Want to prove that US wages are rising? Want to prove they are falling? Either way, you\’ve come to the right place. Actually, the right place is a short essay, \”Are wages rising, falling, or stagnating?\” by Richard V. Reeves, Christopher Pulliam, and Ashley Schobert (Brookings Institution, September 10, 2019).

They point out that when discussing wage patterns, you need to make four choices: time period, measure of inflation, men or women, and average or median. Each of these choices has implications for your answer.

Time period. If you choose 1979 as a starting point, you are choosing a year right before the deep double-dip recessions in the first half of 1980 and then from mid-1981 to late 1982. Thus, long-term comparisons starting in 1979 start of with a few years of lousy wage growth, making overall wage growth look bad. On the other hand, wages are lower in 1990 than in some immediately surrounding years, so starting in 1990 tends to make wage increases over time look higher.

Measure of inflation. Any comparison of wages over time needs to adjust for inflation–but there are different measures of inflation. One commonly used measure is the Consumer Price Index for all Urban Consumers (CPI-U). Another is the Personal Consumption Expenditures Chain-Type Price Index.  I explained some differences between these approaches in a post a few years ago, but basically, they don\’t use the same goods, they don\’t weight the goods in the same way, and they don\’t calculate the index in the same way. The CPI is better-known, but when the Federal Reserve wants an estimate of inflation, it looks at the PCE index.

Here\’s a figure comparing these two measures of inflation. The figure sets both measures of inflation equal to 100 in 1970. By July 2019, the PCE says that inflation has raised prices since 1970 by a factor of 5.3, while the CPI says that prices risen during that time by a factor of 6.7. As a result, any comparison of wages that adjusts for inflation using the higher inflation rates in the CPI will tend to find a smaller increase in real wages.

Men or women? The experiences of men and women in the labor market have been quite different in recent decades. As one example, this figure shows what share of men and women have been participating in the (paid) labor force in recent decades.

In general, focusing on men tends to make wage growth patterns look worse, focusing on women tends to make them look better, and looking at the population as as whole mixes these factors together. If you would like to know more about problems of low-skilled male workers in labor markets, the Spring 2019 issue of the Journal of Economic Perspectives ran a three-paper symposium on the issue:

• \”The Declining Labor Market Prospects of Less-Educated Men,\” by Ariel J. Binder and John Bound
• \”When Labor\’s Lost: Health, Family Life, Incarceration, and Education in a Time of Declining Economic Opportunity for Low-Skilled Men,\” by Courtney C. Coile and Mark G. Duggan
• \”The Tenuous Attachments of Working-Class Men,\” byKathryn Edin, Timothy Nelson, Andrew Cherlin and Robert Francis

Average vs. Median. If you graph the distribution of wages, it  is not symmetric. There will be a long right-hand tail for those with high and very high incomes. Thus, the median of this distribution–the midpoint where 50% of people are above and 50% are below–will be lower than the average. To understand this, think about a situation where wages for the top 20% keep rising over time, but wages for the bottom 80% don\’t move. The average wage, which includes the rise at the top, will keep going up. But the median wage–the level with 50% above and below–won\’t move. At at time when inequality is rising, the average wage will be rising more than the median. One might also be interested in other points in the wage distribution, like whether wages are rising at the poverty line, or at the 20th percentile of the income distribution.

In short, every statement about wage trends over time implies some choices as to time period, measure of inflation, men/women, and average/median. Reeves, Pulliam, and Schobert do some illustrative calculations:

\”If we begin in 1990, use PCE, include women and men, and look at the 20th percentile of wages, we can report that wages grew at a cumulative rate of 23 percent—corresponding to an annual increase of less than one percent. In contrast, if we begin in 1979, use CPI-U-RS, focus on men, and look at the 20th percentile of wages, we see wages decline by 13 percent.\”

Finally, although the discussion here is focused on wages, a number of the points apply more broadly. After all, any comparisons of economic values over time involve choices of time  period and a measure of inflation, often along with other factors relevant to each specific question.

When I\’m talking to a public group, it\’s surprisingly common for me to get questions about when or whether the US dollar will fade as the world\’s dominant currency. Eswar Prasad offers some evidence on this question in \”Has the dollar lost ground as thedominant internationalcurrency?\” (Brookings Institution, September 2019). Prasad writes: 

Currencies that are prominent in international financial markets play several related but distinct roles—as mediums of exchange, units of account, and stores of value. Oil and other commodity contracts are mostly denominated in U.S. dollars, making it an important unit of account. The dollar is the dominant invoicing currency in international trade transactions, especially if one excludes trade within Europe and European countries’ trade with the rest of the world, a significant fraction of which is invoiced in euros. The dollar and euro together account for about three-quarters of international payments made to settle cross-border trade and financial transactions, making them the leading mediums of exchange.

The store-of-value function is related to reserve currency status. Reserve currencies are typically hard currencies, which are easily available and can be traded freely in global currency markets, that are seen as safe stores of value. A key aspect of the configuration of global reserve currencies is the composition of global foreign exchange (FX) reserves, which are the foreign currency asset holdings of national central banks. The dollar has been the main global reserve currency since it usurped the
British pound sterling’s place after World War II.

Prasad digs into the data about the share of US dollar holdings in foreign exchange reserves of central banks. The IMF collects this data. In the last few years, the US dollar share of \”allocated\” foreign reserves has fallen from 66% to 62%, which seems like a relatively big drop in a short time–depending on what that word \”allocated\” means.

As Prasad explains, countries don\’t always report the currencies in which they are holding foreign exchange reserves, because they don\’t have to do so and the information might feel sensitive. The  IMF promises that it will keep the country-level information confidential, and only report, the aggregate numbers–as in the figure. If a central bank does reveal what currency that it is holding for foreign exchange reserves, this amount is \”allocated.\” Thus, the blue line in the figure shows that central banks have become much more willing to tell the IMF, confidentially, what currencies they are  holding.

Economic development is a journey that has no final destination, at least not this side of utopia. But it can still be useful to take a road stop along the journey, see where we\’ve been, and contemplate what comes next. Nancy H. Chau and Ravi Kanbur offer such an overview in their essay \”The Past, Present, and Future of Economic Development,\” which appears in a collection of essays called
Towards a New Enlightenment? A Transcendent Decade (2018, pp. 311-325). It was published by Open Mind, which in turn is a nonprofit run by the Spanish bank BBVA (although it does have a US presence, mainly in the south and west).

(In the shade of this parenthesis, I\’ll add that if even or especially if your interests run beyond economics, the book may be worth checking out. It includes essays on the status of physics, anthropology, fintech, nanotechnology, robotics, artificial intelligence, gene editing, social media, cybersecurity, and more.)

It\’s worth remembering and even marveling at some of the extraordinary gains in the standard of living for so much of the globe in the last three or four decades. Chau and Kanbur write:

The six decades after the end of World War II, until the crisis of 2008, were a golden age in terms of the narrow measure of economic development, real per capita income (or gross domestic product, GDP). This multiplied by a factor of four for the world as a whole between 1950 and 2008. For comparison, before this period it took a thousand years for world per capita GDP to multiply by a factor of fifteen. Between the year 1000 and 1978, China’s income per capita GDP increased by a factor of two; but it multiplied six-fold in the next thirty years. India’s per capita income increased five-fold since independence in 1947, having increased a mere twenty percent in the previous millennium. Of course, the crisis of 2008 caused a major dent in the long-term trend, but it was just that. Even allowing for the sharp decreases in output as the result of the crisis, postwar economic growth is spectacular compared to what was achieved in the previous thousand years. …

But, World Bank calculations, using their global poverty line of $1.90 (in purchasing power parity) per person per day, the fraction of world population in poverty in 2013 was almost a quarter of what it was in 1981—forty-two percent compared to eleven percent. The large countries of the world—China, India, but also Vietnam, Bangladesh, and so on—have contributed to this unprecedented global poverty decline. Indeed, China’s performance in reducing poverty, with hundreds of millions being lifted above the poverty line in three decades, has been called the most spectacular poverty reduction in all of human history. …

Global averages of social indicators have improved dramatically as well. Primary school completion rates have risen from just over seventy percent in 1970 to ninety percent. now as we approach the end of the second decade of the 2000s. Maternal mortality has halved, from 400 to 200 per 100,000 live births over the last quarter century. Infant mortality is now a quarter of what it was half a century ago (30 compared to 120, per 1,000 live births). These improvements in mortality have contributed to improving life expectancy, up from fifty years in 1960 to seventy years in 2010.

It used to be that the world\’s poorest people were heavily clustered in the world\’s poorest countries. But as the economies of countries like China and India have grown, this is no longer true: \”[F]orty years ago ninety percent of the world’s poor lived in low-income countries. Today, three quarters of the world’s poor live in middle-income countries.\” In this way, the task of thinking about how to help the world\’s poorest has changed its nature. 

There was a time when football was king at the University of Chicago. Their famous coach, Amos Alonzo Stagg, ran the program from 1892 to 1932. His teams were (unofficial, but widely recognized) national champions in 1905 and 1913. His teams won 314 games, which means that even after all these years he ranks 10th for most wins among college football coaches.  Stagg is credited with fundamental innovations to the way we think about football: the \”tackling dummy, the huddle, the reverse and man in motion plays, the lateral pass, uniform numbers.\”

But in 1939, in a step that seems to me almost inconceivable for any current university with a big-time football program, the President of the University of Chicago, Robert Maynard Hutchins, shut down the University of Chicago football team.

For a sense of how shocking this was, I\’ll quote from Milton Mayer\’s 1993 biography, Robert Maynard Hutchins: A Memoir (pp. 139- 140).  Mayer describes the role of Amos Alonzo Stagg, the Grand Old Man, at the University of Chicago.

The Old Man was Chicago\’s oldest—and only indigenous—collegiate tradition except for the campus carillon rendition of the Alma Mater at 10:06 every night because the Old Man wanted his players to start for bed at 10:00 and to get there when the Alma Mater was finished at 10:06:45. The most reverent moment of the year was the moment at the Interfraternity Sing when the old grads of Psi Upsilon marched down the steps to the fountain in Hutchison Court with the Old Man at their head. If ever there was a granite figure that bespoke the granite virtues, it was his.

In 1892 … Amos Alonzo Stagg was appointed as an associate professor (at $2,500 a year) with lifetime tenure—the first (and very probably the last) such appointment in history. His job would never depend upon his winning games. But he won them; in his heyday, all of them. As a stern middle-aged, and then old, man he continued to believe in the literalism of the Bible and the amateurism of sports. If (as untrackable rumor had it) some of his latter-day players were slipped a little something—even so much as priority in getting campus jobs—he never knew it. If their fraternity brothers selected their courses (with professors who liked football) and wrote their papers for them, if, in a word, they were intellectually needy, he never recognized it; apart from coaching football, he was not intellectually affluent himself.

The Old Man was sacred, sacred to a relatively small but ardent segment of the alumni, sacred to some of the old professors who had come with him in 1892, sacred to some of the trustees who, in their time, had had their picture taken on the Yale Fence, sacred to the students, who had nothing else to hold sacred, sacred to the local barbers and their customers, sacred, above all, to the local sports writers who, with the Cubs and the White Sox where they were, had nothing much else to write about. The first Marshall Field had given Harper a great tract adjoining the original campus for the student games that Harper spoke of. It was called, of course, Marshall Field, but it had long since become Stagg Field. The Old Man was untouchable—and so, therefore, was football.

But by the 1930s, University of Chicago football had been in decline for some time. As Mayer describes it, the 57,000-seat stadium was about one-tenth full. Part of the reason was that enrollments had grown much more at other schools, and the University of Chicago at that time was attracting large numbers of self-supporting transfer students who rode the streetcars to the school and had little interest in big-time football. In addition, U-Chicago had not bent to accommodate the then-common patterns of big-time college football. About half of all Big Ten college football players at that time majored in physical education, which Chicago did not offer as a major. In addition, it was standard practice at the time for college alumni to subsidize the players, a practice that–by the 1930s–was not encouraged at U-Chicago.  

It\’s of course possible both to teach and to learn via a video or a book. But there\’s an implicit vision many of us share about what happens in a college classroom between a professor and students. It involves how a classroom comes together as a shared experience, as the participants develop both a closeness and an openness with each other. There is an underlying belief that the process of learning through an interwoven reaction and counterreaction, sustained in this shared atmosphere, is part of what matters for an education, not just a a score on a test of pre-specified learning objectives. 

Last year, the university told me they could no longer give me a traditional classroom for my lesson. So I have thirty students behind computer screens attached to the Internet. If I sit behind my desk at the front of the class, or even stand, I cannot see their faces. In their pockets, in their hands, or simply open in front of them, they have their smartphones, their ongoing conversations with their boyfriends, girlfriends, mothers, fathers, or other friends very likely in other classrooms. There is now a near total interpenetration of every aspect of their lives through the same electronic device.

To keep some kind of purpose and momentum, I walked back and forth here and there, constantly seeking to remind them of my physical presence. But all the time the students have their instruments in front of them that compel their attention. While in the past they would frequently ask questions when there was something they didn’t understand—real interactivity, in fact—now they are mostly silent, or they ask their computers. Any chance of entering into that “passion of instruction” is gone. I decided it was time for me to go with it. 

Parks notes that IT-enabled learning has definite and real advantages.

My youngest daughter recently signed on for a higher-level degree in which all the teaching is accessed through the Internet. Lectures are prepared and recorded once and for all as videos that can be accessed by class after class of students any number of times. You have far more control, my daughter observes: if there’s something that’s hard to understand, you can simply go back to it. You don’t have to hear your friends chattering. You don’t have to worry about what to wear for lessons. You don’t miss a day through illness. And the teachers, she thinks, make more of an effort to perfect the lesson, since they only have to do it once.

But many colleges and universities are moving to combination of courses that are explicitly online with courses where the students are there in body, but their spirits are online. Perhaps the gains from this shift outweigh the losses, and in any event, the pressures of cost constraints and cultural expectations mean that there\’s little to done to stem the tide. As faculty and students have less experience with the old pedagogical model, they will all become less well-equipped to participate in it, and it will look even less attractive. Parks is offering a reminder of what is being lost:

[I]t’s also clear that this is the end of a culture in which learning was a collective social experience implying a certain positive hierarchy that invited both teacher and student to grow into the new relationship that every class occasions, the special dynamic that forms with each new group of students. This was one of the things I enjoyed most with teaching: the awareness that each different class—I would teach them every week for two years—was creating a different, though always developing, atmosphere, to which I responded by teaching in a different way, revisiting old material for a new situation, seeing new possibilities, new ideas, and spotting weaknesses I hadn’t seen before.  It was a situation alive with possibility, unpredictability, growth. But I can see that the computer classroom and smartphone intrusion are putting an end to that, if only because there’s a limit to how much energy one can commit to distracting students from their distractions.

Consider a time period of several decades when there is a high level of technological progress, but typical wage levels remain stagnant while profits soar, driving a sharp rise in inequality. In broad-brush terms, this description fits the US economy for the last few decades. But it also fits the economy of the United Kingdom during the first wave of the Industrial Revolution in the first half of the 19th century.

Economic historian Robert C. Allen calls this the \”Engels\’ pause,\” because Friedrich Engels, writing in books like The Condition of the Working Class in England in 1844, described this confluence of economic patterns. Allen laid out the argument about 10 years ago in \”Engels’ pause: Technical change, capital accumulation, and inequality in the British industrial revolution,\” published in Explorations in Economic History (2009, 46: pp. 418–435).

Allen summarizes his argument about the arrival and then the departure of the Engels\’ pause in this way: 

According to the Crafts-Harley estimates of British GDP, output per worker rose by 46% between 1780 and 1840. Over the same period, Feinstein’s real wage index rose by only 12%. It was only a slight exaggeration to say that the average real wage was constant, and it certainly rose much less than output per worker. This was the period, and the circumstances, described by Engels in The Condition of the Working Class. In the next 60 years, however, the situation changed. Between 1840 and 1900, output per worker increased by 90% and the real wage by 123%. This was the ‘modern’ pattern in which labour productivity and wages advance at roughly the same rate, and it emerged in
Britain around the time Engels wrote his famous book.

The key question is: why did the British economy go through this two phase trajectory of development? … Between 1760 and 1800, the real wage grew slowly (0.39% per annum) but so did output per worker (0.26%), capital per worker, and total factor productivity (0.19%). Between 1800 and 1830, the famous inventions of the industrial revolution came on stream and raised aggregate TFP growth to 0.69% per year. This technology shock pushed up growth in output per worker to 0.63% pa but had little impact on capital accumulation or the real wage, which remained constant. This was the heart of Engels’ Pause … In the next 30 years 1830–1860, TFP growth increased to almost one percent per annum, capital per worker began to grow, and the growth in output per worker
rose to 1.12% pa. The real wage finally began to grow (0.86% pa) but still lagged behind output per worker with most of the shortfall in the beginning of the period. From 1860 to 1900, productivity, capital per worker, and output per worker continued  to grow as they had in 1830–1860. In this period, the  real wage grew slightly faster than output per worker (1.61% pa versus 1.03%). The ‘modern’ pattern was established.

In short, technological growth first led to a period where wages did not keep up with economic growth, and then to a period where wages rose faster than economic growth. 

The economies of Latin America have gone through a series of different periods in the half-century or so. There was an \”import substitution\” period back in the 1960s and 1970s, where the idea was that government would direct industrial development in a way that would remove the need for imports from high-income countries. This was followed by the \”lost decade\” of the 1980s, a period of very high inflation, slow growth, and defaults on government debt. The 1990s was sometimes labeled as at time of economic liberalization or the so-called \”Washington consensus.\” Starting around 2000, there was a \”commodity supercycle\” when first a global rise in commodity prices led to faster growth across much of Latin America, but then more recently a drop in commodity prices slowed down that growth.

Many pixels have been spent arguing over these changes. But as these different periods have come and gone, you know what hasn\’t much changed? The region of Latin America has been slowly falling farther behind the high-income countries countries of the world in economic terms, while remaining the region with the most unequal distribution of income. The McKinsey Global Institute lays out these patterns and offers some analysis in \”Latin America’s missing middle: Rebooting inclusive growth\” (May 2019).

Her\’s a figure showing per capita GDP in Latin America since 1960, relative to high income countries. Over that period, the region has been falling behind, not converging. Moreover, the middle income \”benchmark\” countries–which in this figure refers to a weighted average of to China, Indonesia, Malaysia, Philippines, Poland, Russia, South Africa, Thailand, and Turkey–has gone from less than one-third of the Latin American level to above it.

Inequality in the Latin American region has remained high as well throughout this time period. This figure shows that if you look at the share of income received by the bottom 50%, or by the bottom 90%, it\’s lower in Latin America than in any other region.

How can these dual problems of slow productivity growth and high levels of inequality be addressed? the MGI report argues that the underlying problem is a business climate in Latin America which appears to be strangling medium-sized and larger firms. As a result, a large share of the population is trapped in small, low-productivity, informal employment, with no prospect for change. The report notes:

The business landscape in Latin America is polarized. The region has some powerful companies, including some with very high productivity that have successfully expanded from their strong local base to become global companies or “multilatinas”—regional powerhouses operating across Latin America. They include AB InBev, America Movil, Arcor, Bimbo, CEMEX, Embraer, FEMSA, Techint Group, among others. By comparison with large firms in other regions, such companies are fewer in number and less diversified beyond energy, materials, and utilities. At the same time, Latin America has a long tail of small, often informal companies that collectively provide large-scale employment, but whose low productivity and stagnant growth hold back the economy.
Missing is a cohort of vibrant midsize companies that could bring dynamism and competitive pressure to expand the number of productive and well-paying jobs in Latin America, much as these firms do in many high-performing emerging regions. …

The causes of this firm distribution and dynamics are rooted in common legacies of import substitution that favored a few private licenses or large state-run firms in many sectors. Other reasons are differing ways in which state companies were privatized and, especially in Brazil’s case, tax and compliance-heavy regulation that favors either large scale or informality. Unequal access to finance, weak infrastructure, and high input costs also squeeze the middle. The result is a weak level of innovation and specialization needed for future growth. … Much of Latin America’s labor force is trapped in a long tail of small, unproductive, and
often informal firms …

The MGI report suggests how a focus on digital technologies might help, making it \”easier for companies to open businesses, register property, and file taxes over the internet, reducing the cost of red tape. Digital can facilitate more efficient markets from land and jobs to local services. Digital platforms make it possible for small and midsize companies to become `micromultinationals\’ able to compete with much larger competitors by offering their goods and services through online marketplaces regionally or globally.\”

That\’s not a bad suggestion, but my sense is that Latin America\’s failure to provide a business climate that fosters middle-sized and larger firms runs deeper.  For example, an earlier post on  \”Mexico Misallocated\” (January 24, 2019) describes how many government rules about companies and employment are based on the size of the firm. Taken together, these rules in combination have led to a bias in favor of new firms, but against the growth of existing firms. Moreover, the existing laws and regulations in Mexico have led to a common pattern of high-productivity firms exiting markets, while low-productivity firms enter them.

Throughout the world, the success stories of economic development have been led by the growth of private-sector firms of medium- and large-scale. The governments and people of Latin America need to think more deeply about public policy is hindering the growth of such firms.

The idea of  a \”universal basic income\” has some immediate attraction. If we can land an astronaut on the moon, etc., etc. But along with other slogans like a guaranteed government job or single payer health insurance, the devil is in the details.

Three recent essays offer a useful overview of the choices and tradeoffs. Melissa S. Kearney and Magne Mogstad have written \”Universal Basic Income (UBI) as a Policy Response to Current Challenges\” for the Aspen Institute Economic Strategy Group (August 23, 2019). Also, the most recent issue of the Annual Review of Economics, published in August 2019, has a three-paper symposium on the universal basic income.

• \”Universal Basic Income: Some Theoretical Aspects,\” by Maitreesh Ghatak and François Maniquet
• \”Universal Basic Income in the United States and Advanced Countries,\” by Hilary Hoynes and Jesse Rothstein
• \”Universal Basic Income in the Developing World,\” by Abhijit Banerjee, Paul Niehaus, and Tavneet Suri

For those who don\’t have access to the Annual Review of Economics, the first paper is freely available here, the second paper is available as an NBER working paper here, and the third paper is freely available here.

An underlying theme of these discussions is that it is essentially meaningless to discuss the idea of a universal basic income in isolation. Whether you are talking about cost, or effects on distribution of income, or effects on work incentives, it matters considerably whether the universal basic income is views as an addition to any existing income transfer programs, or as a replacement for at least some of those programs.

For example, consider the question of cost.  Hoynes and Rothstein explain this way:

A universal payment of $12,000 per year to each adult U.S. resident over age 18 would cost roughly $3 trillion per year. This is about 75 percent of current total federal expenditures, including all on- and off-budget items, in 2017. (If those over 65 were excluded, the cost would fall by about one-fifth.) Thus, implementing this UBI without cuts to other programs would require nearly doubling federal tax revenue; even eliminating all existing transfer programs – about half of federal expenditures – would make only a dent in the cost. …

A truly universal UBI would be enormously expensive. The kinds of UBIs often discussed would cost nearly double current total spending on the “big three” programs (Social Security, Medicare, and Medicaid). Moreover, each of these programs would likely be necessary even if a UBI were in place, as each addresses needs that would not be well served by a uniform cash transfer. Expenditures on other existing programs sum up to only a small fraction of the cost of a meaningful UBI. This suggests that a full-scale UBI would require substantial increases in government revenue. The impacts of whatever taxes are imposed to generate this revenue are likely of first-order importance in evaluating the impact of a UBI.

This insight helps to explain why no high-income country has actually adopted a \”universal\” basic income, and why most proposals for a \”universal\” basic income aren\’t really a simple universal payment. Instead, such proposals often include various phaseouts of the payments as other income rises, or rules that some of the money must be spent on purchasing health insurance, and so on and so forth.

On the issue of how a universal basic income would affect the distribution of income, the answer again depends on the extent to which is might replace other programs. The United States, like many other countries, uses \”tagging\” in its transfer programs, which means that transfer payments are often linked to some characteristic other than income. For example, payments may be linked to age (like Social Security), or to disability, or to whether or how many children are in a household (like Medicaid, the earned income tax credit, food stamps, and others).

One of the key questions in the escalating US trade disputes with China and other countries is how much the economy of other countries depends on trade. The answer helps to determine how much leverage the US has in trade disputes. Thus, it\’s interesting to note that starting about a decade ago, both India and China started reducing their dependence on exports as a source of growth, while doing more to build internal supply chains and relying more on domestic products.

A group of authors from McKinsey Global Institute published \”Asia’s futureis now\” in July 2019, including Oliver Tonby, Jonathan Woetzel, Wonsik Choi, Jeongmin Seong, and Patti Wang. Here\’a a figure showing how the reliance of China and India on exports has been falling.

The authors also note:

As consumption rises, more of what gets made in these countries is now sold locally instead of being exported to the West. Over the decade from 2007 to 2017, China almost tripled its production of labor-intensive goods, from US$3.1 trillion to US$8.8 trillion. At the same time, the share of gross output China exports has dramatically decreased, from 15.5 percent to 8.3 percent. India has similarly been exporting a smaller share of its output over time (Exhibit 2). This implies that more goods are being consumed domestically rather than exported. Furthermore, as the region’s emerging economies develop new industrial capabilities and begin making more sophisticated products, they are becoming less reliant on foreign imports of both intermediate inputs and final goods. The previous era of globalization was marked by Western companies building supply chains that stretched halfway around the world as they sought out the lowest possible labor costs—and often their supply chains ran through Asia. Now labor arbitrage is on the wane. Only 18 percent of today’s goods trade now involves exports from low-wage countries to high-wage countries—a far smaller share than most people assume and one that is declining in many industries. ….

Asian consumers have long had a strong preference for foreign luxury goods and brands. But things are changing. The post-90’s generation is starting to lose this bias against domestic brands; in fact, they are starting to choose them over foreign brands more often. …

Wages in China have risen substantially in the last couple of decades. As a result, the rising manufacturing hubs in Asia are now in places like Vietnam and Indonesia. In addition, many of the international economic ties are within Asian countries, rather than being between China and the United States. 

Historically China was known as the “factory to the world.” But while low-cost labor was its original competitive advantage, the wage gap between China and the rest of Asia is closing. In 1996, wages in Japan were 46 times higher than in China; by 2016, they were only four times higher. China is moving up the value chain, and as it transitions, other locations around Asia are stepping into some of its former niches. Vietnam, in particular, has become a hub of labor-intensive manufacturing for export. The country has attracted a flood of greenfield investment into cities such as Hai Phong. In addition to Hai Phong (Vietnam), Ho Chi Minh City (Vietnam), Bekasi (Indonesia), and Xi’an (China) are rising makers of electronics. As new places assume new roles in industry value chains, a new set of cities begins to benefit from the influx of capital. Investment in factories leads to new roads, new jobs, and urbanization. Much of the capital flowing into Vietnam comes from South Korea and Japan. These new manufacturing hubs speak not only to the rise of emerging Asian countries but also to a region that is more connected and co-invested.

 This helps to explain why, when the US puts economic pressure on trade with China, it affects US trade with China, but not necessarily China\’s trade with other countries of Asia or patterns of US trade with the Asian region as a whole.

The Tax Cuts and Jobs Act of 2017 largely eliminated taxes on US multinational corporations when they bring profits earned in other countries back to the use. As a result, there has been a dramatic rise in the dividends that U.S. parent companies received from their their foreign affiliates. Sarah A. Atkinson and Jessica McCloskey of the US Census Bureau offer some striking illustrations of this change, alnog with other data on international flows of investment in and out of the US economy,  in \”Direct Investment Positions for 2018: Country and Industry Detail,\” published in the August 2019 Survey of Current Business. 

For example, here\’s a look at \”outward direct investment\” of US multinationals abroad. In any given year, the amount of outward direct investment can change for several reasons, but one key issue is whether earnings from other countries are reinvested abroad, or whether they are returned to the US. As the figure shows, US multinationals have been reinvesting about $300 billion per year in foreign earnings in other countries. In 2018, they instead brought almost $300 billion back to the US economy.