Trade denialism continues: Trade really did kill manufacturing jobs
from Dean Baker
There have been a flood of opinion pieces and news stories in recent weeks wrongly telling people that it was not trade that led to the loss of manufacturing jobs in recent years, but rather automation. This means that all of those people who are worried about trade deficits costing jobs are simply being silly. The promulgators of the automation story want everyone to stop talking about trade and instead focus on education, technology or whatever other item they can throw out as a distraction.
This “automation rather than trade story” is the equivalent of global warming denialism for the well-educated. And its proponents deserve at least as much contempt as global warming deniers.
The basic story on automation, trade and jobs is fairly straightforward. “Automation” is also known as “productivity growth,” and it is not new. We have been seeing gains in productivity in manufacturing ever since we started manufacturing things.
Productivity gains mean that we can produce more output with the same amount of work. Before the trade deficit exploded in the last decade, increases in productivity were largely offset by increases in output, making it so the total jobs in manufacturing did not change much.
Imagine that productivity increased by 20 percent over the course of a decade, roughly its average rate of growth. If manufacturing output also increases by 20 percent, then we have the same number of jobs at the end of the decade as at the beginning. This is pretty much what happened before the trade deficit exploded.
This is easy to see in the data. In December of 1970 the US had 17.3 million manufacturing jobs. Thirty years later, in December of 2000, it had 17.2 million manufacturing jobs. We had enormous growth in manufacturing productivity over this period, yet we had very little change in total employment.
To be clear, manufacturing did decline as a share of total employment. Total employment nearly doubled from 1970 to 2000, which means that the share of manufacturing employment in total employment fell by almost half. People were increasingly spending their money on services rather than manufactured foods.
However what we saw in the years after 2000 was qualitatively different. The number of manufacturing jobs fell by 3.4 million, more than 20 percent, between December 2000 and December of 2007. Note that this is before the collapse of the housing bubbled caused the recession. Manufacturing employment dropped by an additional 2.3 million in the recession, although it has since regained roughly half of these jobs.
The extraordinary plunge in manufacturing jobs in the years 2000 to 2007 was due to the explosion of the trade deficit, which peaked at just under 6 percent of GDP ($1.2 trillion in today’s economy) in 2005 and 2006. This was first and foremost due to the growth of imports from China during these years, although we ran large trade deficits with other countries as well.
There really is very little ambiguity in this story. Does anyone believe that if we had balanced trade it wouldn’t mean more manufacturing jobs? Do they think we could produce another $1.2 trillion in manufacturing output without employing any workers?
It is incredible how acceptable it is for our elites to lie about trade rather than deal with the issue candidly. The most blatant example of this dishonesty is a December, 2007 Washington Post editorial that praised NAFTA and, incidentally, criticized the Democratic presidential candidate for calling for renegotiating the trade deal.
The editorial absurdly asserted:
“Mexico’s gross domestic product, now more than $875 billion, has more than quadrupled since 1987.”
For GDP to quadruple over the course of two decades, it would have to sustain a 7 percent average annual rate of growth. China has managed to do this and almost no one else, certainly not Mexico. According to the IMF, Mexico’s GDP grew by 83 percent over this period.
While it is striking that the Washington Post’s editorial board would have been so ill-informed as to make such a huge mistake in their original editorial, the really incredible part of the story is that they still have not corrected the online version almost a decade later. After all, a reader could stumble on the GDP quadrupling claim and think that it is actually true.
This level of dishonesty separates trade out from most other areas of public debate. There can be grounds for honest people to differ on many issues, but there is less of a basis for asserting Mexico’s GDP quadrupled during this period than there is for denying global warming. It is unfortunate that the proponents of recent trade deals feel they have to be this dishonest to push their agenda.
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A technical question from the non-economist in your midst. Baker wrote, “Productivity gains mean that we can produce more output with the same amount of work.” How is the work measured? Dollars spent or hours allocated or a mixture of both? Something else?
Same amount of work here refers to hours. As output per hour goes up, hours do not have to go up.
https://fred.stlouisfed.org/graph/?g=ddHY
Governments and their cheer leaders continue to rely the illusion of the theory of international trade or comparitive advantage when whatever validity it had, has long gone, to justify ever more invasive trade agreements. In the context of Brexit we see the government constantly refer to securing free trade agreements and obviously not recognising that the phrase “free trade” is an oxymoron, you could almost hear Milton Friedman utter “there is no such thing as a free trade”!
After the Brexit referendum in the UK the statistical hyberbole of forecasts of imminent economic Armageddon may discredited the economic forecasts of government and media for a very long time. These made the Post’s claim seem like a minor misdemeanour.
Self deception is not new amongst members of so called “elites”: I remember reading extracts of Dr. Goebbel’s diary during the final days of the “Third Reich” wherein he found solace in the glory of the dream of the “1000 Jahre Reich”.
Reality is just too messy to deal with.
Keynes warned that in mass production industries, free trade merely created unemployment in the high wage trading partner — since for these industries it was equally efficient to produce anywhere on the globe.. The law of comparative advantage was only applicable for trade in natural resources and climate affected industries such as agriculture.
The elites pushing the automation story just do not understand the limitation of the law of comparative advantage.
The comparative advantage theory does not work for food security either, and hence not for agriculture when we are talking about food. See QUNO’s paper by Jennifer Clapp http://quno.org/sites/default/files/resources/QUNO_Food%20Security_Clapp.pdf
The analysis presented in the paper highlights three points:
First, it shows that the dominant neoclassical economic arguments for agricultural trade have many caveats that need to be put out in the open and examined in light of food security concerns.
Second, it shows that current trade theory tends to utilize an outdated notion of food security, and could benefit from a more nuanced understanding of the concept.
Third, it shows that trade theory and policy tends to prioritize efficiency (in a narrow sense) over other social goals, including ensuring the right to food, the need to preserve livelihoods and to protect the environment.
Given the political importance of these social goals, the paper suggests that we are only likely to see advancement of the dialogue on trade policy and food security once these broader goals are put on equal footing with trade and efficiency concerns.
Manufacturing, Trade, and Automation
Manufacturing employment and automation: Did NAFTA and China contribute to the decline in manufacturing jobs? Quick answer: NAFTA – No; China – Yes
If automation is taking manufacturing jobs then the productivity of manufacturing (output per worker, not the output per manufacturing sector) should be increasing as more automation takes over. But productivity peaked around 2003 and has mostly been in a downward trendline.
During most of the 1990s, under NAFTA, jobs remain steady (around 17 million) while the trendline for productivity has a slight increase. In the late 1990s, after the financial crisis in Asia, the Asian countries decide to become net exporters and it has an effect on the U.S. economy. And in 2001 China gets international trade status with WTO and you see the decline in U.S. manufacturing jobs from approximately 16 million to 14 million jobs up to the Great Recession starting in December 2007 and then another loss of 2 million jobs during the Great Recession (through June 2009); and, most of the trendline for manufacturing productivity since 2001 is flatlined to declining.
https://fred.stlouisfed.org/graph/?g=d9Y5
Industrial production (manufacturing output) and capacity utilization. Capacity Utilization of 75% to 80% is considered good; the 1960s, at over 90%, is the best peacetime performance in U.S. history.
Industrial Production growth is good each decade, 30% to 50%, from the 1960s to 2000; and, this is with employment steady at around 18 million in the workforce. After 2000 growth flatlines — except for coming out of the recession of 2001 where it grows at 15% but only gets back to where we were in 2000. And keep in mind that duiring Bush’s Administration we had two big tax cuts and the repatriation of U.S. corporate foreign profits back to the U.S. with little to show for the investment in our manufacturing sector.
https://fred.stlouisfed.org/graph/?g=d9ZM
Industrial Production and Manufacturing Jobs:
https://fred.stlouisfed.org/graph/?g=dafA
https://fred.stlouisfed.org/graph/?g=dbu0
What I’m reading is that the idea of automation replacing workers is largely a myth.
A disposable human being in a third world country beats automation every time.
“A disposable human being in a third world country beats automation every time.”
That’s how it worked in the past. That doesn’t describe the future.
Productivity numbers are as reliable as the statistics that Mark Twain warned about. Everyone seems to know that productivity is output divided by input. But there is a crucial factor overlooked in the rush to show good numbers on an annual financial report. The crucial factor is that the units of output and the units of input must happen in the exact timeframe. In other words, claiming a year’s worth of product as the output of the workforce on December 31, following a downsizing, is plain cheating.
If a productivity gain is counted that way, then the following year it is necessary to lay off twice as many workers to keep the productivity gain going, at least mathematically. Is it naive to think that modern chief executives work the balance sheet harder than they work inside the business? Claiming automation for the downsizing is as good an excuse as any.
Dean: I think you’re ignoring a lot of history: the impact of the enclosure movement – leading to impoverished thousands if not millions; the Luddite rebellion again the “automation” of their time; long-wall mining techniques reducing employment in coal-mining; electric arc replacing blast furnaces, computer controlled laser-cutting in garment manufacturing, etc. People were dislocated from their former jobs. They didn’t necessarily pick up jobs in the growth sectors that emerged. That’s historical fact. Trade no doubt exacerbated the most recent of these in the search for cheaper and cheaper labor. But as technology has rendered labor a smaller % of total cost, other factors come into play.
Dean, I must disagree with you on the impacts of technology with regard work. Technology has always impacted, for good or ill how humans work and what they work on and with. Slavery I think makes my point. Slavery existed so that the work involved with daily could get done while the non-slaves devoted time to science, the arts, and government. After slavery in the US Confederate South was ended, laws were put in place (“Jim Crow”) to place African-Americans into virtual slavery so the pre-Civil War society could continue. Jim Crow became unnecessary and redundant when technology (mechanical harvester, cotton gin, mechanical bailers, etc.) performed the tasks once performed by slaves. In essence, technology ended slavery in the USA. That is, till the cost trade-offs began. In other words, humans would be used for tasks so long as they were less costly than the technology that could replace their work. This left unanswered the question of what happens to humans when the calculation selects technology over humans. Donald Trump’s first Labor Secretary, Andrew Puzder has that answer. He warned that raising wages only pushes businesses toward machines. He’s said that fast food’s thin profit margins make it impossible to raise wages. Businesses are then forced to use cheaper machines instead. Puzder has also praised automation for bringing convenience to customers and reducing costs for businesses. He’s expressed an interest in letting customers place orders on touchscreens in some of his restaurants. He loves automation. But could not answer this most basic question here – how do customers continue to make purchases at his fast-food restaurants when automation has replaced them on the job?
In essence, technology ended slavery in the USA. Most historians contend otherwise – that new technology, which started during slavery, not Jim Crow, strengthened the system of slavery.
Practically all the discussion here including Dean Baker’s makes the nonsensical assumption that free trade can cause unemployment. A better, truer way to look at it is that unemployment is always a decision (of the issuer of money, the state) to not employ. Baker of course understands this, but unfortunately presents things in the nearly universal, but misleading and confusing way. When states don’t behave this absurd way, simply decide to have full employment, free trade can really only benefit it and its people. The only exception is Susan Bragdon’s above – depending on the outside world to feed you is a bad idea.
Calgacus, what you contend did as I say strengthen slavery until owning slaves or enforcing Jim Crow became more costly that just replacing both with technology to do the work. Then slaves (original or Jim Crow) were cut loose to starve but still under the thumb of local “political” structures. Technology ended slavery/Jim Crow, not political oppression.
i agree with you other points. In fact, after World War II both the Charter of the UN and the Universal Declaration of Human rights maintain that humans cannot be free and have all their rights in place without employment. Employment is a basic human right. This is a guarantee of employment. No chance of this today.
“Practically all the discussion here including Dean Baker’s makes the nonsensical assumption that free trade can cause unemployment.”
When government pays for people to work, it pays for this out of taxes and free trade is essentially a declaration that the proper level of taxes on the rich is zero. After all, if we are willing to give corporations their most treasured resource – a middle class to buy their products – for free, then why on earth would they buy the cow by supporting the creation of first world society?
I suppose you could also pay for people to work using printed money, but that requires talking about an economic situation with totally different math involved.
” free trade can really only benefit it and its people.”
What kind of benefit are we talking about here? The racist Ricardian viewpoint? The “nations are too small to contain complete innovation ecosystems” Krugman perspective? A general “capital accumulation doesn’t matter and instead we need to opimize production and pricing based on today’s static capital levels” perspective?
We should no longer accept “free trade is good because everybody knows that free trade is good” as an answer.
jeff1089: When government pays for people to work, it pays for this out of taxes
False. This is never true. It can’t be true. All government spending is by newly created money; the public needs to get money from the government, not vice versa. Always & forever since the pyramids (I could quibble with this, but only quibble.) Everybody used to understand this at least vaguely; that is a major reason for the post-war prosperity. Practical & theoretical economics took a Great Leap Backwards in the 60s-70s or so, and as Randall Wray notes, now it “gets everything backwards”.
and free trade is essentially a declaration that the proper level of taxes on the rich is zero. Non sequitur. They have little to do with each other. Trade being “free” or not is a trivial matter. I’m not arguing for or against it, just saying it ain’t guilty either way. The fault is not in our stars, but our selves. (Want a quote from FDR saying the same? He thought it was an important insight to act on, and did, by the way.)
After all, if we are willing to give corporations their most treasured resource – a middle class to buy their products – for free, then why on earth would they buy the cow by supporting the creation of first world society?
I cannot understand this paragraph. (Surely my fault.) The major problem with free trade is too much demand for money, foreign saving causing domestic unemployment. In this situation the corporations and everyone else need not be taxed as much, corporate support of a first world society is less needed.
The problem I think – I am too tired to be clearer – is as usual, you are making a hidden full employment assumption, like most (non-Marxian, non-Keynesian, non-institutional) “economics”. That is the only, now rare case when anything remotely like “government spending comes out of taxes is true”, when anything remotely like the arguments you might be sketching have any force at all – which is not much.
I suppose you could also pay for people to work using printed money, but that requires talking about an economic situation with totally different math involved.
Since this is the case ALWAYS, only this math has a good chance of being correct and applicable.
My point is that the major deleterious economic effect of free trade by far is on employment. Free trade is not a panacea and does not have the wonderfully positive effects ascribed to by its boosters – one of my favorite essays is Keynes’s National Self-Sufficiency, but neither does it have tremendously destructive effects outside of that, most especially on the great powers.
So looked at correctly – the solution is full employment, and we are lucky that is a very easy objective to achieve – if only the state decides to do it, which in turn depends on the people understanding it is easy and entirely beneficial and demanding it. And it just doesn’t have much to do with trade, free or not. I’m just repeating MMT & Abba Lerner before. A country has absolutely nothing to fear from from free trade if it practices what Lerner called the Invincible weapon – or something like that – of functional finance. And of course Keynes eventually agreed Lerner (who ascribed these ideas ultimately to Keynes) was right. I’ve said similar things – not at such length – at Beat the Press – and Dean Baker, consistent with some of his own posts – has agreed with me by the way. We disagree about the political viability of doing the sane thing, accommodating international deficits by government spending, not on its desirability and efficacy.
Ken:Technology ended slavery/Jim Crow, not political oppression
I disagree. Too technological-determinist. Too polyannaish if projected to the current scene. What ended slavery/Jim Crow was better social technology, social understanding and consciousness and historical struggles where the Good Guys won. Better material technology was consistent with increased oppression – what if the South had won its independence, as most military experts predicted at the time?
Otherwise we agree entirely.
Calgacus, per history the “good” guys did win the Civil War. Then slavery was supposed to end. It did, obstinately. Replaced by Jim Crow so African Americans were forced to continue picking, bailing, and shipping cotton, tobacco, etc. for virtually no pay. Definitely wage slavery. Especially in the form of tenant farming. The Confederate South preferred that slavery continue. Thus the KKK. Slavery/Jim Crow became unnecessary with technology to replace the work of African Americans. But social oppression was still necessary. Didn’t want the African Americans to vote or have equal rights to food, shelter, etc. Remember, in many Southern states African Americans outnumbered whites. The “social technology, social understanding and consciousness and historical struggles” you mention helped end this oppression. I separate slavery (wage or otherwise) from social oppression. I think that’s where our views separate.
Automation and industrialisation are in the first place aggregate effects. They’re about the total amount of stuff. From the perspective of American consumers, deploying more automation or importing goods from China are two ways to have more goods in aggregate.
Trade and investment are distribution effects. They’re about who has claim to stuff (money). From the perspective of American workers, deploying more automation is a way to shift claims to American capitalists, and having a trade deficit is a way to shift claims to China.
Your argument somewhat conflates these modes. You say that before 2000 automation did not have distributional effects (gains were shared) and afterwards trade did have distributional effects, so trade and automation must be different.
I’d counter that before 2000 there was a political choice to share gains. After 2000 the choice has been not to share, and that goes for both trade and automation.
Perhaps your implicit argument is that international trade makes it harder to share gains between domestic consumers and foreign capitalists. It’s worth to frame that clearly as an internationalist argument, rather than one that is protectionist.