Adjustment, Part 1: Misdiagnosing the Problem of Economic Mobility

Show Notes

A town renewed: Factory in tiny DeWitt, Nebraska, putting tools on the market again, Omaha World Herald, May 2021

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Transcript

Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the audio before quoting in print and write yeutterinstitute@unl.edu to report any errors. Transcripts will be posted within one week of the show.

Jill O'Donnell: Welcome to Trade Matters, a podcast by the Yeutter Institute at the University of Nebraska-Lincoln. I’m Jill O'Donnell. Our guest today is Grant Aldonas, a longtime voice in U.S. trade policy. His many previous positions in law, business and international economic policy include chief international trade counsel to the Senate Finance Committee and Under Secretary of Commerce for International Trade. This episode is part 1 of a 2-part conversation with Grant. In this episode, we discuss global economic competition and what that means for the American worker. In part 2, we discuss what do to about it by rethinking adjustment assistance.

Grant, thanks so much for being on Trade Matters today.

Grant Aldonas: My pleasure.

Jill O'Donnell: So before we begin, I want to mention to our listeners that you knew Clayton Yeutter well. And you also worked for former Secretary of State George Shultz. And you've described those before as both very formative experiences for you. Could you just comment on that briefly here for us in the Clayton Yeutter Institute of International Trade and Finance, and particularly what you remember about Clayton and how you approached your career and life later on?

Grant Aldonas: Jill, thanks actually for the opportunity. Because both working for George Shultz and with Clayton were instrumental in everything that I did in Washington, and really for two reasons. The first and most important was that honesty and a set of principles, particularly focused on trying to engage and expand human freedom were the goals. Particularly given what America's voice should mean in international affairs. And the second thing was more personal because both of them were very open individuals. Both of them had a sense of humor. Both of them were approachable. And what that said to me, a guy from the Midwest who was working in Washington, was that being a good man, and being honest, and open, and thoughtful, and humorous was going to be okay. And that there was a place for people, indeed a need for people like Clayton now more than ever in my view. But that was something where yeah, he made sure that you knew you could succeed with that honesty that's sort of common in the Midwest, in Washington DC. And that made all the difference.

Jill O'Donnell: Thank you for that reflection on him. And I want to mention something else about Clayton and something that he said many years ago now that I think was just one of many examples that showed how much foresight he had. And this gets into our topic today, which is adjustment and adjusting to the very competitive global economy that we know we live in. But I wonder what we really mean by adjustment and how we define the problem that we're really facing. And back in 1989, Clayton told a group of students in Kansas that the world was changing very rapidly, and they would have to adjust to that. Very prescient. So I want to start by asking you for your thoughts on what do we really mean by adjustment? What is it that we're adjusting to, or that we must adjust to? And you've said before that you think the U.S. has done a poor job of addressing adjustment. And why do you think that's the case too?

Grant Aldonas: Great question. And I appreciate Clayton's prescience because I recall conversations in the late '80s and early '90s that foreshadowed many of the things that we would face certainly when I was back in government at the Finance Committee in the U.S. Senate, and then later on as Under Secretary for International Trade in the Bush administration. But I'm actually going to appeal to my mother rather than Clayton on this point, Jill. Because she was the first woman who always told me that the surest way to come up with the wrong answer was to start with the wrong question. And that is in fact the kind of Midwestern common sense that Clayton always brought to DC. And that's why he was loved and respect there, and it's also why I think Clayton is missed so much today. But to the point is that adjustment is not adjustment simply to the fact that we have liberalized trade over decades.

The truth is adjustment's best understood as a response to economic change. And the economic change we're facing now relates to a race between technology on the one hand and education and training on the other. We've done a poor job of confronting that challenge, first by misdiagnosing the problem and second, by focusing our response on programs like Trade Adjustment Assistance that were never intended to meet a challenge of the scope of which we now confront. So we do face challenges on the trade front. I don't want to deny that. But those challenges really consist of improving the disciplines within the trading system on trade distorting and mercantilist behavior. China's without a doubt the principal culprit. Even while it's also a tremendously important economic opportunity for the Midwest and agriculture in particular. But honestly, the challenge we face from China, the need to improve trade disciplines, pales by comparison to the challenge we face here at home in implementing policies that encourage economic mobility at a time of significant economic change.

And again, I'll appeal to another bit of my mother's wisdom is that you need to keep your side of the street clean before you comment on your neighbors. We haven't done that. And the last four years of protectionist trade policy kind of proves that point. The tariffs that President Trump imposed were really born by American farmers and consumers, not by those in the forbidden city in Beijing, that determined Chinese trade policy. And given that, it's no real surprise the tariffs didn't alter the Chinese approach. But having said that, neither President Trump nor President Biden have really done anything to focus on the challenge we actually face. To the contrary, President Biden has called for worker centric-trade policy that looks much like President Trump's trade policy. And there has been a noticeable lack of attention to the issue of economic adjustment. And I want to be careful right at the beginning Jill to say there's two aspects to this that you have to confront. The first is, are broader economic policies aligned in a way that encourages the upward mobility, the economic mobility of workers? And then secondarily, what would government assistance, what form would that take in terms of an approach? So we've begun by misdiagnosing the problem. We seem to be pursuing a trade policy that doesn't embrace the idea of adjustment, that continues in the Biden administration. And the way we should approach adjustment assistance leaves out the first option entirely in favor of looking at a small program called TAA, neither of which will be designed to actually address what workers need.

Jill O'Donnell: So you very succinctly suggested that we've misdiagnosed the problem. So if that's the case, then I wonder how easy is it ever going to be really for people everywhere, Americans everywhere to understand what it is we're really talking about here? So I wonder if you think a prerequisite for effective adjustment would be a population that understands what the problem is. And I want to quote from a House Ways and Means Committee hearing that was held recently on TAA. And I know you mentioned that's just a very small part of what we're talking about when we talk about adjustment, Trade Adjustment Assistance Program. But this was a hearing on that topic. And the program manager for the state of Oregon's Trade Adjustment Assistance Program Shelly Forsberg said, "The biggest issue why I think things aren't filed is because honestly, workers don't always know why they are being laid off. Oftentimes, by the time it happens, that company is filing bankruptcy. Well, why did they file bankruptcy? They filed because they can't compete." So she's talking about why workers who might be eligible for some assistance, if they're laid off due to trade, don't actually pursue that assistance. So how much onus should be on an individual to look at the world and say, "Here's how I need to adjust. And here's what I should do next"? Or how much should we expect of our companies or of our government to help better define this problem?

Grant Aldonas: Well, let me start by saying that I do think actually the American worker has a better grasp of the challenges they face than people give them credit for. And I think American businessmen and women do too. I think our business leaders do understand that the environment they're in means integrating technology into their operations to remain competitive. They oftentimes face government policies that are an obstacle to adjustment rather than one that fosters adjustment. And they also recognize that their workers to the extent they're going to survive and be competitive are a critical component. At the end of the day in today's world, it's all about human capital rather than the way we've conventionally thought about capital. So the best of American businesses and the best of American workers I think do grasp it.

Now, I think a lot of what goes on in Washington is designed to mislead. It is designed to mislead because there is a political reason for doing so. There's either a way you want issues framed for a political debate or to run on in a campaign. Or there are favorite programs that still have supporters in Washington DC that have a vested interest in framing the question in a way that is designed actually to distort what I think American workers have already recognized. So oftentimes, I think it's not so much that people don't understand the challenges they face or the businesses face, but they're certainly getting conflicting messages. Often it's from our political leadership about what the real challenge is. Now I don't think policymakers have their heads wrapped around what the real challenge is. And there is a lack of honesty about the real problem. Not just for the issue of trade policy or Trade Adjustment Assistance, but more fundamentally for the trust and confidence in government that would allow the average American to have some faith that the government is actually, or politics is actually working in their interest. That said, I don't want to ignore the fact that I think your question really poses. Jill, our freedom as Americans depends on each of us as individuals and a society collectively, assuming responsibility for ourselves on our own economic futures. You can't posit the desire to be free and reliance on what the government does as compatible.

I have incredible respect as I was alluding to for Americans, particularly in the Midwest where I'm from, precisely because they tend to be honest about the challenges they confront, and generally don't wait for the government to solve the problem for them. And I think that's true, both businesses and workers in the Midwest. But, there are ways that government can help and should. Sadly, we fail to do that over the 40 years that I spent Washington at a minimum when I was on the Finance Committee and serving as the Under Secretary for International Trade at the Commerce Department. And in part, I hold myself accountable for that Jill, as much as anyone else. I didn't move the government toward policies that would help confront the transition that all Americans were going to face, and the need for what I have called in a book I wrote some time ago about the need for a new social contract with American workers. I did lead an effort to shape a manufacturing policy in a way that tried to steer the debate in the right direction, but I didn't change enough minds in Washington among academics or in the media to shape a better outcome. But one lesson I learned in the process, and this reinforces what I was saying in response to the testimony in front of the Ways and Means Committee is that I learned how important it was to reach out to American workers and business leaders themselves and engage them deeply in the process of thinking about the challenge. I hosted 22 meetings across the country as a way of encouraging that sort of dialogue as we were developing a manufacturing report in 2004. I have to say, it was one of the best things I ever did personally, because it brought me back in touch with so much of my country and the magic that comes from free people. That was the beauty of it, I would say. But the hard part was the fact that there were political constraints that we confronted back in Washington, and trying to follow up on the wisdom we heard and the resulting report that we put out. As in all things, there was significant resistance from institutions in DC that had political interests, any issue remaining framed the way they wanted to it. And they wanted to use it to lobby against trade liberalization rather than confronting the broader economic forces that were confronting American workers. There was also a pronounced antipathy in academia to particularly the idea that government should or could contribute. And that's something which I know is hard for conservatives and hard for what was then a Republican administration to grasp. But there are a lot of ways in which government establish as a framework within which competition takes place inside our country, that shapes outcomes for businesses and workers. And that doesn't take the form of meddling in the economy. It's really about setting the structure in a way that fosters the best interests of American workers. And that, I take responsibility for in terms of my own failure to get people within the Bush administration to see what was really at issue and to move people in Congress to actually start to think materially about the problem and what we should be doing.

Jill O'Donnell: Okay. So a lot to follow up on there Grant. Thank you. I take well your point that most people certainly have a better grasp of the issues they may face economically than they get credit for. I've seen that in my own conversations across the state and a study that we did here in Nebraska, too. But then you referenced a moment ago the broader economic forces confronting the American worker. And that's what I think might be hard for many people to see. So I want to ask you for your response to a situation that I've done a lot of research on here in Nebraska, in DeWitt, Nebraska specifically where an immigrant in the 1920s invented a new tool called the Vise-Grip, and built a very successful family company around that. Later, generations passed, and the company is acquired by larger companies. The last of which closed the factory, which had been operating in DeWitt for many decades, and sent to production to China. People I've spoken with who worked for years at this manufacturing plant, were very convinced, quoting very specific numbers, that they were producing those locking pliers, the Vise-Grip tool, much more cheaply on a per unit basis in Nebraska than was happening in China. So I think it was very confusing and very hard to understand why did this happen. So how do you unpack something like that? How should they understand what happened to them? What can be done to help people understand why that's happening when it does not seem to add up to them themselves?

Grant Aldonas: Again, a great question Jill. I should say that I've used those tools in my whole life. They were better when they were made in Nebraska. You could feel literally the weight of what was being produced in your hands. And that changed fundamentally. So I think they could not only compete because I've seen it happen so many places in basic manufacturing across the United States. A guy outside of Chicago who was clever enough not to be taxed by the city of Chicago by being just outside, but was close to world-class infrastructure hub in O'Hare Airport and was selling submersible pumps to China. Of course it can work. So I wouldn't disagree with their instinct and what they're surprised at it. I don't know enough about the business side of it from the point of view of either management or the larger corporation of which DeWitt became a part, and why they decided to offshore. But I have two instincts, and my experience would reinforce as my instinct on these things. First, there's been a market tendency among management to reduce business to numbers, as opposed to think in terms of the life of an enterprise and the extent to which workers ultimately contribute to its success. That's led to a focus not just on the bottom line, but to a focus that is fundamentally financially driven. Now happily, there's an ongoing debate about the extent to which managers now need to think more broadly and have a broader conception of what their enterprise is and who are its stakeholders. And I find that refreshing in the sense that it focuses on what businesses should be doing to keep their own side of the street clean as I alluded to earlier. Rather than seeking redress against what businesses have done by resort to government policy, things like that. Ultimately, the question once again boils down to the need for honesty both within upper management and among the investors, as well as with the workers in the community in which the enterprises thrive. That should be something that people take on because of the fact they represent the workers as well as investors. That is not something where the instincts of investors and workers that are ultimately in conflict. You can build better enterprises by integrating the workers into the enterprise. So I don't have a direct answer for the people who were working at DeWitt at the time. But the reality is, is that there is certainly a material progress and rethinking the nature of what an enterprise is that should diminish that instinct on the people who run enterprises in the future. Above all, it's a question of honesty between them, and the people who actually create value for them in terms of their workers.

My second instinct is more practical Jill. And it comes from my experience in the tax world rather than trade policy. While opponents of trade liberalization have really pilloried trade as antagonistic to workers' interests for political reasons, the politics of those critics have really prevented them from focusing on the extent to which tax policy influenced many of the outsourcing decisions that managers made over the past 30 years. Including I would bet, the instincts of the company that owned DeWitt. The answer why is a little bit complex. But the short form is the United States not only had and still has tax rates that exceed those of other countries, particularly China. Including our principle competitors like China, but Germany as well, the UK as well. But until 2017, the tax code also allowed for the deferral of income tax on profits generated abroad. In effect, you were inviting companies to move offshore or to sell to companies offshore through our tax code. Now personally, and this is another thing that flows from my discussions with George Shultz and Clayton Yeutter. I never thought it was all that hard to ensure that our economic policies promoted both profit and patriotism. But evidently, tax policymakers and political groups in Washington felt there was more to be gained by focusing on trade politics, than the incentive the tax code was creating for the offshoring of U.S. manufacturing. Now fortunately, the Tax Cuts and Jobs Act of 2017 did eliminate the worst aspects of deferral and moved us in the direction of a territorial tax system. And that led to a significant repatriation of business operations. And just as important, intellectual property to the United States. Unfortunately, this is the flip side, that result is now under threat by the tax policies the Biden administration has put forward as recently as last week in the form of the Treasury Department's Green Book. One telling example is the G7 agreement announced this past week on the basis of what treasury had in its Green Book. There was an agreement that Secretary Yellen foraged with the G7 about a corporate minimum tax. Unfortunately, the rate, the minimum rate is 15%, which is about where our principle competitors are. China's lower than that. And the Biden administration wants to raise corporate taxes to nearly double the minimum rate. Well, I'm pretty sure the workers at DeWitt and elsewhere in America can see how that would make us uncompetitive, and why it would make it financially attractive to move manufacturing operations off shore. And that's a real problem. Again, because we're not identifying the right question. And we're not adapting our policies to meet that challenge. And that is principally tax driven rather than trade driven.

Jill O'Donnell: That’s it for part 1 of our conversation with Grant Aldonas on Trade Matters. Thanks for listening! And stay tuned for part 2 of this conversation where we discuss how to reimagine adjustment assistance for a new era of global economic competition. A big thank you to Alex Voichoskie and Jacy Thoman for helping produce this podcast.

Opinions expressed on Trade Matters are solely those of the guest or host and not the Yeutter Institute or the University of Nebraska-Lincoln.