theodore M I R A L D I mpa ... editor, publisher, writer

Thursday, January 28, 2016

Don't Blame Americans for Blaming China

<p>Your job went to China and all you got was an iPhone.</p>
 Photographer: JOHANNES EISELE/AFP/Getty Images
Megan McArdle
Was opening our markets to trade with China a good idea?
My colleague Noah Smith argues “maybe not,” citing a new paperfrom David Autor, David Dorn, and Gordon Hanson.
They write:
Adjustment in local labor markets is remarkably slow, with wages and labor-force participation rates remaining depressed and unemployment rates remaining elevated for at least a full decade after the China trade shock commences. Exposed workers experience greater job churning and reduced lifetime income. At the national level, employment has fallen in U.S. industries more exposed to import competition, as expected, but offsetting employment gains in other industries have yet to materialize.
This is, as Tyler Cowen suggests, “some of the most important work done by economists in the last twenty years”.  Adds my colleague: “Economists may blithely declare that free trade is wonderful, but our best researchers have now shown that public misgivings about these smooth assurances have been completely justified.”
It’s fashionable for columnists to write “I was wrong” pieces, and if this work by Autor et al holds, this will go down as one of the four things I was most mistaken about: the Iraq War, the severity of the financial crisis that followed Lehman’s collapse, the rise of Donald Trump, and now, China trade. It’s been obvious for a while that China has played some role (though not the biggest) in the decline of labor-market opportunities for workers without a college diploma. But the authors suggest that the effect is both bigger, and longer lasting, than I would have predicted. Nor has much seemed to help the adjustment: workers are less mobile than expected, domestic American industries less able to absorb the surplus, particularly among the lower-skilled workers whose human capital was job- and industry-specific.
Free traders -- and I include myself -- have often sounded too glib about the offsetting benefits of cheap imports. Cheap imports are great. But people value work, and the ability to build some sort of reasonably predictable, stable economic future, more than they do cheap flat-panel televisions. With effects this large, the cost to people who are forced into economic precariousness by permanent labor market changes is larger in human welfare terms than the benefits of affordable electronics.
I’m not saying that we were glib: In fact, my stance on trade was rooted in two quite sound observations.
The first is that all economic growth makes some people worse off,  often permanently. The Luddites were absolutely right that textile mills threatened their livelihood;  moreover, it’s quite likely that many of them never did as well as craftsmen had when weaving was a cottage industry. However, if we’d allowed them to hold back technological progress, we’d all be living at the quite miserable standards of 1800, rather than enjoying the comparative ease and health available even to the poorest Americans.
The second observation is that, historically, the U.S. economy had done a pretty good job of reabsorbing displaced labor. Recent evidence has shown that to be less true than in the past. China was a special case, for obvious reasons: its size, and the speed at which its markets developed.
That said, I’m not sure what lessons I should take from this for the next time, or even for now.
The authors still suggest that in general, trade does not have the catastrophic effects that its opponents claim; the effect seems to be specific to China, because of the vast size of its labor market and the extent to which Mao’s disastrous policies kept the country well below its productive capacity.
Yes, yes, I know: You predicted China's enormous trade surpluses with the U.S. and the disruption they would cause. But if you want to assert some amazing economic foresight, it takes a bit more than one correct prediction (I, for example, called the housing bubble in 2002, which has not made every other prediction correct). I’ll want to see some evidence, like the fabulous stock portfolio you’ve managed to assemble through your superhuman facility for predicting just how economic events will unfold.
For people have been predicting trade disasters for decades: OPEC, Japan, Germany, just to name the most iconic. (Remember Rising Sun, the Michael Crichton Japanophobic thriller published right about when Japan was embarking upon its 20-plus year “Lost Decade”?) The rise of those new manufacturing centers did end up badly hurting individual domestic industries (steel, cars, electronics), but not “industry” overall. China was different because it brought so many workers to market so very fast -- but that was hard to foresee without having perfect foreknowledge of the course of Chinese industrial policy.
Moreover, it’s unlikely to be repeated, unless  another 1.3-billion person country can move half its countryside into the industrial core over the course of a few decades. Future trade movements will be on much smaller scales, meaning that the U.S. economy will probably be better able to handle the shock.
So we can’t go back, and there’s not much of a lesson to take forward. We could, of course, look at what policies need to be reassessed right now, in order to try to right the disruption.
Yet what would those policies be? China’s already having some sort of crisis, without our help.
Nor will slamming shut the door on China have the same effect as not opening it, even if we could. China is now a member of the WTO; we cannot kick them out, nor withdraw ourselves without doing major damage to our export industries. But even beyond that, economic development has a certain amount of path dependence. Industrial clusters that grew up over years have now been disassembled, and even if we slapped 800 percent tariffs on Chinese goods, we wouldn’t expect things to go back to where they were. Workers have scattered, skills have atrophied, equipment has been sold off, or made obsolete by new technologies. A company that wanted to open a sock factory in 1990 naturally went to Fort Payne, Alabama. A company wanting to do so today might choose another location entirely -- great for the new town, but little help to the residents displaced when the mills closed in the first place.
I’d be happy to offer government assistance to these folks, but it’s hard to name the government assistance that is going to undo the damage. The rise of both Donald Trump and Bernie Sanders points to the hollowness of the traditional sops that both parties trot out. The people enraged by the loss of the lower-middle-class American dream don’t think a cut in the corporate income tax or capital gains rate is going to offset China’s enormous wage advantage, and they’re right to disbelieve something so ludicrous. Their problems are also not going to be fixed by paid family leave, college tuition, or free daycare for the kids while they’re at the jobs that don’t exist; these are the preoccupations of an educated professional class that is already doing very well. And wringing another 75 cents an hour out of Wal-Mart is probably not going to cut it either, particularly if that means that their local Wal-Mart will then close.
Politicians know that what people want most is work and community -- not tax cuts, not welfare, not more generous government benefits. The problem is, they have no idea how to actually deliver it. Whatever mistakes we made 20 years ago, we’re stuck with them now.
The problem is, that’s not really a very satisfying answer, is it? I’m not stuck with them; I have a stable job, a lovely if somewhat decrepit row home in our nation’s capital, and a marvelously cheap smartphone manufactured in China. It’s someone else who got stuck with the decisions the elites made, and all the elites can seem to offer is pretty much exactly the same policy prescriptions they were in favor of 25 years ago. I can’t blame the elites, exactly. But I can’t blame the folks who have decided they’re sick of listening to them, either.

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