Free Trade Archives

When Globalization is Public Enemy Number One: At the Milken Review

Posted on October 30, 2017 by Brad DeLong

At the Milken Review: When Globalization is Public Enemy Number One: The first 30 years after World War II saw the recovery and reintegration of the world economy (the “Thirty Glorious Years,” in the words of French economist Jean Fourastié). Yet after a troubled decade — one in which oil shocks, inflation, near-depression and asset bubbles temporarily left us demoralized — the subsequent 33 years (1984-2007) of perky growth and stable prices were even more impressive… Read MOAR at Milken Review

No, It Is Really Not Harder to Make the Case for Free Trade These Days…

Posted on June 13, 2017 by Brad DeLong

Hoisted from Ten Years Ago: Still, I think, true today. Thus I continue to hoist my neoliberal freak flag here: Is It Really Harder to Make the Case for Free Trade These Days? http://delong.typepad.com/sdj/2007/04/is_it_really_ha.html: Paul Krugman wonders if it is harder to make the case for free trade these days. There are more losers from trade liberalization, he thinks, and it is much less clear that the losers are in some sense undeserving.

Mark Thoma writes:

Economist’s View: Krugman: Distribution and Trade Policy: Paul Krugman adds a few more thoughts via email related to the recent trade policy discussion:

Paul Krugman: Another thought or two on distribution and trade policy: The problem of losers from trade isn’t new, obviously, either as a fact or concept. But if you look at the history of trade policy – say, in Matt Destler’s book it’s hard to avoid the sense that the issue has gotten bigger and harder. His final chapters have a definite sense both of nostalgia for the good old days and foreboding.

I’d put it like this: in the old days, when GATT negotiations were mainly with other advanced countries, the groups hurt tended to be highly specific and local – the left-handed widget makers of Northern South Dakota, worried about competition from their counterparts in Upper Lower Swabia. Economists could in good conscience argue that while individual groups were hurt by trade liberalization in their specific sector, the great majority of Americans benefitted from general trade liberalization. And politicians made trade deals by packaging together the interests of exporters, to offset the parochial interests of import-competing industries

But now we’re talking about broad swaths of the population hurt by trade. It’s a good bet that almost all US workers with a high school degree or less are hurt by Chinese manufactured exports, at least slightly. You could in principle put together win-win packages – say, trade liberalization together with an increase in the EITC paid for with higher taxes on high-income Americans, who come out winners from trade. But the reality is that we don’t make those deals.

For those who like their jargon, by the way, I’m basically saying that the right model for thinking about this has gone from many-good specific factors to Heckscher-Ohlin.

I don’t have answers to this. The moral case for open markets is their importance to poor countries: America would do OK even in a highly protectionist world, but Bangladesh wouldn’t. The domestic politics of trade, however, are now very hard, and getting harder.

Well, I think I have answers:

The kinds of win-win deals that Paul says we don’t make are in fact deals that Democratic presidents do make–when they aren’t blocked from making them, that is.
In an American family, both potential workers have to be working in export or import-competing manufacturing for the family as a whole to be injured by imports of manufactured goods from China. Construction workers benefit from expanded trade with China both through higher relative wages and through lower relative prices. Service-sector workers benefit through lower relative prices.
The losers are not undeserving of their previous relative good fortune, but the winners are not unjustly enriched either–and odds are that there are more and bigger winners.
Politics is much healthier when everybody knows that trade restrictions are temporary and fragile than when people believe that trade restrictions are permanent and durable–and thus really worth lobbying for when they are to your material advantage.
A richer world is a safer world for Americans: foreigners working making textiles for export to the United States are not foreigners in caves planning to attack the Great Satan. One important import that we buy through freer trade is a safer, richer, more peaceful world.

The narrow pure-economics case for freer trade is harder to make thsee days because it is less true than it was in the 1960s or the 1950s or the 1930s or the 1910s. But the broader political-economy case for freer trade is still strong and true.

Globalization in the Crosshairs: Trade, Jobs, Inequality, Globalization, Robots II

Posted on May 5, 2017 by Brad DeLong

Milken Institute: Globalization in the Crosshairs: Tuesday, May 2, 2017 / 2:30 pm-3:30 pm: Beverly Hills Ballroom http://www.milkeninstitute.org/events/conferences/global-conference/2017/panel-detail/6801

Moderator: Gillian Tett, U.S. Managing Editor, Financial Times
Steven Ciobo, Minister for Trade, Tourism, and Investment, Australia
J. Bradford DeLong, Professor of Economics, UC Berkeley; Weblogger, Washington Center for Equitable Growth
John Hagel, Managing Director, Deloitte Consulting LLP; Co-Chairman, Center for the Edge
Alejandro Ramirez Magaña, CEO, Cinépolis
Stephen Schwarzman, Chairman, CEO and Co-Founder, Blackstone

In the 20 years leading up to the financial crisis, international trade grew at twice the rate of global output. Since then, trade has struggled to recover. Recent data is more worrying still, suggesting that trade’s share of global GDP is falling. With mainstream political support for multilateral trade deals diminishing and populist movements on the rise in the U.S. and Europe, it is time to examine the future of globalization. Panelists will consider the following questions:

Has international trade—and globalization more broadly—entered a period of stagnation or even reversal?

Once unleashed, can globalization ever reverse or are we just seeing a slowdown in a normal cycle?

What are the implications for the global economy and the international economic order?

Max Roser Globalization Over 5 Centuries

Gillian Tett: Good afternoon, everybody, and welcome to this panel session entitled “Globalization in the Crosshairs”. That is the politically correct, slightly optimistic title. I would probably call it: “Are We Sliding Back to Protectionism and Nationalism? Is It ‘Back to the Future’—Like the 1930s?”

Joining me today is a terrific broup of people to talk about these issues. On my far right, to your left, is Steven Ciobo, Minister for Trade, Tourism, and Investment for Australia. Next to him is Brad DeLong, Professor of Economics at Berkeley, one of my favorite economic bloggers. On my immediate left, your right, is John Hagel, Managing Director at Deloitte. Next to him is Alejandro Ramirez, CEO of Cinépolis, a large Mexican media group, and who is also Chairman of the Mexican Business Council. And at the very end is Steve Schwartzman, a man known well to most of you, CEO of Blackstone, and Chairman of the Strategy and Policy Forum at the White House. A great combination of people to talk about globalization, nationalism, protectionism, and the impact on business and the economy.

I would like to start with you, Steve, since you are now in this elevated role, speaking for business across America at the White House. You have built your career very much on the wave of globalization. Globalization has been good for you. Do you regard the president as a protectionist?

Steve Schwartzman: The way the president looks at himself is as someone who sets the table with equivalent tariff and other duties so that globalization goes ahead, but from the perspective of a certain type of equality. When you have the United States charging 1/3 duties and tariffs compared to three times that for the other country, the administration is saying: either you come down, or we will go up, and then let us let trade expand. It is really these in some cases enormous differences, as well as in some cases non-tariff barriers that make it very difficult for us to export our products. We look at it from the perspective of: How did we get into this situation? Why aren’t people letting there be equivalence, so the best products win, or the best services win? What you are seeing is an attempt at reciprocity, or equality, and then continue with globalization.

Right now the U.S. has the lowest fully-landed tariff borders, tariff plus VAT, in much of the world. It happened because of the U.S. dominance after World War II, when we had 70% of global GDP. And it has been allowed to continue. It’s not that the intent is to void or dampen globalization and the things we are all familiar with.

Gillian Tett: But do you around that table, the Strategy and Policy Council, strongly support these calls to renegotiate NAFTA. Are you concerned that this is part of an anti-globalization backlash that could end up damaging you?

Steve Schwartzman: I was at the G-20 in Hangzhou, and President Xi gave a big speech about the general anti-trade pattern. And everybody who measures these things has seen trade constricting around the world. You could look at, Gillian, in a few different ways:

As a simple correction, for equivalence.
Why is it coming up now? The theory is that these issues are being raised around the world.

But, really, this is an equivalence issue. These issues would all go away if barriers were more or less the same everywhere. We would not be having this panel.

Gillian Tett: OK. So it is not protectionism. It is “equivalence”. That is clearly going to be the new buzzword in Washington: “equivalence”. Alejandro, from where you are sitting…

Steve Schwartzman: Let me put it this way. If it were the reverse—if all these tariffs were upside down—what would other people think?

Gillian Tett: Well, let’s ask them. Alejandro, you come from Mexico…

Steve Schwartzman: As a curious item…

Gillian Tett: Well, that’s a great question to ask everyone on the panel. But, Alejandro, sitting in Mexico does what is happening in Washington look to you like an enlightened policy of “equivalence”, or does it look a bit more ominous? How do you read the current mood in Washington?

Alejandro Ramirez: We are very concerned in the Mexican private sector with what we do perceive as protectionist rhetoric in Washington. The fact that on Day 1 the U.S. withdrew from TPP. Last week there was, as you know, a leak saying that the White House was preparing to withdraw from NAFTA. That we are continuing on the path of renegotiating the trade deal. We are concerned because we think that NAFTA has been unduly vilified. We believe that NAFTA has brought many more benefits to all three countries than the trade deal has cost. Trade has more than tripled between the three countries. Bilaterally, between the U.S. and Mexico, trade has grown by more than sixfold since 1994.

Mexico has become the number two destination for U.S. exports. We trade over $500 billion every year. Around 6 million U.S. jobs depend on trade with Mexico. Of course, Mexico has also enormously benefited from trade with the U.S. In specific sectors, for example, more than 20 years ago when the trade deal was going to come into effect one of the most sensitive areas was agricultural markets on both sides. Today some of the biggest beneficiaries from NAFTA are the U.S. corn growers of the midwest and the Mexican growers of fruits and vegetables.

We are actually exporting very intelligently according to the relative comparative advantage of each country.

NAFTA has allowed us to strengthen the supply chains of North America, and strengthened the competitiveness of the region, so that we can produce more competitively in the world.

Gillian Tett: So when you hear someone like Steve Schwartzman saying, along with the White House, that what is needed is “equivalence”—we need a level playing field—do you think that is fair, or do you think that is protectionism under a new guise?

Alejandro Ramirez: I think part of what Steve was referring to was the policy of other countries that do not have a free-trade deal with the U.S. They may have disparate tariff rates. But Mexico—our average tariff was much higher than the U.S. back in 1994. We brought it down basically to zero. Both countries. The U.S. average tariff was below 5%. The Mexican average tariff was above 20%. I do not know about other countries, but I do know that with Mexico we are dealing with a level playing field. And yet the U.S. government has threatened repeatedly to withdraw from the deal.

I do, however, think that there is room for improvement. It is a 22-year old deal. Parts of the economy that did not exist back then—e-commerce. I think there is room for strengthening intellectual property rights. I think there is room for strengthening biotech. Other things we can add—labor, environment, anti-corruption.

There is room for modernizing it. But to call it the worst deal ever for the U.S. I do not think that is an accurate description of NAFTA.

Gillian Tett: Right, right. Just now that we are on NAFTA—we’ll get on the TPP in a minute—John: You have talked to a lot of CEOs. How concerned are they with rising protectionism—”equalization”, “trade modernization”, whatever you want to call it. Do you think we are in the middle of a protectionist backlash? Is that going to hurt companies that you talk to?

John Hagel: My sense is that there is increasing anxiety about the fact that we are at a pivot point, and about which way the world is going to fall. I think it reflects the paradox about globalization. At one level, globalization is creating expanding economic opportunity around the world. At another level, it is creating mounting performance pressure on all of us. It is intensifying competition on the individual level. We all face the possibility of loss of jobs. Wages are coming down because of international competition. At the corporate level, we are facing increasing competition, globally.

We have spent time—I run a research center called The Center for the Edge. We have looked at the long term forces making the global economy. The one metric that we think illustrates this mounting performance pressure—if I can show slide 1—the return on assets for all public companies in the United States:

Globalization in the Crosshairs Trade Jobs Inequality Globalization Robots II

From 1965 until today, if you look at return on assets for all public companies in the United States, it has basically collapsed, over a period of decades. There are short term cycles that correspond to the economic cycles. But the long term trend is very clear. And there is no sign of it leveling off. There is certainly no sign of it turning around.

Our belief is that that is an indicator not only of mounting performance pressure, but of the increasing inability of our institutions to respond to this pressure. This is public companies. But, based on the research we have done, we believe all institutions—educational institutions, government institutions, NGOs—are facing a similar kind of challenge.

Gillian Tett: That trend is going to hit zero around 2030, isn’t it?

John Hagel: This is not a sustainable trend. Clearly, something is going to have to change. Our belief, and this is being an optimist from Silicon Valley, is that this is going to be a catalyst to force us to reassess all of our institutions.

By the way, one of the key indicators of the failure of our institutions is “trust” metrics. We have study after study showing declining trust in every institution—not just companies, not just banks, not just government. Every institution around the world is collapsing! If that is not an indicator of a problem, what is? And our belief is that the problem is that we are unable to respond to mounting performance pressure, and unable to take advantage of the opportunity that is actually created by globalization.

Gillian Tett: Right. I am going to come back later and ask you what can be done. That is obviously a big question. And that is the point of these conferences: to assess what can actually be done. But before I do, I would like to turn to Brad, who has also come armed with a nice snappy chart. Brad, do you want to put this in a longer term historical term historical context.

Brad DeLong: OK. Let’s go!

Since 1800:

First Globalization—Trade between capital and resource rich regions, and huge amounts of migration of finance and labor to the resource rich regions.
Globalization Retreat—Faster progress in mass production than in transport makes it efficient to bring production back home; combined with the depressions on the interwar period encouraged governments to take steps to keep jobs at home and engage in beggar-thy-neighbor policies.
After World War II, Second Globalization—the enormous expansion of north-north intraindustry trade, as developed countries trade narrow slices of their industrial output with each other. This was the thing that explaining it won Paul Krugman his Nobel Prize.
Followed by the green line: Hyperglobalizion—in which the global south’s low wages give it a comparative advantage which can now be harvested for industrial-scale production because of the success in constructing internet and other communications-mediated intercontinental value chains.

Of these, perhaps the first example was the U.S.-Mexico division of labor in the automobile industry. My friends on the right and my friends on the left feared NAFTA back in 1992. They said NAFTA was going to kill the U.S. auto industry. The whole thing would move to Hermosillo. It did not. By outsourcing the most labor intensive parts of their production processes to Mexico, GM and Ford now find themselves in much more competitive positions vis-a-vis Toyota, BMW, and company than they would have found themselves had we not done NAFTA.

Gillian Tett: If you look at that chart, you have that lovely green arrow heading up towards the heavens, looking like it is going to go up forever. The last time I saw charts like that was in 2007 on the eve of the credit crisis. I have seen other charts like that showing what has happened over the past hundred years—to the credit cycle, to banking pay—that go up and down. The question I have is: I look at that, and I look at what we have just seen from John on returns from assets collapsing, and what makes you think that green arrow is going to continue to do up and not suddenly go down again?

Brad DeLong: It is always dangerous to make predictions, especially about the future. Yes, in an era of secular stagnation, with central bank-controlled interest rates kissing zero for large periods of time and governments loath to expand their purchases, one of the few tools left is to try to redirect its country’s spending to its own goods whenever it finds itself short of jobs. Yes, low wages are going to be a much less important player in the global division of labor as robots come and as labor productivity in manufacturing soars upward.

China is almost sure to be the last country that follows the successful industrialization recipe of becoming a lot richer by exporting low wage manufactures to the industrial core and so building up its communities of engineering practice. After China, low wage simple first line manufactures simply are not going to need enough workers to produce them for it to be worth much of anyone’s while.

Gillian Tett: Right. That is not entirely encouraging. On that note, it seems like a good moment to turn to Australia. You are in the position of being the only elected official, the only government official on the panel. You represent governments throughout the world, while Steve is singlehandedly representing American business. How do you read it? Do you think we are on the brink of an inexorable slide into protectionism? Do you see things like TPP unraveling as signposts of that trend? Or are you more optimistic?

Steven Ciobo: I am more optimistic. I was listening to the remarks that Steve made earlier. I will contrast them with our experience. In the 1980s, Australia unilaterally reduced its tariff barriers. most goods coming into Australia come in with zero tariffs. The maximum is 5%. We have free trade agreements with many countries which means, of course, that there are no tariff barriers at all. We are focused on non-tariff barriers so that they too are reduced over time.

We are now in our twenty-sixth year of consecutive positive economic growth, which is very good for a developed economy. In fact, we have the longest consecutive growth period that any developed economy has ever experienced.

Now I am not saying that that is all the consequence of our unilaterally reducing our tariff barriers. But we do know that they distort. They distort not only trade but the efficient allocation of capital.

Our experience as a country is that trade is driving, in many respects, we’ve seen it in the past twelve or twenty-four months, that trade is driving our economy and driving our employment. One of the points that people remark to me is that Australia has a different view and pattern of trade than other countries. In particular, they will focus on European countries. My observation is to say that may be the case, but if you look at Australia those industries that are particularly protected or subsidized tend to be in the agricultural sector. You see that in Europe. You see that in the United States. In Australia, in fact, it is our ag sector that has benefited from the fact that we have preferential market access to the fast growing Asian powerhouse economies of Japan, China, and Korea. This has really underscored the big price increases for ag products for Australia. There is quite a different view there. We had a lot of these battles thirty years ago. It caused pain. It caused disruption. But we have seen at the end of twenty-six years the benefits of having taken those decisions.

Gillian Tett: So if the White House is essentially saying that is not going to engage in multilateral deals, if TPP has essentially been torpedoed by the White House. Are you willing to say: the Americans are being protectionist; let them get on with it; we are going to go forward with, say, China, and do TPP by ourselves?

Steven Ciobo: I certainly believe that there is tremendous benefit from the TPP. Australia’s position is to continue to pursue all options that we can to bring the TPP into effect. As it is currently constructed, by definition the TPP cannot come into force without the USA. But there is an opportunity for the other eleven countries—we did this recently in Chile—to come together to have a conversation about the future of the TPP. Make a minor tweak so it can still come into force without the USA. That is what we are pursuing. I do not want to speak on their behalf, but I know a similar view is held by New Zealand, by Canada. Ultimately, the big player in this will be Japan. I was in Japan two weeks ago. I was particularly pleased that the Japanese government has given some indication that it is considering a TPP 11.

Now in time, whether China, the U.K., or some other country wants to join—that would be there decision. But meanwhile I think it would be an enormous missed opportunity for us not to do everything we can to bring the TPP into effect.

Gillian Tett: And are you willing to take the leadership in that role?

Steven Ciobo: Absolutely. Australia and Canada have been at the forefront of that discussion.

Gillian Tett: Right. Before I turn back to Steve, I would like to ask your reaction. Do you regard it now as wiser to spend more time building links with, say, China, than America given the way that politics is developing in America?

Steven Ciobo: For a long time, Australia’s view was that we considered ourselves a European country stuck in the wrong part of the world. The amazing thing is that good fortune has smiled on us. We live in the fastest growing region in the planet. So Australia has done a number of things. We have done a number of things. We have been pragmatic. We are very goods friends with the United States, with Japan, with Korea, with China. Now they haven’t all gotten along. But we have managed that process pretty effectively. We are not putting all of our eggs into one basket. We will continue to have a diversified approach. We know who are friends are in the United States. But we are focused on doing deals that are good for our country.

Gillian Tett: Spoken like a diplomat—a politician. Steve, I am curious: did you support TPP last year?

Steve Schwartzman: I thought it was a good thing. I believe it was a good thing. It was a shame that Democrats did not want to do it…

[General laughter from the panel and the audience]

Gillian Tett: I am not sure that is quite how history will write it. But go on:

[Continued laughter from Gillian Tett]

Steve Schwartzman: That is what happened.

Gillian Tett: Do you think it is a shame that the current administration does not want to do it?

Steve Schwartzman: I think it was DOA. The philosophy that the current group has. I’m in the private world. I’m not a government official.

Gillian Tett: That means you can speak freely.

Steve Schwartzman: The theory that the current administration has is that bilateral deals are better than multilateral deals. The way they come about that is—say, pretend you have a group of fifteen countries. You cut a deal with country number 1. They want certain things from you and you want certain things from them. You always hate giving up what you give up. But you give it up because the balance makes sense. And then you go to country number two which wants different things. And you cut a deal with them by giving up things. And you don’t want that. And let’s go to country number three and pretend they don’t want any of the things that countries one and two wanted. So now you have to give up more—different things to each one. But in a multilateral deal you give the same deal you didn’t want to give to country one, you give it to fifteen people…

Brad DeLong: But NAFTA is the ultimate bilateral—or, rather, trilateral—deal!…

Steve Schwartzman: Now, their view is: why would I give something away—why do I give the worst deal I could make with everyone? Why don’t I just give the deal I made with country one to country one. And then I do another deal with country two. It has been explained to me that when you do do that, you can get other benefits from the whole group on softer issues, labor issues. But the current group says: I just want to trade with each one, do the best deal I can, and do deals with each one of these countries.

Gillian Tett: Doesn’t it worry you that if Australia, Japan, China, the TPP will have something prepackaged, ready to go, ready to rock-and-roll very fast? The administration then trying to do negotiations with each of those eleven countries—wouldn’t that be time consuming, and perhaps leave American companies at a disadvantage?

[pause]

I can see Brad’s like…

Steve Schwartzman: I am not trade representative…

Gillian Tett: OK! The professor:

Brad DeLong: I…

Steve Schwartzman: However, I have not found anybody yet who takes the explanation that I have given—and I have checked with the heads of multilateral organizations—that is how it works. The administration doesn’t want to take the first bad deal and give it to all fifteen in a group, and then take the second bad deal and give it to all fifteen in a group. You could make the case, logically, that that makes some sense. You could make that case. And that is what they are pursuing.

Gillian Tett: The professor is dying to come in…

Brad DeLong: Steve Schwartzman is a brilliant genius. The organization he has played a principal role in constructing—Blackstone—is, we all know, outstripping even Warren Buffett’s vehicles in its α-generation for investors over the long run. It is an extraordinary capitalist accomplishment in finance of a truly astonishing magnitude.

Yet the argument Steve is making here this afternoon now against TPP is the ultimate argument for NAFTA—for a focused bilateral or rather trilateral agreement. And yet it was NAFTA that, according to First Son-in-Law Jared Kushner, President Trump was on the brink of abrogating six days ago. According to Kushner, if the President had abrogated NAFTA we would “have wound up in a pretty good place”.

The principal reason Steve gave for why it might be desirable to “get tougher” on trade was that we face asymmetric non-tariff barriers. But I am not aware of any significant non-tariff barriers between the United States, Mexico, and Canada. Indeed, the only one I remember coming up when NAFT was being negotiated was Canada’s request for a cultural carve-out, so that its radio stations and other media could continue to give priority to Canada-themed entertainment—Celine Dion, and for some reason I do not understand, Lenny Kravitz’s “American Woman, Stay Away From Me!”

Gillian Tett: I am presuming a lot of French language Canadian entertainment as well.

You are essentially arguing that if we are moving toward a world with more bilateral than multilateral deals, that that is more dangerous?

Brad DeLong: It is certainly more complicated.

You either have one deal or you have N(N-1)/2 deals. You then have to be very very careful to keep track of what goods go where when with what components of value added covered by what rules of origin. What fraction of stuff coming in to the U.S. from Mexico under the terms of the Mexican-U.S. bilateral is transshipped from Australia where the Australia-Mexico leg is covered by the Mexico-Australia TPP deal. That would negate the idea that there is a bilateral deal between the U.S. and Australia that means anything.

Keeping track of that is an almost insuperable administrative task. It is an example of the reasons that Friedrich von Hayek concluded that central-planning micromanagement could not work. Micromanaging things at any detailed level, very soon—with the G-20, you would have 195 different bilateral trade agreements. It would be a wonderful full-employment thing for trade lawyers, and for those who could deploy the vast numbers of analysts to determine where the loopholes were. You could make serious money in that business. But I don’t think it would be good for the world economy.

Gillian Tett: Steve, how do you feel about moving toward more bilateral arrangements?

* Steven Ciobo*: We keep the full sweep. We are prepared to do a multilateral deal. We are prepared to do a sequence of bilateral deals. We do not believe in one size fits all. You have to cut the cloth to suit. The Holy Grail, as far as I am concerned, is multilateral. multilateral apply one set of rules across all countries. The biggest beneficiaries from a multilateral deal—for example the TPP—are the small-to-medium sized guys.

The big guys can always compete. They can hire the bevies of consultants and lawyers to make sure that the rules-of-origin and so forth are complied with. The little guy cannot. If you have ten different deals with ten different types of rules, the small exporter who is trying to navigate that noodle-bowl of rules really struggles. That is one of the major benefits of multilateral: you have that one set of rules that applies across all eleven countries in the case of a TPP-11 that you can comply with.

The other point I want to make. We get into the politics of this. I need to get votes. I need to get reelected to keep my job.

We took a decision as a government about three years ago to stop all subsidies to our automobile industry. Our automobile industry—tens of thousands of workers—but we could not justify a decision to continue to subsidize it to the tune of $5 billion every four years to maintain a small sector. Your frame of reference matters. I know that by doing that the car fleet in Australia is going to become younger—better for road safety, public health, and all of those things. We do not need a car industry. We were not competitive in it. Now we can focus on other industries where we do have competitive advantage.

The benefits, like always, are diverse, are spread, are small amounts over a large population. Versus a lot of noise that comes from the relatively small population employed in the industry that complains the loudest. That is the politics.

Gillian Tett: Right. Alejandro, you do not need to be reelected, but you are running a company that straddles borders. How would a renegotiation of NAFTA affect you? Do you see problems with trade access between the U.S. and Mexico in fields that you are operating in?

Alejandro Ramirez: Our company, Cinépolis, operates multiplexes in thirteen countries with just over five thousand screens. We are the second largest film exhibitor in the world in terms of admissions. 90% of the films that we show are American films, Hollywood films. Mexico is the fourth largest market in terms of movie admissions in the world, just after India, the U.S., and China. If we started a trade war between the U.S. and Mexico, the Mexican government could retaliate by raising tariffs on American cultural goods like films, including corn—we import all the corn for popcorn from Kansas and Iowa. We import all the amplifiers, servers, screens, popcorn warmers, the cheese—Mexico is the largest consumer of nachos in the world…

Gillian Tett: You are giving your Mexican consumers nachos made from American cheese…

Alejandro Ramirez: The cheese—we bring it from Wisconsin.

Gillian Tett: A fact that you did not know: you go to the cinema in Mexico and you are eating Wisconsin nachos…

Alejandro Ramirez: And popcorn! Mexico does not produce corn with the right expansion properties for popcorn. If there was a cancellation of NAFTA, it would become much cheaper for me to import the corn from Brazil or Argentina. They do have equivalent corn…

Gillian Tett: You can’t import Brad Pitt moves from Brazil, can you?

Alejandro Ramirez: You cannot. Our company is a good example of a NAFTA company. We have cinemas in the U.S. and Mexico, but also throughout Latin America, India. One of the main American exports is cultural goods. If NAFTA were repealed, where would both countries put new tariffs? How would it affect us?

One final point about your previous question: bilateral vs. multilateral. The main economic argument for multilateral is that the deal would include the most efficient producer if it were a multilateral producer. But with a bilateral deal you may well be excluding the most efficient producer. It would be trade diversion rather than trade creation. That is why it would be better to have a global multilateral deal under the WTO. But since Doha nothing has happened. Therefore since then we have had regional pushes. The Asia-Pacific region has pushed for TPP. We have the Pacific Alliance between Mexico, Chile, Columbia, and Peru. That is going very well, further integrating our economies and lowering tariff barriers.

Gillian Tett: Right. I am curious. I would like to ask each of you. If you were suddenly given a magic wand—were to become either the President of the United States, Steve, or the President of Mexico or the President of the WTO—what would you like to see happen over the next year? For you, Steve, would it be rapid “equalization”?

Steve Schwartzman: In the next year? That would be terrific! To resolve most of the major issues… I think NAFTA will be resolved in that time frame. I think you will have general agreement with China. It takes a long time to do trade agreements—working them all out. But the basic outlines of things—it would be great to get all that behind us in life, and have things be normalized.

Gillian Tett: That’s very encouraging! You think NAFTA will be broadly resolved in a year, and a new trade deal with China in the next year?

Steve Schwartzman: We all have our own opinions. I would be quite surprised if NAFTA is not successfully renegotiated. I think with China there is a desire for both countries to normalize trade relations and do it reasonably quickly, if it is possible. I am optimistic on that in spite of the rhetoric and other things of that type. It is in the interest of all of those countries.

Gillian Tett: Alejandro, what would you like to see? Would you like to see a renegotiation of NAFTA?

Alejandro Ramirez: Yes, I would like to see it speedily renegotiated. Hopefully we will have something done by the end of the year. Mexico has presidential elections next year. If this gets into that, it could be messy. So I want it done as soon as possible.

Steve Schwartzman: The biggest service that could be done for NAFTA is to have congress just release this document to authorize renegotiations. Elections are coming up. We could create our own problems as a group of three countries simply by having a document held up, which I think the administration wants to get going. This document is being held up by… I won’t say who… by a part of congress… It is not serving the purposes of the country or of Mexico.

Gillian Tett: John and Brad, what would you hope to see happening over the course of the next year to fell more encouraged?

John Hagel: Without diminishing the importance of these policy debates, I view policy debates as a second-order effect of much more fundamental forces. Unless we address those, the public policy will go beyond our control. The key thing to me is: what is our response to increasing performance pressure? I have spent considerable time studying the psychology of this. Very human things we do when we respond to mounting pressure:

We tend to maximize our perception of risk.
We discount our perception of reward.
We tend to shrink our time horizon: under pressure, we need to just think about today.
When we just think about today, we fall into what economists call a zero-sum view of the world: the resources are given, and the only choice is who is going to get them—you, or me?

The consequence of that is erosion of trust. You may seem like a real nice person, but I know that at the end of the day only one of us is going to get these resources, and it is going to be me. In that kind of environment, we are headed toward a very dysfunctional society. My belief is that at least in the U.S. both sides of the political system have fallen under a threat-based narrative: we are under attack. The enemy is coming at us. We all are going to die. We need to come together and fight, now. These narratives reinforce all those dysfunctional psychological reactions to increased pressure. Until and unless we can frame an opportunity-base narrative that gives a credible view of an opportunity that we can all come together to take advantage of that opportunity, our public policy will go in a dysfunctional direction.

Gillian Terr: And do you see any countries framing things this way at the moment?

John Hagel No.

Gillian Tett: Brad, what would you like to do if you were made president tomorrow. What would you like to do? What would you like to see happen?

Brad DeLong: Since I will not be president, what I hope for is that as little as possible gets broken, and as much knowledge as possible is acquired.

Already we have had President Trump say that he did not know what he was talking about last year on the campaign trail when he said that NATO was “obsolete”. He now agrees that NATO is indeed not obsolete—but the pillar of security for the western alliance.

I would like Donald Trump to say that he did not know what he was talking about when he claimed that the TPP was a job-destroying trade deal that would rob Americans of good manufacturing jobs.

I would like him to say that the TPP would further strengthen market integration across the Pacific to the benefit of the U.S. economy, and that the United States had struck a very good deal with respect to intellectual property in the TPP. Very much so. When I was tending toward “no” on the TPP, it was largely because I did not think that it was fair that the Vietnamese be charged through the nose for pharmaceuticals. They are poor. We bombed them for ten years. We could at least let them buy pharmaceuticals cheaply.

In the best of all possible worlds is one in which people realize that a free trade agreement is a free trade agreement. There are no tariff barriers in NAFTA. To talk about “equalization” of tariffs… There is nothing to be renegotiated. There are no large substantial issues. The issues are, as I said, on the order of those (a) the United States has been consistently in violation of its NAFTA obligations to Canada in the lumber sector over the past 25 years, (b) the United States has, I believe, been consistently in violation of its NAFTA obligations to Mexico in transport services, and (c) the Canadian cultural thing—Lenny Kravitz, Celine Dion. Should we let Hollywood wipe them off the Canadian airwaves?

Gillian Tett: When Secretary Ross suddenly makes lumber and milk key trade issues, is that justified under NAFTA or is that just plucked out of thin air?

Brad DeLong: That is just plucked out of thin air. Admittedly, there have for a long time been many congressmen and senators in the United States who have been upset about the implications of NAFTA. I remember a conversation in the buffet line at Jackson Hole with the chief of staff of one of the Democratic senators. Is it really worth taking a stand here? There response was: yes—we have our lumber and cheese producers, a lot of them, whose interests we need to advance.

That was the thing we had hoped to get away from with free trade. Agreements that were simple, global, comprehensive, and grew the economy so that even the losers from the individual provisions would acknowledge that they had gained more than enough to compensate them from the greater market scale. The spillovers from faster and greater economic growth would make it win-win in five years even if it were a shock now.

The reverse? We know what happens then, too. The spider-diagram from Charlie Kindleberger’s The World in Depression. The collapse of world trade in the early 1930s.

Gillian Tett: The chart that you put up there showing globalization going up like a rocket. Have you tried to calculate what that means for world GDP and so forth? How serious would it be if protectionism does come in?

Brad DeLong: Trade does lead to big redistributions. It leads to big movements of goods and services. But if everything had to be produced at home, prices of most things would not go up by all that much. Australia could run an automobile industry, but at something like 30% subsidies, a 30% cost increase. 10% of the economy in manufacturing that is foreign value added—a 3% hit to global GDP from a coming of some form of protectionism. You can say that’s not very much: 2 years of global north economic growth. But with a world GDP of $80 trillion—that’s a $240 billion a year loss. We do not have a world—you would know it in this room, at this hotel, in this conference—but we do not have a world in which everybody is incredibly rich. We live in a world in which a quarter of our number live lives very much like our pre-industrial ancestors, save that they do have some access to the village smartphone. Fear about where the food is going to come from next week is still a thing for a quarter of humanity.

Only a tenth of humanity has what those of us in this room would regard as a normal, even a bare-bones standard of living.

In that context, $240 billion a year of lost production would be seriously felt by a lot of people. It is not enough to derange an entire economy or to grossly destabilize global asset prices. But there are a lot of people out there whom it would seriously hurt.

Gillian Tett: Steve, when you look at things, is it just business as usual? Do you just try to push ahead with TPP? Or is there something else you can do to promote more globalization?

Steven Ciobo: The outcomes of this global discuss has been an empowering of pro-globalization advocacy. I may feel it more keenly than others. But in the context of myself and the other members of the government, we feel emboldened to stress the benefits of free trade. When you feel under siege, you have to talk about history. You have to talk about how from the 1960s on trade growth was about double GDP growth. We know that trade drives growth. We know that trade drives jobs. I will use illustration after illustration, companies, businesses, and others, that our benefiting from tree trade. This may not be a uniform media environment—but often it is—they will always put the factory closure on the front page and talk about how many workers have lost their jobs. They will never put the business expansion and the extra employment to meet international orders. We have to be realistic. The world is more global than it has ever been. Labor is global. Capital is global. We are kidding ourselves if we do not appreciate that, for the generations coming through now, national boundaries, especially in the western world, mean less than they have ever meant before. That is what we need to tap into.

Gillian Tett: So when you look ahead a couple of years from now, do you see us operating in a climate of more protectionism or less protectionism?

Steve Ciobo: Well, if we are operating in an environment of more protectionism in a decade’s time, we will all be more impoverished. Full stop.

Gillian Tett: How about you, Brad? Do you think that we will be having more protectionism in a decade’s time or less protectionism?

Brad DeLong: I think more. But not significantly more. The secular stagnation issues—that governments are unwilling to increase their purchases, that central banks are largely tapped out and have pushed the pedal to the floor, that redirecting spending to domestically-produced goods is a lever that can and might create jobs—some governments will decide that they have to pull that lever. So there will be some increase in protectionism.

There will also be some reduction in intercontinental value chains. Nike will bring some production back from Vietnam to outside of Boston. It will figure out how to build robots that can handle not just rigid metal and plastic but flexible leather and fabric, and sew shoes. They will get it. Something like a return of the mass production era reshoring, the implications of secular stagnation and aggregate demand pressures, with the burbling underlying political pressures. Lots of people think something is going wrong, lots of politicians are looking for somebody to blame, and the best person for a politician to blame is a foreigner who does not go to the voting booth when they run for reelection. That’s an easy way to go—whether it is true or not.

Gillian Tett: Right. John, do you expect more protectionism? Or less?

John Hagel: In the short term I do expect more protectionism. As an optimist, I view it as a catalyst to force us to reassess our institutions. Broadly, the shift that we see that we need to make is to shift from a model of institutions—and I am not talking about companies alone but all institutions—built on a model of scalable efficiency, thank you Ronald Coase, to a model of scalable learning that will help all of us to learn faster and achieve more of our potential and that will bring us back to more of a globalized mindset.

Gillian Tett: Right. Well, trust the Silicon Valley boys to be more optimistic. Silver linings. Alejandro: more or less protectionism in a few years time?

Alejandro Ramirez: Slightly more, at the global level. But I am an optimist and I hope we will see less after this time that is a little bit turbulent. Mexico, for instance, is trying to open up or strengthen trade relationships with the rest of the world. 80% of our trade is with the U.S. Reach out to Latin America. Modernize and deepen our free trade agreement with the European Union. Open up to Asia. My hope is that we will see less protectionism.

Gillian Tett: Steve. I have chucked many hard questions at you. Only fair to let you have the last word. More protectionism or less?

Steve Schwarzman: Gee. I don’t know whether I want the first word, or the last word.

Gillian Tett: You can have both.

Steve Schwarzman: You will probably see in a historical context a little more. But this is a cycle we are going through. Once you get through the cycle you will have a new baseline and move on to other things. John is right: this is just one part of a very complex set of circumstances, with technology a leader in terms of putting pressure on government and people, and trade gets mixed up with that to some degree as do other political factors. We as a society are going to have to work our way through these things. We have to find a way to deal with technology, with education, which at least in the United States has steadily been declining. We are now number 27 in the world. You cannot deal with important issues like technology putting pressure on margins, returns, job creation expressed through different types of unhappiness with trade and other things without the educational aspect. We used to be in the top three in the world. To become 27 is a remarkable achievement in 25 years. If you do not address that, this will not be the only panel that has not completely cheerful things to say.

Gillian Tett: Right. I think the clear consensus is, by about 4.5 votes, short term pessimism—you are an elected politician so you cannot be short term pessimism—but medium to long term hopes, hopes that this is a cycle. That rocket diagram graph that Brad presented is one quite optimistic framing. Let’s hope that that rocket keeps going up.

Thank you all very much indeed for your time. And best of luck.

Where US Manufacturing Jobs Really Went

Posted on May 3, 2017 by Brad DeLong

Project Syndicate: J. Bradford DeLong: Where US Manufacturing Jobs Really Went: In the two decades from 1979 to 1999, the number of manufacturing jobs in the United States drifted downward, from 19 million to 17 million. But over the next decade, between 1999 and 2009, the number plummeted to 12 million. That more dramatic decline has given rise to the idea that the US economy suddenly stopped working–at least for blue-collar males–at the turn of the century…

Trade, Jobs, and Inequality

Posted on April 29, 2017 by Brad DeLong

http://videostreaming.gc.cuny.edu/videos/video/4983/embed/?access_token=shr00000049839204943398151315087172252494609

Eduardo Porter: Good evening. Thanks for coming. There has been a lot of sturm and drang over the last—what?—98 days. Today I read that the administration is preparing an executive order to start the process for the U.S. to leave NAFTA, which was one of Mr. Trump’s campaign promises. However, over the past 98 days I have come to realize that perhaps President Trump did not really mean all of the things he said on the campaign trail.

He has left China off the hook: “not a currency manipulator”. His first trade battle was against… Canada. And the first battle against Mexico he lost, today at the WTO. And yet I do not think that you would be right to discount the “Trump phenomenon”. There were tens of millions of voters who actually bought into his argument that immigration and trade have done them wrong, have taken their jobs, have weighted on their wages, have caused some of the social dysfunction that we now see in many American communities.

Here we have this group of pretty remarkable pros to talk about whether there is a case against trade. To what extent is Trump’s diagnosis correct? Is there an argument for some sort of protectionist policies to support the workers who have been displaced from their jobs, or whose wages have not improved due to competition from other countries? Perhaps Trump’s prescriptions have been pretty outlandish—slapping a 35% tariff against the world’s second largest economy, or withdrawing from NAFTA and undermining the value chains that have been built over the last 25 years, or even abandoning the WTO. This is something I would like the panel to address. But also softer stuff: like talking about using safeguards against import surges or other tools used in administrations in the past. Our upcoming trade representative thirty-five years ago was negotiating voluntary export restraints with Japan in the way of using protectionism to assist workers.

Without belaboring this further, I would like to give each of you guys an opportunity to address these topics and get this going. If I may start with you, David Autor, you have written some very important papers addressing the impact of trade on workers and your last name begins with an “A”, so we can do this alphabetically:

David Autor: Thank you very much. It is a pleasure and an honor to be here, to be on stage, to be a guest of Paul Krugman and CUNY, and I see many of my friends far more distinguished than I in the audience as well. I am going to try to set the stage. I will not talk about trade policy per se. But I will put it in the context of the dramatic changes in the U.S. labor market that have occurred over the past 35 years.

From 1980 to the present we have had a rapid rise in inequality, and a lot of that rise in inequality is divergence in earnings by education level, and a lot of that divergence is not simply higher earnings for higher education adults but falling real earnings levels for lower-education adults, particularly non-college men, particularly men with just as or with less than a high school degree.

A lot of that phenomenon, in our consensus understanding, has to do with technological change that has increased the demand for highly educated workers and those with judgment, expertise, and creativity, and reduced the demand for repetitive physical and repetitive cognitive labor. So over the last 35 years technology has been more consequential for the divergence we have seen. And up until the mid 1990s I think many economists would have said: end of story.

But things really did change in the 1990s and 2000s, and that change had a great deal to do with China’s economic development which, let us be clear, is a fabulous thing from a global perspective. This has been the best thing for the global middle class in a millennium. It has created prosperity throughout the world not just in China, but in sub-Saharan Africa, Latin America, and so forth. It has been a great thing. But it has been extremely disruptive for U.S. employment, especially U.S. manufacturing employment.

I myself am actually startled when I look at the figures. Many of us have in mind the picture that U.S. manufacturing has been in perpetual decline since 1943, when it was 38% of U.S. employment toward the end of the Second World War. It is true: if you look at the share of manufacturing employment, it is just down, down, down. You cannot even see the early 1980s recession. You can barely see China’s rise.

But if you look at the number rather than the share of U.S. manufacturing workers, you see something very different. In 1943, in the Second World War, there were 16.6 million U.S. manufacturing workers. By 1979 there were 19.7—not that much change. In 1999 there were 17.7—again not that much change. But by 2007 U.S. manufacturing employment had fallen by three and a half million jobs. And in the subsequent three years between 2007 and 2010, it fell by another one and a half million jobs. Five million jobs lost—almost a third of U.S. manufacturing employment—and that is a really traumatic shock.

It really falls off a cliff. And it does have a great deal to do with the rising position of China. Not the fault of China. All of a sudden we have a very competitive low-wage country making high-quality goods that are a better deal for consumers. Consumers start substituting toward them. That raises consumer welfare—it makes lots of goods cheaper—but it also has a very concentrated impact on the places that make those things. Manufacturing by its very nature is geographically concentrated. When we are talking about commodity furniture we are talking about Tennessee. When we are talking about textiles we are talking about the Carolinas.

Five million jobs in a labor market of 150 million really isn’t very many. But when it happens in a few places in a very short period of time—when all the firms in an industry go under at once—it has a seismic impact. We have always known that more trade has diffuse benefits and concentrated costs. That is true and theory. In the 2000s we really saw it play out in practice It is understandable that people do feel like this was unexpected, this was unwelcome, they were not warned, they were told that trade was win-win. Things did not work out as expected.

Brad DeLong: Certainly I have learned a huge amount from David Autor. Certainly I have had to substantially revise upward my own views about the negative U.S. domestic consequences of trade and the China shock that hit the U.S. starting the late 1990s as China’s industrialization shifted from something impressive for a very poor country to something that was of world historical consequence. But I would like to lay down a marker and put David’s remarks a little bit in perspective. And I would like to erase what I think might be somewhat of a misapprehension.

When you talk about the number of manufacturing jobs going from 19 million to 17 million from 1979-1999 and then down to 12 million, those aren’t the same manufacturing jobs. There is enormous churning within manufacturing. There are enormous regional shifts as well. My grandfather had to close his shoe factory in Brockton, MA in 1933 at the nadir of the Great Depression and move up to and reopen in a place where wages were even lower: South Paris, ME. The workers of Brockton were killed by this. This was taking pace at the same moment that the rest of manufacturing in southeastern Massachusetts was beginning its move down to the Carolinas. The Lord Brothers Shoe Company was a bonanza for the workers of the South Paris until 1947, when they hit the wall again.

They took the capital and split up to become real estate developers.

That was not a big shift in terms of the kinds of people employed—the net factor content of domestic employment. The Wellman-Lord Construction Company that built turnkey phosphate plants and other things in Florida employed very much the same kinds of people in terms of skills and education as had the Lord Brothers Shoe Company in South Paris, ME. But these were people in Florida rather than Maine.

There is always churn. That’s the reason I think that looking at the share—which shows a smooth decline—yields much more insight than looking at absolute numbers. Absolute numbers seem to say things were stable for a long time, and then they collapsed . What was actually happening was that the jobs were opening up and closing down the economy at all times in different regions. People were moving and shifting about. Manufacturing was not stable. New England manufacturing got killed—and New England workers along with it. Carolinas manufacturing boomed—and that was a bonanza for Carolina’s workers.

Looking at the share, you see a long decline in the share interrupted by sudden short-term sudden shocks which cause considerable distress. To throw out some numbers:

We were never going to permanently have 38% of our nonfarm labor force in manufacturing: that was only if we were building little but bombs and tanks.
The post-World War II normal was about 30%.
if the United States had been a normal post-World War II industrial powerhouse economy like Germany and Japan, by now the evolution of technology would’ve carried us down from 30% to about 12%.
We have gone from 12% to 9.2% because since the inauguration of Ronald Reagan, the United States has on the whole followed very strange and dysfunctional macroeconomic policies, policies that have made us a savings deficit rather than a savings surplus country. Instead of the United States as a rich country financing the industrialization of the rest of the world and developing economies using that financing to purchase US manufacturing exports, we have been instead acting as… a money laundering center? a provider of political risk insurance? a place to put your money so that if the balloon goes up in your country and you have to flee suddenly in the Learjet or the rubber boat you will be much happier if a large chunk of your wealth is on deposit at J.P. Morgan Chase in New York.
Morever, if you are not a rich person in a developing country but a developing country, and if you want to avoid being subject to the tender mercies of Christine Lagarde of the IMF, it is nice to have large dollar assets in your government’s hands to use in an emergency.
Then from 9.2% to 8.7% is because of changing patterns of trade, primarily the rise of China.
From 8.7% to 8.7% because of the result of NAFTA: NAFTA is a nothingburger as far as the fall in the manufacturing share of the workforce is concerned.
From 8.7% to 8.6% because of bad trade deals we have made with China, with Mexico, with Canada. They’ve taken us to the cleaners, I tell you! Over three generations they have taken us the cleaners! Bigly, they have taken us to the cleaners!

And of course, there are substantial and powerful countervailing gains in other sectors that we have gotten from the trade negotiations that have led us to shed the extra 0.1%-point of our manufacturing labor force.

I would sharply distinguish that 0.1%-point from the 0.5%-point that is due to trade, primarily the rise of China, and from the 2.8%-points that are due to the trade impact of dysfunctional macroeconomic policies, and from the 18%-points that are due to technology.

Eduardo Porter: So, Ann, is trade not it? Is trade a red herring?

Ann Harrison: Let me step back.

Let me try to negotiate between these two men to either side of me. Donald Trump won the US election by convincing voters in states like Michigan, Ohio, Pennsylvania that he would make America great again. What was his platform?

Brad DeLong: If I may say: by convincing three million fewer voters.

Ann Harrison: Yes. Let us recall that he did not win the popular vote.

He promised to impose 20% tariffs on imports. He promised to build a wall to keep out Mexican immigrants. He promised to renegotiate and perhaps throw out NAFTA. On Sunday we saw an almost-repeat of the Trump campaign in the first round of the French presidential elections. Marine le Pen has made it to the final two on a far right platform. Her platform was to take France out of the European Union. So the question is: why are such extreme anti-globalization platform so appealing?

I am going to throw out my own numbers:

Since 1984, when we had 25 million manufacturing workers, half of those workers have disappeared from manufacture. We have gone from a country where one quarter of workers are in manufacturing to one in ten workers. One of the major reasons that this decline is important is that those jobs are in fact”good jobs”. In my research I follow workers were kicked out of the manufacturing sector and move to services. Typically that will lose them 5% of their wages. However if that worker loses his or her job in manufacturing because of the trade shop, he or she loses 15 to 20% of their wages. You are losing jobs, and you are losing good jobs. The important thing is that the pain is real. We are seeing a shrinking middle class. We are seeing stagnant wages for less-educated middle-age workers. And we are seeing an enormous rise in inequality—higher than we have seen in the last 100 years.

In addition to that—and this is very important—we are seeing a rise in insecurity. Even people who still hold on to jobs are afraid for the future. They are afraid about whether their Kit is going to get into college. They are afraid about whether their kid is going to get a job at all. They are afraid about whether they are going to lose their job. That rising insecurity is really important.

Then we have to ask ourselves: somebody like me, an economist who has always supported free trade, did we miscalculate the gains from globalization? I think we made two big mistakes

The first mistake we made was that we thought it would be really easy for people to retool and find new jobs. It turns out that is not so easy. We have a record number of people who have left the labor force.
The second mistake is that we thought it would be easy to compensate the losers. The idea behind globalization is the winners, the exporters, the consumers, are so much richer that it is easy and straightforward to redistribute some of the winnings to compensate the losers. That turned out not to be true. Our package for helping the losers, Trade Adjustment Assistance, helped only about half those that it should have helped. But, much more important than that, Americans do not want handouts. What they really want are jobs.

That leads me to the next question: Is barricading ourselves against China and throwing out NAFTA part of the solution? This is where I am going to deviate from Professor Autor and support my former Berkeley colleague Professor DeLong. Us Berkeley types stick together.

China is a convenient scapegoat. It reminds me of Japan in the 1980s, when Michael Crichton described a “yellow menace”—very racist—in his novel The Rising Sun. I think that is what we are facing.

Why do I think protectionism won’ help? I have a new book, The Factory-Free Economy, with a coauthor and friend named Lionel Fontagne. I want to tell you a story from the very first chapter written by Richard Baldwin. Go down to South Carolina and go into a textile mill, and the only thing you will see is a man and a dog. The dog is there to protect the machinery. The man is there to feed the dog.

That tells you—this is just an anecdote—that China is not the enemy. The enemy is the machine. Let me give you some more facts to bolster my argument and this is where I’m going to support my colleague from Berkeley. My own research has tried to decompose what has happened to manufacturing jobs. My research shows that maybe 10% of the loss is due to firms going offshore. Three quarters of it can be attributed to the fact that the cost of machinery has fallen, and firms are substituting machines for people.

Let us look at the long-run trends here. Let us go back 50 years, 50 years, Long before China came on the scene, the share of manufacturing value added in the economy has stayed completely flat. It has not moved. What has changed very gradually is the share of manufacturing workers, and here again I would agree with my colleague to the left. You do not see a big decline around 2000. There is a decline but it is not enough to materially shift the trend. You see a gradual decline in the share of manufacturing workers. How can we have Constant share of manufacturing value added in GDP while the share of manufacturing workers in employment falls? The answer, once again, is machines. Rising productivity as machines are replacing workers.

Let me summarize:

The pain is real.
The solution is wrong.
It’s not that winter is coming. It is that the robots are coming.

David Autor: I just want to make it clear. I am not advocating trade barriers of any sort. That maybe what you took for my remarks. The China shock was real. It had a large effect. That does not mean we should try to or can turn back the hands of time. Paul wants to say more about this.

Paul Krugman: Instead of arguing with my fellow panelists, I am going to argue with my past self.

Two propositions:

Economists were much too complacent about trade even up until the fairly recent past.
The political system and journalists are way overreacting to trade now.

These are not contradictory. Both need to be in there now.

There was a late 1990s consensus about trade and the economy—that trade was a contributing factor but a very distinctly secondary factor and that if you got the numbers right it was not that big a deal. We should really be focusing on inequality via other programs. Trade was not the issue. If you have to ask: Who was guilty of what turned out to be a bad judgment? The answer is: me.

I was taking standard trade models. I was looking at factor content. I was concluding: look, it’s just not big enough to be having the effects non-economists are ascribing to it.

A couple of things happened. One was that trade went up a lot—and a different kind of trade. It was not just China. If you take a long time series of trade as a share of world GDP, you find that there is a big dip in the interwar period, and by 1980 it does not look that different from 1913. And then something happens. Hyperglobalization. There is this take-off of trade, this geographic deconcentration of value chains, and it is not just China.

Thus a lot of estimates that trade was just not that big a deal were using data from 1993. And guess what? Data from 2015 shows that trade with low wage countries is a much bigger thing.

And then there is the specific falling-off-a-cliff thing of the 2000s. Partly this is a statistical illusion because the rate of growth of the labor force slows a lot. The baby boomers are all in the workforce. The movement of women into the labor force was over. Thus what had been a continuing decline in the share became an absolute decline in the number of manufacturing workers.

There was a big move into trade deficit in the 2000s. A lot of it was emerging market money flooding into the United States in the wake of the financial crisis. In economics, everything is connected to everything else in at least two ways. There is this funny backwash from that. So trade becomes a much bigger deal than it was.

The other thing—which I really kick myself for missing—is what David Autor and coauthors have pointed out: workers are a lot less fungible, and a lot less mobile, a lot less able to shift jobs then we had imagined or would like to imagine. Manufacturing industries are geographically concentrated. When you get a shock you can’t just think as if all workers in the economy are the same. When all the export-oriented workers in some midwestern town have lost their jobs, that matters, the effects are bigger.

On the other hand, it is a dynamic economy. Stuff is always happening. I used the number 75000 for the number of Americans every working day. I got some internal mail from the Times—people saying: that’s ridiculous, that can’t be right, that would mean that 20 million people lose their jobs every year. Yes. 20 million people lose their jobs every year. There is a lot of churn. Things are happening all the time. More retail jobs were lost in the last two months than coal jobs were lost since 2000.

Manufacturing, because of the geographic concentration, does matter more. But disruption of manufacturing centers has been happening for a long time, that is not a new phenomenon, that does not have to be related to international trade. Walk around here and there is even a statue of a garment worker at his sewing machine. This is called the “Garment District”. There is no Garment District here anymore. There are just memories of the Garment District. That disappears, but—and I am not sure where I come down in how we deal with it—we can do the numbers. We can look at objective facts. We can say that it is only one of a number of factors. But it always has a psychological significance that makes it much bigger.

The fact that foreigners are involved makes people always emphasize trade shocks much more than corresponding alternative shocks coming in. People get upset about the disappearance of steel plants in a way they never got upset about the disappearance of the buggy manufacturers. Somehow, the sense of unfairness—and I think to a little bit economists have a reverse problem. Comparative advantage is one of the prides and glories of our profession. And so we overemphasize the good sides of trade as well. That puts us in an awkward position.

Last thought—and I am not offering any answers here—if we think that a large part of the solution is a stronger social safety net, think about the fact that France has a welfare state, a social safety net, that is beyond the wildest dreams of American leftists. Nonetheless le Pen made it into the second round of the election.

Eduardo Porter: Thanks. Just a word in defense of David and of China. I did my last column about whether China should have been labelled a currency manipulator. I was speaking to Brad Setser. He said that there was a “before David Autor” and an “after David Autor”. Because of your work identifying the local impacts of competition from China.

Paul Krugman: I just want to say that I brought multiple columns saying that China was a currency manipulator, which was true in 2010 and 2011, but is not true now…

Eduardo Porter: Part of this conversation should also be about a set of actions that the Trump administration. If trade is at best overblown as a cause of distress, what would be the costs of some of the actions that the Trump administration is proposing?

Brad DeLong: Abrogating NAFTA, for example? I would say full NAFTA abrogation—returning us to 1992—would cause a world of hurt to the American auto industry, as well as to other sectors. The argument back in 1992—Ross Perot on the right and my various labor friends on the right—was that the auto industry was in the crosshairs and gravely threatened by NAFTA. That turned out to be simply wrong.

Sherman Robinson of IFPRI and PIIE have convincingly demonstrated that that was simply not so. NAFTA enabled the creation of one of the first important sophisticated global value chains. After NAFTA, Detroit could reconfigure its work processes and so shift out the “bad”, low-productivity manufacturing jobs to Mexico—the jobs in which we use people as essentially robots because the real robots we can build are not quite good enough—while keeping the high value skilled and semi-skilled manufacturing jobs. Without Mexico there as a resource to draw on in the value chain, Detroit would have a greater cost disadvantage vis-a-vis Nissan, Toyota, Honda, Subaru, and BMW, Mercedes, Audi.

If you abrogate NAFTA, that goes away.

GM, Ford, and Chrysler are then in a much worse position.

Paul Krugman: I do not have an estimate of what Trumpist trade policies would do…

Brad DeLong: And neither does he…

Paul Krugman: We don’t even know what the policies are.

There has been a fair bit of work on BREXIT. We have a better idea of what BREXIT will actually involve. Something like 2% poorer in the long run. There is a dirty little secret: the benefits of trade and the costs of protection are not trivial, but they are not as big as the rhetoric might tend to make you believe. An abrogation of NAFTA would be something like that.

However, here the Autor point cuts in the other direction. NAFTA is not a new thing. The North American economies have adjusted to it. We have an integrated North American production system. A car assembled in Ontario is made from stuff produced all over the continent. Disrupting that would do the same kind of damage as the China shock. The old joke about the motorist who runs over a pedestrian, says “I’m sorry”, and then backs up and runs over him again. The big changes in trade are all in the rear view mirror. The China shock ended around 2008. The big changes from NAFTA ended a decade before that. Now we are talking about taking an established industrial order and disrupting it.

Eduardo Porter: Guys, folks are going to come around to collect the question cards. The cards will then be brought forward here.

David Autor: Let me try to bring this around to trade and automation, which Ann correctly emphasized. Automation has been more important. In the future, automation will likely be more important again. The China shock was hugely disruptive, but it is much closer to equilibrium now. With no change in policy we will not see anything like what we saw over the past 15 years in the next 15 years.

But we ought to learn some lessons about this. One is about our social safety net. As emphasized, trade adjustment assistance policy is woefully inadequate. But a deeper point is, jobs have their own value. You cannot make someone whole… What if you said, “Hey, Paul, we are going to take away your identity. You are no longer an esteemed economist. You are just retired”. Would you say: “Oh, great! I have all this money and I do not have to do anything!”? Of course not. For most people, work is central to organize who they are, how they perceive themselves, how others perceive them, their social identity. A better social safety net is not sufficient. We would like to actually have good jobs.

Are there other ways to go about that? Tax reform. The whole Border Adjustment Tax was a Trojan Horse for a Value Added Tax, which most other industrialized countries have. That treats imports and domestically produced goods symmetrically. Our current tax system levies a lot of taxes on domestically produced goods and only sales taxes on imports. Moving toward a better form of taxation could be beneficial for investment and for the repatriation of profits to the United States. Similarly, we could continue to invest in things that are innovative. We should be concerned about manufacturing not just as a jobs program but as a center of innovation. A lot our patents and a lot of our IP occurs. That creates a lot of wealth and employment. We would be a poorer place and we are going to be a much poorer place if we cut the National Science Foundation and the NIH, if we stop investing in our great public universities. We are really at risk of making that mistake. Severely.

The one thing I disagree with: I don’t think we should fear the robots. Automation has been with us for 200 years. It has made us rich. It has made us more productive. We lead safer, more interesting, longer lives with much higher standards of living because of the advances we have made. It is also disruptive, like trade. But it does not happen as fast. We are living in an era where people are very concerned that automation may all of a sudden change a lot of things very quickly. So far that has not happened at all. In the time since 2000, the U.S. has added 15 million jobs—as many stories as have been simultaneously written about how the robots are taking all of our jobs.

The productivity data do not support the view that we are in this productivity transformational surge. We may be—we may be at an inflection point. But it has not happened yet. We should be preparing for how we can benefit from the complementary and productivity. It is coming. We want to make sure that we are making robots here, and not buying them from China or Germany, because we are going to be using them 20 years from now. We would also like to be making them. We want to be thinking about how we take advantage of these opportunities, not how we make them go away.

Paul Krugman: I also wanted to raise this issue. You could argue that there are too few robots around—that is what the productivity statistics seem to be saying.

Ann Harrison: I want to make just two points about what would happen if we transitioned to a more protectionist state of things. One is that 95% of the world’s markets are outside US borders. A company, any worker who works for an exporting company, anybody who has to think about the rest of the world—for all of them, closing in is really not a good idea even from a narrow business perspective. That is something Trump understands.

The other more important point is that the 2 billion poorest people, the people who live on less than two dollars a day, they live outside our borders. These people in the rest of the world, particularly the Chinese, have benefited massively from the opening up of world trade. A prominent economist sitting in the front row here, Branko Milanovic, has written a very important book showing that even though inequality has risen in every single country, global inequality has fallen. Why is that? Because the poorest countries, particularly China, have been able to use access to world markets to catch up. I just do not see how we can turn our backs on the 2 billion poorest people. That is what I wanted to say about the costs of protectionism.

I want to say one more thing: the hard part is what we will do going forward. It would be great if we could discuss a proposition: Both Bill Gates—whom I think of as middle—and by somebody more on the left, the late Anthony Atkinson and his fifteen points about what should be done. Coming from very different perspectives, one a billionaire and one an Oxford Don, they both agree that what we should do is to tax machines—or find other ways to promote labor-intensive growth.

David Autor: That’s a terrible idea.

Paul Krugman: There are two things I want to say. First, in saying “don’t fear the robots” you are missing “Skynet kills us all”, but let us pat that aside.

Second, in raising this, Ann is making a point that I very much agree with but I am not sure what to do with. If we step back from a U.S. or an OECD perspective and take a rootless cosmopolitan global perspective, hyperglobalization has been an incredible force for good—and it is not just China. In fact, in some ways China is the old story. You want to be thinking about those that are not as far along. If you go to Bangladesh you are horrified: they are very poor, miserable conditions, they have industrial disasters that make the Triangle Shirtwaist fire look like nothing, and yet they are a country that was on the edge of starvation when they achieved independence and has achieved a doubling of real incomes, and it is all because of their ability to export labor intensive manufactures. They are not a banana republic, they are a pajama republic. That is terribly important. That is a reason to keep markets open.

But can you imagine running a U.S. national campaign saying: “Look, your communities are being gutted, but we have to keep these markets open for the sake of the people in Bangladesh”? I don’t know how we deal with that. I really don’t know how to think about that.

Eduardo Porter: If we could think about trade policy into the future. Is there a role for reviewing trade policy, in both the domestic and the global perspective. On the domestic side, you have folks like Larry Summers—hardly a crazy radical—writing pieces about how we should rethink the institutions. We should stop focusing on trade deals, and should focus on other things, like labor rights and institutions…

David Autor: Like the TPP, actually…

Eduardo Porter: And from the global perspective, the issue that globalization has helped a lot of countries move up from poverty is certainly true, but now there is a question about whether that will still be true in the future. You have the work of folks like Dani Rodrik wondering whether the manufacturing economy will be able to do the trick that it did for countries like China.

Brad DeLong: China may well be the last country able to use the standard strategy of export-led industrialization to a complaisant importer of last resort to build up its communities of engineering practice and so become much richer faster. A huge question. Let me say that everybody should read Richard Baldwin’s new book, The Great Convergence.

Paul Krugman: This ties into a huge number of issues. We used to say—I used to say—when we had the original Gang of Four industrializers, Korea, Taiwan, Hong Kong, and Singapore, that: “OK, you can do this, but how much labor intensive manufacturing production is there in the world?” Would it be possible once China tries to do this? And it turned out that it was possible.

Brad DeLong: Barely…

Paul Krugman: But it was possible, and that was because we learned to divide up the value chain, and take labor intensive segments and hive them off. So far—there are still a few countries, Bangladesh, Vietnam, behind China in this—there may be limits. And it doesn’t seem to work everywhere. Why has not Mexico had the takeoff we expected it to have?

Brad DeLong: One thing that it definitely is our job to do as academics and economists is to very proudly fly our rootless cosmopolite freak flag whenever the situation and the evidence calls for it. We need to be saying that a century from now historians will be writing that one of the glories of the American age was that the United States did not view its proper role as hobbling industrialization, growth, development in the rest of the world but rather in encouraging and supporting the making of a much richer world as fast as practicable. An open economy, a liberal polity—that has made the era since 1945 so great.

I find myself wondering—Pascal Lamy, at a conference I was at last November, quoting China’s sixth Buddhist patriarch: “when the wise man points at the moon, the fool looks at the finger”. There was a Hungarian Jewish sociologist 70 years ago, Karl Polanyi, who wrote that a market society was bound to destroy itself. In a market society and the only rights that matter are your property rights, and your property rights are only worth something if they give you control of scarce resources useful for making things rich people have a serious Jones for. But people Believe that their rights extend far beyond their property rights. The way Polanyi put it, people believe that they have rights to Land whether they own the land or not—that the preservation and stability of their community is a right they have. People believe that they have rights to Labor—that if they play by the rules and work hard the market owes them that they should be able to earn the standard of living they expected. People believe that they have rights to Finance—that the firms they work for and the jobs they have should not suddenly blow up and disappear because financial flows have been withdrawn at the behest of some sinister gnomes of Zürich or other tribe of rootless cosmopolites.

This is a huge problem. People believe that they have much stronger rights than the ones a market society gives. But then you try to move beyond a market society to a social democracy with a safety net. And the response is: we don’t want welfare programs. Back in the 1920s “welfare” was a good word. When Edward Filene in the 1920s talked about “welfare capitalism”—firms providing health, accident, and pension benefits to their workers—the “welfare” was in there to make his readers think that the idea was a good thing. But because people want respect, over the past century the word “welfare” has been poisoned.

Dealing with this is one of the major political-rhetorical-economic challenges of our time. As an economist, I want to pass this buck to some sociologists or political scientists somewhere.

David Autor I want to say a little more about why I am not in favor of taxing robots. Unlike carbon emissions, robots do not create direct negative pollution externalities. This would be taxing something that makes us more productive. This would be like taxing computers because they eliminate all of those clerical jobs, or taxing cars because they are displacing all these equestrians end for farriers. It would’ve been a terrible idea—not just making us poor in the short run but keeping us poorer in the long run by retarding economic and industrial development and innovation.

Ann Harrison: Did you just say it was a bad idea to tax cars?

David Autor: I did. To treat them specially and differently. I think that our tax system favors labor over capital in an unfortunate way. They should be treated symmetrically. Rapid expensing and so on is actually a poor idea, but to single out an area of technological advance and say that we are going to punish it because it could be disruptive—that is a way of making us poor in the long run. And I want to reiterate: Robots will be a really large part of production. We had a technological advantage: a lot of the technology behind robot started in the United States. It is now migrating elsewhere. We should be investing in that as a country as we have done at a societal level with so many other technologies. We should not be waving goodbye because we are scared of what it may do.

Brad DeLong: We used to have what, 500,000 women working at telephone switch boards plugging cables into sockets. Now there is nobody in the United States saying: “Gee. I wish I could get my grandmother’s job at the telephone switchboard at Con Ed! That was such a great job!” That was a job that took human being with a very sophisticated brain—one that has evolved to do everything that a hunter gatherer does plus everything else we have built on top of that—and that uses that brain only—and uses her as a massively underemployed robot because making circuits by inserting plugs in the sockets uses only a very small proportion of the intellectual capacity that is the massively parallel supercomputer that fits in the bread box and draws 50 W of power that is her brain for an eight hour shift.

Paul Krugman: Part of the question is: what is a robot? Is a machine learning algorithm that these days makes Google translate so startlingly good a robot? These days are self-driving vehicles robots? If I wanted to think about a technological change the could displace lots of workers in the near future, we have 5 million people in the United States employed as drivers. That could go away in a heartbeat. But on the other hand—third hand, fourth hand, amongst my hands—the long-run optimism about the impact of technological change is born out by history, but the long run can be very long indeed. Wages stagnated for at least 40 years during the Industrial Revolution, and 40 years from now—a lot can go wrong in 40 years.

Eduardo Porter: This conversation was focused on manufacturing. But automation and whatnot are making inroads into the service economy, which employs a lot more people.

David Autor: Software is a much bigger deal than robots already. It will probably continue to be. Software is the hamburger that eats the world.

Eduardo Porter: We have got 15 minutes for questions. I would like to start with this, which seems a great topic for you people to take on. Let me start with this one. The belief is that service sector jobs will always pay less than manufacturing jobs. But is that guaranteed? Should we put the government’s energies into making it so the service sector jobs are highly paid and good jobs rather than focusing on manufacturing, which will always be a small part of employment in the future?

Brad DeLong: I don’t think that “manufacturing” and “services” are the way to partition it. If you asked me to partition it, I would say that there are people who add value with their strong backs, but that began go go out with the domestication of the horse. And there are people who add value with their nimble fingers, but that began to go out with the invention of the spinning jenny. However, because every horse, every steam engine, every spindle, every piece of machinery needs a microcontroller, human brains added an awful lot of value as bosses of the machines that had replaced their backs and fingers. And there is accounting: keeping track of stuff, and who owns the stuff, what the stuff is good for, who is allowed to use the stuff, where the stuff is, information, organization. The problem now is that robots proper are getting rid of the microcontroller jobs and software ‘bots are about to start getting rid of the accounting another white collar Jobs keeping track of the stuff and what it is good for. The graduate admissions committees whose jobs could be better done by an algorithm…

Paul Krugman: We doing know that live job interviews make a fundamental contribution: they destroy information…

Brad DeLong: You’ve seen economists go on the job market. People have long records of what they have done and what they have worked on and what their advisers and peers say about them. And that gets an interview in a hotel room for 30 minutes. And then with the five people in the hotel room for 30 minutes say about you wipes out all previous information. And if the five people turned from’s up then you get if fly out and get to give a seminar. And then what happens in that seminar wipes out all previous information…

David Autor: I think that what Eduardo was asking about was not “service sector”—which is 80% of everything—but rather personal services, helping, assisting. Those are rapidly growing. Those are low paying. Those are low paying in every advanced economy…

Brad DeLong: Sheryl Sandberg and other managers—it’s a social-engineering-organizing job…

David Autor You added “social engineering”: I was talking about food service-security-cleaning-home health aides. 15% of employment. Very low wage. They are intrinsically low wage because they use a very generic skill set. You can be productive in those jobs in a couple of days without a lot of training because labor is not intrinsically scarce for them, they cannot be high wage jobs. They tend to be at the bottom of the ladder. You can cause there to be higher wages for those jobs with subsidies, or through regulations, and then you will tend to have less of them. It is a very challenging problem.

Paul Krugman: Healthcare jobs include a substantial number of middle-class jobs. I have been obsessed since the last election with West Virginia which went three to one for Trump. He promised to bring back the coal jobs. But there are no coal jobs. There will be no coal jobs. It is about 3% of the state workforce now. 15% of the state work force is health and human services. Some of those are low wage—but it is not clear they have to be, you could have more labor unions. Those are the jobs of the future. Of the twelve occupations predicted to go fastest over the next fifteen years, ten are nursing in one form or another. “Services” is everything from hedge fund managers to janitors. Some of those can be middle class. And where we get into things—if Walmart had been unionized, which could’ve happened in a different political environment, we would be looking at quite a different landscape situation for those jobs.

Brad DeLong: So everyone needs a personal shopper and information provider, a personal psychotherapist, a personal trainer, and a personal life coach—and at an hour a day, that’s 50% of employment right there.

Paul Krugman: If you had taken a French physiocrat who believed that the only true creators of value are farmers and showed them modern America, where there are fewer farmers than people playing World of Warcraft, they would be horrified. Everyone must be doing make-work.

Eduardo Porter: Here is a question about unions, but you just brought up. Let me broaden it a little. What institutional changes going forward—you guys have decided that the safety net is not going to do it. Trade policy seems not the right way. So where is a policy set that has some traction? And let me throw in the arguments about the fissuring of the workforce. I’m wondering whether it might have even more impact than trade, and as large a scale as technology—you sorting off workers by their marginal productivity. The janitor who used the work for GE and benefited because he worked for GE is now an employee of the janitorial services subcontractor. Relegated to a much more cutthroat labor market than he would have been in the past.

Paul Krugman: We won’t know until we try it. The decline of unionization—we said that that was inevitable as manufacturing shrank and so we are left with essentially no private sector unions. That is by no means universally true across the advanced world. Canada still has a unionization rate of greater than 20%. DeMarcus something like 70% unionization. A lot of it has to do, I think, this is an argument one could have, with the political environment. The big reason that Walmart, which is our biggest employer, it is not unionized, while GM did is that Walmart became the biggest employer in a time when the legal and political environment was very hostile to unionization. Things like card check—it is possible you could change this. There is lots of reasons to believe that there is substantial wiggle room—that wages are in no wise pinned down by something called marginal productivity to the extent Econ 101 says. Is that enough to sustain the kind of society we want in the face of the robots? I do not know.

Eduardo Porter: you guys did not talk about education. But there is a question: how about spending more on reskilling?

David Autor: Education is the most important investment to make over the long-term. To adapt. In the late 1800s and and early 1900s when agriculture was shrinking very rapidly, agricultural states like Iowa made massive investments in secondary school education to get out ahead of this. They mandated that everybody stay in school until 16. This was a radical step. Not only were those kids hitting the books, but those kids could not provide labor to the farm while they were in school. It was extremely expensive. It was incredibly forward looking. It gave the United States the most productive, the most flexible, the most skilled workforce in the world for most of the 20th Century. It did not happen automatically. It was a societal choice. Imagine taking the labor force of 1900 and plopping them into the 21st century right now. In spite of their strong back some good characters, many of them would not be employable. They would be innumerate and in many cases illiterate as well.

It is challenging. We have definitely fallen behind in this. We are now 14th in the world in getting people through secondary education. We used to be first in the world. I do not want to say “make America great again”, but we are under investing there, and the way we are gutting our great public colleges and universities is particularly tragic, because it is an area in which we are doing very well. In many parts of the world public universities are distinctly mediocre, and that has not been true in the United States.

Brad DeLong: May I concur with and endore everything David Autor has said, and then strengthen it?

Looking out at an audience that include some people who may be thinking at some future time of giving money to some private university like NYU or Columbia, let me just say that from my perspective: don’t. It won’t work. That is not how our private universities work.

Back in the 1950s Harvard educated 1200 undergraduates a year, Yale 800, in a time when the University of California—UCB and UCLA—educated 4000. Today Harvard educates 1600 undergraduates a year while the University of California educates 50,000. At Harvard has in the meantime received some $30 billion dollars in private gifts.

If you want to make a difference as far as education is concerned—it’s organizations like CUNY that carried the serious load back in the days when Harvard and Yale had hard Jewish quotas of 10%. Given the way that our privates are set up, they are unlikely to use further gift money wisely to expand education in the future.

Paul Krugman: We had an event with Raj Chetty here. He did a study of systems that do produce major amounts of upward mobility. Public universities do it. They do it in varying degrees. There is one that stands out—off the charts: CUNY.

Eduardo Porter: One more question. What’s the role of a minimum wage?

Paul Krugman: The minimum wage is clearly something we can do. It won’t transform the situation. But it will make a material difference. There is no subject in economics I know of where careful empirical work has done more to change people’s minds than the question of the minimum wage. People do dig up things I wrote 25 years ago about the minimum wage about how it would lead to a higher unemployment rate. They say: Why do you now say something different? I reply: Because Card and Krueger did the incredible work. It turns out that the evidence is overwhelming that when a minimum wages are at the levels that they are in the United States today there is no detectable employment effect of raising the minimum wage. There is clear poverty reduction. It is one of the things we do know how to do. We should be doing it.

There is a question about the $15 dollar an hour minimum wage. Fine for New York City. Is it fine for Alabama? Maybe not. But a big push on minimum wages—definitely.

Brad Delong: May I ask you to say that to David Card—that it has changed your mind? He was lamenting three weeks ago that I was the only person who had told him it had changed my mind…

Paul Krugman: I always say that. You can tell him this. I like to be open-minded. This is shockingly good work. It moved me significantly left on labor market policy, because it says that you can do much more than I thought.

Brad Delong: And it created a great mystery. It says that, somehow, the manger at the local Burger King have substantial amounts of market power at the low end of the labor market, where you would think he would not.

David Autor: We have another good policy tool in this realm. The EITC. It makes work pay better. It has had positive effects on labor force participation, earnings, and well-being in female headed households. It is almost unavailable to men who cannot claim children as dependents on their tax forms. That does not mean that they are not fathers, by the way, but they are not claiming dependents. But if you are a single mother you can get up to $6000 a year in wage subsidies through the EITC. If you are a father with two children who are not your dependents you get about $400. The greatest declines in employment and falling wages are low-education men.

Brad DeLong: And that is my fault. In 1993 we needed to get the Clinton deficit reduction package up above $500 billion over 5 years, and the EITC for “childless” workers was the last thing we in the Treasury Department had to throw out of the sleigh to the wolves…

David Autor: It’s an idea that is a good one. But it is an expensive one. And the minimum wage appears free—you are making employers pay. For the EITC you would have to pay for it…

Brad DeLong: But the minimum wage is free in an allocative-efficient sense! You are reducing a market power-generated deadweight loss!

Paul Krugman: Let me just say that there is a tone—we worry about the politics, about how hard it is to do stuff. But if you look at how successful safety net programs were in the Great Recession, the answer is: incredibly successful. Increase in child poverty: negligible. Increase in adult policy: barely there. We have the tools to make life a lot better. Do we have the tools to convince people who benefit from these programs that they should vote for politicians who support them? That is another issue.

David Autor: We haven’t done that. The tax share of GDP has been at 20%…

Brad DeLong: But three million votes…

David Autor: But all in California. You can run it up in California—it’s not real America, so…

Brad Delong: Let me make a plea for UBI. The argument against Universal Basic Income is always that it is a “handout”, and people don’t want handouts. You would have to sell it as something that is not “welfare”.

But…

After my grandfather Bill Lord moved to Florida and became a construction company boss and real estate speculator, he did well: he was briefly the richest man between Tampa and Orlando. Ever since the money from the Lord trusts has boosted my consumption by about $10000 a year. That has been my UBI. It has been quite welcome at times, and always convenient.

I don’t see this as “welfare”, as making me a “loser”, as offending my “dignity”—even though I had nothing to do with the invention of the Wellman-Lord desulfurization process or any other value created by his accomplishments, and I would accept the argument that he was overcompensated for them. Similarly, Mitt and Ann Romney do not think in any way that they are loochers—losers and moochers—from their UBI, which came from the stock American Motors had given Mitt’s father George to incentivize him, which stock they could sell to boost their standard of living when they went to BYU.

The problem with UBI and with the welfare state is one of perception and of perception of who is deserving and undeserving. Inheritance in America today is not tainted. I think UBI should not be tainted either—and I think Mitt and Ann Romney would agree, if only they would step back and think a little…

Trade Deals and Alternative Facts: Now Fresh at Project Syndicate

Posted on February 2, 2017 by Brad DeLong

Project Syndicate: Trade Deals and Alternative Facts: BERKELEY – In a long recent Vox essay outlining my thinking about US President Donald Trump’s emerging trade policy, I pointed out that a “bad” trade deal such as the North American Free Trade Agreement is responsible for only a vanishingly small fraction of lost US manufacturing jobs over the past 30 years. Just 0.1 percentage points of the 21.4 percentage-point decline in the employment share of manufacturing during this period is attributable to NAFTA, enacted in December 1993.

A half-century ago, the US economy supplied an abundance of manufacturing jobs to a workforce that was well equipped to fill them. Those opportunities have dried up. This is a significant problem: a BIGLY problem. But anyone who claims that the collapse of US manufacturing employment resulted from “bad” trade deals like NAFTA is playing the fool. Read MOAR at Project Syndicate

Has Protectionism Ever Worked?

Posted on January 22, 2017 by Brad DeLong

Q: Has protectionism ever worked? Are there examples of countries throughout history that have embraced protectionist policies, and did that yield positive results? And what do these examples, if there are any, tell us about the economic plans of Mr. Trump?

A: If I were you, I would go grab Robert Allen’s Global Economic History: A Very Short Introduction <http://amzn.to/2kgt8pj>, and immediately read chapters 8 and 9.

First, chapter 8: Briefly, tariffs–but on the manufacturing goods of the first and early second industrial revolution where learning-by-doing and developing effective communities of engineering practice–is a piece but only a piece of the standard nineteenth century industrialization package: subsidizing railways, schools, banks, and (the right kind of tariffs). They don’t work without the other three components. They do work for a while–for the mid- and late-nineteenth centuries and into the twentieth, with diminishing effectiveness–if the entire package is successfully implemented.

(Note that the British dominions–Canada, Australia, New Zealand–do fine without the tariffs. They become rich in the late nineteenth century. But in the 20th they do fall behind to some degree because they are not strong in the industries where twentieth century productivity growth is initially most rapid. And note that for countries that already have dominant positions in leading edge high tech communities of engineering practice, tariffs are simply a drag.)

Second, chapter 9: After the standard nineteenth-century package is played out, successful rapid development requires a “big push” and a successfully implemented big push: Japan, South Korea, Taiwan, and now China. (The Soviet Union is an interesting case–I am not sure Allen has gotten it right.) And a great many other countries have tried for “big pushes”, and failed. Tariffs on the goods in which your economy is going to have a comparative advantage in a generation are useful, but only those tariffs…

Trump’s plans–whatever they may be, and nobody knows what they are, not even, or perhaps especially, not him–have nothing to do with past successful episodes of the right kind of tariffs as part of a pro-growth or pro-opportunity industrial policy mix.

Sincerely yours,

Brad DeLong

Professor of Economics J. Bradford DeLong
U.C. Berkeley
delong@econ.berkeley.edu
925 708 0467
@delong

Comment of the Day: Sherman Robinson: On the Economics of BREXIT

Posted on December 8, 2016 by Brad DeLong

Comment of the Day: Sherman Robinson: On the Economics of BREXIT: “I largely agree with Simon Wren-Lewis’s comments, and with the quote from Maurice Obstfeld…

…The trade-productivity links they discuss, as Wren-Lewis notes, “all make common sense”.

However, I think it is very important to sort out the empirical relevance of the different causal mechanisms—it is impossible to consider policy choices without doing so. I see four mechanisms at work:

Ricardian movement of factors to exploit comparative advantage from opening to international trade. Clearly true, but forty years of work with computable general equilibrium (CGE) models, both single-country and global, indicates that pure Ricardian effects on productivity are very small. In conferences, we often cite a “theorem” due to Arnold Harberger: “triangles” are smaller than rectangles”.

“Winds of competition” or “challenge/response” models. There is a large literature on such models, all arguing that opening up markets to competition forces firms to move to the production frontier and/or induces investment in technological change. These effects appear to be significant.

Explicit backward linkages between exporting and “learning better techniques”. These are also significant effects in particular cases, but would seem to be limited in coverage and probably not large enough to have much effect at the national/global levels.

Fragmentation of production processes that allows strong specialization and regional diversification of production of intermediate inputs. There are many examples of these value chains across economic activities: agriculture, manufacturing, and services. They allow producers to achieve “Smithian” gains in productivity through fine specialization. They are seen by later stages in the value chain as lowering input costs, which are not measured as, say, a TFP gain by the later-stage producer, but is very significant. I think that these Smithian productivity gains are very large and cover a wide range of economic activity for countries that have taken part in value chains.

These four mechanisms are not mutually exclusive—all are operating and are probably very complementary. For a nice discussion of the empirical importance of fragmentation of value chains, see the new book by Ricard Baldwin: The Great Convergence. He argues, and I agree, that this fragmentation has been a major driver of trade-linked productivity growth.

On Brexit. The UK is embedded in the EU and most of its trade involves imports and exports of intermediate inputs in complex value chains, so mechanism (4) is very important. Policies that interrupt value chains will be very damaging. For example, if the UK leaves the EU customs union, then the EU will have to impose rules of origin conditions that will impede trade. Firms may well prefer to move operations to the EU in order to keep the value chains operating smoothly. There are lots of other issues concerning how to support and foster value chains, beyond the scope of a short comment.

Must-read: Marshall Steinbaum: “Should the American Middle Class Fear the World’s Poor?”

Posted on May 15, 2016May 15, 2016 by Brad DeLong

Must-Read:The very sharp young whippersnapper Marshall Steinbaum:

Marshall Steinbaum: Should the American Middle Class Fear the World’s Poor?: “Politicians responsible to the public cannot sell the idea that the domestic middle class must suffer…

…to the benefit of foreigners. The tradeoff idea instead serves the folk mythology of an elite class of economic policy consensus–enforcers, who push policies that enrich the already wealthy. Democracy is supposed to operate as a natural check to bring the elite policy-making consensus in line with popular opinion and interest; playing the domestic middle class against a foreign one is one of many ways to keep that from happening. Asking which ought to suffer to benefit the other distracts attention from the real issue: their joint exploitation at the hands of globally mobile capital.

In my card-carrying neoliberal view, policies in the Global North to restrict trade (or restrict immigration either below or at rates not far above current ones!) would do relatively little to improve the domestic distribution of income and impose great harm on development prospects in emerging markets. The “China Shock” of the GWB administration is the only trade-related episode that is even plausibly as important as other policy moves. And it would be trivial to compensate for even its net distributional harm.

In my view, the focus of left-wing attention on trade restrictions is due not to the importance of international trade flows in altering income distribution, but rather springs from different motives: from attempts to hook up some of the energy that for two centuries now has been abundantly focused on nation and cross-connect it to class. As Ernst Gellner wrote, leftists have been faced with what they regard as a historical anomaly in the rise of nationalism, and have reacted by embracing:

The Wrong Address Theory…. Just as extreme Shi’ite Muslims hold that Archangel Gabriel made a mistake, delivering the Message to Mohamed when it was intended for Ali, so Marxists basically like to think that the spirit of history of human consciousness made terrible boob. The awakening message was intended for classes, but by some terrible postal error was delivered to nations. It is now necessary for revolutionary activists to persuade the wrongful recipient to hand over the message, and the zeal it engenders, to the rightful and intended recipient. The unwillingness of both the rightful and the usurping recipient to fall in with this requirement causes the activist great irritation…

Policies to enhance intellectual property rights and preserve rents are, of course, another kettle of fish entirely…

Must-read: Kevin O’Rourke: “The Davos Lie”

Posted on May 6, 2016May 7, 2016 by Brad DeLong

Must-Read: From last winter…

Kevin O’Rourke: The Davos Lie: “As I write these words, the great, the good and the self-important are trudging around in the Alpine slush…

…sporting their best parkas and a variety of silly hats, and opining about the state of the world…. If there’s one thing that people agree about in Davos, it’s that globalisation is a Good Thing. And indeed, so it is, if the alternative is the autarky of the inter-war period…. If you are even slightly cosmopolitan in your ethical outlook, you should want this to continue. But it always makes sense to ask whether you can have too much of a good thing…. Who are the winners from globalisation, and who are the losers?… Developing economies with lots of cheap unskilled labour should export textiles and other labour-intensive manufactured goods to rich economies where wages are high. A second implication is that labour-intensive industries should go into decline in rich countries. A third implication is that this should lower the demand for unskilled workers, hence lowering unskilled wages and increasing inequality…. The debate has swung back towards the view that trade is important in explaining rising inequality, not only in rich countries, but potentially in developing economies such as Mexico as well….

I happen to think that inequality matters for its own sake, but even if you don’t agree with that value judgement you should still care about inequality, since it matters politically as well…. Unfortunately for Davos, globalisation’s losers are becoming increasingly hostile to trade (and immigration)…. Such attitudes are now beginning to influence politics in several rich countries…. Economists can tut-tut all they want about working-class people refusing to buy into the benefits of globalisation, but as social scientists we surely need to think about the predictable political consequences of economic policies. Too much globalisation, without domestic safety nets and other policies that can adequately protect globalisation’s losers, will inevitably invite a political backlash. Indeed, it is already upon us.

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