I just listened to Russ’s most-recent excellent podcast with M.I.T. economist David Autor. The subject is the effects of increased U.S. trade with China on the U.S. economy – in particular, on certain American manufacturing workers. Autor’s new paper on this topic, written with David Dorn and Gordon Hanson, is getting a lot of attention, mostly quite favorable.
I have not yet read this paper, so all that I say in this post is based upon the podcast.
In (very) short summary, Autor argues that Americans’ increased trade with the Chinese over the past few decades, while it unquestionably increased the size of America’s and China’s economic ‘pie,’ has left some American workers worse off over the long-run. Further, the extent of this harm to these U.S. workers is larger than what Autor believes economists’ priors would have predicted. The implication seems to be that freer trade is no longer as overwhelmingly positive as economists once believed: the costs are larger both in size and duration; economists’ theoretical case for a policy of free(r) trade is, therefore, weaker than even economist once believed.
Here are some reactions; I’ll likely have more later, especially after I read the paper carefully.
First (on the reasonable assumption that the podcast supplies a sound description of the main points of the paper) I agree with Scott Sumner that (a) one piece of empirical research in economics does not justify rejection of a long-standing conclusion among economists, and (2) much more importantly, it’s unclear that the findings of this paper reveal anything new or anything that should have been paradigm-shifting (or even unexpected) by those of us who accept the standard economic case for free trade.
The economic case for free trade
(1) has never denied that some workers (and other input suppliers), as well as some business owners and creditors, suffer reductions in their economic well-being as a result of changes in the patterns of trade – reductions, that is, from what that well-being would have been had trade patterns not changed;
(2) says nothing in general about how much time it takes those who are ‘harmed’ by changes in trade patterns to optimally adjust to those changes;
(3) was never premised on the argument or belief that the particular flesh-and-blood people who are ‘harmed’ by changes in trade patterns will themselves eventually adjust to these changes in ways that ensure that none of these people remain worse off than they were before trade patterns changed.
Autor would not dispute (1), but he seems to dispute (2) and (3).
He says at least twice in the podcast that during the “Bretton Woods era” – roughly mid-1940s through early 1970s – we in America saw no significant or long-lasting harm caused by changing trade patterns. That might be – and, if it be, it was indeed good. But I am unaware of any theoretical case for a policy of free trade that rests on the prediction that adjustment costs will be small, that adjustment times will be short, and that, in the end, literally everyone will be better off than he or she would have been had the particular change in trade patterns not occurred.
On this point, see Russ’s truly spectacular book The Choice.
Second, I disagree with Autor’s quick dismissal of Russ’s point that the greater availability today (compared to in the Bretton Woods era) of government cash assistance for displaced or otherwise unemployed workers might explain the lengthening of time that Autor et al. find that it takes workers today to adjust to changes in the patterns of trade. It’s true that no one wants to be unemployed, but incentives operate on the margin. With tens of millions of workers affected by changes in trade patterns, relatively small responses to even relatively small increases in government assistance – and, also, to increased wealth in society – can plausibly have detectable effects on the ways that workers respond to losing their jobs to changes in trade patterns.
Third, Autor is mistaken to equate the trade deficit with debt. A U.S. trade deficit might become American debt (as when, for example, non-Americans lend some dollars to Uncle Sam), but a trade deficit is not necessarily debt (as when, for example, non-Americans use their dollars to buy shares of stock on Wall Street). Russ rightly pressed Autor on this point, but I don’t think Autor adequately responded, for he (Autor) kept talking about the trade deficit as if it necessarily represents a drain of demand today from the American economy.
More on this subject later.