NAFTA: A Big Deal, Plus and Minus, for Strongly Affected Individuals; Not a Big Deal for the U.S. as a Whole

San Francisco from Abovee Berkeley

J. Bradford DeLong: San Francisco Review of Books: Interview: J. Bradford DeLong says "NAFTA is just not a big deal for the U.S.", explains why:

Joseph Ford Cotto: Prominent economists and politicians often say that free trade will benefit America in the long run. Many Americans disagree strongly. What is your take on this situation?

Dr. J. Bradford DeLong: Well, typically and roughly, the average import we buy from other countries we get for 30% off--we use foreign currency that costs us $1.40 to purchase goods and services made abroad that would cost us $2.00 worth of time, energy, resources and cash to make at home.

But there's more.

Typically and roughly, we sell the typical export to foreigners for about 40% more than we would get if we had to find a market for it at home: it costs us $1.00 worth of time, energy, resources and cash to make stuff that we can sell to foreigners for $1.40 worth of foreign currency.

Thus for the country as a whole our foreign trade sector--exports and imports--is a way to get $2.00 worth of value for $1.00 worth of work. That's a very good deal. Our foreign trade sector takes advantage of this good deal on a mammoth scale: in the fourth quarter of 2016 we were trading goods and services at a rate of $2.8 trillion a year--17.5% of national income. That means that in a typical year we sell exports that we could get $2 trillion for if we had to sell them here at home and get imports that would cost us $4 trillion. That makes us $2 trillion per year--$25,000 per family each year--richer and more prosperous.

That is a big deal.

Now you can complain that the benefits from international trade are inequitably distributed. And they are. But they are less inequitably distributed than what we produce here at home: serous worriers about economic equity do not start with foreign trade, only non-serious worriers do. 

If you ask me why many Americans "disagree strongly" that trade benefits America, my answer is that they have been successfully grifted by some of the many, many grifters we have at all levels of our society.

Think of it:

  • If international trade is bad--if we should be self-reliant at the national level--then the same argument applies at the state level.

  • If interstate trade is bad----if we should be self-reliant at the state level--then the same argument applies at the municipality level.

  • If inter-municipality trade is bad--if we should be self-reliant at the municipality level--then the same argument applies at the neighborhood level.

  • And so we get all the way down to the basic bedrock of human society: the hamlet or band community of less than 100, say 75.

How much could any 75 of us produce as a group if we couldn't trade with outsiders? About $1,000 a year per worker. A United States that tried to be self-sufficient at the hamlet or band level would be lucky to have a national income of $160 billion, one hundredth of the $16 trillion we have. 

Now we certainly can manage our international trade account badly--the Reagan administration, in particular, was especially disastrous. But Americans who "disagree strongly" that trade has benefits  have been misled. Perhaps "free" in your question is supposed to serve as a weasel-word escape hatch?

Cotto: Libertarian economic theorists tend to believe that trade deficits are of minimal importance. Do these deficits really have a great impact on America's economy?

DeLong: If the president and congress are not doing their job through fiscal policy--regulating government spending and taxing--and the Federal Reserve is not doing its job through monetary policy--regulating the supply and price of liquid purchasing power--in order to maintain full employment, then, yes, a trade deficit can make matters much worse.

Given that President Obama was much too cautious in 2009-10 when he had congressional majorities, that congressional majorities over 2011-2016 were focused mostly not on keeping America great but on making Obama look like a failure, that Fed Chair Bernanke was much too cautious over 2008-2014, and that Fed Chair Yellen has been somewhat too cautious since, yes, the trade deficits have made our problems significantly worse.

But before 2009, and going forward into the future in which the unemployment rate is--we hope--6% or below, the trade deficit was not and will not be among the five biggest errors of economic management the U.S. government was and will be making.

Cotto: Since it went into effect during late 1995, the North American Free Trade Agreement has formed a trilateral commerce bloc between Canada, the United States, and Mexico. From your research, has this proven to be of benefit to our country? 

DeLong: NAFTA is just not a big deal for the U.S. We import $100 billion of goods and services a year from Mexico--that's $1,250 per family per year. If NAFTA had never been negotiated, we would, roughly and approximately, be importing about $75 billion of goods and services from Mexico--$940 per family per year. Since we get a good deal on the stuff we buy from Mexico, shrinking that down would make use poorer, but only by about $100 per family per year.

If we did not have NAFTA, we would have about 400,000 fewer people working in--for the most part good, high-paying--manufacturing at jobs that sell goods to Mexico, and we would have about 600,000 more people working in--for the most part bad, low-paying--manufacturing at jobs making things that we buy from Mexico because of NAFTA.

If you want to say that NAFTA is not a benefit to America, you have to believe that (a) getting an extra 600,000 mostly bad, low-paying manufacturing jobs is worth (b) losing 400,000 mostly good, high-paying manufacturing jobs plus (c) lowering the annual income of the typical family by $100 per year--that's total income losses of $80 billion a year. For the country as a whole to pay more than $400,000 a year to increase the number of bad, low-paying manufacturing jobs... that looks like a very bad deal to me.

Cotto: One reason the American economy fails to meet standards set by its postwar halcyon era is that it produces a decreasing number of material goods. What would you say could be done to reinvigorate our manufacturing sector?

DeLong: Look what Germany does:

  1. Much more support for apprenticeship programs.
  2. Labor-capital codetermination in industrial management.
  3. The opposite of the U.S.'s "strong currency" policy--an appropriate-value currency policy sensitive to the needs of exporters.
  4. Budget surpluses so that foreigners take what they earn by selling us imports and use them to buy our exports rather than the stock of government bonds we have issued.
  5. A government that nurtures communities of engineering practice rather than looking the other way while the world market sends our communities of engineering practice false signals that they are not wanted and are not valuable.

Copy Germany's policies.

Cotto: Progressive income taxation is far from popular, but having been instituted on Capitol Hill over a century ago, is embedded not only in our politics, but American culture. Some, though, want change. Certain voices say that income ought to be taxed at a flat rate. Do you believe this is a feasible idea?

DeLong: It's feasible. Is it a smart thing to do? Only if you think that one of America's biggest problems is that the after-tax distribution of income in America today is too equal. Back in 1975 the top 1% took home 8%--were about 9 times as prosperous as the average of the 99%. Today the top 1% takes home 22%--are about 26 times as prosperous as the average of the 99%. Back in 1975 the top 0.01% took home 1%--were about  110 times as prosperous as the average of the 99%. Today that top 0.01%--that's 14,000 households nationwide, about 1000 of them in Greater San Francisco--take home 5%, and are doubt 625 times as prosperous as the average of the 99%. If you think that progressive income taxation is a bad idea, then either (a) you are in the top 0.01% or top 0.1% and are confident your children will be in the top 1%, or (b) you have been grifted.

Cotto: Many have heard about the fair tax, but fewer know much about it. In a summary sense, what are your views on the concept?

DeLong: The Fair Tax has two big effects. The first is that it takes some investment-income money that recipients have already paid capital gains taxes on and taxes it again--thus subjecting a slice of the rich to surprise double taxation. The second is that, even with this, it makes America a more unequal place. I have never understood why this is supposed to be attractive.

Cotto: In small, prosperous places such as Bermuda and the Cayman Islands, there is no income or fair tax. Rather, taxes are levied on imports and -- generally speaking -- personal assets (though it should be noted that the Caymans tax not even these). Could America seriously replicate their policies and apply them across the fruited plains?

DeLong: Bermuda and the Caymans are places that make their money by supplying financial services to the rich that allow them to "avoid" taxes (i.e., it's legal in the eyes of other governments) or "evade" taxes (i.e., it's not legal in the eyes of other governments). Bermuda and the Caymans can prosper this way. Larger countries cannot. Such countries are not producing wealth, but rather enabling upward redistributions of it—not positive sum but zero sum, or less than zero sum.

Cotto: The Donald Trump Administration promises many changes to federal politics. Do you believe that his economic proposals, generally speaking, will bring typical Americans higher wages?

DeLong: The value of the shares of DJT went from $15 in 1995 to $1.60 in 2005, when it declared its first bankruptcy. Losing essentially all of your shareholders money while running part of a government-sponsored casino oligopoly in New Jersey is a performance that is amazing on many levels.

Now all Americans--including not just the 60 million of you who voted for Trump but the 63 million of us who voted for Clinton--are along for the ride, just as the shareholders of DJT were. We should expect to be treated the same, and for the outcome to be the same. Fortunately, a president has much less power over the economy than a CEO has over a company.

Cotto: A few years ago, certain political forecasters claimed that the future of America's center-right belongs to free traders. Since the 2012 presidential election, protectionism has surged in both major parties. Now, in the age of Trump, free trade's once-ascendant nature seems a distant memory. Would you say that free trade has any serious potential under Trump?

DeLong: Trade in goods will be--probably--a little bit smaller as a share of goods production in the future than it has been in the recent past. But trade in services and ideas will be a larger share--the technological tide making it easier to talk across national borders is still roaring forward. And international investment will be an even bigger deal: more and more, the world's rich will be desperate to spread their money out in order to reduce the risks of being caught and bankrupted by some clown's trade, business cycle, immigration, or nationalistic policies. And the U.S. as a financial hub will get a very large share of the business of making that happen. Think of the future as being one of less-free trade but freer and larger finance.