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Truthiness on trade

from Dean Baker

With the official death of the Trans-Pacific Partnership (TPP) and the likely renegotiation of the North American Free Trade Agreement (NAFTA), the proponents of these deals are doubling down in their defense of the current course of US trade policy. While there are serious arguments that can be made in defense of these policies, advocates are instead seeking to deny basic reality.

These trade policy proponents are trying to deny that these policies have hurt large segments of the workforce and are claiming that the people, who believe that they were hurt by trade, are simply misinformed. The proponent’s story is that the real cause of job loss was the impersonal force of technology, not a trade policy that deliberately placed US manufacturing workers in direct competition with low paid workers in the developing world.

Fortunately this is a case where the facts are clear. The people who think they were hurt by trade are right. It is the people who blame technology who are misinformed or worse.

The obvious error in the technology or automation story is that automation is not anything new. We have been seeing increases in productivity in manufacturing forever; it is not something that just happened in the last two decades. In fact, the most rapid period of technological change was in the quarter century from 1947 to 1973, not the last two decades. 

In spite of increases in productivity growth, there was relatively little net change in manufacturing employment in the three decades from 1970 to 2000. There were 17.8 million jobs in manufacturing in 1970 and 17.3 million in 2000. There were cyclical ups and downs, but the downward trend was relatively modest. To be clear, manufacturing was declining as a share of total employment, but there was little change in the absolute level of employment.

This changed in the years from 2000 to 2007. During this seven-year period, manufacturing employment fell by 3.4 million jobs to 13.9 million. Note that 2007 is before the collapse of the housing bubble that threw the economy into recession. The reason for this plunge in employment is simple, the trade deficit exploded to almost 6 percent of GDP, more than $1.1 trillion in today’s economy.

To argue that this surge in the trade deficit was not associated with a loss of manufacturing jobs is absurd on its face. Does anyone seriously want to argue that if the trade deficit had remained near 1.5 percent of GDP (its mid-1990 level), that we would not have more manufacturing jobs. Or to flip the question, can we add more than $1 trillion to our annual output in manufacturing without hiring additional workers?

And these job losses were concentrated in the traditional industrial states that featured prominently in the fall election. Ohio lost 250,000 manufacturing jobs during this period, one quarter of its total. Michigan lost 280,000 jobs, more than 30 percent of its manufacturing employment. Pennsylvania lost more than 300,000 manufacturing jobs, roughly one-third of its total.

None of these numbers are seriously contestable outside of Donald Trump’s alternative fact universe. They all come from the Bureau of Labor Statistics and can be easily verified by any of the commentators blaming automation, if they were interested in actually knowing anything about the issue.

In fact, this story really understates the impact of trade since the imbalances that lead to the housing bubble and the subsequent crash and Great Recession were directly tied to the massive trade deficit the United States ran in this period. For this reason, people would not be wrong to say that our trade policies were an important contributor to the Great Recession and its devastating impact on the labor market.

It is also worth pointing out we could have pursued trade policies that were not so harmful to these workers. Our high dollar policy, which began under Treasury Secretary Robert Rubin in 1996, was central to the huge trade deficits of the next decade.

Also, contrary to the folk wisdom of the elites, we have selective protectionism, not free trade. While it is easy to import manufactured goods produced by the cheapest labor anywhere in the world, even a highly qualified foreign doctor would get arrested for practicing medicine in the United States unless they first completed a US residency program. We subjected our manufacturing workers to international competition, while largely protecting our most highly paid professionals.

This reality check is important. The people who turned away from the Democrats and voted for Trump really did have legitimate grievances. Trade policies supported by the leadership of both parties had a devastating impact on the lives of millions of workers and their families.

This doesn’t justify voting for a reality-challenged bigot like Trump, but it is flat out dishonest to deny the damage that our trade policies have inflicted on large segments of the country. Denying this reality is not a promising path for winning back the support of these voters, although it may make the people who benefited from these trade policies feel better about themselves.

See article on original site

  1. patrick newman
    February 1, 2017 at 6:09 pm

    Perhaps the trade deficit reflected the globalisation of production motivated by the high profits from low wages found in overseas displaced previously indigenous facilities?

  2. Paul Davidson
    February 1, 2017 at 6:57 pm

    keynes noted that for mass industrial oroduction [manufacturing] industries, production could be equally efficient [in terms of labor hours input per unit of output] anywhere on the planet –so that the law of comparative advantage was not applicable fpr imports from cheap labor nations– Comparative advamstage was applicable only to the production of natural resource and climate affected industries [eg, agriculture].

    Keynes agrued that trade in these mass production industries that favored cheap labor was wrong and he stated that labor income in these mass production industries must be under the same nation consumption and financial institution to assure full employment.s

    • patrick newman
      February 3, 2017 at 11:23 am

      Absolutely but the obsolete theory of comparitive advantage has very deep roots in the media and academia!

  3. February 1, 2017 at 7:44 pm

    Dean:

    I think you have the numbers correct, and also the timeline in your article, although that almost flat-line of 17 million manufacturing jobs between 1970-2000 always strikes hard at basic gut instincts on the issue, that most of what we know as the decline in the “Rustbelt” happened in those years: Youngstown as the prime exhibit, but also Bethlehem Steel in the Lehigh Valley. If steel, autos, rubber and textiles all lost more dramatic numbers than that flatline would indicate, could someone, though, please fill us in: where was the growth in manufacturing taking place between 1970-2000 to keep the overall number around 17 million? In the South, border states, Texas, California and the Southwest? But what industries? IT hardware until Asia took over?

    I know from statistics I’ve seen from historians, that Philadelphia’s industrial job losses were as follows, taken from Walter Licht’s brief but moving little online essay about Philadelphia’s industrial history, with the nostalgic title “Workshop of the World”: in 1953 Philly had 365,500 industrial jobs; by 1977 it was down to 168,400; and by 2008, it was down to 29,800.

    Now the time frame for Philadelphia is off at both ends…but the impact of this earlier phase of de-industrialization was, in my view, as devastating for the black and white working class of Philadelphia as it was for that of Youngstown, Ohio, so emotionally raw that working class Philadelphia was the physical setting not only for the Rocky series of movies with Sylvester Stallone, but for Mark Wahlberg’s 2006 film “Invincible,” which covered much the same social-psychological terrain.

  4. JohnL
    February 2, 2017 at 2:56 am

    Interesting analysis.
    If you look at manufacturing employment against BLS’s manufacturing output (link below) during the NAFTA period, there seems to be more to the story.
    With this series the conclusion could be drawn that NAFTA was good for manufacturing, why did employement suffer? I don’t know.
    Therefore any action against trade may not materialize in significant employment gains
    Now given labours inability to negotiate wage increases and that trade actions will likely result in price inflation. This will lay the ground work for a stagflationary resession.

    https://fred.stlouisfed.org/graph/?graph_id=358353

  5. February 2, 2017 at 9:51 am

    Could it be that both are true? On one hand, labour in poor countries is cheaper because they’re poor countries. On the other, for the world as a whole there is surplus labour, at least in the narrow sense where that labour is put to use serving the needs of affluent consumers. To increase demand for labour we need more equitable consumption, such as care for all and material wealth beyond the West.

  6. robert locke
    February 3, 2017 at 9:25 am

    In this discussion people leave management out of the equation. There is a mountain of evidence and discussion blaming the decline of US manufacturing on poor corporate management. If this is true, poor trade deals and currency manipulations are beside the point.

    • February 3, 2017 at 5:36 pm

      “There is a mountain of evidence and discussion blaming the decline of US manufacturing on poor corporate management.”

      I would be very hesitant to blame management in today’s society for demand-side problems.. After all, any managers today who represent Henry Fords ideal of “I pay them extra so they can buy one of my cars” are nothing more than value waiting to be unlocked.

      It’s the underlying economic forces and profit motivations.

  7. February 3, 2017 at 6:06 pm

    It is pretty simple to prove that the assumption “The proper level of tariffs is always zero” can be used to prove “The proper level of national internal taxation is always zero, or at least bounded above by transportation costs”. I guess we need more rhetorical devices, but I have to admit a bit of disappointment that Ricardian supporters don’t see the ridiculousness of their positions and then just say “Oops!” and move on.

    “Our high dollar policy, which began under Treasury Secretary Robert Rubin in 1996”

    I have always wondered exactly what Rubin meant by that. The Reagan tax cuts were a very strong and explicit strong dollar policy and I never really saw anything Rubin did to match Reagan’s policies that justified his rhetoric, although I will agree that the trade deficit got worse under his watch. I agree that if he actually did anything beyond talk about this, it was going the wrong direction.

    “Also, contrary to the folk wisdom of the elites, we have selective protectionism, not free trade. While it is easy to import manufactured goods produced by the cheapest labor anywhere in the world, even a highly qualified foreign doctor would get arrested for practicing medicine in the United States unless they first completed a US residency program.”

    I would certainly agree with this, but I would go further. Even the industrial policy of having a college system that includes research institutions like Berkeley and MIT represent putting a finger on the scale of Free Trade. We should all be grateful that Free Trade proponents will never achieve their ideals.

  8. February 5, 2017 at 5:14 am

    I read the writings on free trade by its opponents and supporters. Far as I can tell it’s all nonsense. What they say sums up to “international trade left to its natural course without tariffs, quotas, or other restrictions.” This is witless, since no trade of any kind is ever free of cultural, governmental, religious, and even family restrictions. We don’t trade babies on a Wall Street styled market, even though that is possible. It’s just morally repugnant for many people. We don’t trade slaves for the same reason. The US military and law enforcement arrests and/or kills arms dealers daily. Practicing Jews don’t trade on the Sabbath. And no business happens for many Muslims during Ramadan. These are not “natural” restrictions. They are all created and carried out by humans. Even many traders on Wall Street will hold up or stall transactions to better their profit margins. It is possible, of course to believe a system of rules can be created to control all these restrictions. But it’s a belief without foundation, due to the complexity. So, someone tell me how do we know “free trade” when it happens? My view, it never happens. If I’m correct, then what is the purpose of all these treaties, negotiations, and economic analyses to create and expand free trade agreements? I believe they are simply ways intended (sometimes, perhaps often) to benefit some people and nations over others. Hitler and the Nazis conquered Europe, half of Africa, half of the USSR, and with their Japanese allies all of Asia based on a search for Lebensraum, the space they said they needed to survive. Free trade is just a current version of Lebensraum. An excuse to screw your neighbors.

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