The Trouble With Trade: People Understand It

Ever since Donald Trump was elected there has been a huge backlash among elite-types against those blaming trade for their problems. Major news outlets have been filled with misleading and dishonest stories claiming that the real cause of manufacturing job loss has been automation and that people are stupid to worry about trade.

In fact, people are exactly right to be concerned about the impact of our trade policies on their living standards. It is the fact that people are right that is worrying our elites. Trade is just one of the areas in which politicians of both parties have promoted policies to redistribute income upward. It just happens to be the area in which the impact is most recognizable and therefore people have mounted an effective resistance.

The story with trade is simple. When a manufacturing worker in the U.S. is placed in direct competition with a worker in Mexico, China, or some other developing country, who earns one-tenth of their pay, it puts downward pressure on their wages. Either their jobs go away or they are forced to take substantial pay cuts to keep their job.

This competition has cost a huge number of manufacturing jobs in this century. It has also put downward pressure directly on the wages of manufacturing workers and indirectly on the wages of less-educated workers more generally, as displaced manufacturing workers sought jobs in other sectors.

Elite media types have tried to deny these facts by claiming that the source of job loss is automation (i.e. productivity growth), not trade. This claim deserves to be met with the same sort of derision as the claims of climate change deniers.

The data are very clear. From December of 1970 to December of 2000 we lost 130,000 manufacturing jobs, less than one percent of the total. There was plenty of productivity growth in manufacturing over these three decades. While manufacturing employment did fall as a share of total employment, there was little change in the absolute number of manufacturing jobs over this long period.

By contrast, manufacturing employment dropped by more than 3.4 million, or more than 20 percent, in the seven years from 2000 to 2007. This was trade. The trade deficit exploded over this period to almost 6.0 percent of GDP, which would be more than $1.1 trillion in today’s economy.

The people in the states hit the hardest like Michigan, Ohio, and Pennsylvania are absolutely right to believe that trade has hurt them, their friends, and communities. The trade denialists would have us believe that if we had something close to balanced trade, we could produce another trillion dollars a year worth of manufactured goods without employing any workers. Sorry folks, that one does not pass the laugh test.

But denialists are right in saying that trade is far from the whole story. The elites have been pursuing policies in a variety of areas to redistribute income; the difference is that the policies are less visible in other areas.

For example, the Federal Reserve Board deliberately keeps the unemployment rate from falling too low in order to keep workers from gaining too much bargaining power. This is ostensibly a hedge against inflation, but the people who pay the price in this war on inflation are workers at the middle and bottom of the income distribution. It is worth noting in this respect that the champion inflation fighter was Paul Volcker who President Carter appointed as Fed Chair.

The leadership of both parties has supported stronger and longer patent and copyright protection. The Hepatitis C drug Sovaldi has a list price of $84,000, instead of the free market price of $200, because of its government granted monopoly. This protectionism transfers more than $350 billion a year ($2,500 for an average family) from the rest of us to the drug industry alone.

And the reason that CEOs can pocket tens of millions of dollars a year is a corrupt corporate governance structure that allows their friends who sit on their board of directors to determine their pay. It is incredible that supposed supporters of the free market fiercely resist reforms that would give shareholders - the owners of the company - more control over what they pay top management.

But these and other policy areas are where the rules have been rigged in ways that can be difficult for the public to understand. After all, most people have little or no knowledge of the Federal Reserve Board and monetary policy or the rules on corporate governance. They can see, however, their factory being shut down and moved to Mexico.

This explains the harsh reaction of elite types. In the case of trade, the public is onto the game. And elites are doubling down to hide the truth. Therefore we can expect to see a continuing flow of dishonest news stories and columns, mixed in with plenty of name-calling, all to discredit the truthful claim that trade has been a major factor undermining the living standards of the middle class.


Reposted from The Huffington Post.