Beat the Press is Dean Baker's commentary on economic reporting. Dean Baker is co-director of the Center for Economic and Policy Research (CEPR).
By Dean Baker and Lara Merling
There have been several efforts by the media and various organizations funded by the Peter G. Peterson Foundation to highlight projected shortfalls in the Social Security trust fund in the context of the presidential campaign. They have argued that candidates should be proposing plans to deal with these shortfalls and in particular that these plans should include cuts to Social Security. Implicitly, or sometimes explicitly, they have argued that the projected tax increases needed to maintain full funding for the program would be too large a burden on taxpayers and the economy.
In this context, it is worth remembering that the economy’s output has fallen sharply relative to the levels projected before the downturn in 2008–2009. If the economy had grown as was projected by the Congressional Budget Office in 2008, it would be more than 10.5 percent larger (almost $2 trillion) than it is today. This lost output comes to more than $6,200 per person for every man, women, and child in the country.
The exact cause of this loss in output is not easy to determine. Usually the economy bounces back from a recession and more or less returns to its trend path of growth. That didn’t happen with this recession. A main reason it didn’t bounce back is that there was no source of demand to replace the demand generated by the housing bubble. The bubble led to a massive boom in construction. It also caused consumption to jump as people spent based on their bubble generated housing wealth.
The NYT had its second major article in less than a month on the alleged mistreatment of a small public pension fund by the California Public Employee Retirement System (Calpers). The focus of this piece is the bill that the small California town of Loyalton faces from terminating its pension plan for four retirees and converting to a 401(k) system. According to the piece, the city council apparently did not understand the information Calpers gave it on termination costs when it voted in 2012 to end its pension with Calpers. This is unfortunate, but it is not clear that the council's confusion is an appropriate topic for a major NYT piece.
The prior piece discussed problems involving pensions for six workers for Citrus Pest Control District No. 2. They discovered that there would be substantial costs associated with terminating their participation in Calpers and switching to a 401(k) pension. While that piece, like this one, implied that Calpers has been doing something improper; in fact, the system has provided all the appropriate information to its participants.
It is certainly plausible that these very small systems with no professional administrators may not understand the information given to them by Calpers. In this case, the problem is a lack of sophistication on the part of the people managing these small funds, not Calpers.
Of course, this is the argument as to why a defined benefit system like Calpers is better than a 401(k) type system where individuals have to make their own investment decisions. Most people are not financially sophisticated. As a result they often make bad choices in managing their money. This is especially likely when people pushing various funds are in a position to make large fees by promoting bad choices.
It is striking that the NYT has now devoted a large amount of space to the problems facing a total of ten workers in the California Public Employees Retirement System. It might be appropriate for it to shift its focus to the tens of millions of workers without adequate retirement plans.Add a comment
We can always count on Robert Samuelson to give us some economic misinformation on Monday morning and he didn't let us down this week. In a very balanced column (yes, many tons of sarcasm here) decrying the economic proposals of both Donald Trump and Hillary Clinton he told readers:
"The United States runs chronic trade deficits because the dollar serves as the main global currency. This raises its exchange rate, putting U.S. manufacturers at a disadvantage."
This is wrong at just about every level. First, there are multiple reserve currencies, not just dollars. And, they trade frequently against each other, so there is a limit to how much the dollar will rise relative to the euro, yen, or pound because it is the main reserve currency. So, that is not the biggest part of the story of the trade deficit.
The more important part of the story is that countries are holding much larger reserves relative to their GDP now than they did in the years prior to the East Asian financial crisis in 1997. This is due to the harsh terms of the bailout imposed by the Clinton administration through the I.M.F. As a result of these terms, virtually every country in the developing world in a position to do so began accumulating massive amounts of foreign reserves. This was to avoid ever having to be in the same situation as the East Asian countries and have to rely on the I.M.F. for help.
The result was that instead of being net importers of capital from rich countries and running trade deficits, as standard economic theory would predict, developing countries became large exporters of capital running trade surpluses with rich countries. This was the origin of the "global savings glut" and secular stagnation that many prominent economists have complained about in recent years.
This is all worth mentioning in the context of the rest of Samuelson's piece since he seems obsessed with the idea that we face inadequate supply when the economy's problem is quite obviously one of inadequate demand. In other words, he is recommending that someone on the edge of starvation go on a diet.
His complaint about Hillary Clinton's proposals to expand Social Security and pay for college tuition for poor and middle-class children is that we don't have enough money. The whole story of secular stagnation is that we aren't spending enough money.Add a comment
The line that large numbers of people are out of work or seeing declining wages due to the wonders of new technology is really popular among pundits and elite-types. If technology is the culprit then we can all wring our hands and say how unfortunate it is that we have these losers, but it means that the folks on top are not to blame. After all, we aren't going to blame the Steve Jobs or Elon Musks of the world for their great innovations.
For this reason, it is understandable that news outlets owned by rich people would endlessly promote this line even though it is utter nonsense with no basis in reality. Yet one more piece in this genre is a column by Ryan Avent in the Guardian. The column is taken from his new book, "The Wealth of Humans", which touts the great developments in technology in recent years. The column sees large numbers of workers being displaced by technology, leading to wide-scale unemployment.
The obvious problem with this argument for those in the reality-based community is that it is a story of massive unemployment due to rapid productivity growth. But we haven't seen rapid productivity growth in recent years. In fact, productivity growth has averaged just 1.0 percent annually over the last decade. That compares to a rate of almost 3.0 percent in the decade from 1995 and 2005 and the quarter century from 1947–1973.
Year over Year Change in Productivity
Source: Bureau of Labor Statistics.
So what we are seeing here is a continuing effort to misrepresent the nature of the problem of unemployment with something which clearly cannot offer a plausible explanation. If productivity growth is very slow then it doesn't make sense to argue that people are losing their jobs because of rapid productivity growth.Add a comment
The Brexit vote was a case where the elites were clearly aligned against the U.K. leaving the European Union. While they had many good arguments on their side, and much of what the pro-Brexit crew was saying was nonsense, some of the elite gloating now also falls into the nonsense category.
In particular, the fall in the British pound is being taken as evidence that Brexit was a mistake. Actually, this is not really evidence of anything. The pound had become seriously over-valued in recent years causing the U.K. to run a current account deficit that is projected to be almost 6.0 percent of GDP for 2016. This is almost certainly not sustainable. The current account deficit also leads to a large gap in demand, which at the moment appears to be filled primarily by demand generated by a housing bubble.
Note that this is an economic quagmire created by the British elite: the establishment folks running the Bank of England and the Treasury Department. The Brexiters had nothing to do with it.
The correction for an excessive current account deficit is a fall in the value of the currency, which the U.K. is seeing now. Rather than being a negative for the economy, this is a positive development. It is the only plausible mechanism through which the U.K. can get closer to balanced trade. While the decline has undoubtedly been hastened by fears over Brexit, the bigger problem was letting the pound get so over-valued in the first place.
It is also worth noting that if the value of the pound is measured relative to the euro rather than the dollar, which is arguably the more appropriate yardstick, the pound has not fallen that sharply. It is still well above the lows it hit relative to the euro in 2008 and 2009.
As the U.K. loses part of its financial industry in the fallout from Brexit, it will need increased output in other areas to fill the gap created. A lower-valued pound would be an important part of this story. A lower-valued pound will make a wide range of U.K. produced goods and services more competitive internationally, reducing the size of the country's trade deficit.
The long and short is that anyone who thinks the falling pound is the best evidence of the foolishness of Brexit doesn't have a very good argument for their position.Add a comment
The NYT printed a column by Arthur Brooks which beautifully displayed how political elites misunderstand the appeal of Donald Trump. The piece, which is titled "those who don't understand Trump are doomed to repeat them," complained that many people see Trump's rise as meaning, "that mainstream positions on issues such as trade and immigration must be fundamentally rethought."
Brooks goes on to assert:
"The real issue is weak, unevenly shared growth. If we addressed this issue, and if people felt their lives improving, the appetite for invective on secondary issues such as trade and immigration would dissipate. So walking away from free enterprise principles on trade and immigration is not the solution."
While the real issue is in fact unevenly shared growth, the fact is that we have not been following "free enterprise" principles on trade and immigration. Longer and stronger patent and copyright protections, which are the equivalent of tariffs of several thousand percent, are not "free enterprise." Nor is a licensing system which prevents foreign trained doctors from practicing in the United States unless they complete a residency program in the United States part of most definitions of "free enterprise." (Dentists have to complete a dental school in the U.S., although recently graduates of Canadian schools were also allowed to practice here.)
As a result of patent and related protections for prescription drugs we will pay more than $440 billion for drugs that would likely sell for around 10 percent of this price in a free market. The difference of close to $400 billion a year is more than five times the amount that we spend on food stamps and twenty times the amount that we spend on TANF. The "doctor tax" that we pay as a result of protectionism is close $100 billion annually. This is the difference between what we pay for doctors in the U.S. and what we would spend if our doctors were paid the same as doctors in Germany, Canada, or other wealthy countries.
These and other forms of protectionism are responsible for "unevenly shared growth." The Trumpites will thrive both as long as such protections persist and even more so as long as our elites pretend that they are just the free market. This is of course the point of my new book, Rigged: How Globalization and the Rules of the Market Economy Were Structured to Make the Rich Richer.Add a comment
By Dawn Niederhauser
My name is Dawn Niederhauser, and I am the Director of Development for the Center for Economic and Policy Research. You may have received some emails from me in the past (OK I never signed them, but if you were asked to donate, well, that was me). This time I am writing to you directly because I have some exciting news — and I want to make you an offer that I hope you won’t be able to refuse.
The exciting news first: CEPR’s Co-Director Dean Baker has written a new book! Titled Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer, the book looks at the various ways in which the elites rig the game to ensure that income flows upward. It also offers policy prescriptions that would serve to reverse this trend.
Early blurbs are glowing:
"This is an important and compelling book about how the rules governing the American economy have been rigged in favor of those with the wealth and political clout to rig them. Baker shows why and how the nation's staggering inequality has been the consequence of staggeringly unequal political influence.” writes Robert B. Reich, while Katrina vanden Heuvel of The Nation says “Dean Baker’s timely book Rigged is a must-read for the many who believe the status quo is unsustainable."Add a comment
Okay, that's not exactly what this piece on trade as a way to promote world peace said, but it is a logical implication. The piece was presenting the argument that free trade is a way to promote world peace since countries that trade with each other don't want war to get in the way of their prosperity.
Of course if we accept this argument, then it can't possibly make sense to claim that protectionist measures that some groups like are okay. So the protectionist measure that prohibits foreign doctors from practicing in the United States unless they complete a U.S. residency program is an obstacle to world peace. The same applies to the ban on foreign dentists who have not completed a dental program in the U.S., or in recent years, Canada as well. In the same vein, patent and copyright protections, which can be equivalent to tariffs of many thousand percent, should also be seen as major barriers to world peace.
After all, no one has made the argument that a protectionist barrier does not threaten world peace if rich people like it, although a Nobel prize in economics probably awaits anyone who does make this case.Add a comment
There aren't many people who still regard former Treasury Secretary Robert Rubin with much respect. After all, his high-dollar policy was what caused the U.S. trade deficit to explode beginning in the late 1990s. It went from just over 1.0 percent of GDP in 1996 to almost 4.0 percent by the time President Clinton left office in 2000, and eventually peaked at almost 6.0 percent of GDP ($1.1 trillion in today's economy) in 2005. These trade deficits created enormous holes in demand which were filled by the stock bubble in the late 1990s and the housing bubble in the last decade.
In both cases, the collapse of the bubbles were really bad news for the country. The labor force didn't get back the jobs lost from the recession following the collapse of the stock bubble until January of 2005. At the time it was the longest period without net job growth since the Great Depression. Of course, the impact of the recession following the collapse of the housing bubble was even more severe.
Given this history, most folks don't hold Robert Rubin in high regard today, with the exception of the Washington Post. Yesterday, the paper gave Rubin the opportunity to share his wisdom in his own column. Today, it gave a column to two of the leaders of the Wall Street-funded group Third Way. The column was a warning to Hillary Clinton not to fill her cabinet with progressives. It instead argued for the importance of people who understand capital markets, with Robert Rubin topping its list as an example of the sort of person that Secretary Clinton should be looking for.
While the rest of us may not think too well of Rubin at this point, there is a sense in which it is possible to think highly of the guy. Rubin managed to walk away with over $100 million from his stint at Citigroup, a bank which was at the epicenter of the financial crisis and perhaps the bank that most directly benefitted from the deregulation that Rubin engineered as Treasury Secretary.
In this sense, just as Rudy Giuliani argued that Donald Trump was a genius for managing to avoid paying taxes for 18 years, perhaps our Third Wayers think of Rubin as a genius for being able to personally profit from an economic catastrophe. It's good to know that we have such geniuses in both political parties.Add a comment
The desire to beat up on Donald Trump is understandable, but it is important to realize that not everything he says is wrong. For example, according to press accounts he adheres to the belief that the world is round.
Anyhow, Greg Ip goes a bit overboard in a Wall Street Journal piece where he argues that Trump's claim that a trade deficit can be reduced or eliminated with tariffs is wrong. Referring to Trump's approach to the trade deficit, Ip tells readers:
"But that is out of step with standard economics, which predicts that a country’s trade balance is determined by the gap between what it invests and saves, not by tariffs."
As an accounting identity a country's trade balance is always equal to the gap between what it invests and what it saves. This means that if the U.S. invests $200 billion a year more than it saves, then it will by definition be true that it has a trade deficit of $200 billion.
However, this accounting identity tells us nothing about causation. If we are below the full employment level of output, and Donald Trump's tariffs or threats of tariffs, reduce our annual trade deficit by $200 billion (@ 1.1 percent of GDP), then this would lead to additional employment, output, and savings in the United States. A standard multiplier would suggest that a $200 billion reduction in the size of the trade deficit would lead to a $300 billion increase in GDP. This higher GDP would lead to more corporate and individual savings, as well as more tax revenue, which also count as savings. (The growth in GDP would also led to more imports, partially offsetting the initial improvement in the trade deficit.)
In other words, it is totally possible to reduce the size of the trade deficit as long as the economy is below its full employment-level of output. This is basic economic theory. Folks should be clear on this point, even if it suggests that Trump might be partly right on something.Add a comment
The Washington Post gave a column to Robert Rubin, the man best known for setting the U.S. economy on a path of bubble-driven growth in the late 1990s, the opportunity to share his wisdom on the economy. Unsurprisingly, Rubin proposes to cut Social Security and Medicare, as he has in times past. Of course, Rubin is not likely to need these programs since he earned over $100 million in his stint at Citigroup in the housing bubble years. The Financial Crisis Inquiry Commission recommended that the Justice Department investigate Rubin's conduct at Citigroup during this period but for some reason it seems the Justice Department did not follow through.Add a comment
It's a sad day when the Republican Presidential nominee is closer to the mark on an issue than a major news outlet, but that appears to be the case when it comes to CNN and trade. CNN managed to get badly confused as it confronted Trump's "myths" with "reality. It rightly criticized the idea that trade is a zero sum game, trade is typically mutually beneficial so that both parties gain, but the situation is still not quite as CNN presents it.
Its myth #1 is that "America is losing money to Mexico, China, and others." The piece then gives us the "reality," which it claims is:
"There's no proof that a trade deficit is bad for an advanced economy like the United States."
While a trade deficit is not necessarily bad for an advanced country (actually, trade deficits are likely to be worse for advanced countries, in theory fast-growing developing countries should be the ones running deficits), it certainly is bad in a context where an economy is operating below its full employment level of output. The trade deficit means that spending in the United States is creating demand in other countries rather than the United States. In a context of secular stagnation, which many economists believe the U.S. is now experiencing, the trade deficit is making the lack of demand worse than it would otherwise be.
It's true that the demand lost to a trade deficit could be offset by a larger government budget deficit, but at the moment there is little explicit support in either political party for larger budget deficits. This means that there is nothing to offset the demand lost to trade deficit, therefore the trade deficit means slower growth and higher unemployment.Add a comment
Economists just hate to let the data get in the way of a good morality tale. For this reason we keep seeing stories about the problem of men not working, and in particular less-educated men not working. The big theme here is that technology has eliminated the need for the sort of work these less-educated men do. We got another example in this genre from Justin Fox in a Bloomberg piece.
The big problem with this story is that there has been a decline in employment rates for both men and women, including those with college degrees, since 2000. Furthermore, if we focus on less-educated workers (those without college degrees) the drop in prime-age employment rates has been larger for women than for men. (The Fox piece tries to make a case for the technology story with data that refuse to cooperate. A chart in the piece that is supposed to show men dropping out of the labor force everywhere, shows that in Canada the rate of non-participation went from 9.5 percent in 1995 to 9.5 percent in 2015. In Germany it fell from 8.4 percent in 1995 to 7.6 percent in 2015.)
This suggests that the problem is a lack of demand in the economy, not the destruction of jobs held by less-educated men due to technology. The remedy in this case would be create more demand by policies like getting the government to run larger budget deficits or by getting the trade deficit down through a lower valued dollar. We can also look to create more jobs by reducing the duration of the average work year through policies like paid sick days and family leave and mandated vacation time. In this story, we certainly wouldn't want the Fed to deliberately slow the economy and rate of job creation with higher interest rates.
It is worth noting that the dismal labor market prospects of formerly incarcerated people is a real issue. The piece is right to highlight this issue, it just cannot explain the larger falloff in employment rates over the last 15 years.Add a comment
At a time when we are seeing the slowest productivity growth on record the NYT decided to devote a Room for Debate section to the question of how we will deal with surging productivity (called "automation" in the description). Blaming the problems of high unemployment and low wages on automation has certain attractive features. It makes our major social problems the result of the development of technology rather than bad economic policy. This is a longer topic (yes, it will be addressed in my forthcoming book), but let's just say that it is not only Donald Trump's supporters who have a tenuous grip on reality.Add a comment
A NYT piece discussing the tax rules surrounding business losses like the $916 million loss taken by Donald Trump on his 1995 tax return left out an important aspect of the law. The piece points out that many small businesses are organized as "pass-through" corporations, which means that the profits, or losses in this case, are directly passed through to the owners to declare on their tax returns.
However, these corporations also have the important benefit of limited liability. This means that if Donald Trump's business dumps hazardous waste in a poor neighborhood, leading to an increase in birth defects and cancer, the victims can only sue Donald Trump's corporation, not Donald Trump. If the corporation goes bankrupt, then the victims would be out of luck, even if Donald Trump still was a very rich person. They would not be able to go after his personal assets.
The rationale for the corporate income tax is that the corporation is an artificial individual. (This is also the basis under which the Supreme Court has bestowed it with free speech rights.) The income tax is a quid pro quo for the benefits of corporate status. A pass-through corporation gets to enjoy the benefits of corporate status without having to pay the corresponding taxes.
It may not take a "genius" like Donald Trump to take advantage of this loophole, but it was a pretty good sleight of hand to slip it into the tax code. It's yet another way to redistribute income upward.Add a comment
The NYT is bending over backwards to promote the protectionist pattern of trade policies of recent presidents. Yes folks, it is protectionist even if they call them "free trade" deals. Patent and copyright protection are protectionism, even if your friends benefit from them. And when we spend an extra $100 billion a year on doctors, compared with pay in Canada and Western Europe, because doctors who don't complete a U.S. residency program are not allowed to practice in the United States, that is protectionism.
So the story is what happens if we try to bring back some of the barriers to trade in manufacturing, the area where our political leaders have gone farthest to reduce barriers. In discussing NAFTA the NYT goes to great lengths to tell us any rollback would be a disaster. It explains how our industry has become closely integrated with Mexico's then warns:
"What we do know is that even relatively small tariffs can stand in the way of the kind of supply networks on which many modern industries are based. With these networks, goods can cross back and forth across national borders multiple times as part of the pipeline that leads to a finished automobile or a computer or even a side of beef. It’s not that companies couldn’t adjust; over time they could. It’s that the networks evolved this way for a reason, and readjusting would come at a considerable cost."
Really? Even small tariffs would upset everything. Let's see, suppose the U.S. imposed a five percent tariff on everything imported from Mexico. As a first approximation, everything we bought from Mexico would cost five percent more than it did previously. In reality, this price increase would not be passed on in full, but this is a good starting point. The NYT tells us that this would be really bad news.
Okay, suppose the dollar falls by five percent against the Mexican peso. As a first approximation, everything we bought from Mexico would cost five percent more than it did previously. In reality, this price increase would not be passed on in full, but this is a good starting point.Add a comment
The NYT had a major article on the problems of the health care exchanges established under the Affordable Care Act (ACA). The piece implied that the problem is that too many people are opting to go without insurance, even bringing up the silly old line about the lack of young healthy people. (The exchanges need healthy people, it doesn't matter if they are young. In fact, older healthy people are more profitable since they pay higher premiums.)
In fact, fewer people are going without insurance than had been predicted when the ACA was passed. In 2012, before the key provisions of the ACA took effect, the Congressional Budget Office (CBO) projected that the uninsured population would fall to 32 million by 2015. In fact, it fell to 32 million by 2014, a year in which it was projected there would still be 38 million uninsured people. According to data from Gallup, the number of uninsured non-elderly fell to less than 28 million by the fourth quarter of 2015. (The 2012 projections also assumed that all states would expand Medicaid since it preceded the Supreme Court ruling that allowed states to opt out.)
The reason that the health care exchanges have had lower than predicted enrollments is that fewer employers have dropped employer based insurance than expected. This is the sort of thing that a major article on unexpected problems in the exchanges should have noted.Add a comment
Gretchen Morgenson had an interesting piece pointing out that it is rare that corporate boards ever clawback substantial sums from CEOs involved in illegal or inappropriate activity. (The immediate context is the clawback of some future performance pay from Wells Fargo CEO John Stumpf.) The issue, as Morgenson presents it, is that boards don't generally do clawbacks except where it is legally required.
The point is that boards do not want to do clawbacks. This raises the obvious question as to why boards would not want to clawback money from CEOs?
Corporate boards are supposed to be working for shareholders. If they have a legal basis for getting extra money for shareholders by taking back pay from a CEO, they should want to do it. The assumption in Morgenson's piece, which is undoubtedly accurate, is that the boards are allied with the CEO. They don't want to take away from money from him/her unless they are forced to by the law.
This is the context in which CEOs like John Stumpf can earn close to $20 million a year, more than 500 times the pay of the median worker. And then we can count on leading policy experts to tell us the problem is that most workers lack the skills to compete in the modern economy.Add a comment
In an article reporting on Senate Majority leader Mitch McConnell's statement that he will not bring up the Trans-Pacific Partnership (TPP) in a lame duck session of Congress, the Post asserted:
"Some Republican lawmakers typically inclined to support trade deals have objected to some provisions in the TPP that could hurt tobacco and pharmaceutical companies."
Actually, there are no provisions in the deal as now written that "hurt" tobacco and pharmaceutical companies. The provisions in question don't help the industries as much as they would like.
In the case of the tobacco industry, it is not guaranteed the same access to investor state dispute settlement tribunals as other industries. The pharmaceutical industry only got a guarantee of the equivalent of eight years of marketing exclusivity as protection against biosimilar drugs. While the industry wanted this protection for 12 years, it currently has no guarantee of protection, so the issue is one of how much it will gain.
It is understandable that powerful interests would look to get as much as possible out of a trade and regulatory pact like the TPP, but it is highly misleading to report their failure to get everything they want as being hurt by the deal.Add a comment
A headline of a NYT business section piece confidently told its readers that "China manipulates its currency, but not in the way Trump claims." The gist of the argument is that China has recently sold off some of its foreign exchange reserves in order to raise the value of its currency. It goes on to assert that because the inflow of foreign investment into China has slowed, its currency should fall if left to market forces.
Actually, China still holds well over $4 trillion in foreign reserves counting the money in its sovereign wealth fund. Given standard rules of thumb, a country with China's level of imports would be expected to hold between $500 billion and $1 trillion in foreign reserves. These additional holds of reserves have the effect of keeping down the value of China's currency, just as Donald Trump claims. (I will not vouch for the fact that this is what Trump is thinking when he complains about currency management.)
It is also worth noting that even though China's economy has slowed, it is still growing far faster than the economies in Europe, Japan, and the United States. This would be expected to lead to an inflow of capital to China, which would correspond to China running a trade deficit. Instead, China is continuing to run a trade surplus of between 2–3 percent of GDP.
In short, Trump is much closer to the mark on this one than the NYT.Add a comment
Most workers suffer serious consequences when they mess up on their jobs. Custodians get fired if the toilet is not clean. Dishwashers lose their job when they break too many dishes, but not all workers are held accountable for the quality of their work.
At the top of the list of people who need not be competent to keep their job are economists. Unlike workers in most occupations, when large groups of economists mess up they can count on the media covering up their mistakes and insisting it was just impossible to understand what was going on.
This is first and foremost the story of the housing bubble. While it was easy to recognize that the United States and many other countries were seeing massive bubbles that were driving their economies, which meant that their collapse would lead to major recessions, the vast majority of economists insisted there was nothing to worry about.
The bubbles did burst, leading to a financial crisis, double-digit unemployment in many countries, and costing the world tens of trillions of dollars of lost output. The media excused this extraordinary failure by insisting that no one saw the bubble and that it was impossible to prevent this sort of economic and human disaster. Almost no economists suffered any consequences to their career as a result of this failure. The "experts" who determined policy in the years after the crash were the same people who completely missed seeing the crash coming.
We are now seeing the same story with trade. The NYT has a major magazine article on the impact of trade on the living standards of workers in the United States and other wealthy countries. The subhead tells readers:
"Trade is under attack in much of the world, because economists failed to anticipate the accompanying joblessness, and governments failed to help."
Of course many economists did not anticipate the negative impact of trade, but of course many of us did. The negative impact was entirely predictable and predicted. (Here are a few from CEPR, there are many more books and papers from my friends at the Economic Policy Institute.) The argument is straightforward: trade policy has been designed to put manufacturing workers in direct competition with low paid workers in the developing world. This costs jobs and puts downward pressure on the wages of these workers. It also puts downward pressure on the wages of less-educated workers more generally, as displaced manufacturing workers seek jobs in retail and other sectors. Stagnating wages and increasing inequality are the predicted result of this pattern of trade, not a surprising outcome.Add a comment