The new age or the stone age: we either deal with the costs of trade or they deal with us

April 26th, 2016 at 9:51 am

Economist David Autor et al keep producing really important findings about the impact of trade on people and communities hurt by international competition. Their latest entry, on the connection between trade-induced job losses and political polarization, is written up in today’s NYT:

“Cross-referencing congressional voting records and district-by-district patterns of job losses and other economic trends between 2002 and 2010, the researchers found that areas hardest hit by trade shocks were much more likely to move to the far right or the far left politically.”

For years, it was impolite to raise the costs of trade in policy discussions, even while fully recognizing the benefits. Eventually, the implications of the models, especially “factor price equalization,”—the idea that trade with low-wage countries could lower the wages of workers in sectors that compete with imports—allowed the word “globalization” to be added to “technology” in describing inequality. (Go ahead and try this at home: ask an economist what causes inequality, and they’ll say “globalization and technology.”)

But Autor et al, along with various others (the Economic Policy Institute has been onto this since its inception in the 1980s), have helped us get beyond sweeping generalizations. They’ve done so by drilling down into the microdata to identify the impact on affected communities and groups of workers (e.g., those without college degrees), with a particular emphasis on the impact on China of trade in the 2000s. Their work is creating the oxygen to recognize, even in polite company, the double-edged sword of U.S. trade dynamics, with our persistent and large deficits.

In my work, I’ve argued for an agenda that recognizes the benefits of trade, both to ourselves in terms of deeper supply chains and lower prices, and to the poor in developing economies. That means pursuing full employment here, especially in the communities that Autor et al identify as highly exposed to import competition. The Autor et al game-changer insight for mainstream economists is that people are not only consumers; they’re also workers that dwell in places that can be devastated when factories leave.

This is true even if the net benefits for the nation are positive. It’s mind-blowing how long it has taken establishment politicians and economists to recognize that people in communities crippled by import competition couldn’t care less about the aggregate national benefits of trade. Even in the NYT piece, a prominent trade economist crows: “Free trade really helps working-class people in terms of lower prices for products. The benefits are skewed toward people with lower income because they spend a much larger fraction of their income on merchandise.”

Those are the very people whose wages and incomes–real wages and incomes, factoring in lower inflation!!–have fallen.

The next trade agenda must also, I’ve argued, pursue a new kind of trade deal, one that elevates a wholly different group of stakeholders than the largely corporate interests who have come to dominate that process.

That agenda must also incorporate an evolving understanding of international macroeconomics, one that incorporates “savings gluts,” wherein large trade surplus countries export savings to and import labor demand from deficit countries; capital flows and their contribution to “secular stagnation;” and the impact of these dynamics on the dollar, interest rates, the Fed’s macro-management, and inflation.

The problem we face, of course, is that it took way too long to get to this discussion. That has allowed protectionists/demagogues to blame immigrants and trade for all that ails us, which leads to the obvious solutions: get rid of the immigrants and build barriers to trade.

But those ideas can’t work in no small part because globalization is…um…a global force with a massive infrastructure in place and benefits that American consumers will not comfortably sacrifice, nor should we, both for our own well-being and for the ability of emerging economies to lift their living standards through trade with richer countries.

Because we ignored the brewing problems with trade for so long, wasting time with fractious arguments over trade deals instead of dealing with the real problems identified by Autor et al and EPI, we’ve not built the policy architecture to deal with the micro and macro issues raised above (sorry, but “wage insurance” doesn’t get it). The Times piece points out that the unemployment rate in a district wherein the trade/polarization problem is fully operational is about 2.5 percentage points above the national average.

That’s a big hint, friends. Where trade deficits and import competition have hit hardest, labor demand is weakest. These communities need jobs and new investment. If the private sector doesn’t go there, and it often doesn’t, than the public sector must, through direct job creation and infrastructure investment.

On the macro front, when countries manage their currencies, as China did in the 2000s, we must take countervailing actions of the type I suggest in Chapter 5 here. When the strong dollar is exacerbating the trade deficit and capital inflows are further weakening demand, the Fed must incorporate these dynamics and act accordingly, as they have in their dovish turn in recent months.

We either figure out how to offset the impacts that Autor et al have been documenting in ways that preserve the benefits while accounting for the costs, or we’ll be stuck with Trumpian atavism. Not to put too fine a point on it, our choice is between the new age or the stone age. We’d best choose wisely.

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8 comments in reply to "The new age or the stone age: we either deal with the costs of trade or they deal with us"

  1. Non Idealist says:

    Thank you, Jared, for making this a real issue. I’ve been fighting on this front for about 10 years now. It is an issue that is easily ignored by most people, but it needs immediate attention. We might not agree 100% on what is necessary to fix it, but we’re on the same side here.

    I’ve been arguing at the NYT for a while now that the rise of Trump was caused by this trade problem and the joblessness and loss of wages. It gets mixed up with racism, because the only prominent politician that seems willing to talk about the problem is a racist, Trump. It didn’t have to be this way. Economists could have been a lot more lucid in their analysis, or perhaps just being aware that individuals don’t really form political opinions based upon the cost of goods would have sufficed.

    The biggest mistake an economist can make is to blame people for being people. This is a major problem in this field, that they believe when people don’t realize the greatness of economic theory that they’re flawed or just not understanding things properly. In this situation, the people are not the problem, rather the economists are the problem. Because they refuse to understand that people don’t operate based upon numbers, they totally miss the problems they sometimes create.

    Jared, you and Dean Baker have been instrumental in renewing my hope that we can tackle this huge problem in the future political arena. The first step is recognition.

    We fight even harder when we believe that this gets conflated with racism. Some individuals really feel racism as a result of trade policy, and that is unfortunate. But these are fundamentally different things. The people can separate them if the people are respected. But currently, economists don’t seem to respect normal people. They seem to want them to fit their models. They never will fit the models. The models need to change to fit real people.

    • Barry says:

      Non Idealist says:
      “I’ve been arguing at the NYT for a while now that the rise of Trump was caused by this trade problem and the joblessness and loss of wages. It gets mixed up with racism, because the only prominent politician that seems willing to talk about the problem is a racist, Trump. ”

      What about Sanders?

  2. Non Idealist says:

    Some economists believe that the problems of trade can be dealt with by increasing the safety net, government welfare benefits.

    I disagree. Here is where we should be in agreement with Republicans. Working adults do need to find dignity through work. Do kids feel or lose a sense of dignity when eating their subsidized lunch? Of course not! This is ridiculous. This is an adult issue!

    Adults need to feel useful, and they should be paid not by the government necessarily but by the company acknowledging their value.

    While the numbers might look good on paper, the belief that we can sooth the pains of trade with welfare is a fantasy. It isn’t based in the reality of how people feel. We’re talking about voters here. I respect people much more than I respect numbers.

    All economists need to respect people over numbers. Is this included in the curriculum? It should be emphasized throughout.

    • Procopius says:

      I would say that people can earn dignity in their jobs even when being paid by the government. This was an important issue for Roosevelt and was recognized by many of his Brain Trust, especially Frances Perkins. Yes, it’s very easy to do the opposite and make people ashamed for “being on the dole,” as the Republicans love to do. Projects like Hoover Dam, TVA, the CCC, all provided opportunities for people to earn a decent paycheck (they didn’t actually pay all that much) by producing things of real value. How many schools, firehouses, courthouses, office buildings did the WPA build? Many are still in use today because the Republicans and the New Democrats/Third Way are unwilling to maintain our infrastructure.

    • NoPolitician says:

      I would like to second the idea of people needing to feel useful. I think that the idea of transfer payments to the poor from everyone else is unpalatable to the general public and creates a poor underclass, generally segregated, with a lot of negative feelings. The Brookings Institute has reported that communities with over 20% poverty start to break down; we have communities with 60% or higher poverty. You’re not going to get enough support to create transfer payments to put people in the middle class, and minimal transfer payments don’t have a very good track record of moving people out of high-poverty communities – either the people who receive them or their offspring.

      A much better solution would be to increase public works programs and put people into them. This gives people the self-worth, but also allows them to gain skills which they can then take to the private sector.

      One barrier is that, generally speaking, government employment these days pays upper-middle-class wages. Government workers have generally been shielded from the impacts of globalization and technological improvements, and that, coupled with strong unions, have made their wages comparatively higher than the general public’s wages. For example, toll collectors on the Massachusetts Turnpike earn $65k to $75k for what is an unskilled position. I’m not trying to demean public workers for fighting for and receiving middle-class wages, but it will be a non-starter to pay an unemployed person $65k in a WPA program to pick up litter in a poor city. Such a job probably should be closer to “living wages” – maybe $30-35k.

      I think this is not going to be easy for even Democrats to grasp. Over the past 25 or so years, the focus is primarily on “education” – pushing more people into college all the way down to funding pre-K programs in inner cities. There seems to be a philosophy in place that if we just give “educational opportunities” to the poor, we’re absolved of everything, and if they don’t use them to get out of poverty, well, that is their own fault. That philosophy needs to change because it clearly does not work.

  3. Brett says:

    Has anyone duplicated Autor’s research on trade displacement and damage? I’m remembering his work on job polarization, which was rightfully criticized by Dean Baker.

  4. Flex says:

    I meant to write down a couple thoughts yesterday, but was pretty busy. I enjoy studying economic theory, but I’m not an economist. I’ve been in automotive manufacturing for over 20 years, and while I doubt that I can provide a lot of insight, I’ve seen decisions made by companies to move some of their supply chain overseas and seen some of the justifications of those decisions.

    And I think part of the answers the macro-economists look for as to why companies go global are buried in the weeds of those decisions.

    One of the things which seems to be rarely discussed is the cost of inventory. About twenty years ago, in my recollection and probably longer in some industries, the lean-manufacturing movement took hold. The concept had two prongs, and they both really dealt with inventory costs. The first idea was that maintaining a large inventory of unfinished goods for assembly means paying for storage and at the time there was a lot of discussion that these unfinished goods were taxable real property. So reducing on-hand inventory gave the business two systemic cost savings on storage costs and taxes.

    The second idea was the cost of scrap. If a change to the product occurs, and some changes are driven by safety concerns in automotive, there can be large amount of unusable inventory and thus a large amount of scrap which not only is a loss on the books, but often has a cost of disposal. So, lean-manufacturing also reduced occasional one-time costs of change by reducing scrap costs.

    Once the transportation costs dropped for imports, the idea of off-shoring both these costs became very attractive. I know that lean-manufacturing is sold as being more able to accept rapid change, and makes the company more ‘nimble’ (whatever that means) in the marketplace. But based on my experience with the supply chain; which has communication issues, quality leaks, regular air-freight costs, shortages, and other disruptions which regularly threaten manufacturing, the hype of lean-manufacturing has not lived up to the reality. The accountants are still saying that if you can just eliminate the special-cause problems, like earthquakes, lean-manufacturing will save companies a lot of money. And that’s probably true. But there is a difference between theory and reality, and reality wins every time.

    I know that economists often talk about labor and labor costs, and it makes great news, what with people losing their jobs and all. But part of the justification for moving off-shore rests on other savings, like the fact that inventory costs are greater than transportation costs. By making that trade-off less attractive, the idea of moving off-shore also becomes less attractive. And some of those costs can be adjusted by government, without much public fuss.

    For example, while going to a VAT system seems impossible, simply changing GAAP to call unfinished inventory non-taxable assets would change that equation. (I honestly don’t know if unfinished inventory is currently a taxable-asset, it was a number of years ago but I don’t keep close tabs on the tax code.) Yes, that would be a loss of revenue, but it would also encourage companies to maintain a higher inventory level, with a potential ripple affect of reducing the incentive to off-shore business and then hire more local workers. These effects should be able to be estimated and see if the loss of the tax revenue would be off-set by increased labor participation rate (and the associated benefits to wages, which leads to taxable income, etc.). Note, this isn’t a Laffer-Curve type nonsense, where we don’t know where we sit on that theoretical curve and thus cannot predict the impacts. There should be some real data about costs, revenue, decisions, and labor participation rate based on those decisions, so estimating the impact is probably possible.

    But that’s where policy makers need to focus. Finding and looking at the financial analysis used by companies for off-shoring. I doubt any CEO’s wake up one morning with the urge to move their supply chain and workforce overseas. I even doubt that CEO’s want to fire their local workforce, regardless of what they are paying them. Those decisions include a lot of factors, and most of them are financial. Most of them are not obvious from the balance sheets, but if the numbers on the balance sheets start to move around, like the cost of transportation goes up while the cost of inventory drops, the incentives change.

    Wow. That’s a little longer than the usual comment here. I suspect everyone reading this blog probably already knows all this. But I feel a lot better having my opinion out there.

    • Kaleberg says:

      There is something to be said for outsourcing, but Boeing took it to a reductio ad absurdum with its 787. It might be easier with automotive systems as opposed to aircraft, but odds are you are shipping parts by sea which means you have multiple week delays in your supply line. It might be lean, but not particularly flexible.

      Amusingly, early car manufacturers were extremely lean in their operations. They would buy parts on 30 day terms, assemble the cars and ship them to dealers with a sight draft attached. That meant the dealer took delivery by signing a check. That check paid the suppliers. That sounds about as lean a supply chain that one could get.