October 26, 2016
The usually excellent radio show This American Life may have misled listeners in its discussion of NAFTA and trade this week. The piece misrepresents both some of the key issues on trade and also economists’ attitudes towards trade deals.
On the key issues, the piece notes that deals like NAFTA have led to job losses. It uses the figure of 700,000 jobs. It then compares this to the gains to the economy that are projected from lower tariff barriers and therefore lower priced goods.
What this discussion leaves out of the picture is the fact that the jobs lost are disproportionately for non-college educated workers. This puts downward pressure on the wages of non-college educated workers more generally as the displaced workers crowd into retail, services, and other sectors of the economy. So it is not just the 700,000 displaced workers who suffer as a result of this pattern of trade, it is non-college educated workers more generally who see their wages fall as a result of the deal.
This issue of wage inequality is important to remember when the segment tells listeners:
“In fact, there’s this survey that the University of Chicago did where they asked all these economists all across the political spectrum, are Americans better off, on average, because of NAFTA? 95% said yes. 5% said they were unsure.”
This might be taken as meaning that nearly all economists think that NAFTA benefited the country. Whether or not this is true, that is not the question they answered. This question asks the economists whether American “on average” are better off because of NAFTA. The question does not ask about distribution. This means that if NAFTA gave Bill Gates $100 billion and cost the rest of the country $99 billion, then the correct answer to this question is that NAFTA made the country on average better off. Even economists who think NAFTA was bad policy might think that it led to gains on average.
The piece also includes the line that we should blame robots for the plight of less-educated workers, not trade. This is also misleading. We had very rapid growth in productivity (i.e. robots) in the 1950s, 1960s, and early 1970s, yet most workers saw large gains in wages. The 1980s and first half of the 1990s were actually periods of weak productivity growth, yet most workers saw stagnant or declining wages. So there is not an easy story whereby productivity growth leads to lower wages for non-college educated workers.
Third, the piece implies that trade cannot lead to an aggregate loss in output and employment. This is not true. In a period of secular stagnation like the present, when the economy is suffering from a shortfall of demand, a trade deficit reduces overall demand and employment. A reduction in the size of the annual trade deficit of $180 billion a year would have roughly the same impact in boosting demand as a $180 billion annual stimulus program.
Fourth, the United States actually has not pursued a policy of free trade. It has maintained or increased many protectionist barriers. For example, we prohibit foreign doctors from practicing medicine in the United States unless they complete a residency program in the United States. As a result we pay our doctors roughly twice as much as the average in other wealthy countries. If we had free trade in physicians’ services we could save roughly $100 billion a year (that’s right every year) by paying our doctors the same as they get in Canada, Germany, and elsewhere. We might double these savings by reducing professional restrictions that protect dentists, lawyers, and other highly paid professionals.
Finally, patents and copyights are forms of protection. These barriers can raise the price of the protected items by ten or even a hundred times the free market price, making them the equivalent of tariffs of 1,000 percent or 10,000 percent. We have made these forms of protection stronger and longer in the last four decades in both domestic legislation and trade deals.
This has been extremely costly for the economy. We will pay more than $430 billion in 2016 for prescription drugs that would likely cost 10–20 percent of this amount in a free market. (Yes, we have to pay for the research, but there are more efficient mechanisms.) The savings in other areas may double the $340 billion to $380 billion we could save from a free market in prescription drugs.
Anyhow, the view of trade presented on This American Life in this segment is overly narrow and misleading. You can get a fuller story in my new book, Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.
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