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

Jared Bernstein Senior Fellow, Center on Budget and Policy Priorities

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, 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 communities 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.



This has been reposted from On the Economy.


Jared Bernstein joined the Center on Budget and Policy Priorities in May 2011 as a Senior Fellow.  From 2009 to 2011, Bernstein was the Chief Economist and Economic Adviser to Vice President Joe Biden, executive director of the White House Task Force on the Middle Class, and a member of President Obama’s economic team. Prior to joining the Obama administration, Bernstein was a senior economist and the director of the Living Standards Program at the Economic Policy Institute in Washington, D.C. Between 1995 and 1996, he held the post of deputy chief economist at the U.S. Department of Labor. He is the author and co-author of numerous books, including “Crunch: Why Do I Feel So Squeezed?” and nine editions of “The State of Working America.”

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