By Scott Lincicome
Monday, April 04, 2016
It is virtually impossible to tune in to political TV or
radio without hearing presidential hopeful Donald Trump promise to restore
American manufacturing glory by imposing punitive tariffs on imports from
China, Mexico, and any other country that pops into his golden dome. Trump’s
shtick, repeated ad nauseam since he first started toying with a presidential
run in the 1990s, is replete with errors and myths. But buried therein is an
important kernel of truth about America’s labor market and its distressing lack
of dynamism — a problem exposed, though certainly not caused, by free trade.
Imports have inarguably affected U.S. manufacturing
companies and workers — no serious free-trader argues otherwise. But criticism
of trade and its impact on American workers has acquired a sharper edge in the
Age of Trump, bolstered in part by a recent study from labor economists David
Autor, David Dorn, and Gordon Hanson that found that the recent surge in
Chinese imports to the United States has inflicted pronounced harms on the
wages and labor-force participation of U.S. workers in local markets (e.g., mill
towns) that face direct competition with those imports. Trump fans and longtime
trade skeptics on both the left and the right have seized on this study as the
final “proof” that free trade — in particular, trade with China — has been a
disaster for the United States and its workers, and that a heavy dose of
protectionism, through Trump’s tariffs or export subsidies, could produce a
manufacturing renaissance in America.
Reality, however, begs to differ.
First, even assuming Autor et al. are entirely correct
about the harms of Chinese imports — a conclusion about which George Mason
University economist Scott Sumner has raised legitimate questions — there
remains no evidence that imports are the primary driver of U.S.
manufacturing-job losses, or that the U.S. manufacturing sector is actually in
decline. In fact, American manufacturers began slowly and steadily shedding
workers as a share of the U.S. work force in the late 1940s and in sheer
numerical terms in 1979 — long before the North American Free Trade Agreement
existed or Chinese imports were more than a rounding error in U.S. GDP. By
contrast, the United States has gained about 54 million jobs since 1980,
30-plus million of which came after the creation of NAFTA and the World Trade
Organization in the mid 1990s.
Meanwhile, it is a myth that the United States “doesn’t
make anything anymore” or that trade agreements have caused a “giant sucking
sound” as investment and jobs go elsewhere. Our manufacturers continue to set
production and export records, and the United States is the world’s
second-largest manufacturer (17.2 percent of total global output) and
third-largest exporter. America also remains the world’s top destination for
foreign direct investment ($384 billion in 2015 alone) — more than double
second-place Hong Kong and almost triple third-place China. Much of this
investment went to U.S. manufacturing assets, as shiny new BMW, Toyota, and
other foreign-owned plants across the American South attest.
For these and other reasons, it is widely accepted that
U.S. manufacturing “decline” has been limited to employment, and that these
losses were primarily caused by productivity gains, not trade. Indeed, even the
most pessimistic academic studies on imports and manufacturing jobs have found
only a limited connection between the two. Autor, Dorn, and Hanson found in
2013, for example, that “import competition explains [only] one-quarter of the
contemporaneous aggregate decline in US manufacturing employment” between 1990
and 2007. Other studies have been even more sanguine. For example, a recent
Ball State study attributed almost 90 percent of all U.S. manufacturing-job
losses since 2000 to productivity gains. “Had we kept 2000-levels of
productivity and applied them to 2010-levels of production,” the authors write,
“we would have required 20.9 million manufacturing workers. Instead, we
employed only 12.1 million.” Thus, it is simply wrong to blame import competition
for the disappearance of American manufacturing jobs or the supposed
destruction of U.S. industrial capacity.
Second, despite its harms to some manufacturing
interests, free trade also has generated broad-based benefits for U.S.
consumers, businesses, and workers. In The
Payoff to America from Global Integration, economists with the Peterson
Institute found that past global-trade liberalization through the WTO and other
efforts generated between $2,800 and $5,000 in additional income for the average
American and between $7,100 and $12,900 for the average household. The consumer
gains from trade disproportionally accrue to America’s poor and middle class. A
2015 study by Pablo Fajgelbaum and Amit Khandelwal finds that these groups,
because they concentrate spending in more-traded sectors such as food and
clothing, enjoy almost 90 percent of the consumer benefits of trade. These
benefits are even more concentrated for Chinese imports, since poor and
middle-class American consumers are more likely than their richer counterparts
to shop at “big box” stores such as Target and Walmart that carry a lot of
made-in-China goods.
American businesses, of course, also benefit. More than
half of all imports (including those from China) are inputs and capital goods
consumed by other American manufacturers to make globally competitive products.
Raising these firms’ costs via tariffs would mean fewer employees, if not
outright bankruptcy — a particularly bad outcome given that downstream
industries (e.g., steelmakers) typically employ far more workers than their
upstream counterparts (e.g., steel users). Non-manufacturers benefit, too —
whether they be retailers such as the Gap, transportation and logistics
companies such as FedEx, or multinational firms such as Apple, which assembles
iPhones in China but generates most of their final sale price through
marketing, design, engineering, and even manufacturing done in the United
States. (Chinese manufacturers themselves earn only a few dollars from an
iPhone’s assembly.) U.S. exporters such as Caterpillar and Boeing also gain
from trade, and many foreign markets wouldn’t be open without reciprocal trade
agreements such as NAFTA. According to the Business Roundtable, in 2014, U.S.
free-trade-agreement (FTA) partners purchased 13 times more goods per capita
from the United States than non-FTA countries did.
Third, free trade and protectionism raise serious moral
issues. Protective tariffs force American families and businesses to subsidize
— through hidden, regressive taxes — the small share of U.S. manufacturers and
workers (and the tiny portion of the total economy and work force) that compete
directly with the imports at issue. For this reason, labor unions such as the
United Steelworkers expend considerable financial and in-kind resources
lobbying the federal government to insulate them from foreign competition, at a
huge cost to American consumers. When the Steelworkers convinced President
Obama to impose 35 percent tariffs on Chinese tires in 2009, the result was,
even under the best assumptions, a few unionized jobs saved at a cost to U.S.
consumers of $900,000 per job — precisely the type of crony-capitalist
boondoggle that, in any form other than that of a hidden tax targeting a
foreign “adversary,” would engender hostile political opposition from the
right.
Finally, even if it were morally and economically
advantageous for the United States to embrace protectionism, it’s almost
certainly impossible for it do so. U.S. manufacturers have evolved over decades
to become integral links in a breathtakingly complex global value chain —
whereby producers across continents cooperate to produce a single product based
on their respective comparative advantages — that could not be severed without
crippling both them and the global economy. According to the WTO, for example,
almost 40 percent of all U.S. exports are involved in global value chains;
almost 31 percent of exports from China, Canada, or Mexico contain U.S. inputs;
and almost 34 percent of U.S. exports contain inputs from these same three
countries. Perhaps the automobile industry, more than any other, makes this
point clear: The National Highway Traffic Safety Administration estimates that
the American “Big Three” automakers produce only five of the top 20 most
“domestic” cars (defined by their total share of U.S. and Canadian auto parts)
sold in the United States in 2016. Killing the “virus” of global trade
integration would surely kill the host, too.
* *
*
Given these realities, even the authors of the
protectionists’ favorite new study reject protectionism and instead point to
problems in the U.S. labor market that keep it from adjusting adequately to the
effects of trade or other disruptions. In releasing a previous study of trade
with China, David Autor in 2012 stated, “I’m not anti-trade, but it is
important to realize that there are reasons why people worry about this issue.”
He elaborated: “We do not have a good set of policies at present for helping
workers adjust to trade or, for that matter, to any kind of technological
change.” His co-author Gordon Hanson told the New York Times earlier this year: “The problem is not trade liberalization.
. . . The problem is that labor-market adjustment is too slow.” Indeed, the
very study on which nouveau protectionists rest their hats states plainly that
the problem is not simply (if at all) the impact of Chinese imports but rather
that “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.” They find “ultimate and sizable net gains” from trade, but these
are “realized only once workers are able to reallocate across regions in order
to move from declining to expanding industries.” Thus, the paper recommends
that trade and labor economists focus on raising “the speed of regional
labor-market adjustment to trade shocks.”
U.S. labor-market data attest to this problem — one that
exacerbates job dislocations arising from trade, technological innovation, or
any other disruptive but ultimately beneficial phenomenon. Total non-farm job
openings, for example, are at their highest point on record (including well
over a million unfilled jobs in “blue collar” fields such as manufacturing,
construction, and transportation) and continue to outpace hirings. Workers have
recently appeared more willing to quit their jobs and seek others, but the
civilian labor-force-participation rate has hovered near its lowest point (62.5
percent) since the late 1970s — a problem caused in part by the fact that
workers have become less likely to move to areas with better employment
opportunities, choosing instead to remain in places hit hard by the Great
Recession and to drop out of the labor force entirely.
More-complex measures of labor dynamism corroborate the
aforementioned numbers: The Goldman Sachs Labor Market Dynamism Tracker, which
synthesizes various labor reports, shows that, after remaining positive through
the 1980s and ’90s, U.S. labor dynamism — the natural, beneficial replacement
of old jobs with new ones, owing in part to the willingness of workers to seek
new jobs and their ability to obtain them — dove into negative territory in
2001 and has remained there ever since. A recent study by Steven Davis and John
Haltiwanger found that the “U.S. economy experienced large, broad-based
declines in labor market fluidity in recent decades,” and that this reduction
in fluidity had “harmful consequences for productivity, real wages and
employment.”
* *
*
Some of the troubling decline in U.S. labor dynamism is a
matter of an aging work force disproportionately composed of Baby Boomers —
older workers are far less likely than their younger counterparts to change
jobs. However, three types of distinct government policy failures have
amplified the problem. First, state and federal policies prevent Americans from
saving enough wealth to cope with unexpected financial calamities or to enable
them to take professional risks. Over 60 percent of Americans have less than
$1,000 in their savings accounts, and economists on the right and the left
agree that our current tax and entitlement policies discourage private savings
— unlike, say, those of Canada, which has a highly successful and popular
system of tax-free savings accounts.
Meanwhile, the costs of health care, child care, and
education — all highly subsidized, protected, and regulated — have risen far
faster than the rate of inflation, and there is little doubt that government
intervention has played a role in this trend. The New York Fed in 2015, for
example, found a strong link between federal student aid and the skyrocketing
cost of tuition. Such cost increases disproportionately harm poor and
middle-class Americans and force them to spend more of their stagnating wages
on these essential services — money that could have gone into a savings
account. Indeed, the rampant inflation in these sectors stands in stark
contrast to the declining prices of other goods, such as clothing, toys, and
electronics, that are less subsidized, more open to competition (foreign and
domestic), and less subject to onerous government regulation.
Second, government policy actively discourages Americans
from finding work in burgeoning fields. Perhaps the most brazen example of such
policies is the federal tax code’s business deduction for work-related
education, which permits a worker to deduct education and training expenses
from his taxable income, but only if they relate to his current job. Thus, a
textile-factory worker can get a tax benefit for new training on the latest
garment machine, but he cannot get the same benefit for night classes to become
a certified IT specialist. Such a system discourages workers in dying fields
from preparing themselves for a new career.
An assortment of other government policies also
undermines a worker’s ability or willingness to change jobs. In their
aforementioned study on collapsing U.S. labor dynamism, Davis and Haltiwanger
identified five specific contributors: employment-protection laws (which
protect employees from being fired because of certain actions or immutable
characteristics) that “suppress labor market flows, sometimes to a powerful
extent”; laws that erode the employment-at-will doctrine (which permits
employers to fire employees without cause); occupational-licensing laws and
other labor-supply restrictions; minimum-wage laws; and the tax code’s
preference for employer-provided health insurance. At the same time, the United
States has witnessed a distressing collapse in business dynamism — the creation
and destruction of firms — which has had the consequence of entrenching workers
in large, existing firms while reducing job openings in new and innovative
ones. According to one recent study, a big cause of the recent collapse of
business dynamism is the federal government’s response to the Great Recession,
which involved “defensive policies to protect large firms and existing
employment, rather than proactive policies to encourage entrepreneurship and
new venture/job creation.” None of this is good for people looking for a job or
considering a career change.
Finally, current government policy has failed to help
displaced workers when disaster strikes, and has very likely made things worse.
Most notably, the Trade Adjustment Assistance (TAA) program, intended to subsidize
U.S. workers affected by import competition, is a notorious failure: Not only
are TAA’s costs too high and its eligibility criteria too loose, but multiple
studies commissioned by the Labor Department have found that TAA participants
are worse off, as measured by future wages and benefits, than similarly
situated jobless individuals outside the program. (TAA also breeds the
misconception that trade is somehow different from, and worse than, other forms
of beneficial economic disruption, such as automation.)
Other federal job-training programs are similarly
inefficacious. A 2011 Government Accountability Office study, for example,
found that the federal government had 47 different, often overlapping
job-training programs spanning nine federal agencies at a cost of $18 billion
per year. Only five had been subject to any sort of impact analysis since 2004;
thus, “little is known about the effectiveness of [the] employment and training
programs” identified. A 2014 reform of this system, the Workforce Innovation
and Opportunity Act, eliminated 15 programs (while maintaining the rest,
despite their long history of subpar results) but failed to impose any sort of
rigorous multi-site evaluation and accountability system. Without these simple
reforms, or other, more radical ones, there is no way to ensure that the
“reformed” federal job programs won’t continue their long record of failing
American workers and taxpayers.
Unfortunately, the private sector has not succeeded where
our problematic government job-training system has failed, and government
policy may actually deter it from attempting to do so. Private-sector
job-training programs, for example, seem to be disappearing: The Labor
Department estimates that “formal programs that combine on-the-job learning
with mentorships and classroom education fell 40% in the U.S. between 2003 and
2013,” and the 2015 Economic Report of the President found substantial declines
in the percentages of American workers receiving employer-paid training (19.4
percent to 11.2 percent) or on-the-job training (13.1 percent to 8.4 percent)
between 1996 and 2008. There are legitimate concerns that such programs have
simply been sloughed off in favor of ineffective government programs. Tax and
regulatory costs might also play a discouraging role: According to one
analysis, a $14-per-hour worker has a true cost to his employer of almost $20
per hour because of federal and state taxes plus an array of mandated and
voluntary benefits and job training. As labor costs continue to rise, companies
are more often looking for skilled workers whom they don’t have to train.
Federal unemployment benefits also have the potential to
discourage workers from searching for and obtaining a job. Most troubling is
the current Social Security Disability Insurance (SSDI) system, which, because
of its generous benefits, lax eligibility criteria, and lack of rigorous
enforcement, has become, according to the Manhattan Institute’s Scott Winship,
“a permanent dole for a rising number of adults with limited earning potential
who clearly are physically able to work.” The numbers bear this out: Between
1990 and 2014, the percentage of working-age individuals who receive SSDI
benefits more than doubled, from 2.3 percent to 5.1 percent. Basic unemployment
insurance also raises concerns: Four economists examined the effects of North
Carolina’s 2013 cuts to unemployment benefits and found that previous benefit
extensions had had a significant negative effect on the state’s employment
level, number of job openings, and labor-force-participation rate — harms that
“dominate any potential stimulative effect that some ascribe to such policies.”
The same economists found similar discouraging results at the national level.
* *
*
Free trade — with China or any other country — has
demonstrable benefits for American families and businesses. To the extent he
denies this, Donald Trump is entirely wrong. However, the economic anxiety
propelling Trump reflects very real problems in America’s labor market —
problems caused not by Chinese imports or any other type of creative
destruction but by multiple government-policy failures and a resulting collapse
of labor dynamism. The solutions to these problems are complex and deserving of
substantial debate. But the analysis I have presented should provide some
clues. Most simply, U.S. workers should receive the same tax benefit for job
training unrelated to their current job as they do now for training related to
it. SSDI and unemployment-insurance eligibility requirements should be
tightened and redesigned to ensure that able-bodied adults are looking for, and
accepting, available work. Occupational-licensing reform should be a priority,
particularly at the state level. Federal job-training programs should be
consolidated, if not eliminated outright — perhaps through a simple voucher for
dislocated workers to use at accredited community colleges or vocational
schools, or a single block grant to states for local experimentation with
programs that support, instead of crowd out, private-sector training
initiatives such as apprenticeships.
More broadly, tax-free savings accounts, similar to those
in Canada, also should be explored, as should ways to increase the portability
of health care and other benefits currently tied to people’s jobs. (Eliminating
the tax preference for employer-provided health insurance would be the most
obvious solution.) Finally, the federal government should more seriously
consider, and attempt to rectify, the inflationary harms caused by its
subsidization and overregulation of basic essential services such as health
care and higher education — opening them to global competition would be a great
place to start.
None of these ideas is a silver bullet, but the problems
they would seek to address, and the palpable economic anxiety of Americans,
clearly show that reform is needed. Protectionism not only would ensure that these problems
aren’t fixed but would actually make things far worse.
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