Did Globalization Cause the Great Stagnation?

Analyzing the effects of any long-run macroeconomic trend is admittedly a difficult affair. After all, typically more than one big trend is happening at a time, which means that isolating the impact of any particular force requires careful and thoughtful empirical analysis. It is somewhat troubling then, that “Where’s the Growth?” doesn’t appear to draw any clear causation between the alleged malign forces of globalization and the declines in productivity and economic dynamism.

Put more straightforwardly, it is true that American productivity growth and economic dynamism has been on the decline for decades. But these are much broader trends that reams of empirical work have connected to self-imposed housing scarcity, demographic headwinds, an overbearing regulatory environment, a general societal decadence, and the slow process of new ideas getting harder to find. Given what we know about these other factors, do we have strong evidence to suggest that globalization played a large (if any) role in the Great Stagnation?

It’s possible that, absent globalization, many of the same trends would have been worse—the fact that the U.S. manufacturing sector appears to have been made worse off by the Trump Administration’s tariffs andtrade wars is certainly revealing.

Beyond the general slowdown in science and technology, let’s take a few of the key charts from “Where’s the Growth?” and examine the more complicated macro stories that may be hiding underneath.

First, the shift to intangible assets complicates trade deficits. Put aside the question of whether the trade deficit is a meaningful economic concept at all, or whether the suggested policies in “The Balancing Act” would actually decrease the deficit (some likely would, others would likely exacerbate it). If we are going to measure it properly, then we need to consider the massive shift toward intangible assets in the global economy that aren’t captured by the traditional metric. Patents, know-how, trademarks, copyrights, brands, management techniques, and trade secrets are some of the core building blocks of the modern economy, and ones in which the U.S. specializes. One recent attempt to account for only a few of these channels found that including intangible assets shrank the U.S. trade deficit to half its original size and has declined since 2011 as intangible assets continue to grow in scope.

Second, it is notable that manufacturing productivity and output don’t fall sharply with the entrance of China into the World Trade Organization (WTO) in 2001, as one might expect if globalization were the culprit. Both measures show on-trend annual growth until 2008–09 and then fail to pick up afterwards. This would seem to indicate that the painfully slow recovery from the Great Recession has much more to do with these declines than globalization does. And the causal story here is straightforward: The Federal Reserve consistently raised rates during the early 2010s before the labor market had reached full employment, resulting in a “lost decade” with depressed worker bargaining power and little incentive for employers to invest in the invention or deployment of new labor-saving technologies. This interpretation would also explain the early uptick in manufacturing productivity after 2019 as the labor market moved much closer to full employment.

Third, the same phenomenon likely played a hand in the overproduction of college degrees, as workers looked to credentialing as a means of competing in a loose labor market (and led other workers to accept lower-wage service sector jobs). Consider the fact that employers finally appear to be reducing their degree requirements as the labor market has tightened. While globalization could theoretically play a role in a loose national labor market in the form of offshoring, both the timeline and the magnitude of these trends appears ill-fitted.

None of this is to say that globalization has been costless—and indeed I’m inclined to agree that it was oversold on some margins. “Where’s the Growth?” is on the strongest empirical ground when discussing the localized labor market impacts from the “China Shock,” as research from David Autor and others has shown. But as Niskanen’s Samuel Hammond has pointed out, this was far more a failure of domestic investment in active labor market policy and a strong social safety net than it was a failure of trade policy. An America that tries to isolate itself from shocks rather than prepare for them proactively will be vulnerable to future disruptions of all stripes.

If we want to restore American dynamism, we have to be rigorous about identifying the underlying causes of its decline. There are many strategic and geopolitical reasons to boost domestic high-tech manufacturing capacity and for the U.S. to be wary of certain Chinese investments backfiring. But blaming a generic globalization boogeyman is an analytical error in the other direction.