Trade, Jobs, and Inequality
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.
- 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”.
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…