allow a larger range of possibilities and could be used for an extended period to compensate for the gap between the higher-wage jobs lost in manufacturing and the lower wages common in many service jobs. In any program, particular attention needs to be paid to the participation of men in retraining, lest the social and monetary costs of incarceration, drug addiction, poor health and the deterioration of skills drag them and the society down.

None of this need increase the national deficit if we have the political will to transfer more of the gains of free trade from the winners to the losers. Doing anything less will threaten the gains already made and tear at our economic and political fabric.


Richard M. Romano is an economist and director of the Institute for Community College Research at SUNY Broome. He is also an affiliated faculty member at the Cornell Higher Education Research Institute at Cornell University.


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