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The trouble with trade: people understand it

February 16, 2017 11 comments

from Dean Baker

Ever since Donald Trump was elected there has been a huge backlash among elite-types against those blaming trade for their problems. Major news outlets have been filled with misleading and dishonest stories claiming that the real cause of manufacturing job loss has been automation and that people are stupid to worry about trade.

In fact, people are exactly right to be concerned about the impact of our trade policies on their living standards. It is the fact that people are right that is worrying our elites. Trade is just one of the areas in which politicians of both parties have promoted policies to redistribute income upward. It just happens to be the area in which the impact is most recognizable and therefore people have mounted an effective resistance.

The story with trade is simple. When a manufacturing worker in the US is placed in direct competition with a worker in Mexico, China or some other developing country, who earns one-tenth of their pay, it puts downward pressure on their wages. Either their jobs go away or they are forced to take substantial pay cuts to keep their job.

This competition has cost a huge number of manufacturing jobs in this century. It has also put downward pressure directly on the wages of manufacturing workers and indirectly on the wages of less-educated workers more generally, as displaced manufacturing workers sought jobs in other sectors.

Elite media types have tried to deny these facts by claiming that the source of job loss is automation (i.e. productivity growth), not trade. This claim deserves to be met with the same sort of derision as the claims of climate change deniers.

Read more…

Badly confused economics: The debate on automation

February 8, 2017 24 comments

from Dean Baker

The media have been filled with accounts in recent years of how automation is displacing workers and threatening the country with mass unemployment. Even President Obama even made a point of warning about the dangers of mass displacement from automation in his farewell address.

This obsession is bizarre for two reasons. The first is a simple empirical point. In contrast to the concern about automation leading to massive displacement, in recent years the pace of automation has been extremely slow. Productivity growth, which is a measure of the rate at which workers are being displaced by technology, has averaged less than 1.0 percent annually in the United States over the last decade.

By contrast, it averaged almost 3.0 percent annually in the decade from 1995 to 2005. Productivity growth also averaged almost 3.0 percent annually in the long Golden Age from 1947 to 1973. This slowdown has not been restricted to the United States. Virtually every wealthy country has seen very slow productivity growth over the last decade. The United Kingdom even had several years of negative productivity growth. This is equivalent to workers were replacing robots: a situation where it takes more workers to produce the same amount of output.

So at a time when automation is proceeding at an extraordinarily slow pace we are seeing many policy types and politicians worrying about mass displacement from automation. That does not make a great deal of sense.   Read more…

End patent and copyright requirements in NAFTA

February 4, 2017 8 comments

from Dean Baker

The trade deals negotiated in the last quarter century are becoming less focused on traditional trade barriers like tariffs and quotas. Instead, they are imposing a regulation structure on the parties, which tend to be very business oriented. In many cases, the rules being required under the trade deals would never be accepted if they went through the normal political process.

The renegotiation of the North American Free Trade Agreement allows the United States, Canada and Mexico to get rid of rules that have no place in trade deals. At the top of this list is the Investor-State Dispute Settlement (I.S.D.S.) tribunals. These tribunals operate outside the normal judicial process. Their rulings are not bound by precedent, nor are they subject to appeal. Also, they are only open to foreign investors as a mechanism to sue member governments.

These tribunals can be used to penalize governments for measures designed to protect the environment, consumers, workers or to ensure the stability of financial institutions. TransCanada, the company that had been building the XL pipeline, gave us an example of how these tribunals can be used. It initiated a suit after President Barack Obama decided to cancel the pipeline. It is likely that we would see many more suits in the future using the I.S.D.S. tribunals if they are left in NAFTA and other trade deals.  Read more…

Truthiness on trade

February 1, 2017 10 comments

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.  Read more…

The Trump cabinet: strangest show on Earth

January 28, 2017 4 comments

from Dean Baker

As we start the Trump presidency, events just keep getting more bizarre. At his first and last press conference as president-elect, Donald Trump boasted about his divestment plan in which he was “sort of, kind of” turning over the management of his business enterprises to his two adult sons. He displayed a table full of documents that were supposed to indicate the extent of his divestment, but the documents were not made available for the press to examine.

Furthermore, in spite of claiming that he was stepping away from his business enterprises, Trump was still boasting being offered a $2 billion deal from a Dubai businessman. While Trump assured us that he turned the deal down, the obvious question is why he was discussing it in the first place.

Insofar as Trump is actually stepping away from his business, this is very far from the sort of blind trust arrangements made by presidents of both parties for the last half century. The public can never be sure that his actions as president are not motivated by a desire to fatten the profits of Trump enterprises. Nor can we be assured that actions by foreign governments won’t be affected by their country’s dealings with the president’s business empire.

The ethical lapses from the top carry through to his cabinet appointments, which seem destined to replace Ringling Bros. Circus as the strangest show on Earth. Andy Puzder, Trump’s pick for secretary of labor, runs two chains of fast-food restaurants that have repeatedly violated wage and hour laws and has been legally forced to make payments to workers. These are the laws that Mr. Puzder will be responsible for enforcing if he gets approved for the job.
Read more…

Weak labor market: President Obama hides behind automation

January 13, 2017 8 comments

from Dean Baker

It really is shameful how so many people, who certainly should know better, argue that automation is the factor depressing the wages of large segments of the workforce and that education (i.e. blame the ignorant workers) is the solution. President Obama takes center stage in this picture since he said almost exactly this in his farewell address earlier in the week. This misconception is repeated in a Claire Cain Miller’s NYT column today. Just about every part of the story is wrong.

Starting with the basic story of automation replacing workers, we have a simple way of measuring this process, it’s called “productivity growth.” And contrary to what the automation folks tell you, productivity growth has actually been very slow lately.

Book2 9104 image001

Source: Bureau of Labor Statistics.

The figure above shows average annual rates of productivity growth for five year periods, going back to 1952. As can be seen, the pace of automation (productivity growth) has actually been quite slow in recent years. It is also projected by the Congressional Budget Office and most other forecasters to remain slow for the foreseeable future, so the prospect of mass displacement of jobs by automation runs completely counter to what we have been seeing in the labor market.

What does Donald Trump actually intend to do about trade?

January 5, 2017 4 comments

from Dean Baker

Shortly after Donald Trump enters the White House, we should get an answer to a key question from his campaign: What does he actually intend to do about trade? Trade was one of his main issues when he campaigned in the key industrial states that he won in November.

Trump argued that past presidents of both parties had failed the country’s workers by signing bad trade deals. He said that the negotiators were “stupid” and that he would instead appoint “smart” negotiators who wouldn’t let Mexico, China and other trading partners beat us at the negotiating table.

Trump is correct in identifying trade as a force that has caused enormous economic damage to millions of people in these states, but he is wrong that the problem was “stupid” negotiators. The vast majority of people who have been given the responsibility for negotiating trade deals are smart, ambitious and hard-working.

The large trade deficits we have been running in the last two decades are not due to negotiators. We run large trade deficits because securing manufacturing jobs in the United States has not been a priority for our negotiators.   Read more…

Economists, Doctors’ Cartels, and Uber

January 1, 2017 3 comments

from Dean Baker

Breaking the taxi industry cartel’s and promoting Uber has been somewhat of a cause celebre among economists in recent years. Any card carrying economist can give you the two minute tirade on the evils of the taxi cartel and the benefits of Uber. (I can too, but the argument should be for modernized regulation, not Uber gets to do whatever it wants because it’s Uber, see pieces here, here, and here.)

What is striking is that the enthusiasm for the virtues of competition seems to disappear when we switch the topic from the taxi cartel to the doctors’ cartel. Doctors actually have been far more effective than taxi companies in limiting competition. Doctors largely get to set standards of care, which not surprisingly requires twice as high a percentage of highly-paid specialists as in other wealthy countries. They also restrict the number of doctors with a wonderfully protectionist rule that prohibits doctors from practicing in the United States unless they have completed a U.S. residency program. This means that even well-established doctors in places like Germany, France, and Canada would face arrest if they attempted to practice medicine in the United States.  Read more…

Trump’s infrastructure financing seems like a joke

December 22, 2016 9 comments

from Dean Baker

While Trump is right to emphasize the need for more and better infrastructure, his program is not the way to address the problem.

There is much research showing the benefits of spending on traditional infrastructure such as roads and bridges. There are also likely to be large gains from less traditional areas like broadband, where the U.S. ranks poorly among wealthy countries, and improving the quality of public drinking water to avoid more Flint disasters. Ideally, a public investment agenda would carry over into areas like early childhood education, which we know provides huge benefits to the children directly affected and the economy over the longer term.

The economy can still use a further boost to demand. The percentage of the prime age population (ages 25-54) that is employed is still down by 2 full percentage points from pre-recession levels and four points from the year 2000 peaks. There is no evidence that the economy is pushing against limits in either more rapid wage growth or accelerating inflation. There is little reason not to push the economy to see how many more workers can be employed, especially since those who would get jobs are disproportionately Hispanic, African-American, and the less-educated, who are still less likely than others to have jobs.

But based on what is known to date, the Trump plan is not likely to meet these needs.  Read more…

Pushing to full employment: a Trump dividend?

December 15, 2016 3 comments

from Dean Baker

Economists are not very good at economics. We repeatedly get reminded of this fact when we see the economy act in ways that catch the bulk of the profession by complete surprise.

The most obvious example is the housing bubble, whose collapse gave us the financial crisis and the Great Recession. Almost no economists saw the bubble or the potential hazards posed by its bursting. But this is just the beginning of what economists got wrong in recent years.

Not only did the bubble and its collapse catch them by surprise, the recovery turned out to be much weaker than almost anyone predicted. Part of this was due to the austerity policies demanded by Congress, but even accounting for these policies, we didn’t see the rapid growth projected by the Congressional Budget Office (CBO) and other forecasters. In 2010, CBO projected average GDP growth of 4.4 percent for the years from 2012 to 2014. The actual number was less than half this amount.

The housing bubble wasn’t the first bubble CBO and other forecasters failed to see. The collapse of the stock bubble, which gave us the 2001 recession, also caught almost all economic forecasters by surprise. In short, the ability of economists to predict the future state of the economy, or understand the present state, is really poor.

This history is relevant in assessing Donald Trump’s plans for infrastructure and tax cuts because much of what economists say about these plans is likely to be wrong. Just to be clear, from what we have heard to date, both the infrastructure and tax plans seem like they are primarily designed to make Trump’s wealthy friends richer.   Read more…

Disagreeing with Paul Krugman: His friends probably do vote against the interest of the working class (white and other)

December 10, 2016 7 comments

from Dean Baker

Paul Krugman told readers that intellectual types like him tend to vote for progressive taxes and other measures that benefit white working class people. This is only partly true.

People with college and advanced degrees tend to be strong supporters of recent trade deals [I’m including China’s entry to the WTO] that have been a major factor in the loss of manufacturing jobs in the last quarter century, putting downward pressure on the pay of workers without college degrees. They also tend to support stronger and longer patent and copyright protections (partly in trade deals), which also redistribute income upward. (We will pay $430 billion for prescription drugs this year, which would cost 10-20 percent of this amount in a free market. The difference is equal to roughly five times annual spending on food stamps.)

Educated people also tended to support the deregulation of the financial sector, which has led to some of the largest fortunes in the country. They also overwhelmingly supported the 2008 bailout which threw a lifeline to the Wall Street banks at a time when the market was going to condemn them to the dustbin of history. (Sorry, the second Great Depression story as the alternative is nonsense — that would have required a decade of stupid policy, nothing about the financial collapse itself would have entailed a second Great Depression.)  Read more…

Donald Trump and the Republicans: The art of the steal

December 6, 2016 4 comments

from Dean Baker

During the campaign Donald Trump boasted that he could kill someone on Fifth Avenue and it wouldn’t affect his standing among his supporters. Whether or not this is true, this appears to be the approach that Trump and his fellow Republicans are taking to their role in governing. The basic story is that they can rip off the public as much as they want, because ain’t no one going to stop them. They could be right.

The most immediate issue is Trump’s refusal to sell his assets and place the proceeds in a blind trust. This was a practice followed by every president in the last half century. The idea is that the president should be making decisions based on what they think is good for the country, not based on what they think will fatten their pocketbooks.

Trump’s proposal in this area is essentially a joke. The idea is he turns over the operation of his empire to his kids. It’s not clear how this helps at all. His kids will never discuss any business issues with him and also have no opportunity to discuss policy with their father or father-in-law?

Perhaps more importantly, he knows what properties are in his empire. This means that if he decides to make an issue of the crackdown on opposition by Turkey’s president, Recep Erdoğan, it is likely that Erdoğan will retaliate against the Trump resorts in Turkey. The same applies to his dealings with many other countries.

We shouldn’t have to rely on a “trust me” pledge from the president that the financial interests of his family will not be a consideration in his foreign policy. That is exactly why prior presidents put their assets into a blind trust. And, there is little reason to believe that Trump is more honest than our past presidents.   Read more…

Trade, Trump, and the economy: What does Greg Mankiw’s textbook say?

December 4, 2016 12 comments

from Dean Baker

Harvard professor, textbook author, and occasionally New York Times columnist Greg Mankiw told readers today that Donald Trump’s economic team is wrong to worry about the trade deficit.

“The most important lesson about trade deficits is that they have a flip side. When the United States buys goods and services from other nations, the money Americans send abroad generally comes back in one way or another. One possibility is that foreigners use it to buy things we produce, and we have balanced trade. The other possibility, which is relevant when we have trade deficits, is that foreigners spend on capital assets in the United States, such as stocks, bonds and direct investments in plants, equipment and real estate.” …..

“in reality, trade deficits are not a threat to robust growth and full employment. The United States had a large trade deficit in 2009, when the unemployment rate reached 10 percent, but it had an even larger trade deficit in 2006, when the unemployment rate fell to 4.4 percent.

“Rather than reflecting the failure of American economic policy, the trade deficit may be better viewed as a sign of success. The relative vibrancy and safety of the American economy is why so many investors around the world want to move their assets here.”

There are three points worth making here. Read more…

The slow, painful death of the TPP

December 1, 2016 7 comments

from Dean Baker

In spite of the hopes of many elite types for a last-minute resurrection, it appears that the Trans-Pacific Partnership (TPP) is finally dead.  This is good news, but it took a long time to kill the deal, and the country is likely to pay a huge price for the execution.

The basic point that everyone should know by now is that the TPP had little to do with trade. The United States already had trade deals with six of the 11 other countries in the pact. The trade barriers with the other five countries were already very low in most cases, so there was little room left for further trade liberalization in the TPP.

Instead, the main purpose of the TPP was to lock in place a business-friendly structure of regulation. The deal was negotiated by a series of working groups that were dominated by representatives of major corporations. The regulatory structure was to be enforced by investor-state dispute settlement tribunals. This is an extrajudicial system that would be able to override US laws with secret rulings that were not bound by precedent or subject to appeal.

In addition, the TPP would strengthen and lengthen patent and copyrights and related protections. This is protectionism: It is 180 degrees at odds with free trade. These protections can raise the price of protected items, like prescription drugs, by a factor of 10 or even 100. This is equivalent to tariffs of several thousand percent, with the same waste and incentives for corruption. Free-traders oppose such protections, if they are honest.   Read more…

How Trump theft hurts you: thoughts to chew on over Thanksgiving dinner

November 24, 2016 10 comments

from Dean Baker

Donald Trump has basically come right out said that he intends to use the presidency to further enrich himself and his family. After refusing to follow long-established precedent and put his assets in a blind trust, he proclaimed, “the president can’t have a conflict of interest.”

Of course the president absolutely can have a conflict of interest as speakers of the English language use the expression. If a president owns a large business empire, as does Mr. Trump, there are all sorts of situations where his personal business interests could be in conflict with the country’s interests.

For example, he may want favorable treatment from a form government for one of his hotels. This may lead him to make concessions to the government in other areas which he would not otherwise do. The same applies to domestic tax policy where he may decide to push tax changes that will help his business interests. There are literally an infinite number of situations where the president can and does have a conflict of interest when he owns a business empire like Mr. Trump.

It is also worth noting that it does not seem as though corruption will be exlcusively a family affair with Mr. Trump. David Dayen has an interesting piece in the Intercept about how Trump may hand billions to his friend and campaign contributor, John Paulson, by reprivatizing Fannie Mae and Freddie Mac. Of course this is just the tip of the iceberg. Trump seems intent on raising political corruption to a new level in his administration. As he is prone to say, it will be yuuge!   Read more…

Surviving the Age of Trump

November 15, 2016 6 comments

from Dean Baker

I will claim no special insight into the politics that led to Trump’s election last Tuesday. I was as surprised as anyone else when not just Florida and North Carolina, but also Pennsylvania, Michigan, and Wisconsin started to turn red. But that’s history now. We have to live with the fact of President Trump and we have to figure out how to protect as much as possible of what we value in this country from his presidency.

This won’t be easy when the Republicans control both houses of Congress and will soon be able to appoint a new justice to the Supreme Court to again give them a right-wing majority. But there are still points of pressure.

Most importantly, the people in Congress want to get re-elected. Pushing unpopular policies like privatizing Social Security or Medicare, or taking away insurance by ending Obamacare, will be horrible albatrosses hanging over their heads the next time they face voters. This reality has to constantly be put in their faces. It is easy for politicians to push nonsense stories about eliminating trillions of dollars of waste, fraud, and abuse. It is much harder to get away with taking away your parents’ Social Security check or the health care insurance that pays for your kid’s insulin.

The other point of pressure is that we know (even if the folks who report the news don’t) that Trump got elected by making many promises that he will not be able to keep. Rebuilding an economy in which the benefits of growth are broadly shared is a great idea, but Donald Trump is not going to bring back the coal mining jobs lost in West Virginia, Kentucky, Ohio and elsewhere. These jobs were not lost because of environmentalists concerned about the future of the planet; they were lost because of productivity growth in the industry (think of strip mining replacing underground mining). We should make sure that people regularly are informed about President Trump’s progress in bringing back coal mining jobs to Appalachia.

Before getting into some specific issues, it is worth noting that not everything Trump says he wants to do is bad. He says that he wants a big infrastructure program. This is badly needed both to modernize our infrastructure and also to create jobs. Trump’s proposed tax cuts will provide a boost to demand that will generate jobs as well. It’s horribly targeted in giving most of the benefits to the rich, but it will still lead to more consumption and therefore more demand and jobs. This may finally give the economy enough stimulus to restore the labor market to its pre-recession strength. That will be good, especially since the beneficiaries of the job growth and the stronger labor market will be disproportionately African American and Hispanic and less-educated workers. Now, I will get to some specifics.   Read more…

Inequality as policy: selective trade protectionism favors higher earners

October 28, 2016 4 comments

from Dean Baker

Globalization and technology are routinely cited as drivers of inequality over the last four decades. While the relative importance of these causes is disputed, both are often viewed as natural and inevitable products of the working of the economy, rather than as the outcomes of deliberate policy. In fact, both the course of globalization and the distribution of rewards from technological innovation are very much the result of policy. Insofar as they have led to greater inequality, this has been the result of conscious policy choices.

Starting with globalization, there was nothing pre-determined about a pattern of trade liberalization that put U.S. manufacturing workers in direct competition with their much lower paid counterparts in the developing world. Instead, that competition was the result of trade pacts written to make it as easy as possible for U.S. corporations to invest in the developing world to take advantage of lower labor costs, and then ship their products back to the United States. The predicted and actual result of this pattern of trade has been to lower wages for manufacturing workers and non-college educated workers more generally, as displaced manufacturing workers crowd into other sectors of the economy.   Read more…

The old debt and entitlement charade

October 22, 2016 8 comments

from Dean Baker

The establishment is trying to pull a big one over on the public yet again. One of the designated topics for the last presidential debate goes under the heading, “debt and entitlements.” This should have people upset for several reasons.

The first is simply the use of the term “entitlements.” While this has a clear meaning to policy wonks, it is likely that most viewers won’t immediately know that “entitlements” means the Social Security and Medicare their parents receive. It’s a lot easier for politicians to talk about cutting wasteful “entitlements” than taking away seniors’ Social Security and Medicare.

The ostensible purpose of the debate is to allow voters to be better informed about the candidates’ views. So if the purpose is conveying information, why not use terms that most voters will understand?

But the semantics are the less important part of the problem. Why is it that Social Security and Medicare are linked to debt?  These are not the only programs that entail future commitments of resources.

For example, our military budget involves large commitments of future resources. New weapon systems can require decades to develop and produce. We commit ourselves not only to the annual salaries of current soldiers, but also many decades of veterans’ benefits. And, when we make military commitments through policies like the expansion of the North American Free Trade Agreement, we are potentially obligating ourselves to vast expenditures in future conflicts.

Many of the government’s largest commitments of future resources do not even appear in the budget. When the government grants a patent or copyright monopoly, it is allowing the holder to effectively tax the public for decades into the future.    Read more…

Economists keep getting it wrong because the media coverup their mistakes

September 30, 2016 7 comments

from Dean Baker

Most workers suffer serious consequences when they mess up on their jobs. Custodians get fired if the toilet is not clean. Dishwashers lose their job when they break too many dishes, but not all workers are held accountable for the quality of their work.

At the top of the list of people who need not be competent to keep their job are economists. Unlike workers in most occupations, when large groups of economists mess up they can count on the media covering up their mistakes and insisting it was just impossible to understand what was going on.

This is first and foremost the story of the housing bubble. While it was easy to recognize that theUnited States and many other countries were seeing massive bubbles that were driving their economies, which meant that their collapse would lead to major recessions, the vast majority of economists insisted there was nothing to worry about.

The bubbles did burst, leading to a financial crisis, double-digit unemployment in many countries, and costing the world tens of trillions of dollars of lost output. The media excused this extraordinary failure by insisting that no one saw the bubble and that it was impossible to prevent this sort of economic and human disaster. Almost no economists suffered any consequences to their career as a result of this failure. The “experts” who determined policy in the years after the crash were the same people who completely missed seeing the crash coming.

We are now seeing the same story with trade. The NYT has a major magazine article on the impact of trade on the living standards of workers in the United States and other wealthy countries. The subhead tells readers:  Read more…

The anniversary of Lehman and men who don’t work

September 21, 2016 7 comments

from Dean Baker

Last week marked the eighth anniversary of the collapse of Lehman Brothers, the huge Wall Street investment bank. This bankruptcy sent financial markets into a panic with the remaining investment banks, like Goldman Sachs and Morgan Stanley, set to soon topple. The largest commercial banks, like Citigroup and Bank of America, were not far behind on the death watch.

The cascade of collapses was halted when the Fed and Treasury went into full-scale bailout mode. They lent trillions of dollars to failing banks at below market interest rates. They also promised the markets that there would be “no more Lehmans” to use former Treasury Secretary Timothy Geithner’s term.

This promise was incredibly valuable in a time of crisis. It meant that investors could lend freely to Goldman and Citigroup without fear that their loans would not be repaid — they had the Treasury and the Fed standing behind them.

The public has every right to be furious about this set of events eight years ago, as well what has happened subsequently. First, everything about the crisis caught the country’s leading economists by surprise. Somehow, the country’s leading economists both could not see an $8 trillion housing bubble, nor could they understand how its collapse would seriously damage the economy. This bubble was clearly driving the economy prior to the crash, it is difficult to envision what these economists thought would replace the demand lost when the bubble burst.  Read more…