 Good morning and welcome to the Center for Strategic and International Studies. My name is Andrew Schwartz and I'm our Vice President for External Relations here. And I am honored to be introducing my friend, my colleague, Grant Aldonis, who for so long here at CSIS, our offices were next to each other. And so I got to hear some of the most fascinating conversations. You just can't even imagine. And all of you who know Grant, and I know that there's many of you in this room who know Grant personally know what a fascinating person he is. This is a person who has served in the highest levels of government, who has practiced law at the highest levels in Washington, who knows how to play a mean blues guitar and many other skills. But, you know, I don't need to go through Grant's long and distinguished bio, but some of the highlights are that, you know, before Grant came to CSIS, he worked with the great Bob Strauss at Aiken Gump, where he took over Bob Strauss' trade practice, which is no small thing. Before that, Grant, of course, was under Secretary of Commerce in the first four years of the Bush administration, and was one of the key economic and policy advisors to the president and to the president's economic team. Prior to that, Grant, of course, was at Miller and Chevalier, and he served many years on the Hill. I think, you know, when we're talking about Grant's new book, Globalization and the American Worker, Negotiating a New Social Contract, all you have to do is look to the Wall Street Journal today for what kind of impact this book's having. I mean, many of you have seen the headline, Global Economy Gains Steam, Job's Still a Worry. So I think that's a perfect way to get into some of the issues that Grant's covered here in his book. You know, this book is divided into four parts, and the study begins with an examination of the changes facing American workers and the transformational importance of globalization and technological change. The book then moves on to consider the real implications, the implications of these changes for the workplace and the workforce. And the third part of the book reviews the current private sector and public policy responses to these changes, those that are helpful and not so helpful. Finally, the study offers recommendations for negotiating a new American social contract, investing in American workers and creating an economic environment and actually enabling an economic environment. One of the things that really struck me about Grant's new book, making a national commitment to a social contract, is as he says, negotiating a new social contract will require a process of building broad public support, which only the president can do. While the president has out of necessity had to focus on kick-starting the domestic economy, the outset of his administration, he will increasingly find that retooling the American economy to compete in a more knowledge-driven, globalized world simply cannot wait. With that, I can't wait to hear what Grant has to say, so I'm going to throw it to Grant, and he'll lead you through his presentation and we'll be able to take some questions. I also should point out that we have books for sale in the back, and that's okay, by two or three, because they're great gifts for Labor Day, which is coming up right around the corner. Well, first of all, thank you, Andrew, very, very much. Andrew's one of those guys who I think has followed the basic rule in public speaking, which is try and provide insight to those who are willing and ready to accept it and entertainment for the rest, and I'm assuming I'm going to try and do the same thing. But probably to start off, the first and most important thing I have to do is thank some people. First, Andreas Tricopolis at the Nearchos Foundation who funded most of the research that went into the book over the last three years. John Hamry and my many friends here at CSIS who supported it throughout, supported my efforts throughout. And also, I realize now, steering out all my friends in the audience, I have to thank all of you for the times I've bored you in conversation with many of these ideas. A number of the people were in the room, were a part of a couple of sessions we had early on that were simply trying to frame the issues that became the body of the book. And I was telling Joe Kennedy, who was not only from Minnesota and a colleague at the Commerce Department, but now is at the Pew Foundation that I didn't start out to write a book. I really thought this was something that we'd get it out to be one of those nice tight Washington things with lots of recommendations in the back. But what I realized I was going to have to do was actually kick over the traces of a debate that's going on for 15 years on globalization and that has, in many respects, driven itself into a cul-de-sac. And my sense was, like I've often said about the Doha around, that if we just accelerate, we're going to find ourselves in our neighbor's house rather than actually trying to get to our goal. And part of the book and trying to dig out what was going on with globalization was trying to find a way to explore why we'd gotten into the ditch but also how we would get out of it as a practical matter. So what I'm going to do is I'm going to run through a series of slides which don't spend a lot of time on globalization, actually. And I'm happy to come back to that in the Q&A. I don't want to spend a lot of time with the forces driving it, but that's an important part of it. I really want to get to just sort of a pastiche of some of the numbers that should be driving us to think about human capital as the principal American response to globalization. I will spend some time talking about why trade policy and trade policy tools are completely inapposite to the challenges we face competing in a global economy. And that because we have a trade debate or that our principal response to globalization has taken the form of a trade policy debate, there's a tendency to think in terms of trade policy tools as the solution. Unfortunately, that is completely the wrong way to try and approach how we grapple with giving American workers the tools to succeed in a, as I say, a more knowledge-driven, globalized economy. The genesis of a lot of this work I should say started actually when I was working on The Hill both in terms of grappling with an ill-informed trade policy debate, but also in trying to reform a program called assistance. And for those of us who have had to work on TAA and recognize fairly early on that it wasn't capable of coming to grips with what American workers faced as they went through jobs adjustment. It was sort of an insight into the direction we ought to be going. But let's start with why we're here. The benefits of globalization starts out where essentially 10% of US GDP is a benefit of our openness to the global economy. So anything that puts that at risk essentially 10% off the US economy. I know that's a rough measure, but it translates into $10,000 for a family of four at a median income of $48,000. So roughly 20% of their annual income is at risk if you get the globalization debate wrong. What's interesting too is that, we've come to this point in terms of trade policy where it doesn't look like the administration has a trade policy and it doesn't look like we're going to make any progress until after the midterm elections in 2010 with then. And if that's the case, what you're putting at risk is another $500 billion in annual GDP because we're not going to be making progress in terms of trying to deliver. The other thing that I wanted to comment on was the extent to which because it's been a trade policy debate, the politics of this has become inverted. We have a tendency to forget and indeed Secretary of State Clinton when she was running for the presidency had gone so far as to say the law of comparative advantage no longer applied in a more globalized economy. And the point that I want to make is a lot of the truisms that we've always thought about trade still prevail. In fact, trade liberalization serves people at the bottom of the pyramid. The most regressive taxes we impose in our system in the United States are in fact tariffs. If you look at this you'll see that over half the revenue is on shoes and clothing alone. So for the single mom who's going to Walmart to make sure that the kids have jeans without patches in them to go to school, they're paying $2,000 a year annually of which 400 bucks is basically tariffs. And the highest tariff, interesting enough is on the lowest cost sneakers. So if what you're trying to do is just let your kid go to gym class relative to the people in this room walking around and finding Italian shoes the fact is you're going to be paying about 67% of the value of that shoe. So what we're trying to do with that is that ironically we have a trade debate that somehow now says that trade liberalization is at odds with workers' interests. And the question that I think we have to come to grips with is why and then what do we do to address that in terms of a public policy response? So I describe this more as weighing those benefits which we all talk about. I feel like when I talk about the benefits of globalization it's a little bit like the law of comparative advantage again which doesn't impress any worker I've ever met when I try and do this a practical matter. It doesn't impress my son Noah when I've tried many, many times either and I've gradually come to realize the wisdom of what the physicist Richard Feynman said about relativity which is you never understand it, you just get used to it. And I think that's sort of where I am on comparative advantage at this point. But the important thing here is to contrast the benefits I was just describing with the experience of American workers. And that explains a lot about the insecurity that American workers feel and why the trade policy debate has become inverted or the globalization debate has become inverted. First of all declining job security if you look roughly over the last 25 years you've seen average job tenure go from about 13 years with a particular employer down to below 10 stagnating wages particularly at the bottom of the scale. There's been some more interesting things more recently where it's actually been college graduates who suffered more in terms of the downward pressure on wages which is one of the reasons why trade isn't actually an explanation for a lot of this. But the important thing to realize is you really have had stagnating wages for roughly 30 years wage compression. Increasing income disparity so you can see that the gains are going to the people at the top. Many people view that as a social issue it is but the truth is is that it has a lot to do with something we're going to come to later which is the skill bias and the technological change we've seen over the last 30 years. The rewards are going to the people with the skills that match the needs of this globalized economy. But to understand this best is really to think about advice. You have this downward pressure on wages to which trade undoubtedly contributes. But much of it goes from the other forces that are driving globalization and the other problem is that you have this upward pressure on three of the most significant factors on family income. So if you think about the American dream as something where the average worker educates themselves and has that opportunity for upward mobility think about what this means for their liquidity when they're trying to as a family pay for their children's education. If you think about the progress and the aspirations we have in our families and with our children that this means that you can see a future that doesn't look as good for your kids as it did for you as a practical matter. And so you can try and find a couple of ways to grapple with it. Obviously the current political debate is trying to grapple with health care costs but I have to say much of what I think is the answer is grappling with the supply side and ensuring the productivity gains that workers create flow back to their paychecks which is part of what hasn't happened over the last 30 years because as you know in the 90s and in this decade we've actually had pretty remarkable productivity gains but what the numbers tell you is they haven't actually flowed back to the workers that in many respects create those. So that obviously reinforces the rising populism these numbers come from NBC, Wall Street Journal polls and they've been tracking this really since we about the time of the battle in Seattle I think for all of you WTO experts but they started to look at what was behind the anti-globalization movement and what they came up with of course was this tracking that they've now done for a decade and what it shows is that insecurity that we saw on the last chart is flowing through to opinions about globalization. The rhetoric about globalization is that it is trade and the addition of 2 billion workers in the form of China and India joining the global economy trading this downward pressure and that has a lot of resonance and as you can see those supporting the idea that trade agreements helped us fall in precipitously as well and what's intriguing about that is that recent fall in those numbers tracks the downward pressure on wages of the college educated college educated were the strongest supporters of free trade as a policy and that's eroded as their economic circumstances eroded so while I wouldn't want to say it's a causal connection there's a strong correlation between what we saw in terms of the downward pressure on wages particularly for people with a college education and then the erosion of support. Now what's interesting about this is that while we attend for those of us who work in trade we think about the political problem that Democrats face and creating the political space to move ahead with a trade policy agenda that's about liberalization about trying to expand opportunities for exporters and for American workers in those enterprises but the important thing is to understand that this populism is crossing the aisle. Now it metastasizes in two different ways among Democrats it's a trade policy debate among Republicans it's an immigration debate but the motivation behind it is that we can somehow build a wall around our prosperity which we can't. The reality is it didn't even work when there were castles in motes they always found a way to take some dead corpse throw it over the parapet and infect everybody inside and it's the same thing if we try and close off our economy as a practical matter. But what's interesting to see is that this is a broad paradigm shift in politics that isn't limited to one party this really is a rising populism that's affecting the policy across the board. Now is trade to blame? I want to preface all this by saying the basic conclusion I reached in the book is that the debate we've had about whether trade is to blame or whether it's technology or other things is essentially sterile. The reality is that you can't segregate the different eddies in this current. The current globalization has become a thing in and of itself and it's not something you can actually strip down. The best estimates come from Robert Lawrence of Harvard who basically has said trade may contribute 10% of what we see in terms of wage fluctuations the rest of it is coming from other forces that are driving globalization but what even that number belies for those of you who know trade well is that the actual degree of trade liberalization is pretty limited. It's limited to industrial goods if you think about the WTO what we haven't done is a lot to impose any discipline on agriculture or lower barriers. We've essentially had capped the ability to raise barriers on agriculture and on services. The commitments apart from developed countries and financial services and telecommunications are relatively limited. The United States stands alone in terms of its willingness to liberalize on services. Efforts in terms of free trade agreements frankly have not been negotiated with partners that are large enough to make a huge difference in this equation. So even where you did get greater services liberalization or more discipline and market access in agriculture the actual degree of liberalization is still fairly limited. And the thing that I find much more interesting is I started to track the onset of specific trade agreements with the fluctuation in wages. So at the broadest level you see trade liberalization going on over the last 60 years and the last 30 years you see this wage compression. But if you look within the last 30 years at every time we've opened up what you don't see is something that correlates with the downward pressure on wages. If you think about NAFTA and its implementation what you actually saw was real income particularly for people at the bottom rising including in industries like textiles ironically. And so what you see is a picture that suggests or should suggest to you that there are other forces that are driving much of what we see in terms of the wages and what's driving the insecurity among Americans. But more importantly the trade policy debate is obscuring the real challenge. We're now living in a world that is roughly 40 years beyond the political debate. The way the political debate is structured and how we think about trade and about globalization is a picture from the 1960s. It thinks of trade as an arms length transaction between independent buyers and sellers in different countries. It doesn't think of what are have now actually gone beyond global supply chains. They've really become part of systems. The interaction among the different participants in the global supply chain is so thick that what you've actually done is soften the borders of enterprises. You no longer have vertically integrated multinational corporations that are doing much of their production in one place and then outsourcing bits of it. In fact what you have are global enterprises that are made up of the supply chain. And so the idea that we have a tax code that thinks about nationality and the headquarters of a corporation in this world that has now shifted beyond that paradigm means that our public policies have yet to catch up. And that's certainly true for those of us who've been in the trade policy debate. The reality is when you hear people talk about the idea that we could raise tariffs or impose anti-dumping duties my first reaction is to pull out my blackberry and say but I'm getting financial services and healthcare delivered to my phone. There's nothing about an anti-dumping duty that's going to impinge on the ability for me to receive that. That's the effect of globalization that's not captured in that static view of the global economy. What it's done is redrawn economic boundaries. If you think about it it's not just softening the lines and the borders of enterprise. It's softening the borders of countries. A good example would be the auto industry. What's the first thing that happens when GM starts to run into trouble in the United States? Canadians and the Swedes get excited, right? Why? Well, we started out with a production sharing agreement across the Canadian border in 65 I think. Then we went from there to NAFTA and first the FDA and then NAFTA and then you've got this production network on a North American basis that leads Toyota to invest in San Antonio and its truck plant precisely so it can pull in the value of that entire supply chain and sell into the U.S. And in one sense what you're seeing is it's no longer when we're making trade policy or economic policies that we only have an impact within the confines of the United States because of the way things have been organized. But the most powerful point that I want to make is really that we've crossed a rubicon. In 2003 more than 50% of world trade was in intermediate goods. The goods that are just moving back and forth within these ecosystems that cross borders. So you can see the conclusion of that idea of the arms length thing that I was talking about that picture that static picture we have. That's basically gone. The other thing is and this I think is the critical point that's lost on most people is that the other rubicon we've crossed was in 2005 the developing world now represents more than 50% of world GDP and considerably more than half of all the economic growth. And the more interesting point is that China and India only represent 25% of that growth. So what you've got is this broad rise in incomes in the developing world that represent the markets of the future. And that is not a picture that's caught by the static one we had from the 1960s. The implications from US workers. This is a lot of text on a page. But basically what I started to think about was when you hear someone like Hillary Clinton say that compared to Advantage no longer applies there's actually some rationale for saying the conventional explanation of comparative advantage in the medium through which it operates is no longer consistent with what we see in the global marketplace a picture I had of these ecosystems. But it doesn't mean that comparative advantage is ceased to apply. It's just that we have yet to capture fully the medium through which it's operating in these ecosystems. My point is that comparative advantage so I guess I am going to talk about comparative advantage. But the comparative advantage is really about specialization. You remember the Adam Smith principle insight that Ricardo built on was that specialization and trade allowed for productivity gains. And it was the productivity gains that drove growth and horizon standards of living. And so the essence of trade was simply to create expanded opportunities for that specialization to take place that raised productivity overall and allowed individuals in effect to contribute to the society's economic development. Well globalization multiplies those opportunities. So in that framework you have to say what drives specialization and then what become the differentiating factors we ought to look at from the point of view of an American worker. And in this context it's innovation that drives the specialization and what that means is that the talent and ideas become the differentiating factors in the global economy. The skills that are needed for this more knowledge driven globalized economy define whether or not a worker succeeds or not. In other words human capital at the end of the day. Now I have to say I think the most interesting thing I've read which I recommend to all of you is not this goofy book in the back with high moral sentiments and willy headed economics but it is a book by Claudia Golden and Larry Katz of Harvard called The Race Between Education and Technology. Because what Larry are people who are among economists revered for their ability to mine the data. And what they did was they explored what happened at the early part of the 20th century and early part of the later part of the 20th century, early part of the 21st. And what it showed won't surprise you if I say it in words. The technological change that you saw at the start of the 20th century was just as profound as the technological change we're seeing now. We don't think about it that way because suddenly that NEAC original computer is now has less computing power than my blackberry. But the reality is the shift from like steamed electricity and what that meant for the reorganization of production the way that complemented what Ford did which was create not only a system of interchangeable parts but interchangeable workers was just as profound in our shift from an agricultural nation to a manufacturing nation as the current shift is. Their point was and this is the really powerful point that reinforces what I was saying a second ago about the differentiating factors is that the skills needed in mass manufacturing favored the unskilled. And at the same time they were complimented by a high school movement so our human capital policies such as they were at the beginning of the 20th century consisted of trying to get everybody to graduate from high school which turned out the literate and numerous individuals you needed for mass manufacturing. Unfortunately what you've got now going on and as we go into the 21st century is that all the technological changes skill-biased to live and operate in this new world you actually need a higher order of skills. And much of it is because the competition at the end of the day is not between high wage and low wage workers it's whether or not your job can be turned into an algorithm that a computer can run. And if the computer can run it whether it's conventionally a computer or a numerically controlled machine tool ultimately what you end up with is the machine has the comparative advantage. And what that means is that the nature of skills that you use and the judgment you exercise and the context you provide within which this machine operates is the critical set of skills. What that means also is you need a huge investment to pull people up this chain in terms of their human capital to allow them to succeed but also to allow them to raise their productivity in a way that would affect their income at the end of the day. All right, well what that said to me was that we need to draw this conversation out into the open. Leaving this as sort of an academic exercise never makes a lot of sense. What you actually need to do is say starkly we really don't have a choice other than globalization it's not going away. People talk about being reversible because an Archduke got shot in 1914 in the way of a globalization with World War I but the reality is many of the forces that are driving this change will mean that other conflicts could emerge but the globalization as we know it is not going away. We really don't have any choice but to embrace it. So then the question is what's the counterpart going back to that question of the insecurity workers feels and in my view it's investing in the skills that they need to compete and providing an enabling economic environment. That's really the two principal things that we have to do. So at the end of the day what we're really talking about is how do we make that investment and what form does it take. Now what I'm going to start to go through are just some elements of that real quickly that are, I wouldn't pretend it's a monopoly on the truth but I would say that this is where the debate has to take place. I'm going to start in a weird sort of place with the Head Start program. You think about worker skills, you don't think about Head Start and you think about the forms of how to work and much of what happens in your early years means that your economic future is baked in the cake. So that unless you affect early learning all that does is reproduce the same problems at each level of education and in a career. And so probably the most dramatic thing I'm suggesting is we actually need to expand public education down to the earliest years of life and I think we have to have a counterpart to the constraints that families have to the family medical leave act which I know it sets employers and I don't mean exactly the family medical leave act but it's a good metaphor. I think what families need is the opportunity for a few hours a week actually to spend time in school with their children as a part of the educational process. I know that certainly when I talk with my sister-in-law who is a principal out in Fairfax County she works in one of the most challenging school environments in the world. She always says I'm not doing fine with the kids if I had the parents and I could teach them a little bit I'd be so much better off and I want to make that possible these two things have to fit together and the interesting thing is this is what the Head Start program does the Head Start program obliges the parents to be a part of the process it's not something where you simply park your kids and head off to work and so I want that model to be a part of that early education we can use the infrastructure we have to reduce the cost but what we really have to do is find a way to encourage that sort of level of learning both among parents and children that goes to what I would describe as one of the higher order values it's not economics it's just the equal opportunity that we're reaching for at that point primary and secondary education desperate need to reform the curriculum we've had debates about school choice and about standards I'm actually not interested in that debate all that much the truth is that the curriculum that we're teaching is the same curriculum we were teaching for an economy that was about mass manufacturing and it's not about that higher order set of skills about context, about judgment about managing information which is really what most jobs will be about even if you're a steel worker going forward and so a change in the curriculum consultation really between the schools and the private sector so that you understand what the market is demanding in a way of skills the one way I wanted to try and tackle something which I the more I read about this the more I felt we have an unconscionable problem in America as long as our public education system is tied to local school taxes which everybody loves local school control but the reality is education and your future employment opportunities become a lottery by birth and we got to find a way to come to grips with that well the one way I could think about trying to preserve local control of schools but still create new opportunities was where we had to start with all this idea of implementing broadband Americas in the schools we had to be investing so every school in America think about this as like the national highway system of this century we had to have every school soaked in the technologies that our children will have to be able to use successfully to be able to achieve anything in this global economy and be a way of offsetting the necessary discrimination that goes along with the system that's tied to local property taxes for its financing last thing is you got to raise teacher salaries and what I say that is not you know for the benefit of the folks in the teachers union because I think all those guys are going to have to re-compete for these new jobs at higher salary levels the point is that if you the critical thing interesting enough this is just reflected in the latest issue of U.S. news and world report the critical differentiating factor in the schools are teachers and it's not class size even though that would help but what you really need are teachers who increasingly know the subject matter very well but are also very adept at communicating and which are not easy skills as we all know you can always point to that one teacher in my case it was Mrs. Smith in the fifth grade that actually made all the difference in your sort of young years of getting you to study but Mrs. Smith was pretty unique even in my day when we kept women out of the rest of the workforce and they all became teachers right we had a deeper pool of very highly qualified people that were teaching us and she still stood out what that means is particularly in this market you're going to have to bid talent away from other careers and that's going to take money at the end of the day to affect individual choices post-secondary education it's principally a liquidity constraint remember that vice I was describing early on what you're seeing is a number of standard ways that come at that I like the idea of allowing people to save to let them keep their money rather than giving it to the federal government that's a predilection to my part since my wife used to be assistant secretary of tax policy and she resents spending through the tax code I now it won't surprise you favor Pell grants rather than spending through the tax code but the principle around with Pell grants and all the things that we do allow people to afford college at this point is that they are dedicated to individual groups instead of recognizing that what we have is a problem that affects every student who needs to get some post-secondary training at this point so you really need to expand the definition of Pell grant to apply more broadly to families that have median income and renationalizing Sally May so you can pass the cost savings on I know that's anathema for many of my friends and I don't think government is a very efficient financial mechanism but where we are right now with Sally May makes no sense you have a very high cost operation and you have an awful lot of people that are facing financial constraints and in some respects this is our seed corn to be able to compete in the global economy and I'm willing to make the investment to reacquire Sally May to get more of that seed corn out there is really what I'm saying lifetime learning we have a number of obstacles we have a lot of adjustment measures good examples our tax code prevents you think about it this way a market now treats an individual worker as their own enterprise increasingly you have to pay for your own health insurance you have to pay for all the other things that are a part of building a career you have to be looking ahead to make sure that you see where your industry is going so you make the right choices about what you do with your life but the tax code says you can't treat yourself as an investment in a new career you couldn't deduct that on your taxes you couldn't even treat it as a capital investment which is what it is so until the first step in this lifetime learning process is to eliminate a lot of the anti-adjustment policies but the other thing that we really ought to be doing is trying to expand the opportunities for innovations IBM has got a good one essentially a 401k plan for education which again would involve tax consequences adjustment of retraining all this is to say that basically we got to break the link between trade and our adjustment policies the idea that the adjustment we're seeing is driven by trade you know where I started out in the presentation what we really need is a comprehensive adjustment policy that applies to every worker and the goal actually should be trying to encourage them to get as quickly back to work as possible the program we have you really obliged to get out of the out of your employment and take the training and as a part of that process your skills are eroding in an economy where the pace of change is accelerating so the goal of the new program has to be to get people back to work as quickly as possible rather than getting them out and training what that means is a practical matter is subsidizing the cost of on-the-job training rather than what we do conventionally which is tell you to go off to the junior college love the junior colleges they do great work but the reality is and more importantly the market-relevant learning that you do is on the job so the goal has to be get people back to work creating an enabling economic environment I'm really only going to spend time on the first one here my own reaction is I'd love to see the current tax code simplified those distance incentives I described we ought to get rid of but the more I start to think about human capital and the need for us to invest the need for individuals to invest in themselves it drives you in the direction of a value out of tennis why? because we have a false claim to progressivity in the current tax code the reality is that a family a median family at that $48,000 salary I was talking about pays the same effect to tax rate when FICA is added in as a family at $150,000 in other words you got a flat tax in a horribly complex tax system why not eliminate the disincentive for investing in human capital that the progressivity in the current tax code represents and the VAT has other benefits which is we would make the United States more competitive on global markets because we suffer with the current tax arrangement under the current WTO rules trade policy I described this as focusing on what matters having accused my good friend Bob Zelik once or twice that we were negotiating free trade agreements with the outer asteroid belt in commercial terms what I wanted to say was we needed to focus on things that mattered if you're really going to convince the American public that we should move ahead with trade policy you really had to say there was something on the other end that there was a payoff commercially that it really would result in jobs well that means negotiating with bigger partners and it means refocusing our efforts on the multilateral process as opposed to bilateral the other thing I'd say is that in negotiating these arrangements part of what we have to do is reach beyond the conventional stuff we've all talked about as folks following the trade debate increasingly what we need to be negotiating are actually underlying premises of a market economy in other words if I think about China there's always this debate about China's currency but to me the problem in China that we end up seeing as a trade problem is actually a financial system that doesn't work it doesn't allocate capital in a way that would eliminate distortions in the Chinese market and what that does is subsidize things like lots of steel mills there's plenty of excess capacity worldwide and eventually when the economy turns down it spills onto global markets we see it and it becomes a series of anti-dumping actions or 401 actions on tires right but the essence of the problem lies in the premises on which the Chinese financial market operates so in bargaining we're reaching well beyond border measures and what we really had to be talking about are do we agree on a common set of premises so that the feeling of unfairness that these distortions generate is something we come to grips with as a part of trade policy and then lastly I wanted to make a pitch here I spent a lot of time in the book on labor some of it negative in terms of labor's involvement in thwarting progress on trade which serves workers and makes the point implicitly that they represent a slice of American workers but they don't represent American workers' interest in opposing trade liberalization on the other hand labor actually invests an enormous amount of money in training people in fact the private sector as a whole invests 10 times as much as the government does in training people what's interesting about that is a fair share of that is driven by the craft unions who actually decide who's going to be hired for a particular job carpenters things like that but what that means is that there's an opening for labor and management and a long standing problem in labor and management relations and opt for a new model it's already been done in the steel industry and all it does is link wages directly to productivity gains so that the interests of the employees are aligned with the interests of the company in terms of trying to increase its productivity and its profitability on the road and that's the model that we need to bring together and it's a contribution I think the private sector can make to this process a lot of this really does depend on the president if you're going to take all that stimulus money I'd be investing in schools and education and I'd be invested in these elements of a social contract because until I think we have that level of national commitment to our workforce we'll have missed the underlying anxiety that is thwarting our ability to capture the gains of globalization we'll also miss the opportunity to create that profoundly leveling effect that a better educational system would provide so sorry I was very long winded as usual but let me stop there and throw it open for questions yeah please so I would like to suggest you know I'm going to send my good friend Tim Reif a book along with the slides but I can tell you Tim and I have had this conversation over a 12 year period and I think Tim gets it the problem of course is that given healthcare given climate change the idea that the administration will take up trade policy at any time soon is unlikely in the extreme and equally important as soon as Kirk suggested on that conference call yesterday that there would be a speech the White House then immediately shot that down so the reality is is that they're being disciplined about their message in a very unfortunate way and I think in all honesty of a foreign policy that claims to rebuild rebuild America's standing in the world and then goes and talks to the developing nations of the world and refuses to talk about the one thing they want to talk about which is trade until somebody actually confronts the administration in a setting like the G20 that we're not satisfied with the rhetoric of saying we need to conclude Doha no we actually need to conclude Doha or we need to get off that track and find something new for the benefit of the United States American workers and for the developing world but I think until we get there we're not going to see a lot of progress on trade yeah hey Joe all this basically the end you're you're trying to get after requires a whole bunch of government agencies to work in concert how do you rally agencies around the goal like competitiveness that is so crucial to the US future I mean Joe you know this from our experience together at the Commerce Department with the manufacturing report you know simply trying to get the people at the White House to realize they had a political problem but they had to grapple with and have a strategy for much less to get other agencies interested in the idea and what you need was leadership you know there's no substitute for the president taking on the challenge in a one sense when Arnie Duncan comes out with the race to the top program you want to applaud that and I'd love to see that succeed but you also know that it's incomplete given the challenge we're facing and so what I think the reason I pose this as negotiating a new social contract is I'm trying to create the political space in one sense Joe for the president to say that's an issue that I could seize and we can take on the competitiveness challenge where you could then draw out internationalists among Democrats and Republicans who want to support trade liberalization and a social agenda that marries with that that would bring a lot of other support in the Democratic Party in other words if you're going to create the political space for the president to succeed for him to lead you got to present this sort of paradigm in one sense so that he can see how he can translate that into the politics of his own party which is going to predominate for the foreseeable future so that's definitely the goal you got your finger right on it but it's got to start at the top please I guess very interested in the political side I was focused specifically on the idea of de-linking trade justice assistance from trade and I've been talking to people on the Democratic Republic side about this for actually a couple years and there's a huge political problem I run into if you talk to Republicans basically we'll never pay for what that would really cost and if you talk to Democrats it's this issue of basically we're saying that we will one you take away the political capitalism to pass trade deals and two also it's sort of an admission that we haven't really been doing a program that's worked for decades let me deal with the second one first the premise is just wrong the idea that TAA is something in terms of further trade liberalization is a joke I mean this is something we should do because we have a different sort of challenge it's not to pass trade agreements it's because we legitimately have workers who if they're going to be able to succeed and we're going to succeed as a society this is the investment we have to make so that's the starting point but you know from the point of view of folks on the Democratic side particularly the left of the Democratic Party SOP like a $2 billion TAA program with respect to moving on trade liberalization so the premise is wrong there the flip side of it from a Republican perspective part of it is one of the reason I use human capital here which is it's not only correct and you know you can go back to Noble or it like Gary Becker to give you the economics of it and so that it's got a justification but it is also to put what we're doing in an investment context I want to get my friends on the Republican side of the out comfortable with the idea that government does have a very big role here and it's role is actually realigning the incentives in the economy so that people can invest in themselves first and foremost that enabling economic environment but then making the sort of investments that would allow that idea of upward mobility in the American dream to continue to exist so if I'm going to speak to my Republican friends that's the side that I'm going to focus on because really when you say pay for it I mean in work I did with Matt Slaughter and Robert Lawrence we ran the numbers in terms of what you would do a comprehensive adjustment program relative to the amount of change we're throwing at General Motors and auto parts suppliers it really is a small it's jump change you know it's like 20 billion and I'm not saying that small because it's ultimately taxpayers but we actually included a model which allowed for a very small increase in FICA and you could cover the expense of most of what we had as an adjustment policy now what I'm talking about is much more comprehensive than just an adjustment policy but the argument that there's a lot under our comprehensive TAA program I don't actually think we're standing scrutiny because we were talking about wage insurance we were talking about broad retraining programs a variety of things and you were still looking at a $20 billion price tag that to me given the $500 billion that's on the table much less than $1.4 trillion that's at risk if you see retrograde motion here is worth the investment yeah, Phil Grant you were talking about in the trade policy context the WTO that really should be grappling with sort of fundamental premises what do you see as the prospects of reaching a consensus among 150 or so countries on those fundamental premises of how the economy works? Phil's zero the reality is that you have to opt for a variable geometry here it has to be a two speed process what we have to do is go back to the technology we used in the Tokyo round you couldn't bring people along on a subsidies code and an anti-dumping code so what you had and believe me we had our own problems with Congress with an anti-dumping code in 1969 at the Kennedy round so now you're looking at something where you say I've got to make a much more profound change and what I would suggest the vehicle is is that you negotiate a free trade agreement within the WTO subject to WTO dispute settlement of whoever is willing to come along and you challenge the United States, Europe and Japan to lead I'd also say that on preference programs you leave them for the least developed and not for the Indians of the world and not for the Brazils of the world and I know my friends in Brazil and India always protest when I say this but they have access to investment capital which is what these programs are designed to do they're designed to attract investment capital so frankly they're out and you know what I'm trying to do I'll be very blunt about it I'm trying to create a vice so that there's a huge incentive to move up toward liberalization and then in negotiating that I think you have to reach well beyond and that does mean grappling with things like how are you going to do agricultural price support that could create a very strong incentive for the developing world to follow with liberalization of their own particularly of Brazil for example but that's what I want to do I essentially want to create an incentive for the developing world to come and join the folks who want to start negotiating the underlying premises of a market economy that would work and I want to create as much pressure for the distortions like I mentioned in Chinese financial stuff it's a tall order I don't deny it and it's a very different paradigm and what it means is you've got to recognize that Doha is dead and you have to move on but it's time to recognize that and in one sense it would match what the administration is doing we have a strategic pause now whether we like it or not so we might as well make use of the strategic pause and actually start to rethink the fundamentals of our approach Good to see you again and great speech very insightful I want to find out I don't know if it was insightful it was restful looking at the audience I saw that it was very restful I think in terms of the relationship of the education and the global trade that you pointed out to me at least is very insightful I would like to ask you a question along that line of education it seems for the up to the high school level lots of issues in the education system and you know there is a lot of focus on it and then the higher education so it looks like if everything goes right even today the people who will graduate they will be very productive in the economy to do all this knowledge worker things maybe 10 years, 12 years down the line and so the question I am thinking of are we going to have a big time lag and the world may change so much by that time that whatever we do know it's useless I would like to really know if we should be pessimistic or should we say look let's just do this very fast and we can still catch the view and my reaction is that in the United States you have two very powerful things going for you which means that we've got the time to make the investments for education to pay off you're absolutely right if you're investing in primary education or early learning it's a very long cycle before that affects your economic productivity it's a little bit like the old line about computers you see them everywhere except in the productivity statistics it'll be the same thing with our investments in early education that won't pay off for 20 years but I also know that without creating that foundation you're marginalizing a part of our economy that we can't afford to marginalize so I want to make that investment the other things that are built in to try and reduce the liquidity trap for parents who are trying to get their kids through college or some other post-secondary training the adjustment assistance program is really designed to address needs now and that in a broader sense is designed to create the opportunity for more public support for liberalization I'm not linking that to a trade agreement specifically like TAA, we pass more TAA we get to pass an agreement with Columbia what I'm suggesting is is that you're really interested in reshaping public opinion about our engagement in the global economy and the investments in a stronger social safety net that is pointed to getting people back to work is actually the most productive way to try and address that I actually am optimistic and here I want to come back to a point the thing that I sort of struggled with recently which Phil knows because I've peppered him with lots of questions is what is the medium through which comparative advantage does work in a modern global economy and the best I can tell is that what globalization has done is reinforce the importance of institutions private property the depth and liquidity of your financial markets your school system in terms of the influence it has over both your competitiveness but also the shape of your comparative advantage if you think about strong intellectual property laws in this world what it may bias you toward is a research based economy if other people have weaker standards our comparative advantage is based on those institutional arrangements in some respects the other thing is that and this I think is actually one of the critical things I'm glad you asked the question in this sense is that the other thing that's most important is that in a time of rapid and accelerating economic change the ability to adjust flexibility itself is both a competitive advantage and folds back on your comparative advantage now the important thing to understand is the United States is just absolutely the world class in terms of those institutional arrangements and I know people will dispute this but the world economic form for what it's worth keeps giving us very high rankings and most of it's on the strength of our institutional arrangements freedom of contract property rights intellectual property protection things like that the other thing is the flexibility of our industry and our workforce including the entrepreneurial side of it and the seed corn of the economy that creates most of the new jobs that part of it is the best in the world and in one sense we're living off those strengths right now well I think we've got time to do this but I think we've got to start making these investments now because even on things like venture capital everybody's catching up right people are wise to the fact that entrepreneurialism drives growth in a market economy and so you see this bubbling in China in India and everywhere else so we're going to have to be wise about making an investment in this asset this most important asset our workforce if we're going to be able to compete a decade from now but I actually think there's some hope there's a chance to globalization rather than this sterile debate about trade policy that you could make some progress please yeah I wanted to look at another point in the age spectrum that is older workers we know of course Japan is the poster country if you will and the baby boomer generation is as we know aging at least I am what in your scenario speaks to that I guess it would be continuing education encouraging industry to give older workers a shot at continuing their employment and whatever else do you have to shed light on the challenge we're going to face highly trained baby boomers in this country who do face job discrimination and we need their intelligence and their experience how do we get it you sort of put your finger on the first point on the discrimination point broadly rid any form of discrimination that limits the ability to make use of their talents whether it's because of race, age, sex whatever is anathema to this whole model I mean ideally what you're trying to do is create an environment where anyone can succeed who wants to succeed my own view is that the economics particularly the financial crisis is going to open a lot of new prospects for people my age because we're going to have to and that's not a bad thing the reality is that one of the dangers of this baby boom retirement is that you so contract the workforce that's supporting the rest of the consumption of the economy that you have to drive productivity very high among the remaining workers just to keep your standard of living where it is so the idea that more of as baby boomers decide there's a fourth career out there for us or that we want to continue what we're doing but at a reduced pace is no bad thing and I actually think the economics certainly are providing a huge incentive for that yeah I do think that and I do think that a lot of the things for someone my age it should be available so for example IBM in its Keo plan, its education Keo plan would say to me as a 55 year old man that you in fact can start investing now and they will match whatever you invest in that educational savings account so that and you could that's perfectly portable if you retire or if you go to another company you take that with you so there are things that are developing that actually would still affect the equation and reduce your liquidity trap in retirement of trying to gain a new set of skills but I think all this works and I think that there shouldn't be an age limit on when you can apply for a Pell Grant right you know I mean there definitely shouldn't be that and I think particularly given the way are part of this community is going to age I think that's and it's going to be to be honest yeah in fact please Obama administration has put an emphasis on worker training with 3.4 billion dollars in the stimulus package and more recently with the community college initiative and I'm wondering I know you have doubts about the Obama administration's approach to trade but just on the training piece how do you think the president has done so far it's not nearly enough and like much of the rest package it's focused on paying constituencies in the educational community rather than it is in trying to reconstruct the incentives over the long term is it good to invest in junior colleges are they really a wonderful tool for retraining yes but it also ignores that the more that you subsidize them the more of a negative impact you have on the private training industry so net net if you gain something in terms of the ability to translate an entire generation into people who are capable of being in the global economy probably not but my sense of where the education spending has gone has largely been to sustain existing resources rather than something new and what I'm really talking about is something additive and so yeah I'm skeptical I have to say I mean I've been known to say that on economic policy president Obama gets an A on deportment and sort of a D in terms of how he puts his policies together and I have to say I'm well I'm I like the idea of the race to the top again that's missing here is that this is all too conventional in terms of the economic policy approach it doesn't actually try and create economic change which is involves a process of realigning the incentives simply adding more money on top of the bad system of incentives isn't going to produce the change you want it's true health care as well for that matter yeah my grant how do you get organized labor to be a positive factor for the future rather than the negative drag that has been for so long yeah and I think there's two things there Mike one is there's a recognition politically based on my conversations with the folks at the FLCAO and their counterpart now they recognize that as much success as they've had in forwarding a trade policy that was designed to progress they now have limited their ability to affect the change they wanted to on labor rights and they is frustrated at this point with the Obama administration for not having an aggressive trade policy articulating aggressive trade policy as anybody in business now we may differ over amongst ourselves about what ought to be the content of that policy but what I hear is that they too are saying we can't live where we are right now their workers need jobs their workers need markets and so in that sense there's a shift even within the labor movement with respect to what the administration is doing now the other thing I'd say is that if you move more toward a generation of contracts that links wages to productivity there's a much greater incentive then to try and create the markets that allows those productivities a broader plane to play out and so changes in how you do the bargaining could make a difference and also Mike I got to say I sort of had a revolution in my thinking about the labor issue as well if I was thinking about that free trade agreement I was talking about in the WTO I actually would want a labor chapter just like the ITO originally had and the reason is that if you think about trade theory and this isn't the conventional AFL-CIO approach to the trade and labor thing but if I'm thinking about trade theory and human capital together I want to provide an incentive for individuals to invest in themselves and if I deny people the ability to bargain freely for the full value of their labor productivity gains they create I reduce the incentive for them to invest in themselves so one way to think about the limitations on labor rights that you do see in the developing world is that it's an implicit limitation on the ability to specialize the ability to create the same sorts of things I was talking about here so I have to say I'm a pretty strong proponent at this point of we got to do something constructive on labor it is not to use trade tools to penalize people because of the model which is largely an environmental model as you recall in terms of litigating everything but I do think that having ground rules about how labor is treated and what rights they have in the context of a broader global economy actually starts to make a lot more sense to me just like I feel about China's capital markets I want the premises to be honest open above board and I want to favor human freedom as a part of that that you need card check in the rest of the world absolutely not but do I want that simple basic rule that people can bargain freely for the full value of their labor absolutely I want to see that vindicated and frankly the more I think about it Mike it's a damn shame that in the WTO the only thing we have on labor is something that allows us to prevent imports made with prison labor I'm not sure that people realize this but you know if somebody if goods were produced with slave labor the WTO wouldn't allow us to impose a duty on it and that's the way the rules are written and that is wrong morally it's also wrong economically as I explained earlier so I actually think that's a direction we have to go that would bring labor along so if what I said was let's negotiate this free trade agreement in the WTO we need a labor chapter there there has to be a strong premise about how labor should be treated and I draw that together with the trend that I see in their own thinking about the lack of progress they're making now with the Obama administration and I'll see there's actually some hope that you could draw them into the conversation but that's a process that I'm convinced will take two to three years even to start so here's the strategic pause we have in effect we have to make use of it but part of the conversation to bring labor in and certainly the reason that I spent a little time on labor and management and more on the book is precisely because labor actually makes a much more profound investment in human capital than most people realize and I think we ought to honor that thank you very much thank you for coming, appreciate it