Denialism on Trade

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Denialism on Trade

It is really amazing how the political and economic establishment types feel the need to deny that trade can actually have a negative impact on manufacturing jobs and total employment in their arguments against Donald Trump's trade policies. George Will gave us a great lesson in this silliness in his column today.

Among the highlights were the claim that the loss of manufacturing jobs in the years after 2000 had little to do with the explosion of the trade deficit to almost 6 percent of GDP ($1.1 trillion in today's economy), but rather was almost all due to productivity. There are two points about this one that should immediately lead numerate types to tear up the column.

First, we always have productivity growth, that was not something that just happened in the decade of the 2000s. In spite of productivity growth, manufacturing employment changed little from 1973 to 1997, when our trade deficit first began to explode following the East Asian financial crisis and the surge in the value of the dollar. While manufacturing was declining as a share of total employment, the level remained roughly even (with cyclical ups and downs) at 17.5 million. Employment then plunged to around 12 million as the trade deficit soared. Productivity growth was not the new part of the story, the trade deficit was. (Susan Houseman has done excellent research showing that manufacturing productivity growth in the 2000s was almost entirely in the information technology sector, which means it will not explain a loss of jobs in sectors like steel and furniture.)

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The other troubling item to numerate readers of Will's column is the implicit claim that if we had been producing an additional 6 percentage points of GDP worth of manufactured goods in the U.S. (e.g. another $1.1 trillion of manufacturing goods annually in today's economy) it wouldn't require any new workers. That sounds really cool. After all, it takes more than 12 million workers to produce the current $1.7 trillion in manufacturing output in the United States, so Will apparently thinks we can increase this output by 60 percent without hiring any new workers? That would be quite a surge in productivity growth, something our slow growing economy could badly use. Sounds like a great argument for protectionist measures if anyone really believed it.

Then Will gives us the high cost of protectionism story.

"In 2012, Barack Obama boasted that 'over a thousand Americans are working today because we stopped a surge in Chinese tires.' But this cost about $900,000 per job, paid by American purchasers of vehicles and tires."

And where did most of that $900,000 per job according to the study Will cites? It went partly to higher profits for the domestic industry and to some extent to non-Chinese foreign producers, but it also went to higher pay for U.S. rubber workers. And, much of it went to the government as tariff revenue. A tariff is a tax. Insofar as we are having budget targets, this additional revenue reduced the tax revenue we needed from other sources, which also would have pulled money out of people's pockets.

There also has been a surge of people questioning the basic economic logic than in an economy that is below full employment (certainly the state of the U.S. economy for the first six years following Great Recession and arguably still the case today) that substituting imports for domestic production reduces output and employment. Our national income accounting geniuses point out that in the identity:

GDP = C +I + G +(X-M),

the imports term appears as a negative because the imports have already been counted positively in one of the other components. This means that we do the subtraction to avoid double counting.

Let's give our brilliant economists a gold star to wear on their foreheads for getting an Econ 101 concept right and then a big kick in the rear for misrepresenting the issue at hand.

Compare two simple scenarios in which we have the same level of consumption, investment, government spending and exports. In one of them we have no imports, in the other we are importing $1 trillion worth of goods and services. In which scenario do we have a higher GDP? That's right folks, we have a higher GDP in the scenario in which we have no imports.

Don't worry, I am not pushing autarky or even tariffs, I just want to see an honest discussion of trade policy. It is likely that Trump's team will be pushing many bad policies and using nonsense to promote them, but that is not an excuse for opponents making up nonsense.

Trade has cost millions of manufacturing jobs and devastated families and communities across much of the country. Denying this fact is just being dishonest. It is not a serious basis for discussing trade policy.

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