Assessing the "China Shock"
Assessing the China Shock: I enter into a conversation between Noah nd Larry to give my views:
Noah Smith: An easy way to reconcile @de1ong and @joshbivens_DC on trade is to see the China Shock (and thus China's entry into the WTO) as sui generis http://www.bradford-delong.com/2018/08/eg-it-has-always-seemed-to-me-that-the-sharp-josh-bivens-is-engaging-in-some-motivated-reasoning-here-1-_putting-pen-to-.html
Larry Mishel: What I don't like about the 'shock' terminology is that the damage to jobs and wages are permanent, not a temporary phenomenon. One can argue...
Noah Smith: A shock can be a unit root shock...
Larry Mishel: Does anyone say that? All those words by Autor and co-authors?
Noah Smith: ? I'm just saying, shocks can be permanent shocks.
Larry Mishel: Got you...
I think we are—or ought to be—looking at the total collapse of the neoclassical synthesis. Shocks having transitory Keynesian effects because of nominal wage and debt stickiness causing fluctuations around a Classical or Neo-Classical trend appears to have been the wrong horse. If it every worked—and that looks to be a big if—it was, much more likely than not, because the policy response to business-cycle shocks was attaque à outrance, as when Eisenhower gave Burns the baton to stop recession. Once policy is run by Bernankes, Geithners, and Orszags, who believe in their bones that the economy returns rapidly to classical equilibrium—unless you frighten the bankers—then it simply does not work. And it never really worked outside the US. Only US hegemony in economics and our parochialism produced the impression it did...
The "China shock" papers all look at the micro-regional impact of competition from Chinese imports. They do not look at the micro-regional impact of Chinese financing of investment. Thus the comprehensive net effect on country very different from what's in the papers...
Noah Smith: They also don't look at trade diversion, clustering effects, etc...
They take a partial-equilibrium approach to an inherently general-equilibrium question...
