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Opinion: Stop Scapegoating China For America’s Economic Ills

American politics aren’t exactly immune to bouts of protectionism. A Bloomberg poll has found that two-thirds of Americans, Republicans and Democrats, are four-square behind it—a sentiment that Bernie Sanders is exploiting on the left and Donald Trump on the right.

But although free trade has always been a tough sell to the general public, American economists across the political spectrum have long held firm that globalization and trade liberalization are, on balance, a boon for the country. But now this consensus may be fraying, with The New York Times’ agent provocateur Paul Krugman recently declaring that such thinking is “fundamentally dishonest” elitist bunkum.

Krugman won a Nobel Prize back in 2008 for advancing precisely such “fundamentally dishonest” stuff. But what’s partly driving him now is the much talked about work of Massachusetts Institute of Technology’s David Autor, purportedly showing that the American middle class never recovered from the assault on its jobs by trade liberalization with China.

“It is fair to say,” Krugman declaims, “that the case for more trade agreements—including TPP, which hasn’t happened yet—is very, very weak. And if a progressive makes it to the White House, she should devote no political capital whatsoever to such things.”

That is astonishingly myopic.

For starters, there is every reason to believe that even after job losses are factored in, trade with China and other developing countries has benefited even working-class Americans. A study by UCLA’s Pablo D. Fajgelbaum and Columbia University’s Amit Khandelwal found that the economic effects of trade are definitely skewed—but in favor of lower-income consumers, who enjoy 90 percent of trade’s benefits. Why? Because trade lowers prices in areas such as food, clothing, and low-end consumer goods where these folks spend the bulk of their paychecks.

Likewise, another study by University of Chicago’s Christian Broda and John Roma found that, thanks to trade, inflation for the basket of goods that poor people buy has been much lower than for those that rich people purchase. Those in the top five percentile have experienced 1.2 percent annual inflation, and the bottom 10th 0.4 percent. This means that in terms of actual buying power, poor people are not falling behind rich people as rapidly as the doomsayers would have you believe, and may in fact be closing the gap.

Shutting the door to cheap Chinese imports won’t bring manufacturing jobs back to America. Why? Because American manufacturers that open shop here are far more likely to heavily automate rather than hire overpriced American labor to remain globally competitive. (Are you listening, Mr. Trump?) And for those who remain without jobs, cutting off cheap imports will mean that their unemployment checks will go less far. In short, in a world with diminished trade, Americans won’t get better-paying jobs, they’ll just get even poorer.

Autor estimates that about a quarter of manufacturing job losses in America between 2000 and 2007 were the result of Chinese imports. Other estimates put these losses closer to a fifth—with automation causing the rest. Either way, it’s hardly news that trade would result in some job losses.

What is news is that, post trade liberalization with China, workers who lost their jobs didn’t quickly bounce back and move on to higher and better things in growing industries, as standard trade theory would predict and as has historically been the case. Indeed, usually even if whole towns and cities succumb to trade or other forces of creative destruction, the vast majority of their inhabitants flee to better climes elsewhere. This time around, however, a significant number of Americans seem to have gotten stuck in a downward spiral where they are. For example, workers in Tennessee’s furniture district, which was badly hit by cheap Chinese imports, never found new jobs.

What’s driving the diminishing dynamism of the American workforce? Why do so many Americans seemingly prefer to drop out of the labor market or take lower paying jobs closer to home rather than seeking better opportunities elsewhere in the country?

Is it because there are no jobs? Hardly. Total non-farm job openings are at a record high, with a million positions in blue-collar fields like construction and transportation going begging. Yet the labor participation rate in the country is at a record low.

A skills gap between employer need and worker qualifications can explain some of this gap, as well as America’s aging population. But the other big culprit is government policies that disincentive work.

Chief among them is Congress’ relaxation of the rules for claiming Social Security disability during the Reagan years so that a worker’s own subjective self assessment—rubber stamped by his own self-selected physician—would be enough to file a successful claim. What’s more, it also made the payment more generous.

The upshot was that when the Great Recession hit in 2008, many able-bodied adults went on Social Security disability after their unemployment benefits ran out and never got off. Scott Lincicome of Cato Institute notes that between 1990 and 2014, the percentage of working-age adults receiving disability more than doubled.

This meant that workers had less need to uproot themselves from their families and communities for jobs far away. The aforementioned Tennessee workers have preferred to stray not too far from their original commuting zones, for example. In other words, family ties became a barrier to—as opposed to facilitator of—individual ambition. But this dampening of drive will prevent Americans not only from adapting to the gale force winds of trade but other disruptions as well. Indeed, if China, India, and—as per Donald Trump’s new bugaboo—Vietnam, pose a mortal threat to Americans, what exactly will they do when robots arrive on the scene? Call for repealing the laws of physics? Deport scientists?

It is one thing for an intellectually challenged, self-aggrandizing, populist windbag like Donald Trump (or Bernie Sanders, for that matter) to scapegoat trade while ignoring the broad complex of government policies responsible for the plight of the American middleclass. But what exactly is Krugman’s excuse?

By SHIKHA DALMIA Mar. 25, 2016 on The Week

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