David Autor of MIT talks with EconTalk host Russ Roberts about the fundamentals of trade and his research on the impact on workers and communities from trade with China. Autor's research finds large and persistent effects on manufacturing jobs and communities where those jobs once were. Autor and Roberts discuss whether these results capture the full impact of increased trade with China and what the policy response might be that could help workers hurt by trade.
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Readings and Links related to this podcast episode
Related Readings
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This week's guest:
David Autor's Home page
This week's focus:
"The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade," by David H. Autor, David Dorn, and Gordon H. Hanson. National Bureau of Economic Research Working Paper, January 2016.
"The China Syndrome: Local Labor Market Effects of Import Competition in the United States," by David H. Autor, David Dorn, and Gordon H. Hanson, American Economic Review, 2013.
Additional ideas and people mentioned in this podcast episode:
David Autor on the Future of Work and Polanyi's Paradox. EconTalk. October 2014.David Autor on Disability. EconTalk. April 2012.
Adam Ozimek on the Power of Econometrics and Data. EconTalk. February 2016.
"Earnings Losses of Displaced Workers" by Louis S. Jacobson, Robert John LaLonde, Daniel Gerard Sullivan. Upjohn Institute for Employment Research Working Paper, 1992.
County Business Patterns. Census.gov.
Sub-topic: Comparative Advantage
"Comparative Advantage," by Lauren Landsburg. Library of Economics and Liberty.
"Comparative Advantage," by Donald J. Boudreaux. Concise Encyclopedia of Economics.
"Treasure Island: The Power of Trade. Part I. The Seemingly Simple Story of Comparative Advantage," by Russ Roberts. Library of Economics and Liberty, November 6, 2006.
Roberts on Smith, Ricardo, and Trade. EconTalk. February 2010.
Don Boudreaux on China, Currency Manipulation, and Trade Deficits. EconTalk. November 2010.
A few more readings and background resources:
Aaron Mermelstein's - It's A St. Louis Thing: Corkball. Youtube video.
John R. Hicks. Biography. Concise Encyclopedia of Economics. Compensation test for free trade.
Vilfredo Pareto. Biography. Concise Encyclopedia of Economics.
Sub-topic: Balance of trade, trade deficits, etc.
International Capital Flows, by Mack Ott. Concise Encyclopedia of Economics.
Balance of Payments, by Herbert Stein. Concise Encyclopedia of Economics.
Mercantilism, by Laura LaHaye. Concise Encyclopedia of Economics.
Most Favored Nation Status, FreeDictionary.com. See also Most Favored Nation Clause, Investopedia.com; and Most Favoured Nation, Wikipedia. Alternative definitions, viewpoints, details, and history about the meaning of Most Favored Nation.
A few more EconTalk podcast episodes:
Kling on Patterns of Sustainable Specialization and Trade. EconTalk. February 2011.
Adam Davidson on Manufacturing. EconTalk. February 2012.
Rodrik on Globalization, Development, and Employment. EconTalk. April 2014.
Boudreaux on the Economics of "Buy Local". EconTalk. April 2007.
Benn Steil on the Battle of Bretton Woods. EconTalk. February 2015. What and when was Bretton Woods?
Highlights
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0:33
Intro. [Recording date: February 25, 2016.] Russ: Your work on China was recently mentioned in a recent EconTalk episode with Adam Ozimek as an example of a paper or papers which had empirical research in it that caused him to change his mind. The issue was the flexibility of U.S. labor markets and the effects of trade on the lives of workers. And your work convinced him that trade with China has been much harder on U.S. workers and the adjustments are much slower; that the effects last for a long time. So, we're going to talk about that work. But I want to start where you start at the beginning of your recent paper, "The China Shock," with how the economics profession has looked at these issues. And there's been something of a consensus for a while that maybe is in the process of changing. But I want to start with the standard arguments that people have held for a while about free trade. So, talk about what the assumptions have been that economists have worked under: the priors they have about the impact of trade on welfare, the well-being of workers generally, and particularly workers maybe in areas that are competing directly with foreign imports. Guest: Sure. So, the basic argument for free trade--an argument that I support--is that free trade allows countries to specialize in what they are good at. And specializing in that, they can sell those goods to the rest of the world and buy from the rest of the world the things that other countries are good at. Rather than do all my cooking and do all my cleaning and make my own car and sew my own clothes and then go teach an economics class, I engage in exchange with people within the United States and outside the United States, and I focus on the thing I'm especially good at and trade for the rest. And so that's the general principle of comparative advantage and it's as much true as it is between people as it is between countries or between firms within a country. And almost any conventional economic theory, including the ones I subscribe to, will tell you that that's going to improve aggregate welfare--the ability to focus on your comparative advantage makes all countries better off in aggregate. And if it didn't they would have no reason to trade. So, if they couldn't somehow get a better deal by producing one thing, trading with another country and getting the thing that country produces, they wouldn't do so. So, in aggregate, trade is growth-enhancing, increases the total output of countries; and there are other long-term benefits as well: it improves the competitive landscape, it improves the variety of products and services available, and it helps lots of countries grow and experience benefit from the technologies and innovations and variety of great stuff made around the world. So, there's a very strong case for trade, in general. Russ: I was just going to ask--I want to put a footnote in. Because a number of our listeners probably have taken or are taking an economics class that talks about comparative advantage. But many of them have not. And many have a sort of general idea of what the term means. I just want to, not so much correct what you just said, but perhaps give a different way of looking at it and let you expand on that. One of the challenges is--I think you phrased it, 'You should specialize in what you are especially good at'--that's not really a meaningful statement. You meant a lot of things in the background when you said that. So, there are a lot of things I'm really good at. For example, there's a game my father played as a young boy called Corkball, where you flip a cork underhand and hit it with the handle of a broomstick, akin to baseball. I'm very good at pitching corkball. I have some great pitches. My drop is really spectacular. But, that's not a good thing to specialize in. Because it's not just--there's no absolute way to compare the things I'm good at across activities; and of course even if I'm really good--if we could think of a way to do that, if we had, for example, a time measure of how long it took me to do certain things and I could do them quicker than other people, that's not enough for that to be the thing I specialize in. Guest: No. Russ: The way I think about it is, I should get the things in my life as cheaply as possible. And one of the ways to get stuff cheaply is to buy from other people. And to do that, you have to have resources. And so I specialize in things that allow me to buy things that I couldn't otherwise produce cheaply. By not trying to produce them myself, by letting other people produce them. And then in turn, the things that I can do--here I'm getting into trouble with the language--that I can do relatively well--meaning things that I can do more cheaply for other people than they can do themselves--they are happy to pay me to do those things. So I think one of the challenges-- Guest: Yeah. I agree. I think, just to embellish your corkball example, if there was a major corkball fan base that was paying for television rights and so on, paying to come out to games, and you were really good at it, you would specialize in corkball for a living. And you would, you know, you would hire other people to build your house for you and to clean and cook for you, for example. And so, when I say, 'what your comparative advantage is,' it really means, like, what you can produce that the market wants, cheaply or better than others can. That's what your comparative advantage is in a market economy. And then of course you buy from the people who produce it more cheaply and better than you. They are focusing on their comparative advantage. And the example I like to use--I probably used this a few years back--is Bill Belichick, the coach of the New England Patriots, was an economics major. And I think he's probably very good at economics. He really understands tradeoffs, building an NFL (National Football League) roster, which is very, very challenging. And perhaps that's actually what he does better than anything else, in conjunction with his general manager. But if he had been living in 1930, when the NFL I don't think existed yet--I don't think the NFL came into existence in the 1930s or 1940s. So if he had been an adult at the time that the NFL didn't exist, his comparative advantage wouldn't be coaching it. It doesn't make any sense. Guest: Hmmm. Exactly. Russ: So, it's a complicated--it changes with your opportunities, with the prices and wages that you face. It's an incredibly subtle concept. I just like to--I just mention that because we teach it typically as a 2x2 matrix that I think masks the richness of the idea and the emergent nature of it. Guest: Absolutely. And there's another point that you hit on that also will become important in our discussion, which is that it's crucially about prices. And one of the things that trade does, when nations trade, is it changes prices. So, the thing that you are "best at" under one set of prices--let's say that thing is--it may not be the thing you are best at, at another set of prices, as the value of that thing that you are good at, that you have absolute advantage in, may fall. That, you know, if you are great at producing corkball, you are a great player; but then we open up to the Dominican Republic and it turns out that they have just an incredible set of talent there; and all of a sudden your skill is not as valuable any more. Not because you are less good at it. But because there is an abundant supply of people who are even better. Russ: Exactly.
8:39
Russ: Let's turn to one aspect of this that's a little bit tricky. Which is, contrary to the way some people talk about it--and there's a little bit of subtlety here, but we'll get to that--trade can be "good for the United States but not good for every person in the United States" at a particular point in time, with respect to a particular kind of trade. Now, Don Boudreaux, who has been a guest on the program before, likes to emphasize that trade--he likes to argue that trade doesn't hurt people. And what he means by that is that it's better to live in a world of trade even if your particular skill is being punished--which may be right now by a competitor overseas--than to live in a world of total self-sufficiency or no trade with the international world. And we often forget that. I think it's an important point to remember. At the same time, certainly trade with certain countries at a point in time is harder on some workers than others. And their well-being and absolute standard of living can go down. So, talk about the issues there. And when we think about national wellbeing, which is a little bit deceptive as a concept. Guest: Right. So, that's exactly the distinction that's important to me: That trade is--the simplest way to say it is it's going to raise GDP (Gross Domestic Product) in aggregate. So the total wealth available to the nation, the total quantity of goods and services produced, will increase. But it's going to increase by more amongst some than amongst others. And it's quite possible that even though the pie grows in aggregate, certain slices shrink enough that individuals actually end up with a smaller piece of pie, even if there is more pie to go around, notionally[?]. So trade both increases the size of the pie; but it's also always been understood in theory to be strongly redistributive. In other words, go back to the Dominican Republic and corkball example, if, you know, we discover a vast supply of corkball players in the Dominican Republic, that's great for American sports fans; and you know, they are going to be a lot better off than watching not-as-good play. But it's not good for Russ Roberts. The value of your, of your talent has all of a sudden been diminished. Russ: I need to correct: You said 'not as good play.' You meant better play. They are going to-- Guest: Sorry, better play. Yup. That's right. So there will be better players. And so the supply, you know, the entertainment value of corkball will rise. Advertising revenue; the stadiums will be filled. But not good for Russ Roberts. Because if you are one of those competitors, because now all of a sudden you are playing in the farm league instead of in the majors. So, the supply of talent has increased; and your market value has declined. And in general, though that's an extremely stylized example, you can kind of show, even in a straightforward blackboard exercise, that the size of the pie from that growth, from that improvement in quality, will more than offset the losses to Russ Roberts or to all the domestic corkball players. However, the gains go to a different set of people. Right? They are going to the consumers. Or they are going to the Leagues. They are certainly not going to the corkball players who used to be stars, who are now the also-rans.
11:49
Russ: So, just as a footnote--and don't worry, listeners: I'm going to talk less and David's going to talk more as we get deeper into this--but these are really important issues, and they came up recently in another episode. I just want to mention that, when I started teaching trade theory to my microeconomics students, and what's called the 'deadweight loss' from a tariff or quota--which is a fabulous source of exam questions, and also intuition on how the world works--I want to say it's a very valuable general set of skills. But I used to talk about the loss to America, the gains to America. And then I'd wave my hands and say, 'Of course, they don't all accrue to the same people. But the gains are large enough to outweigh the losses; and therefore trade is efficient.' And I think--I eventually stopped teaching that, the deadweight loss part of it, the shrinking of the pie due to restricting of trade through tariffs and quotas. I'm still against tariffs and quotas. But not because it makes the pie smaller. I think that's a dishonest way that we frequently sell it. Especially to undergraduates. The point, I think, to be made--and I try to make it in my book, The Choice--is that: Yes, some people will be hurt at a point in time; Yes, in particular they won't grow as fast and they may even be absolutely hurt. But the world that their children and grandchildren inherit will have a lot more opportunity and a higher standard of living. And we care about our children and grandchildren. And most of us would make that swap willingly. And some of us don't have to make that swap: we get a better world and for ourselves, and for our children and grandchildren. So, when NAFTA (North American Free Trade Agreement ) was being debated and people would say, 'Are cheap brooms worth ruining a town?' I would always argue that's a false choice. That's not what the choice is when consumers get cheap stuff and workers lose their jobs--and hey, the gains to consumers of a nickel a broom, when you add them all up, that outweighs the losses of the ruined lives of these workers. Or, to take your corkball example, I'm going to go to my next best alternative, if that takes 10 years to find and it pays a fraction of what it paid before and I have no self-esteem; and my family falls apart because I don't get pride in my work any more--that's real. And that's not going to be compensated for, directly or indirectly by government programs. There are things in place to try to do it. As you point out in your paper they don't work very well, don't add much money to the pockets of those folks. So, trade is very disruptive, and we should be honest about it. Guest: That's right. So, in the context of our paper, or this work we have been doing about the impact of the China shock, we sort of start off by, you know, kind of re-stating the conventional economic understanding; and we actually quote from Paul Krugman in 1997, who writes: 'If economists ruled the world there would be no need for a World Trade Organization. The economists' case for free trade is essentially a unilateral case. A country serves its own interests by pursuing free trade regardless of what other countries do.' And that wisdom is correct if you think of aggregate country welfare. But it's not correct if you think about the perspective of every individual in that country. And in Krugman and Obstfeld, in their undergraduate textbook, also make this point. Which is that owners of a country's abundant factors gain from trade. I'll say what that means in a second. But owners of a country's scarce factors lose. Compared to the rest of the world, the United States is abundantly endowed with highly skilled labor; and low-skilled labor is comparatively scarce. That means that international trade tends to make low-skilled workers in the United States worse off. Not just temporarily, but on a sustained basis. So, economists have sort of long understood those theoretical points. But in reality, we haven't seen a lot of evidence that said that trade was actually very disruptive for low-skilled workers in America. We've seen a lot of contraction of manufacturing over time. But much of that is technological. In fact, manufacturing in the United States has been on the decline since the end of WWII. Russ: Seventy years. Guest: Exactly. And so, it was reasonable to sort of develop the idea that, although those costs existed in theory--there were sort of disruptive losses, for example low-skilled workers--in practice they were sort of second order. And I think that view was correct at a time. And that was the kind of Bretton Woods era of trade, before China's rise, when a lot of the trade that we saw, from the rich world, was basically rich-country trade. You know, so, France sells us cheese and we sell them aircraft engines, right? And we buy cars from Germany and sell them machine tools. And so it was a lot of, you know, high-skilled workers competing with one another but focusing on different areas of expertise. And what changed with China's rise, starting in the early 1990s, was that all of a sudden a very labor-abundant, low-skill intensive country that was quite large--and size is quite significant in trade because it affects how much product, how much you can move into the world market--all of a sudden became extremely--it opened to the world, and then sort of marked up[?] a technological frontier from being decades behind it and created a flood of extremely competitive, high quality products that directly competed with low-skilled U.S. workers, as well as workers in other countries, including things like textiles, shoes, commodity furniture, plastics, rubber products, dolls-- Russ: toys-- Guest: Toys, right. My coauthor, Gordon Hanson, likes to say, 'If you go into a Walmart and buy yourself a plastic doll, a raincoat, and a pair of, you know, cheap high heels, you've just made a trip to the Chinese manufacturing center.' Russ: Yup. Guest: And so that--all of a sudden the redistributive face of trade became very, very evident. Because we had an unusual situation where an extremely large country, meaning capable of supplying a lot of the world's manufacturing demand, all of a sudden just came online. It's like it hadn't been there. It's like we discovered oil. And its development was so rapid--it's sort of unprecedented in [?] world history to have a country that is so backwards, technologically, all of a sudden become so competitive. And [?] it has an educated workforce--relatively educated and skilled, hard-working. And then Deng Xiaoping opened up these special economic zones; he said you can use market prices; you can import foreign machinery; we are going to allow foreign direct investment. And I don't think anyone--in fact it's clear that almost no one anticipated how quickly that would move. And how--yeah--you know. And let me say--it's been great for China. It's brought hundreds of millions of people out of poverty. The fastest anyone has moved out of poverty any time in world history. It's brought a lot of wealth to a lot of the developing world, because China's demand for commodities has brought it into Africa and into Central America, into Brazil. And it's done a lot of good--both in China and other places. So, I want to be clear that this is not all cost, by any stretch of the imagination. But it has been very disruptive--more than I think economists or anyone else had anticipated based on our sort of Bretton Woods era experience of, 'Yeah, we know trade is not Pareto-improving in theory'--meaning, Pareto-improving doesn't make everybody better off all at once. But in practice, that sort of doesn't show up so much. Well, it showed up. It showed up a lot.
19:30
Russ: Give us an idea of how big a change it is. I was shocked myself to see China's impact on world manufacturing output. A hard thing to measure, by the way, but something we try, we make an estimate at. Guest: So, China's share of world manufacturing exports, measured in dollar terms, went from approximately 2% in 1990 to about 17% in 2012. If we look at share of value added, meaning the actual sort of improvements it makes--so, when you take a raw material and turn it into a finished product, part of the value is the raw material. You shouldn't count that as your output. So, value added--the difference between what you buy and what you sell, effectively--its share of world manufacturing value added went from 5% to 25% in that period. Which is just remarkable. Russ: Yeah, it's incredible. Guest: Yeah. And that has certainly corresponded to a big decline in the--well, by definition in the shares of many other countries. But particularly the United States, actually. And it's not because the United States was such a large exporter of many of these goods that it's buying from China. It was that it was producing them for itself. So, the United States, within the United States it was buying from itself. It was buying leather goods and textiles and plastics and toys and commodity furniture--the kind of stuff you'd see at a Walmart or Target--producing it for itself. And all of a sudden, it found: Wow, it's actually cheaper just to buy it abroad than to make it here. And that led to a substantial decline of employment in import-competing manufacturing plants. And some of those plants are, you know, quite, quite large. So, furniture plants that employed more than 10,000 workers. There were a not-trivial number of them, and almost all of them closed up. And, you know, because--it's actually labor-intensive work. Making furniture is labor intensive. And especially if you are doing fine sanding, if you are doing urethaning--it's different, when you are making couches you are kind of slapping on some cloth and stapling it. But if you are actually making finished furniture, it's very labor intensive. And labor costs in the United States are considerably higher than they are in China, especially around 1990 or 2000. And so though a lot of those firms or those plants just got wiped out, and we estimate the numbers in our work--it's somewhere on the order of, conservatively about one and a half million workers.
22:10
Russ: So, I want to put this in perspective. And I want to make sure people understand, again, the sort of standard arguments that I'm sympathetic to; and that you are, too, but only up to a point. This is nothing new--one argument goes. And this would be the argument I've given most of the--over this period. So, I'm interested in hearing why it's not true if you think it's not. This is nothing new. We had massive imports from Japan; we've had a surge in imports from Mexico after NAFTA. As you say, manufacturing in employment has been declining steadily; there's been an acceleration of the downward trend in the last 10 or 12 years. But it's not like it falls off the map. It goes down. And at the same time, U.S. manufacturing output is rising steadily throughout this period, as it's measured. Guest: Right. In terms of value added Russ: It's not like we don't understand that. They think, 'Oh my gosh, we don't make anything any more.' We make a lot more than we used to make. And that's because of productivity and technology. So, that's happening all around the world. The total pie of--the total amount of manufacturing is getting a lot bigger. But that always happened--U.S. in car manufacturing shrunk in the 1980s as Japan's production came online. And through all this period, until recently, unemployment never got very high. It's not very high right now--it's 5%. The American consumer got cheaper goods; that freed up money to buy other things. Those things are hard to measure, the direct effect. But surely there are jobs that expand. And we see that during decade after decade of hundreds of billions of dollars of trade deficit year in, year out--and the economy still keeps humming along; unemployment stays low. Most of the time, unless we've had a recession. They've been mild. So, it's not obvious that China's rise should be much different than what we've seen before. Why--what's the theoretical case for paying more attention to it? Guest: Sure. I think there--the theory is not different from what it's been. I think what's distinctive about the China case are, 1. How large it is--so, let's say, VietNam had gone, followed exactly the development path of China in exactly the same time period--gone from absolutely backward to, you know, at the frontier. Well, it couldn't have been as big a deal for the world as China's rise. Because Vietnam has only so much export capacity. So, after it got really more productive, eventually they would have run out of labor, run out of space, and price would start to rise; and it just couldn't be that--it couldn't supply a lot of the world's demand. But because China is the world's largest country, and because it had a huge amount of surplus labor--basically you had a lot of people out in the rural areas, about 150 million of whom migrated into cities, into export processing zones, to this incredible latent capacity. You could think of it as China was like the proverbial rock poised atop a spiring mountain, waiting to come down. It just--all that potential energy can convert into kinetic energy in very short order. So, that's one factor, is how quickly it occurred and how big the country was. A second was, its extreme specialization in labor-intensive production. Right? It's ability to make, you know, goods that required just a lot of human hours. Textiles and leather and also even electronics assembly, a lot of plastic things: they just require hand assembly. And so, that was direct competition with the lowest-skilled sector of the U.S. manufacturing work, of course [?] a lot of which is employed along the Southeast. So it's not the rustbelt, it's not cars, it's not engines, it's not electronics. It's really the labor-intensive part of U.S. manufacturing. It's much more in the low-wage regions of the country, a lot of them being in the Southeast. So, furniture being a really good example. So, that second factor is that specialization, extreme specialization in labor intensive. And let's see--is there a third factor? Yeah, actually there is a third factor. In fact, there are actually two other factors. So, a third factor is the WTO (World Trade Organization)--so, China's accession to the WTO, the World Trade Organization, in 2001, led to a kind of inflection in U.S. trade with China that no one had anticipated. This is again, another case of, you know, unanticipated consequences. And it's not clear even today why it happened so dramatically. Because China already enjoyed Most Favored Nation (MFN) trading status in the United States. So it already got the best deal in terms of the rules in Paris we'd applied. And so the WTO accession basically just sort of formalized that and said, Okay, this is not happening year to year; this is for keeps. And so it didn't nominally change the tariffs facing China to any substantial degree. But, you know, the best interpretation of what actually happened goes to Peter Schott at Yale and his coauthors--is that all of a sudden the uncertainty was resolved. The country said, 'Okay, this is good. Let's go for it. Let's move production overseas now; our property rights are secure. Our markets are, you know, going to be stable. So this is a keeper. Let's go all in.' So that's the third factor--is the WTO accession just really caused--it was already going 60, it went from 60 to 100 in very short order. And it's very striking when you see it in the data. And I think everyone, just about everyone was surprised by that as well.
28:05
Guest: And then the fourth factor--and this one is really, is difficult also to explain the origins. But the U.S. trade deficit is a big part of this. And the reason is--well, first of all the United States has a merchandise trade deficit as a share of share of GDP (Gross Domestic Product), as large as 3 or 4 percentage points during the 2000s. So, quite large. And a trade deficit, you can think of as, it's like we're borrowing. So it's like if we were making a bunch of stuff for ourselves: we are making shoes and leather goods and furniture; and then all of a sudden China comes along and says, 'Hey, I can make these more cheaply than you.' And we say, 'Okay, great. We'll buy some.' And they say, 'And you know what? I'll just lend them to you. You can pay me back later.' And if we had had to say, if there had been a deal--and again, I'm personifying: there is not any country saying, this is not part of an explicitly crafted deal. But if there had been a situation where we would have said, 'Okay, we are going to get those goods from you, but we are going to produce something else in exchange,' then we would have had labor reallocating from one manufacturing activity to another, presumably. So, we say, okay, we'll buy these furniture from you but we will sell you these electronics or these aircraft parts or something. But not doing that, it's like we took a set of activities that we were engaged in, that employed, millions of people actually to do them, and we just stopped doing them. And instead just got the goods on loan from another country. Now, in the long run, we have to pay that back. And to pay that back, presumably we have to either make more stuff for export, which will create a lot of employment. Or we have to devalue the U.S. currency, which will lower our standards of living but will also have the effect of making those debts easier to service. But the trade deficit does loom large. Because it means in the short term, it's like an inward shift in labor demand: stock that we were paying ourselves to make, we just got elsewhere without having to pay for them. And so that was pretty contractionary for demand for the type of workers--I'm sorry, these manufacturing labor-intensive goods that we started getting from China instead of producing domestically.
30:17
Russ: I've got to disagree with a bunch of that. So, let me take--let me take a shot. I think it's--I know you are trying to use it as a shorthand, but I think calling it 'borrowing' or 'debt' is misleading. And it, unfortunately I think it leads to Presidential candidates who claim that because we have a large deficit, a trade deficit, with China, that we are somehow in hock to them, or they are beating us, or we are behind. So, let me rephrase it a different way, and see if you agree or disagree. We finance our trade deficit with a capital surplus. Roughly. There's currency and some other things in there. But basically what we've done is, we can buy more than we produce--that's what a trade deficit, with respect to the rest of the world, that's what a trade deficit is. So where does that money come from? Well, it comes from the fact that foreigners are willing to invest more in the United States than we want to invest in their countries. So, what we've swapped, when we got those cheap textiles and toys from China, what we got in return wasn't--they didn't buy our airplane parts--they did a little bit, but on average the net effect was that we bought a lot more from them than they bought from us; but they invested in us a lot more than we invested in them. That is, they took a slice of our future productivity as the price for the cheap goods, less expensive and attractive goods that they gave to us. So, the way I think of it--and this was true of Japan, as well, in the 1980s and 1990s--there are boats going from China, and they are still doing this, and what are those boats carrying? They are carrying all those textiles and all the great stuff that they produce. And they land on our shores and fill up our Walmarts and our kitchens and our houses. And in return, those boats going back to China; but they don't have our goods as much. They have some. But they also have lots of pieces of paper that are claims on U.S. investments, and various property, and all kinds of things. Guest: Well, a lot of those actually would be U.S. bonds. Russ: That's correct. But that's-- Guest: They allowed the United States-- Russ: Yeah, go ahead. Guest: But, so what it did is it allowed for very, very cheap interest rates in the United States. You know--we could borrow for essentially nothing. Whether we use that opportunity well? Well, I think-- Russ: I just think it's important not to confuse that with trade. The fact that the U.S. government spends a lot more than it takes in and is able to get the Chinese to finance it, I think is unfortunate. That's a whole separate can of worms we are not going to go over. Keep that closed. But the point I want to make is--this is really, I think, important. Forget all this trade balance stuff. If China showed up, if a foreign nation showed up in America with gifts, not sales, gifts--and they parked cars in our driveways and they filled our closets with free clothes and cheap food; and it wasn't a trick--it was just something they were going to do for the next 20 or 30, or maybe forever--it's not a plot to get us to stop doing it and then they are going to jack up the prices--you hear that argument. But let's just say, they are giving us all this free stuff. That's really fantastic. Unless, as you point out, you are in the clothing business. In which case, it stinks. That's true. No doubt about that. But I want to come back to my question, which is: This has been going on for a long time. In big magnitudes, through the 1980s and 1990s, not just the 2000s. It did not appear to have--let me phrase the question a little more pointedly. The last three recessions have been pretty disappointing in terms of job growth. Those effects suggest that something has changed in the U.S. labor market. So, it's not China that's the problem. It's something else that China is letting us see--which is that the one-time flexibility of the U.S. labor market, the ability of, say, the auto workers of the 1980s, or the defense workers of the 1990s after the Cold War ended, a lot of people were thrown out of work. It had nothing to do with international trade. It had to do with the fact that our Defense Department could shrink, which was great. And those people found other work, just like they had when other things changed. When textile jobs left New England and went to South Carolina and North Carolina; and then they went to Asia--it was good for almost everybody. If you were really specialized, yes, you had a tough time. But you found other things to do. That appears to have changed. Is that the problem rather than China trade, per se? Guest: So, there are so many points on the table here, but let me see if I can respond to a few of them. First of all, I want to make clear here: it's not China's fault. And this is in no sense--to say that this was a consequence of China's rise is not to say it was China's fault. And certainly the things we are talking about: what did we do with these cheap interest rates and low-cost loans? You could say that it was a squandered opportunity, right? That didn't have to be the case. Many other countries responded to China's rising productivity by importing Chinese goods from China but then selling China other goods. So, Germany did that. Germany runs a trade surplus with China, and most of Europe is relatively more in balance. So, the reason I bring up the trade deficit is not because there is something intrinsically wrong with trade deficits: they are an opportunity. Basically someone is lending you something or making an investment in you, and you can use that as you like. However, it did mean the manufacturing jobs that might have occurred if we were running a trade balance--workers would have been reallocated from one type of manufacturing potentially to another--that didn't occur. So that's part of the reason there wasn't faster reabsorption. A second question you are asking me is: Has the U.S. labor market become less flexible, so that these shocks matter differently? Why aren't we just getting back on our feet the way we should or the way we perceived ourselves to have done in the past? And there, I'm not--I think the answer I'm going to give is sort of yes and no. So, let me start with the No. We've known for a long time that displaced workers losing career jobs do very badly. And this go back actually to the work of Jacobson,
Lalonde, and Sullivan, their famous 1992 paper, which basically studied the closing of the steel industry in Pittsburgh during the early 1980s. When the dollar was extremely strong and we started importing a lot of steel from Japan, and basically this was the first really big rust belt recession. And those steel plants never came back. And those workers who worked at those steel plants, many of them also never came back. So, they lost on average about 30% of earnings for the next 10 years. Many of them were not re-employed many years later; and those who were reemployed were reemployed at significantly lower wages. We even know from subsequent work that their mortality increased--many of them died of--there was a higher rate of mortality probably having to do with heart attacks and other health issues: maybe some drinking--it wasn't oxycodone at the time. So, when[?] we've always known it's costly to workers to be displaced; and so in general you don't get fired from Ford Motor Company and then just go start your own auto company and make a fortune at that. I think there are two things that make this episode somewhat different. One of course is that it was so big, and so rapid. So, the rate of change matters because workers compete with each other when they are unemployed for new jobs. So, we know this from data. For example, when Austria bought out a bunch of late-career workers, 55 and older, who were former steel employees and just basically gave them an early retirement, all of a sudden the employment rates of guys just slightly younger shot up. Why? Well, they were all competing for the same set of jobs. So if a lot of people are displaced all at once, that adds to it. Especially when it's geographically concentrated. And of course manufacturing is always geographically concentrated. So it all tends to happen all in one place. So it's not just a few people losing jobs, but lots of people. So that has kind of a multiplier effect on the local economy. I think another factor is that the United States has seen a long-run decline in demand for less educated workers. And many of these folks were less educated workers--not[?] high school grad or high school dropout. And so there wasn't--when you talked earlier about your outside option if you weren't playing corkball, these guys didn't have a good outside option. You could argue that they were doing much better in manufacturing than they could have been doing in some alternative sector. And so, there wasn't a kind of a soft landing for them. So that sort of goes to your question about was there something that's changing. I'd say, yes, the bottom has been dropping out for a long time for non-college workers in the U.S. labor market, really since 1979, 1980. And these guys were, you know, in some sense in a relatively privileged position to have stable, recently well-paying career jobs that didn't require high levels of education. And so when those jobs unexpectedly went away, they didn't have something good to fall back on, something equal to fall back on.
39:58
Russ: Yeah, just a couple of thoughts, and then I want to get to some of the empirical work of yours. So, that 1992 paper, of course that's the beginning. I think I said jobless recession; I meant jobless recovery. The 1991 Recession was the first--the recovery from that, and the 2001-- Guest: Right. But they were studying steel workers in the 1980s. The paper was published in 1992. Russ: Good point. I just want to add one other theoretical point, though, which is: I don't like when you say that if China had bought stuff instead of investing or borrowing from [lending to--Econlib Ed.] U.S. assets--investing in U.S. assets, either loans from the government or stock or equity or real estate, that the job effects wouldn't have been as big. Or it would have been different. Go back to the gift scenario. If they gave us all the stuff and they didn't charge us anything and they didn't borrow anything and they didn't invest anything, those workers in those industries would have to reallocate. But if they bought--but Americans, because they have free stuff now--they now have more money to spend on other things. So those industries are going to expand. There's no reason, inherently, that trade--imports--are going to cause unemployment or job loss in the aggregate. Unless markets don't adjust. And that's the crucial question. Guest: Sure. Agree: if they are given as gifts that would be incredibly disruptive; even though it would increase aggregate welfare--we're getting stuff for free that we used to have to pay for. So, lots of people are going to be better off. It's just that a subset of people are going to be much, much worse off. The gains are on net going to be positive as conventionally measured. It's just that the guys who have free clothes but no employment are not going to feel fully whole. Russ: That's not my point, though. That's not my point. My point is that those workers' opportunities are no different than if China bought goods instead of investing. Because if they invest instead of buying American stuff, then Americans have all this extra stuff to spend money on, and those industries are going to expand. And there's no reason to think that Americans' demand for other stuff is going to be--it will be different than Chinese; there will be an adjustment period; and certainly we care about and worry about and are interested in how long it takes. I'm just picking on this point that somehow because China didn't buy stuff that somehow there's job losses that can't be made up. There's disruption. But I don't think there's job losses. Guest: Okay. So, first of all, let me be clear. It's not China's fault for not buying stuff. They bought stuff from lots of other countries, right? So, I want to be clear-- Russ: I didn't say that [?]. Guest: It's not like we're giving you but we won't buy--no, no, I want to be clear that I'm not bashing China. So, we're telling a positive story about what happened, not a normative story about whose fault it is. But so, sure, it creates aggregate wealth, and that makes consumers better off; they can go out to dinner more; they can buy television sets; money they would have spent on clothes they can spend on their kids' education. Lots of things can happen. But it does mean that the workers [?], the workers who were laid off, had a specific skill set in general, and it's not a highly educated or flexible skill set. If China had said, 'Well, we're going to sell you all our textiles but we're going to buy leather goods,' you could imagine that those workers could more easily reallocate into another activity that looked pretty similar to what they were doing. So potentially[?] might have been reemployed under comparable conditions. But if instead we said, 'Well, because of this we get to buy all these iPhones--we have all this money so we're going to buy big TVs and iPhones and go out to restaurants and we'll take more vacations,' well, we're wealthier but that's not going to do much for the employment of those specific individuals who are directly impacted. So, that's why I think the bounceback is a little harder, because there's not a good outside option for those workers. And we know employment rates of low-educated Americans have been on the decline for a long time. So it's not that they were otherwise doing great and this was a blip. It's that the bottom had been slowly dropping and then this was a very rapid drop. And all of those declines have been associated with declining employment rates of non-college workers. And the last recessions, after each one, there's been an incomplete bounceback. The only time we really saw a rise in the employment-to-population rate of low-educated Americans was during the mid-1990s when the labor market was extremely tight, and productivity and wages were rising; and that was sort or morning in America. But unfortunately it didn't last that long. Russ: Yeah; I don't disagree with any of that. I'm just, again, reacting to this idea that somehow there was an employment loss because China didn't buy stuff. Which is, I think it just misleads folks who don't know these issues, don't think about them a lot. Guest: I think the thing we agree on, and really the point of our paper: it's not about the net job losses. It's really about the degree of concentrated loss. Right? Even if the gains are positive in all likelihood on net, it was very devastating the way that people were not expecting to specific subsets, specific regions that went from being relatively robust manufacturing centers to being rather blinded[?], or at least to a subset of people losing career employment and not being able to find good alternatives. And that's what we're trying to draw attention to. The other part, the calculus, which is the net gains are very likely positive. However, the distributional costs, which we've always known about in theory but hadn't seen a lot in practice, we now saw that very, very clearly. And I can talk more about how we did that if that's helpful, as well. Russ: Yeah, that's where we're headed.
45:48
Russ: Let's turn to that. And I agree with everything you just said. I just think that all kinds of changes, technological change, changes in taste--I don't think the construction in the housing market, the people who were in that market who suffered when the housing market collapsed, I think a lot of them, very geographically located, in certain states, have struggled to find new stuff. To me--I'm happy to hear a broader perspective--but to me, what your work so far highlights to me is that labor markets and geographical mobility are not what we thought they were. And so a response to all these kind of changes, certain types of people especially with narrow skills or less education are really struggling. Guest: That's correct. That's absolutely correct. Russ: So, let's talk about what you found for China, this particular case. Guest: Sure. So, we start out to ask the question: How have labor markets adapted to this very, very rapid rise of trade[?]? And, our prior was that they would have adapted pretty well. And the way we went about analyzing that question, we said: Okay, let's take all the goods that the United States imports from China--and there are, let's say there are about 400 categories of those. And we see an increase in, you know, tennis shoes; an increase in furniture; an increase in certain types of construction products. Well, then we can say, well where would those be produced in the United States? What are the--so, if we were making them here, where would they have been produced? Well, we just go to the old County Business Patterns where we see employment, detailed industry by county. And we can look, and let's say in 1980, before this started, or even 1990, and we say, 'Okay, these are the places where those things are produced. So if there's going to be an import-competition effect, it's going to be in these locations.' So, then we--so, for each of these imports we can then sort of attribute where they would potentially have been produced; and we can trace them back to [?] what's called a community zone, which is a cluster of counties--122 of them in the United States. And then, say, 'Well, did that have--if we see imports surge in footwear, do we see footwear-producing places start to lose employment?' Now, the thing that's insufficient about that is you say: Well, look, imports can start to surge for all kinds of reasons. They could surge because China's getting more competition, but they could also surge because our tastes change; they could surge because our factories shut down for some other reason and then we start importing. So, that's not really completely compelling. We really want to focus on the part that is due to China's rising competitiveness--its rising productivity, its falling trade cost, and so on. So what we do is we look at the same goods being imported to 8 other wealthy countries. And we choose these 8 countries because there is harmonized data--like Austria and Australia and Japan and so on. And we look at when exports from China in a particular category surged to all those countries simultaneously. And we say: That's very likely--again, we can't perfectly [?]--that's almost surely due to China's falling costs, rising productivity, rising quality. And we use that to predict the import growth in the United States by category--by each of these 400 product categories and then look at that predicted component and how it relates to changes in employment in manufacturing in each of those locations. And that may or may not have sounded too complicated. But it's actually incredibly visually striking. You see it right away. It jumps off the page. And I think that's why this research, as your prior guest said, you know, changed some minds. Because it's quite strict transparent; you can find locations and you can see what's happening there. Russ: But that's not the most important part of this research to me. So--again, it's not surprising that textile mills in the South got in trouble. What we're really interested in--and it's not surprising that Lowell and Lawrence aren't what they used to be, because what we really care about is the people there. And a lot of those people, when they see that the mill is gone or the factory is gone, they move. And they change. Or, the example I like to emphasize is their kids notice, 'I'm not going to grow up and work in that factory. I better graduate from high school; I better go off to college if I can,' even though it might be a community college because the parents don't have a lot of money any more. Or to a public university. So, I think the more dramatic thing you find is how long it takes for the people in those areas to recover. So, the impact is large--because there's a lot of stuff coming from China. But there's also opportunities now that expand elsewhere, we would think. And you don't find that. That's what's striking, it seems to me. Guest: That's absolutely right. So, you are completely right to emphasize that. We shouldn't be surprised for competing manufacturers to contract--we are only going to buy so many tennis shoes, so if we buy a billion dollars of them from China, we'll probably produce somewhat less here. Russ: Like, zero, in some industries. Guest: Yes. In many cases it's zero. Your analysis is absolutely correct. What we conventionally expect is those workers would reallocate. So we ask, at the level of these community zones: Do we see a movement into other sectors? And the surprising finding is that the net decline in employment, community-zone wide, is actually larger than just the decline in manufacturing. In other words, there seems to be a general slowdown of economic activity--not enormously larger but about a third again larger. Which is consistent with the sort of, you know, of the Detroit effect, you might think, where an area loses a lot of manufacturing, then it becomes somewhat blighted. Or, you know, people also stop going out to restaurants; and they stop going to movies; and they buy fewer consumer goods. And so, that actually spills over and reduces household incomes, reduces employment rates, causes more people to exit the labor force--not only to become unemployed but to become non-employed--meaning they say they are no longer searching for work; and usually to claim public benefits programs. Now, you might think those benefits are Unemployment [Unemployment Insurance] and Trade Adjustment Assistance (TAA); and that's true. Those programs are very responsive in proportional terms. But they are actually kind of small potatoes. The much bigger transfers spurred by these trade shocks are actually Disability payments--which you and I have talked about on this program a number of years earlier. And early retirements. And Medicare, Medicaid, TANF (Temporary Assistance for Needy Families), and SNAP (Supplemental Nutrition Assistance Program) which is Food Stamps. And those programs are not intended to spur employment; in fact, in the case of Disability, they are really the opposite of employment. And so they don't facilitate--they do shield workers to some degree against income shocks, which is a good thing. But they do not have the incentive properties to help people get back into the labor market. Unlike unemployment insurance or Trade Adjustment Assistance, which are designed, at least, exactly--they are temporary and they have incentive effects, for return to work or even for training in the case of Trade Adjustment Assistance. So that was another thing that became very clear in our research, was that part of the adjustment mechanism was onto other benefits programs that were not designed as labor market programs.
52:55
Russ: So here's the story--we're going to come back to how reliable those--we haven't really talked about the magnitudes; I want you to talk about that. Why don't we talk about that first? How big are these effects? Guest: Sure. Let's see. We estimate that about 25% of the decline in U.S. manufacturing employment between 1990 and 2007 was due to China's rising competitiveness; and about 45% between 2000, 2007. I want to be clear: these are conservative estimates. We're only taking account for the piece of variation that we can confidently attribute to the productivity side, as opposed to just whatever else causes imports. So, on net that would be a reduction of about one and a half million manufacturing jobs. The net employment effects are somewhat larger, because of this sort of one-third multiplier, so you can add another half million to that. When we look at the effects on transfer income, we find that sort of every $1000 of increased import penetration leads to approximately--this is kind of interesting--about a $58 increase in transfer payments. About $4 of which is Unemployment; another $8 is Disability; another $10 is Retirement; another $15 is other Federal income assistance; and another $18 is government medical benefits. So, it's actually--$60 out of $1000 is not a huge number. It's only 6%. But it's not at all small. And, if you want to think of these--now some of them are transfers, not losses, right? If you take money and give it to me, that's not an economic loss. That's just a transfer between us. But of course we have to raise taxes to pay for those transfers, and that does have efficiency costs. And then you might think that just the involuntary unemployment itself has a cost--it's not just when people are not working, they are not indifferent about that. They are usually kind of miserable. So we think of that, although we don't try to monetize that--as also a potential cost. So, yeah, I think we see--and what we don't see, what we expected to see: one, we expected to see people moving out of manufacturing into non-manufacturing--everything else. We don't see that happening at the local