Delong typepad com pdf 20061223 DeLong Aftathoughts on NAFTA pdfI have been meaning to pick on the very sharp and public-spirited Jeff Faux since he wrote this seven months ago:

Jeff Faux: NAFTA, Twenty Years After: A Disaster:

New Year’s Day, 2014, marks the 20th anniversary of the North American Free Trade Agreement (NAFTA). The Agreement created a common market for goods, services and investment capital with Canada and Mexico. And it opened the door through which American workers were shoved, unprepared, into a brutal global competition for jobs that has cut their living standards and is destroying their future. NAFTA’s birth was bi-partisan—conceived by Ronald Reagan, negotiated by George Bush I, and pushed through the US Congress by Bill Clinton in alliance with Congressional Republicans and corporate lobbyists….

NAFTA directly cost the United States a net loss of 700,000 jobs…. And the economic dislocation in Mexico increased the the flow of undocumented workers into the United States…. By any measure, NAFTA and its sequels has been a major contributor to the rising inequality of incomes and wealth that Barack Obama bemoans in his speeches…. The agreements traded away the interests of American workers in favor of the interests of American corporations…. NAFTA’s fundamental purpose was… to free multinational corporations from public regulation in the U.S., Mexico, Canada, and eventually all over the world…. The 20th anniversary of NAFTA stands as a grim reminder of how little our political leaders and TV talking heads—despite their crocodile tears over jobs and inequality—really care about the average American who must work for a living.

Let’s start with the numbers:

Graph U S Imports of Goods from Mexico Customs Basis FRED St Louis Fed

Back before NAFTA about 0.53 a cent of every dollar spent in the U.S. was spent on goods and services imported from Mexico. Today 1.6 cents of every dollar spent is so spent–a tripling. Some of this would have taken place anyway as containerization and all the other -izations that make up globalization took hold. U.S. trade as a whole is up by a factor of 1/2 as a share of total spending. So it is reasonable to think that in the absence of NAFTA we would have gone from spending roughly 1/2 a cent to spending 3/4 of a cent of every dollar spent in the U.S. on imports from Mexico. And the extra doubling–from roughly 3/4 of a cent to 1.6 cents–is the result of NAFTA. We can say that, roughly, in the absence of NAFTA the goods and services we import from Mexico would, if produced here at home, have employed 1.05 million people if monetary and fiscal policy were to remain the same as it is. And in the presence of NAFTA the goods and services we import from Mexico would, if produced here at home, have employed 2.1 million people if monetary and fiscal policy were to remain the same as it is. Thus the passing of NAFTA has caused us to increase the goods and services we import from Mexico by enough that the excess would employ 1.05 million people if produced here at home and if monetary and fiscal policy were to remain the same as it is.

But there are also our exports to Mexico–which have risen, again, from an amount equal to 0.8 for every dollar spent in the U.S. had we not passed NAFTA to 1.3 cents for every dollar–an increase large enough to employ at extra 0.7 million people if monetary and fiscal policy were to remain the same as it is. And we think that these 700,000 jobs are, on average, better jobs with higher pay than the 1.05 million jobs America does not have because of imports from Mexico. Why? Because if the jobs we have swapped in add less value-added than some of the jobs we have swapped out to Mexico, our businesses could make more money by unswapping them and also unswapping some of the jobs we have swapped out. Given that our businesses are neither stupid nor not-greedy, they would have done so. Job for job we would rather have the extra 700,000 jobs from making extra exports for Mexico than the equivalent number of jobs displaced by increasing our imports from Mexico.

Now it is the case that we do now have a trade gap vis-a-vis Mexico: while we spend 1.6 cents of every dollar on imports from Mexico, our exports to Mexico are only 4/5 as much. Mexicans are on net taking 1/5 of the dollars they earn by selling to America, and socking those dollars away in New York bank accounts and other U.S.-located investments. This does create a net cost to the U.S. from NAFTA if we believe that fiscal and monetary policy would remain the same in its absence. The net cost to the U.S. of NAFTA, if we denominate it in jobs, is something less than 350,000 jobs–less by the amount that adjusts for the value of the amount by which NAFTA allows us to improve average job quality–if monetary and fiscal policy were to remain the same as it is. and that is a dicey assumption. (No, I don’t know why Jeff gets a net job cost number twice as large as I do: I think he has gotten the analysis wrong.)

In a world of 140,000,000 American jobs, 350,000 missing is 0.25%–and a very small number relative to the 7,000,000 job gap produced by the Lesser Depression, only 1/20. You want to talk about what is wrong with the American labor market, and you should spend 20 times as much time talking about the housing bubble, the financial crisis, the downturn of 2008-9, the slow jobless recovery–the whole mishegas that is the Lesser Depression–as about NAFTA.

And NAFTA has benefits. The same logic that leads us to think that the bilateral U.S. trade deficit from NAFTA has reduced employment in the U.S. by 350,000 leads us to think that it has boosted employment in Mexico by 1.5 million–that’s 3% of the Mexican labor force. Mexico’s unemployment rate is currently 5%. Would we really wish a world in which it were 8%?

I am of the faction that holds that if we are unhappy with the level of employment and of wages in the U.S., we should change our monetary, spending, taxing, banking, regulatory, and exchange rate policies to change them. Trade policy is a relatively weak tool to use for macroeconomic stabilization and income-distribution purposes. And we should compensate for what negative effects it has with our other policy levers.

But more important it is clear to me that NAFTA was a very big deal for the Mexican government and the Mexican economy, but it was a small deal for the U.S. economy. Other forces, factors, and trend swamp its influence on the U.S. Whether NAFTA was a good thing to do or not hinges well-nigh completely on what its effects were on Mexico. What does Jeff say? In sixteen paragraphs, what he does say is:

the lack of worker protections in NAFTA insured that corporate investors would reap most of the benefits [to Mexico]…

That is all.

Now you can make the argument that NAFTA was a net minus–that the (perhaps large) benefits to the plutocrats of Mexico and of those investing in Mexico plus the (perhaps small) benefits from higher demand for labor in Mexico were outweighed by the losses to U.S. workers. I think that argument is wrong. But Jeff doesn’t make it.

Now you can make the argument that NAFTA strengthened fundamentally destructive neoliberal forces within Mexico in a way that has harmed Mexico in the long run. I think this argument is partly right–evidence: the eagerness with which the Mexican government was anxious to decrease urban poverty at the expense of increasing deep rural poverty by the early opening-up of the Mexican domestic market to corn from Iowa. Is it right enough to tip the balance? I waver back and forth on this from year to year. But right now I do not think it is right enough to outweigh the notional 3%-point decline in the Mexican unemployment rate. And Jeff doesn’t make it.

Now you can make the argument that the regime that negotiated NAFTA was fundamentally illegitimate–that Carlos Salinas de Gortari stole the presidential election in the late 1980s, and that the U.S. should have listened to the rightful president, NAFTA opponent Cuahtemoc Cardenas, and refused to negotiate. With this argument I have more sympathy, but in the end I come down on the side that in the circumstances of Mexico in the early 1990s democratization was aided rather than retarded by NAFTA. But Jeff doesn’t make it.

And you can make the argument–with which I agree–that the energy spent on NAFTA would have been much better spent on a more bottom-up program of domestic Mexican development focused on education and infrastructure, and that the willingness of the George H.W. Bush administration to negotiate NAFTA pulled Mexico into a development strategy that was definitely second-best. And I have come to agree with that argument. But I then do note that once NAFTA was negotiated for Clinton and the 1993 Congress to ratify it was plausibly better for the world than not ratifying it. And, anyway, Jeff doesn’t make it.

The argument that Jeff does make is a very U.S.-focused, anti-cosmopolitan argument. The seventeen words I quoted above are the only words in which anything outside the United States appears as anything other than a means to a U.S.-centric and a U.S.-focused analysis. And this, I think, is wrong. The U.S. was a global hyperpower of a relative strength never before seen in human history. The U.S. is still a ne plus ultra superpower of a relative magnitude exceeded only perhaps in the mid-nineteenth century when Britain was the only industrial nation and the sun never set on the British Empire. A hegemon of such a magnitude has a strong moral obligation to the world as a whole–and to its own long-run comfort and, indeed, survival once it ceases to be a hyperpower–to be cosmopolitan, and to look at the broad effects of its policies on the world outside its borders.

And there remains the question that puzzles me: The energy the American left poured and pours into the anti-NAFTA cause could have been devoted and could be devoted to issues of domestic political economy that are closer to even in the balance and that would have much bigger positive effects on the U.S. working class. So why the direction of energy to NAFTA? Why such a focus? And–if there is going to be such a focus–why such an anti-cosmopolitan focus?

I have wondered this for 21 years now…

Also see: J. Bradford DeLong (2006): Aftthoughts on NAFTA

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