JB on Brad DeLong’s Vox piece on trade deals and trade

January 31st, 2017 at 11:50 am

A number of people have asked me to react to this recent Vox piece by economist Brad DeLong. Therein, Brad argues that trade agreements have a lot less to do with manufacturing job loss than a lot of people say and think they do.

My first reaction is that Brad is saying some things that needed to be said, and doing so with a persuasive, muscular argument. My second reaction is that when most people, including politicians and voters, are talking about trade agreements, they’re conflating them with trade itself. As far back as I’ve been involved in this debate, which is decades, I’ve argued that this is a mistake. There’s trade deals and there’s trade, and they’re not the same thing. But I’ve lost that fight, and if we want to understand the political dynamics in play here, we need to recognize this conflation and its implications. To fail to do so risks misunderstanding those dynamics in a way that will only strengthen the forces of protectionism, anti-globalization, and Trump’s faux populism.

Let me start by asserting my firm belief, shared with Brad and many others, in trade’s positive net benefits, and not just for us but for our trading partners, especially emerging economies who raise their living standards by trading with rich countries.

But as Brad recognizes, there is also a lot wrong with US trade policy—as distinct from trade deals (about which I’m less favorable than he is). We run persistent trade deficits, our highest office holders mindlessly argue for a strong dollar (though Trump has already broken with that), and most importantly, persistent trade imbalances have delivered concentrated negative impacts to some communities across the land.

Here the problem is worse than DeLong suggests. It’s not just that the winners fail to compensate the losers. It’s that they use their winnings to buy the politics and policies that further hurt the losers. When Trump and Bernie and even Hillary said “the economy’s rigged,” this is what they meant: the benefits of growth (including those from globalization) are going largely to the rich, who then use those resources to advance more inequality-inducing government policies (real time examples include ACA repeal and the big, nasty, regressive tax cut that’s coming). The fact that Trump pulled this message off may seem remarkable, but history is littered with carnival barking faux populists tapping this play.

So when politicians inveigh against NAFTA, a non-trivial group of people/voters hear them saying “you’ve been screwed by globalization,” and that resonates with them.

Why is that? I doubt it’s because they didn’t like the TPP’s rules-of-origin chapters or Chapter 7 on “Phytosanitary Measures.”

It’s probably true that many fail to appreciate the linkages between trade and cheap goods. But my strong impression is that there’s a way in which a lot of people have been hurt by globalization that the trade deals vs. trade angle overlooks, and that’s the story of widespread real wage stagnation.

To be clear, that story isn’t a trade deal story either, but it’s likely more of a trade story, as “Stolper-Samuelson effects” put downward pressure on wages—real wages, including everyday low prices at Walmart—of the majority of the workforce that’s non-college educated (these economists derived the common-sense theory that lower-skilled workers in rich countries will be the ones who get hurt by expanded trade with poorer countries).

Of course, trade is but one factor driving wage stagnation. Changes in technology favoring more highly educated workers, low unionization rates, the absence of full employment (which provides middle- and low-wage workers with more bargaining clout), eroding minimum wages, and excess profits in the finance sector are all factors are in play. But if we want to understand why NAFTA and China-WTO resonate so negatively, my bet is that it’s because there really are far too many people who’ve been hurt by all those structural changes, including persistently imbalanced trade.

And while all that was going on, elites were not only failing to address the existing wage and income pressures, they (we; I worked on selling the Korean FTA during Obama’s first term) were working on the next trade agreement, assuring those on the wrong side of the inequality divide that this time will be different—“this time, the FTA’s gonna really create tons of jobs and hey, if not, there’s Trade Adjustment Assistance” or as Brad aptly calls it, “burial insurance.”

Or, as Brad also says, “…those whose jobs vanish usually find something else to do that does not involve too much downward mobility, whether in income or status.” OK, but man, that’s some cold comfort!

The scariest part of all of this is that the virtual ignoring of the downsides of global competition (along with the other stuff in that list of wage-suppressors above) by well-meaning technocrats has provided an opening for isolationist racist xenophobes that delivered unto us President Trump, and he’s just the US version.

So, while I appreciated Brad’s clarifying the minor role of trade deals (vs. trade), I wasn’t sure where to go with that insight. Brad seems to argue that trade deals had little impact on jobs but they’ve really been pretty great. But how so?

Brad wants policy makers to tell it like it is on the NAFTA, KORUS, CAFTA, TPP, but if so, what does he want them to say to the median household whose real market income is about where it was in 2000? What is in these deals that he’d like them to know about so that they’d feel as good as he does about them?

I’m with Brad in believing that we should neither eviscerate trade deals nor freight them up with so much meaning and import.

But neither should we romanticize them. These trade deals aren’t wonderful innovations brimming with great ideas. They’re just legal, technical rules by which countries agree to trade—how to adjudicate disputes; how to determine domestic content; how to deal with patents; how to decide what constitutes food safety; how to harmonize around logistical constraints (on this, see TPP chapter 5 on Customs Administration and Trade Facilitation, one of my personal favorites; Oh, and here’s a neat, inside-DC tip: a lot of people who talk about trade deals haven’t read trade deals).

That’s not a critique—we need such rules. But it matters who gets to write them, and I think I can make a strong case, one with which Brad might agree, that the whole negotiating process now suffers from excessive corporate capture. Brad correctly elevates concerns about protectionist (patents, IP) and other inequitable provisions in the TPP, like the Investor State Dispute Settlement system, that many feared would have distorted prices and power. To this list of concerns about contemporary trade deficits, I’d add the absence of chapters with enforceable rules against currency manipulation.

So while I again stress that Brad’s making a useful contribution here, my punchline response to his piece is: Given persistent trade deficits that have contributed to long-term wage stagnation, along with corporate capture and the absence of consumer, labor, and environmental voices at the trade-negotiating table, perhaps it’s not so crazy that these trade deals have become code for a lot of other stuff that’s gone wrong for many in the working class.

That’s my main political economy point, but here are a few other reactions to other points in the piece.

Brad argues that those who analyzed the TPP concluded “it was on the whole very profitable for the US.” He may well have stuff in mind, but here’s what the International Trade Commission report found for the US, by 2032 (and I’d argue the ITC was one of the less thumb-on-the-scale studies around on this).

  • Increase real GDP by $42.7 billion, or 0.15 percent;
  • Increase employment the equivalent of 128,000 full-time jobs, or 0.07 percent;
  • Increase exports by $27.2 billion (1 percent) and imports by $48.9 billion (1.1 percent);
  • Have the biggest sectoral impact on agriculture and food, increasing employment in that industry by 0.5 percent;
  • Decrease employment in the manufacturing, natural resources, and energy sector by 0.2 percent

FTR, that’s one month of 2032 GDP growth. Maybe other models back up Brad’s claim, but I think we should heavily discount modelling of a 6,000 page trade agreement on what GDP will be 15 years from now! Any honestly derived confidence interval around such an estimate would be likely to swamp it.

On the other hand, as those who know his work would expect, Brad’s macro critique of our persistent imbalances and the role of the strong dollar was spot on and important. I would have added how they contribute to credit bubbles, as per Bernanke’s savings glut arguments.

Finally, Brad argues, without evidence, that “By and large, the jobs that we shed as a result of NAFTA and China-WTO were low-paying jobs that we did not really want.” Isn’t that inconsistent with the wage outcomes in the sector? Real blue collar manufacturing compensation has been virtually flat since the early 1980s. A lot of moving parts here, so maybe I’m wrong, but that didn’t sound right, at least without proof.

 

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6 comments in reply to "JB on Brad DeLong’s Vox piece on trade deals and trade"

  1. Seamus says:

    What impact do you believe automation has had in this?


  2. urban legend says:

    There is something really obnoxious about saying low paying jobs are the ones “we” don’t really want? Who the hell is “we,” Brad? The whole idea makes no sense. You don’t get more high paying jobs by getting rid of low paying jobs. What you get is a lot of unemployment — and, for that matter, less bargaining power and lower wages for many of those who manage to score some of the better paying jobs.


  3. Denis Drew says:

    Re: Bernstein on DeLong on Rodrik on Delong on NAFTA

    Lost in all the fine and refined analyses …

    … see http://angrybearblog.com/2017/01/trade-agreements-have-harmed-manufacturing-employment.html

    seemingly forever out of focus is that most all today’s $10/hr US jobs (e.g., Walmart cashier) could plausibly pay more like $20/hr — with German level union density. Given that 45% of today’s US workforce is earning $15/hr or less this seems to make the debate about a few percent more or less available manufacturing jobs blamed on this or that — far from being the defining issue of our time.

    And don’t forget health care looks like the next manufacturing — evenly spread everywhere and eventually government funded.

    [cut-and-paste]
    THE MONEY IS THERE SOMEWHERE

    You can’t get something from nothing but, believe it or not, the money is there, somewhere to make $10 jobs into $20. Bottom 45% of earners take 10% of overall income; down from 20% since 1980 (roughly — worst be from 1973 but nobody seems to use that); top 1% take 20%; double the 10% from 1980.

    Top 1% share doubled — of 50% larger pie!

    One of many remedies: majority run politics wont hesitate to transfer a lot of that lately added 10% from the 1% back to the 54% who now take 70% — who can transfer it on down to the 45% by paying higher retail prices — with Eisenhower level income tax. In any case per capita income grows more than 10% over one decade to cover 55%-to-45% income shifting.

    Not to mention other ways — multiple efficiencies — to get multiple-10%’s back:
    squeezing out financialization;
    sniffing out things like for-profit edus (unions providing the personnel quantity necessary to keep up with society’s many schemers;
    snuffing out $100,000 Hep C treatments that cost $150 to make (unions supplying the necessary volume of lobbying and political financing;
    less (mostly gone) poverty = mostly gone crime and its criminal justice expenses.

    IOW, labor unions = a normal country.


  4. Prairie Populist says:

    Trade deals are about a lot more than trade, and the devil is in the details. And no, I am not about to write an essay here about all the other stuff. In summary: the cumulative effect of trade agreements is to install a transnational body of law above national governments and impose an unelected tribunal to adjudicate and enforce the new laws. The right place for the birth of this new world order might have been the United Nations, but the negotiations were closed-door between experts representing corporations. Corporate rent-taking was enshrined under the guise of patent protection, environmental protections were eliminated, and individual rights extinguished. And much much more. People everywhere lost to corporations and to the wealthy who own them. Even if there is net economic gain from “free trade” agreements, loss of national sovereignty to transnational corporations was too high a price to pay.


  5. Ebenezer Scrooge says:

    Yep. The TPP would be very profitable for the US. That’s absolutely right.

    The profits would flow to the shareholders of Big Pharma and the informatics industry. (The proper word is “informatics”: “technology” is a word that includes stone axes.) Neither industry is a major domestic employer, and most of their jobs are the kind of high-ed high-pay jobs that hurt income inequality.


  6. rd says:

    These deals are always advertised to have labor protections but seem to have no enforcement mechanisms. Don’t know if this is exactly accurate but after years of trying there are no Mexican unions in the border areas where U.S. and other firms run their operations. In addition it has been said the Mexico itself has a somewhat unsaid policy of wage suppression that of course benefits employers but not Mexican labor.


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