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2016-10-04: Inequality/Trade and Inequality

Politically speaking, there is no debate on the international trade of the United States this fall.

The political truthiness with respect to trade in America you hear is clear: From the... I do not think it is exactly correct to call it “right”, but from somewhere, we have Republican Party presidential nominee Donald Trump; from the left, we have Democratic presidential primary runner-up—and a remarkably close runner up he is—Bernie Sanders; from the past we had 1992 presidential-election spoiler Ross Perot. Listen to them:

They say: The jobs America wants to have--the good jobs, the manufacturing jobs--have gone. The 1993 NAFTA (North American Free Trade Agreement with Mexico and Canada); the 2001 joining of the WTO (the World Trade Organization) by China--thus granting China a normal country's freedom to export to other countries and obligations to accept imports from other countries--and now the forthcoming TPP (Trans-Pacific Partnership) all have and will "left millions of our workers with nothing but poverty and heartache…", "lost [us]... manufacturing jobs...", "this catastrophe...", "the death blow for American manufacturing... "undermine our independence...", "forced American workers to compete against desperate and low-wage labor around the world...", "massive job losses in the United States and the shutting down of tens of thousands of factories...", "a giant sucking sound going south…", "you've wrecked the country with these kinds of deals…"

And from the center-left establishment we have Democratic Party presidential nominee Hillary Rodham Clinton stating: "I will stop any trade deal that kills jobs or holds down wages, including the Trans-Pacific Partnership. I oppose it now, I’ll oppose it after the election, and I’ll oppose it as President..."

That is the political truthiness. I see the economic-policy truth as very different. I do not think American international economic policy has been perfect. I can rant about our failure to be a capital-exporting nation financing the industrialization of the world. I can rant about our reluctance to properly incentivize the creation and maintenance and to guard against the erosion of the global treasures that are our communities of engineering practice that are global treasures. And I can rant about other things as well.

But NAFTA and China-WTO? By and large, the jobs that we shed as a result of NAFTA and China-WTO were low-paying jobs that we did not really want. As a result of NAFTA and China-WTO we have been able to buy a lot of good stuff much cheaper--which means that we have had more income to spend on other things and to pay people to do other, more useful things than work on low-productivity blue-collar assembly lines. We have not done our proper job in cushioning the incomes of and providing opportunities to those people who and those communities which have found themselves behind the eight-ball, in sectors flooded by imports as others, especially China, industrialize. But NAFTA and China-WTO look, to me, like things that have been broadly good for the American economy.

Why do I think that what I say is the economic-policy truth is in fact the truth?

Let me tell you the story as I see it:

The elephant in the room is the collapse over the past three generations of the manufacturing employment share here in America. A manufacturing job making things in a factory is no longer, in any sense, a typical job for Americans. What was three out of ten nonfarm jobs back at the start of the 1950s and one in four nonfarm jobs at the start of the 1970s is less than one in eleven nonfarm jobs today. On a share basis, the United States has shed almost two-thirds of relative manufacturing employment since 1971:

This shift of jobs out of what we call manufacturing--a word which in its origins is Latin for "making things with our hands"--is just the latest of a number of shifts that have taken place over the past 10,000 years. First we lost a great many jobs in hunting-and-gathering as agriculture and herding animals came in. With the domestication of the horse around 2000 BC, we started the process of losing the jobs that involved dragging heavy things around: horses could pull more and could be largely paid in grass they found themselves. The arrival of first practical and then theoretical understanding of what was up with nitrogen-in-the-soil and plant growth started the process of losing jobs in agriculture: each farmer could do more. That process has carried farming down from three-quarters of the labor force to a smaller proportion of it than "gardeners, groundskeepers, and growers of ornamental plants". The coming of water- and then steam-driven spinning and weaving destroyed millions of home craftwork jobs--and sent the family of future Gilded Age Robber Baron steelmaster Andrew Carnegie fleeing from a Scotland ridden by death-by-starvation-from-povery to the United States. In each case advancing technology enabled us to make vital things with less human time and energy, and demand by those with money to spend did not expand enough to preserve all of the jobs.

And for the past two-thirds of a century, it has been the turn of blue-collar manufacturing jobs to vanish.

To be the beneficiaries of such a process is a very good thing: lots more good stuff becomes available much more cheaply. To be caught up as a victim of such a process is a bad thing: you need to find another kind of job that you may well not be prepared or equipped for--if you can find another job. The process as a whole is usually a net gain: the benefits of enhanced cheapness are, usually, not that concentrated among the already rich; and those whose jobs vanish usually find something else to do that does not involve too much income and status downward mobility. The process could always be made a net gain: it allows us to make what we made before with fewer people working at it, and the people released can do something else useful. But a lot of work must be done by the words "could" and "net" here.

But in the truthiness of American politics in 2016, the talk is not about managing a generations-long process of structural economic transformation. The talk is of NAFTA in 1993, China's joining the WTO in 2001, and the forthcoming TPP as villains.

Have these three trade agreements--one still in the future--driven this process of shedding manufacturing jobs? How much have they driven this process of shedding manufacturing jobs? And would breaking our NAFTA promises made to Canada and Mexico, withdrawing from the WTO, and not ratifying the TPP be appropriate and sufficient policy responses to the shedding of manufacturing jobs?

The clear and obvious answer is: "No."

Before NAFTA was signed, we were already five-sevenths of the way from July 1953 to our present state, and already three-fifths of the way from January 1971 to our present state. Even the best policies favorable to nurturing a country's manufacturing sector would not have prevented this process of the shedding of relative manufacturing jobs. Consider a country that has, everyone agrees, done everything right as far as nurturing its manufacturing sector is concerned: Germany. Here’s the share of German employment in manufacturing since 1971:

Now you can say—correctly and truly—that one-third of that shedding by Germany of its manufacturing job share takes place in the first half of the 1990s, when the German East is absorbed and Germany is unified:

Datawrapper liQQh Visualize

That unification era sees an enormous one-time structural change, as the inefficient low-wage low-productivity jobs of the communist factories of East Germany prove uncompetitive on the world market. Those factories shut, shedding workers and releasing them for other, more societally-productive uses elsewhere in the economy. And you can also say--again correctly and truly--that such a shedding of inefficient, unproductive, and low-wage manufacturing jobs is not an economic-policy minus, but rather an economic-policy plus.

But isn’t that the neoliberals' point?

Back in 1953, relatively low productivity (compared to today), tariff barriers, and the heavy transportation and distribution costs of the pre-container ship era kept U.S. manufacturing large. Back in 1971, the same reasons kept the manufacturing sector of Germany large: because East Germany’s manufacturing was heavily protected by the tariff barriers thrown up by COMECON and the non-tariff barriers thrown up by East Germany's communist centrally-planned material-balance allocation economy. Today’s Germany—the Germany that has done everything right as far as nurturing its manufacturing sector is concerned—has shed those manufacturing jobs. And that has been a good thing.

Thus the question: Just as in Germany, a lot of the shedding of the U.S. manufacturing share of employment is due to (a) rising productivity in the face of not unlimited demand and (b) reductions in tariff, non-tariff, and transportation barriers to trade. That shedding is a good thing. What of the shedding of manufacturing jobs is a bad thing? And what role did NAFTA, China's joining the WTO, and the TPP play and will play in that bad job-shedding process?

One possible baseline is to assume that under the best policy and the best circumstances the U.S. would have matched Germany--would have shed half of its manufacturing job share since 1971. That would have given the U.S. today manufacturing employment equal to 12.2% rather than 8.6% of nonfarm employment: a gap of 3.6%-points, or 5.4 million manufacturing jobs. Call that the excess shrinkage of U.S. manufacturing: the part that might, potentially be attributable to bad policies--the "aggressively pursued... policy of globalization moving our jobs, our wealth, and our factories to Mexico... [that] has left millions of our workers with nothing but poverty and heartache...", the "massive job losses... [that] have significantly contributed to the race to the bottom [and] the collapse of the American middle class...", the "giant sucking sound..."

NAFTA: From the most thoughtful and careful think tank that is highly skeptical of (rather than being radically supportive of) globalization, Larry Mishel's [Economic Policy Institute][], Robert Scott ascribes the shedding of 420,000 manufacturing jobs to the pattern of the growth of trade with Mexico since the passage of NAFTA. As best as I can figure out from the more detailed numbers, his estimates imply that manufacturing industries in which we are net exporters to Mexico gained about 300,000 jobs, while manufacturing industries in which we are not importers from Mexico lost about 700,000 jobs because of the growth of trade with Mexico since the passage of NAFTA.

Of this, Scott classifies "116,400 U.S. jobs displaced... between 2007 and 2010... [as] net job losses for the entire economy." Scott's argument is that 2007-2010 were not normal times. In normal times the Federal Reserve typically responds to overall employment declines by cutting interest rates to boost employment in other sectors, and thus that job displacement in traded goods is roughly offset by job growth elsewhere in the economy. But over 2007-2010 the Federal Reserve was already doing everything it could to boost employment. And so job displacement over those years due to the increasing trade deficit with Mexico was job loss: an increase in the numbers unemployed or out of the labor force. In Scott's view, presumably, the other 300,000 manufacturing jobs displaced by the pattern of growing trade with Mexico are not reductions in employment in the U.S., but rather shifts in net jobs from manufacturing to other sectors.

Of course, trade with Mexico would have grown and grown in a similar pattern, but to a lesser extent, without NAFTA. I would be unhappy attributing much more or less than half of the employment shifts calculated by Scott to the effects of NAFTA: the shedding of 200,000 manufacturing jobs, with a counterfactual work in which we did not join NAFTA having employment today about 150,000 less in export manufacturing and employment today about 350,000 more in import-competing manufacturing. I think that Scott agrees: the tell is the phrase "after NAFTA" in his title, rather than something like "because of NAFTA". That 200,000 shedding is 0.14%-points of nonfarm employment, or one-twenty fifth of the excess shedding of the manufacturing job share, or one-one hundred twelfth of the total shedding of the manufacturing job share since 1971.

Thus, in the context of all the forces and disruptions affecting the U.S. economy and the U.S. distribution of income and wealth over the past half century, NAFTA was and is simply not a very big deal.

China: In the decade from 1991 and 2001, the Chinese economy sat up: U.S. imports from China increased from $20 billion at 2007 prices--0.6% of the market in the U.S. for manufactured goods--to $120 billion--2.3% of the market. And then in the half-decade from 2001 to 2007, the Chinese economy stood up: imports surged from $120 to $320 billion at 2007 prices--from 2.4% to 5.8% of the U.S. manufactured goods market. This is, potentially, a bigger deal than NAFTA occurring in a shorter time: three times as large an increase in manufactured goods imports as in Mexico in less than half the time. This is the "China shock".

Daron Acemoglu et al. estimate that "had import penetration from China remained unchanged... manufacturing employment would have fallen by... 560,000 fewer jobs during the employment sag era of 1999–2011..." Again, that is made up of roughly 1,000,000 fewer jobs in import-competing manufacturing, and roughly 450,000 more jobs in export manufacturing.

Once again, the pre-2008 shedding of manufacturing jobs is overwhelmingly a job shift rather than a job loss--the people who lose jobs in import-competing manufacturing and leave the sector find jobs elsewhere, in services, in construction, and so forth. It was not until 2008 the Federal Reserve was tapped out in the sense that it was unable or unwilling to adopt policies that it expected to return the economy to full employment within a couple of years. And, once again, remember that manufactured goods imports from China would have surged substantially even had China not joined the WTO--which is what Donald Trump claims "enabled the greatest jobs theft in history..." For true net numbers on the effect of China's admission to the WTO, divide Acemoglu et al.'s by half: roughly 300,000 fewer jobs in manufacturing, made up of 500,000 fewer in import-competing manufacturing and 200,000 or so more in export manufacturing. That net number is 0.22%-points of nonfarm employment, one-sixteenth of the excess shedding of the manufacturing job share, or one-eightieth of the total shedding of the manufacturing job share since 1971. Yet the political truthiness attributes the bulk of the 18%-point decline since 1971 in the manufacturing employment share to NAFTA, China's entry into the WTO, plus some other less significant "corporately-backed unfettered free trade agreements".

TPP: The Trans-Pacific Partnership has not happened yet. So none of the excess shedding of manufacturing jobs can be attributed to it. And it does not do anything like as much as NAFTA or China's accession to the WTO did to reduce the costs and frictions that other countries face when they ship their manufactured goods to the United States. I cannot see the TPP as anything other than a nothingburger as far as its effect on U.S. manufacturing jobs is concerned. Yet the political truthiness sees the TPP as a dire threat to our remaining manufacturing jobs.

The relative decline in employment in manufacturing since World War II is the biggest piece of economic evolution and structural change that has hit the American economy over the past half-century. The political truthiness attributes roughly all of the 18%-point decline since 1971 in the manufacturing employment share to NAFTA, China's entry into the WTO, plus some other less significant "corporately-backed unfettered free trade agreements". But the excess shedding of manufacturing job share is, roughly, only one-fifth of that: 3.6%-points. And the amount attributable to the two big bad trade agreements is, again roughly, only one-tenth of that: 0.36%-points. This contrast with political truthiness is awesome, and not in a good way.

How Much Does It Matter?: We thus attribute to NAFTA and to China's joining the WTO trade one-fiftieth of the reduction in the manufacturing job share, and one-tenth of the excess reduction in the manufacturing job share, since 1971. But simply to no longer be working in manufacturing, or no longer getting your first job in manufacturing, is not by itself a bad thing. You might be pulled out into a better alternative job rather than being pushed out into a worse job by the disappearance of your old one. And even if you keep your blue-collar manufacturing job, you might find yourself under pressure to make wage concessions to do so. How much downward pressure did NAFTA and the China Shock put on the incomes of Americans who had formerly worked in manufacturing, or who would have worked in manufacturing had these two not occurred, or had the option to have shifted into or out of manufacturing and either implicitly or explicitly used that or had that used on them in their bargaining with their bosses?

Steven Davis and Till von Wächter are the go-to guys here. They looked at mass layoffs--that is, firings as opposed to quits (for one reason you might quit is that your outside options look unusually good), and mass layoffs rather than individual firings (for in mass layoffs there is surely no possibility that the worker is unusually unproductive). Then find that if you are fired in a mass layoff when the unemployment rate is less than 6%, your income over the next 20 years will be one-seventh lower than if you avoided getting caught up in the mass layoff: that's three years' worth of your normal wages that you could reasonably have expected to earn over the next 20 years, but won't.

For the typical American, getting caught in economic destruction--creative or not--is a big and bad, albeit not a life-destroying, deal. It is right and normal that people should be upset at getting caught up on the downside of the industrial evolution and structural transformation of the economy. And Americans have every right to demand that the government do something about it--not to freeze the relative distribution of jobs across sectors and industries at what it was in 1953 or 1971, but in making sure that such economic evolution and structural change that takes place is a win for the economy as a whole, and that those who lose out as a result of economic evolution and structural change are compensated handsomely to make their lives easier when they find themselves behind the eight-ball.

But if you are fired in a mass layoff when the unemployment rate is more than 8%, your income over the next 20 years will fall by twice as much. It will be two-sevenths lower than if you avoided getting caught up in the mass layoff: that's six years' worth of your normal wages that you could reasonably have expected to earn over the next 20 years, but won't. Thus keeping the unemployment rate reliably below 6% and avoiding at all costs episodes in which the unemployment rate spikes above 8% would be a very effective trade-adjustment policy. Few indeed complained about NAFTA as its implementation took hold in the high-employment late 1990s.

Unfortunately for those caught up in the general process of the shrinkage of manufacturing, most of the job losses took place in high unemployment recession years. Shifting 18% of America's nonfarm labor force out of manufacturing is not chopped liver: it has had major effects on American distribution and growth. For 18% of the labor force to lose an average of, say, five years' worth of income each means that the net losses to blue-collar America since 1971 from this process have been on the order of 90% of America's total national income in a year. This is a huge deal. The relative decline in employment in manufacturing since World War II is the biggest piece of economic evolution and structural change that has hit the American economy over the past half-century. And saying that on net the process is a gain does not absolve anyone of being unprepared to figure out what are the appropriate policies to deal with it.

But the impacts of trade agreements are, or, least, so far have been different. Fortunately, the principal effects of NAFTA and China-WTO on American manufacturing took place in the boom years of the late 1990s and the not-totally-awful years of the mid-2000s. The 0.36% of the American labor force that was pushed out of manufacturing by NAFTA and China-WTO thus lost future income equal to perhaps four years' earnings: call it 1.5% of one year's national income lost to this group behind the eight-ball. And those losses are, in simple arithmetic at least, almost surely offset by bigger gains to those who get to buy more good imported stuff cheap. Measure this by the yardstick of the economic costs--total costs to everyone, not costs to one group offset by gains to another--of what we used to think of as a "normal" business cycle recession which would steal 12% of one year's American national income--eight times as much--from us. Or measure this by the yardstick of the crisis produced by the Crash of 2008 and what I am now calling the Longer Depression, which looks likely to rob the world of total wealth equal to 500% of one year's American national income, if not more.

The disturbing thing, from my perspective, is that the distributional consequences of the large decline in the manufacturing employment share are being hung on two--now three--trade agreements: NAFTA, China's accession to the WTO, and now the TPP. The political truthiness attributes roughly all of the 18%-point decline since 1971 in the manufacturing employment share to NAFTA, China's entry into the WTO, plus some other less significant "corporately-backed unfettered free trade agreements". But the excess shedding of manufacturing job share is, roughly, only one-fifth of that: 3.6%-points. And the amount attributable to the two big bad trade agreements is, again roughly, only one-tenth of that: 0.36%-points. The contrast with political truthiness seems awesome, and not in a good way.

Now I do not want to say that American trade policy has been perfect, or even particularly good. If Vox.com is happy with this piece, I would like to write another one about what has been wrong with America's international economic policy--our failure to assume our global responsibilities to be a capital-exporting nation that helps finance the industrialization of the rest of the world, our willingness to be a bolthole where foreign kleptocrats and others can store their money, our reluctance to properly incentivize the creation and maintenance and guard against the erosion of our communities of engineering practice that are global treasures, our willingness to use spending power resources provided form abroad to finance consumption by our elite rather than investment in America, and our desire to charge poor people through the nose for access to what we deem "our" intellectual property. But NAFTA and China-WTO have at most a tangential role in these issues. (TPP has a rather bigger role in the last.) These, however, are issues for another piece: this one is already too complicated, and its argument is already too sprawling.

But I do want to close with a few more questions: Why the salience of NAFTA, not blocking China's joining the WTO, and the TPP in today's political debate over economic policy? Why did left and right combine so vociferously in opposition to NAFTA in 1992 and 1993? Why is opposition to the TPP so much a litmus test for being a true American--rather than some form of oppressive elite rootless cosmopolite--for both the left and the right today? I know why I am (mildly) opposed to the TPP: It gives us the power to overcharge poor people elsewhere for using what we deem our "intellectual property" in ways that will make them poorer and slow their economic growth somewhat. And it gives corporations relatively minor rights to interfere with the making of domestic economic and social policy in ways that they probably should not have.

But those are not the reasons for opposition to TPP in America today on either the right or (save a little bit for the second) on the left.

It feels to me like--on both the left and the right--the populist impulse gone badly wrong and destructive. As a rule, it is remarkably hard in America to build any kind of governing or intellectually-hegemonic coalition by treating other Americans as enemies. (Although Donald Trump and his Republican Party are probing the limits of and whether this rule still holds as I write.) This is a good thing about America: most Americans most of the time regard almost all of the people who live here as their fellows, as co-participants in our common enterprise, our great contract between the dead, the living, and the unborn. But you can mobilize a great deal of populist energy much more easily by identifying foreigners as the enemy.

I do not think that this is an impulse that it is healthy for any part of this country, or any political movement that seeks to do anything other than destroy, to encourage.

But I am now far beyond my competence, and want Ezra Klein and company to commission smart things by historians, sociologists, political scientists, and cultural studiers to tell me where and how salience of NAFTA, of not blocking China's joining the WTO, and of the TPP came from.

The relative decline in employment in manufacturing since World War II is the biggest piece of economic evolution and structural change that has hit the American economy over the past half-century. The disturbing thing, from my perspective, is that all of this is being hung onto the nail of trade. And, furthermore, the more disturbing thing is that the bulk of this is being hung on two--now three--trade agreements: NAFTA, China's accession to the WTO, and now the TPP. The political truthiness attributes roughly all of the 18%-point decline since 1971 in the manufacturing employment share to NAFTA, China's entry into the WTO, plus some other less significant "corporately-backed unfettered free trade agreements". But the excess shedding of manufacturing job share is, roughly, only one-fifth of that: 3.6%-points. And the amount attributable to the two big bad trade agreements is, again roughly, only one-tenth of that: 0.36%-points. The contrast with political truthiness seems awesome, and not in a good way.

That contrast raises four questions:

  1. Why the salience of NAFTA, not blocking China's joining the WTO, and the TPP in today's political debate over economic policy?
  2. If even Germany--doing everything right in terms of supporting manufacturing--is shedding manufacturing jobs at such a large rate, what factors that are not connected with economic policies are driving this shedding?
  3. If NAFTA and not blocking China's admission to the WTO aren't responsible for even the excess shedding of manufacturing job share in the U.S., what factors and policies are responsible?
  4. Are Germany's shedding and/or the United States's excess shedding of manufacturing job share bad things? And if so, why?

Jon Hilsenrath and Bob Davis

The steep fall in the early 1990s comes from the restructuring of the German economy following West Germany’s (the Federal Republic of Germany’s) absorption of communist-ruled and Soviet-dominated Cold War-era East Germany (the German Democratic Republic) and the exposure of East Germany’s inefficient factories to competition from West Germany and from the rest of the world. So adjust the trend to take that out:

Percent of Employment in Manufacturing in Germany

If we want to (and perhaps we do), we can construct a counterfactual Germany in which manufacturing in the East was efficient in 1971 would then have had 33% of its labor force in manufacturing, and would have lost two-fifths of its manufacturing share. That gap between the two-fifths employment share that counterfactual Germany would have lost and the three-fifths that the U.S. has lost can serve as a measure of how much of the U.S. decline we can attribute to the U.S. doing policy toward manufacturing wrong—other policies, and trade policy.

So we are down to 4.5%-points of employment share missing.

——

  • The non-debate
    • Trump on NAFTA and TPP "outnegotiated"
    • Sanders on NAFTA and TPP "neoliberalism"
    • Perot on NAFTA "giant sucking sound"
    • Clinton on NAFTA and TPP
  • Wait a minute
    • Wait a minute: NAFTA
    • Wait a minute: TPP
  • What if a country does everything right on manufacturing?: Germany vs. U.S.
    • Are Germany's policies superior? Probably
    • But not because they maintain a key fraction of blue-collar metal-bashing jobs in the economy
  • So where did all this energy come from? And how did it get attached to the TPP?

——

Vox: Christopher Shea 2500 words?

  • The non-debate
    • Trump on NAFTA and TPP "outnegotiated"
    • Sanders on NAFTA and TPP "neoliberalism"
    • Perot on NAFTA "giant sucking sound"
    • Clinton on NAFTA and TPP
  • Wait a minute
    • Wait a minute: NAFTA
    • Wait a minute: TPP
  • What if a country does everything right on manufacturing?: Germany vs. U.S.
    • Are Germany's policies superior? Probably
    • But not because they maintain a key fraction of blue-collar metal-bashing jobs in the economy
  • So where did all this energy come from? And how did it get attached to the TPP?

  • Up until 2000, the impact of trade on American job numbers and inequality was minimal

    • Yes, new low-cost foreign firms entered manufacturing for the U.S. market and pushed wages down
    • But that was offset by existing foreign firms exporting to the U.S. having to raise their wages as their countries developed
    • Net impact: close to zero on U.S. wage levels
    • And because (with the exception of 1981-1984) the Federal Reserve was largely successful at balancing the economy before 2000, no effect on job numbers either--fewer imports would have led both Volcker and Greenspan's Fed to raise interest rates to curb inflation, and so left number of U.S. jobs unchanged

  • After 2000, we have the China shock

    • Which is a significant deal
    • But still at most #7 in putting downward pressure on working- and middle-class wages (behind financialization, weak aggregate demand, superstar CEO and other executive salaries, decimated union movement, lagging minimum wage, and move toward a winner-take-all economy)

  • So why is everyone convinced that lousy trade deals and a rising tide of imports have been a big factor destroying American jobs and putting downward pressure on American wages?

  • Four political-economic moments: Reagan deficits, NAFTA fight, strong-dollar policy, and China shock

  • Reagan deficits

    • Mean that the U.S. has a choice: if the government is going to keep inflation low in a full-employment economy, either
      • High interest rates to curb investment and slow productivity growth
      • Massive imports to fund investment--and decimate Midwestern manufacturing
    • Benefits from Reagan tax cuts--none, unless you personally received the tax cut:
      • No sign of faster productivity growth from unleashed entrepreneurship
    • Given that you were going to have the Reagan deficits, strangling Midwestern manufacturing probably better for the country as a whole than strangling overall productivity growth
      • But Reagan deficits not a good policy
      • And an especially bad policy for the Midwestern union infrastructure of America's left
      • Karma for the Reagan Democrats who thought Reagan would alleviate what I understand we are now supposed to call their "economic anxiety"

  • NAFTA fight

    • NAFTA a tiny deal for the U.S. economy
      • A big deal for border states, a moderate deal for furniture and apparel sectors, but not for manufacturing as a whole
      • In fact, by allowing offshoring of low-wage low-skill parts of manufacturing, makes U.S. semi- and high-skilled manufacturing sectors slightly healthier
    • But communities and union leaders that are hit by imports from Mexico care a lot
    • Those who benefit from NAFTA don't see it
    • And NAFTA/WTO proves to be the strongest issue in the 1990s for the union left as far as getting grassroots political juice out of it
    • Those of us working for Clinton were bewildered about the energy associated with NAFTA/WTO: Where were these people when the issue was healthcare reform? Or a better welfare reform? Or about the level of public investment?

  • Strong-dollar policy

    • A strong dollar is not necessarily in America's interest
    • It is in the interest of the Treasury Secretary in his job as bond salesman
    • When the economy is near full employment, for the Treasury Secretary to be constantly repeating "a strong dollar is in America's interest" leads--if he is believed--to:
      • a slightly more valuable dollar,
      • slightly cheaper imports,
      • slightly lower interest rates,
      • slightly higher investment, and
      • a slightly faster move out of low-wage manufacturing and into finance
      • Good if you think being banker to the world is a business we need to invest in
      • But bad for U.S. if you think communities of engineering practice associated with manufacturing are an important productive national asset
      • And certainly bad for the rest of the world--the U.S. should be financing the economic development of the rest of the world, not running a large trade deficit and financing it by offering Safety Deposit Boxes to foreign plutocrats and kleptocrats
    • Reinforced belief that neoliberals--even Democrats--didn't really have the interests of America's manufacturing workers and their unions at heart

  • Post-2000 China shock

    • Unexpectedly large
    • Hits just as "secular stagnation" begins
    • If the economy had been as strong as in the late 1990s, not a huge biggie...
    • But it wasn't, and, especially post-2008, China's and now Germany's trade surplus with the U.S. is substantially damaging...

  • But what does all this have to do with the TPP?

    • Next to nothing, as far as the economics is concerned.
    • Less than nothing, as far as national security strategy is concerned.
    • A great deal, as far as political symbology is concerned.

How should we think about the economics of the TPP? * Probably a bad thing for the world as a whole: * we don’t need to make it harder for good ideas about how to do things productively from diffusing out from the United States to the rest of the world. * It’s unneighborly. * It’s also not likely to be good for our long run national security… * Certainly a bad way to build international institutions. * Choices like the term of intellectual property protection should not be set in stone in treaties that require unanimous consent to change. * They should be determined by authorities like the WTO… * A foreign policy demonstration that we are going to keep being a good neighbor in the western Pacific even if nothing interrupts China’s standing up to its normal status in the world. * A substantial plus for America’s upper class considered as owners of intellectual property * it provides substantially better protection for America’s ideas * whether drug formulas, software programs, movies etc. * A priority of the center-right piece of the Republican coalition. * As a matter of governance, Barack Obama should not have taken ownership of it. * He should have given responsibility for negotiating it to someone like Mitt Romney as USSTR, * and then gone to McConnell and Ryan saying: “This is more your priority than mine. What on Harry Reid’s and Nancy Pelosi’s wish list will you give them in exchange: * for not blocking a Democratic filibuster in the Senate and * for the 40 extra votes in the House you need * because your caucus is a goat rodeo? * A small net plus for the rest of the U.S. economy: * we will trade a few more low-wage jobs to places like Vietnam and the Philippines than we would otherwise lose, * they will pick up a whole bunch of jobs from places like Bangladesh which need them just as much as Vietnam does, and * we will export a little more in the way of financial services and entertainment and capital goods exports across the Pacific. * But these are small considerations… * Certainly not going to reduce the incomes of America’s middle and working classes: * but it will widen inequality somewhat, * unless it helps to trigger a big economic boom like the kind we last saw in the late 1990s, and before that the late 1960s, that pulls wages up rapidly. * And these are small considerations… * How you think about the TPP depends on how you come down on world, security, institutions, and institutional property protection. * The screeching from Teabaggers and Herbal Teabaggers is about something that is, really, a nothingburger--except as far as the symbolic politics of respect are concerned. * I am weakly against, but can argue myself into being weakly for it in under 15 minutes, given incentive…

From the… I do not think it is correct to call it “right”, but from somewhere: Republican Party presidential nominee Donald Trump:

Our politicians have aggressively pursued a policy of globalization - moving our jobs, our wealth and our factories to Mexico and overseas. Globalization has made the financial elite who donate to politicians very wealthy. But it has left millions of our workers with nothing but poverty and heartache….

America has lost nearly one-third of its manufacturing jobs since 1997—even as the country has increased its population by 50 million people. At the center of this catastrophe are two trade deals pushed by Bill and Hillary Clinton. First, the North American Free Trade Agreement, or NAFTA. Second, China's entry into the World Trade Organization. NAFTA was the worst trade deal in history, and China's entrance into the World Trade Organization has enabled the greatest jobs theft in history. It was Bill Clinton who signed NAFTA in 1993, and Hillary Clinton who supported it….

The TPP would be the death blow for American manufacturing. It would give up all of our economic leverage to an international commission that would put the interests of foreign countries above our own. It would further open our markets to aggressive currency cheaters. It would make it easier for our trading competitors to ship cheap subsidized goods into U.S. markets - while allowing foreign countries to continue putting barriers in front of our exports. The TPP would lower tariffs on foreign cars, while leaving in place the foreign practices that keep American cars from being sold overseas. The TPP even created a backdoor for China to supply car parts for automobiles made in Mexico. The agreement would also force American workers to compete directly against workers from Vietnam, one of the lowest wage countries on Earth.

Not only will the TPP undermine our economy, but it will undermine our independence. The TPP creates a new international commission that makes decisions the American people can't veto…

From the left, Democratic presidential primary runner-up—and a remarkably close runner up he is—Bernie Sanders:

The Trans-Pacific Partnership is a disastrous trade agreement designed to protect the interests of the largest multi-national corporations at the expense of workers, consumers, the environment and the foundations of American democracy. It will also negatively impact some of the poorest people in the world. The TPP is a treaty that has been written behind closed doors by the corporate world… Wall Street, the pharmaceutical industry and major media companies….

The TPP follows in the footsteps of other unfettered free trade agreements like NAFTA, CAFTA and the Permanent Normalized Trade Agreement with China (PNTR). These treaties have forced American workers to compete against desperate and low-wage labor around the world. The result has been massive job losses in the United States and the shutting down of tens of thousands of factories. These corporately backed trade agreements have significantly contributed to the race to the bottom, the collapse of the American middle class and increased wealth and income inequality. The TPP is more of the same, but even worse… part of a global race to the bottom to boost the profits of large corporations and Wall Street by outsourcing jobs; undercutting worker rights; dismantling labor, environmental, health, food safety and financial laws; and allowing corporations to challenge our laws in international tribunals rather than our own court system….

According to the Economic Policy Institute, if the TPP is agreed to, the U.S. will lose more than 130,000 jobs to Vietnam and Japan alone. But that is just the tip of the iceberg…. At a time when corporations have already outsourced over 3 million service sector jobs in the U.S., TPP includes rules that will make it even easier for corporate America to outsource call centers; computer programming; engineering; accounting; and medical diagnostic jobs…. As a result of NAFTA, the U.S. lost nearly 700,000 jobs. As a result of Permanent Normal Trade Relations with China, the U.S. lost over 2.7 million jobs. As a result of the Korea Free Trade Agreement, the U.S. has lost 70,000 jobs. The TPP would make matters worse by providing special benefits to firms that offshore jobs and by reducing the risks associated with operating in low-wage countries.

U.S. sovereignty will be undermined by giving corporations the right to challenge our laws before international tribunals. The TPP creates a special dispute resolution process that allows corporations to challenge any domestic laws that could adversely impact their “expected future profits.” These challenges would be heard before UN and World Bank tribunals which could require taxpayer compensation to corporations. This process undermines our sovereignty and subverts democratically passed laws including those dealing with labor, health, and the environment…

We have, from the center-left political establishment, Democratic presidential nominee Hillary Rodham Clinton:

The Trans Pacific Partnership, which includes the US and 11 other nations, is the largest regional trade agreement in history. But as of today, I am not in favor of what I have learned about it. I don't believe it's going to meet the high bar I have set for creating jobs and advancing national security. I am also worried about currency manipulation not being part of the agreement, and that pharmaceutical companies may have gotten more benefits from the deal than their patients…

Plus: Hillary Clinton on NBC News:

The story has to begin with the election of Ronald Reagan, and the massive Reagan tax cuts. Democratic economists, plus Republican economists who were neither deluded nor corrupt, said that the scale of these tax cuts would be bad for the American economy . Whatever boost to economic activity would be produced by the rich working harder because they would get a greater share and by reduced lawyer and accountant effort at tax avoidance would be overwhelmed by the diversion of money that would otherwise have gone to finance investment into the pockets of the relatively well off. After the regular administrations legislative victories of 1981 Democratic economists plus those Republican economists who were not deluded looked forward to a decade of low investment and sluggish growth.

But it turned out that investment in the 1980s was not as low and growth was not as sluggish as my elders were predicting at the end of 1981. It came as a surprise that a good deal of the financing for the Reagan deficits came not from the United States but from abroad. The government issued a lot of bombs. Supply and demand in the bond market pushed interest rates up. Foreign investors sent their money to the United States in order to take advantage of those higher interest-rate's. And in the main the total flow from savings into investment in America was little changed in the 1980s.

My sixth floor office neighbor Barry Eichengreen has some excellent slides from a talk about inequality that he gave. Here they are. Strongly recommended.

Why do we care about inequality? Well, the reason we care about inequality is at its core the reason that we care about anything. We care about the resources that in economy is able to mobilize to provide for its members well-being because we think: the more resources, the more well-being. But resources--Capital, skills, labor, and nature--Arnoldo we care about. What the outcome of the economy is in terms of human well-being also depends on the efficiency with which those resources are used to produce useful things: we just care about GDP per capita as a very crude summary index of how many resources are mobilized and how efficiently they are used.

Depreciation

Log utility and Taylor expansion

Negishi welfare weights...

Providence?