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Globalization and Trade

Latin America and the Caribbean

Mexico

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Washington Post Goes Pinocchio Happy Over NAFTA

I appreciate the work that Glenn Kessler does as the writer of Washington Post's Fact Checker column. It's a difficult job. I don't always agree with his assessments, but I think he tries to be fair in his analysis. For this reason I was disappointed to see him max out with four Pinocchios over Donald Trump's trade representative Robert Lighthizer saying that NAFTA led to a government certified loss of 700,000 jobs.

According to Kessler, the basis for this figure is the 757,000 petitions for NAFTA-related trade adjustment assistance that were certified by the Labor Department between Jan. 1, 1994 and Jan. 1, 2001. Kessler raises three major objections to this figure.

First, he argues that the number is old. This is true, but it is difficult to see why that is relevant. There may have been some additional NAFTA related job loss in subsequent years, but that would make the number higher not lower. Complaining that the number is dated would be a bit like criticizing a figure for the number of traffic accidents in 1995. Presumably, there has been no major recalculation of the number of accidents that took place in 1995, so using the originally calculated number would be reasonable for most purposes, even though it is now more than twenty years old.

The second point is that the number could be overstated because the Labor Department was very generous in accepting petitions and likely gave assistance even in instances where the job loss had nothing to do with NAFTA. This is undoubtedly true, but there also had to be many cases where workers lost jobs due to NAFTA, who never filed a petition.

CEPR / August 24, 2017

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Wage Growth and Demographics: One More Time

I messed up earlier this week in discussing the possible impact of demographic changes in the composition of the labor force on the rate of wage growth, but this is an important issue that we should be able to think about clearly. The question is whether the slow pace of wage growth in the last year or two can be explained to any substantial degree by changes in the mix of workers, specifically lower paid younger workers taking the place of relatively higher paid workers who are retiring.

The backdrop is that we are seeing rates of unemployment that are below most estimates of the non-accelerating inflation rate of unemployment (NAIRU). This means that the rate of wage growth should be increasing. In fact, it seems to be slowing. The year-over-year increase in the average hourly wage did pick up a bit in the second half of 2016, going from 2.5 percent, taking the year from January 2015 to January 2016, to a peak of 2.9 percent taking the 12 months ending in December of 2016.

However, instead of rising further as the unemployment rate has continued to fall, the rate of wage growth has slowed modestly in 2017. It was just 2.5 percent in the 12 months ending in July of 2017. It's even a bit slower if we use my preferred measure, the average wage in the last three months compared to the prior three months. That gets you just a 2.3 percent annual rate of wage growth. So, wage growth is clearly going in the wrong direction from the standpoint of the accepted estimates of the NAIRU.

One response to this seeming anomaly is to argue that wages would be growing more rapidly, except for the high-paid older workers being replaced by lower paid younger workers. I got sloppy on this in my earlier post, but I will try to be clear on the point here. If we are looking to explain a change in a growth rate (an increase or decrease in the rate of wage growth) with a demographic change (the rate at which younger workers are replacing older workers) then we need to see a change in the rate of demographic change. Specifically, if we are arguing that the reason wage growth has slowed rather than increased between 2016 and 2017 we need to show a faster pace of demographic change in 2017 than in 2016. The data will not support this story.

CEPR / August 24, 2017

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Using Protectionism to Try to Keep China Down

There is a recurring theme in public discussions, seemingly embraced by everyone from Steve Bannon to columnists at the New York Times and Washington Post, that we should use protectionist measures to try to keep China from overtaking the U.S. as the world’s leading economic power. This effort is both incredibly wrongheaded and doomed to failure.

In terms of it being wrongheaded, the people doing the China bashing don’t even understand that they are being protectionist. Heather Long tells readers in the Washington Post:

“The real issue is that the Chinese are pirating American ideas and technologies. In the 1990s and early 2000s, people were worried about China illegally copying movies, music and books. The stakes are a lot higher now as the world's top economies compete on groundbreaking technologies in cloud computing, robotics, artificial intelligence and gene editing. Whoever controls these technologies will dominate global business — and more.”

Okay, great diatribe here, but let’s try some serious thinking instead. What exactly makes them “American ideas and technology?”

I know, we say so. But once an idea comes into the world or technology is developed, it is really there for the taking. We have rules on patent and copyright protection that say they are “American,” but why should China or anyone who believes in free markets give a damn?

Bannon, Long, and others want the United States to get tough with China (trade war!) to make it honor our protectionist rules on ideas and technology, but there is no obvious reason that most of us should go along with this crusade. Suppose we sit back and let China continue with its evil plans. In a few years, they will be flooding the world with low-cost cloud computing, robots, airplanes and who knows what else? The horror, the horror!

CEPR / August 18, 2017

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An Explanation for Weak Wage Growth That Fails the Simple Logic Test (See Correction)

When workers are doing badly you can always count on a large number of economists to come forward with ways to argue it really ain't so. For example, we have heard endless stories about how our price indices hugely overstate inflation — we're actually way better off than we think we are. Or, they point to the growth in non-wage benefits. One problem with that story is that non-wage benefits have been shrinking as a share of total compensation in recent years, not growing, but whatever.

One recent effort along these lines, which got mentioned in a NYT article, is the argument that aggregate wage growth is being depressed by the retirement of older, more highly paid workers. The argument is that individual workers are actually seeing a healthy pace of wage growth, but the change in composition leads to the aggregate growing more slowly.

While this argument has been given credence by many, it suffers from a simple logical flaw. It is not the change in the age composition of the work force that matters for the aggregate rate of change in wage growth, but the change in the change (the second derivative for calculus fans).

CEPR / August 17, 2017

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Senator Lankford Is Confused About the Trade Deficit

Yep, the senator from Oklahoma says it is good in a Washington Post column. Most of Senator Lankford's confusions are pretty standard, but he does come up with an original one.

"For starters, a powerful economy such as ours often runs a trade deficit because of the immense buying power of its people. Mexico’s average net per capita income is roughly $13,000, while the average U.S. household brings in more than $41,000 each year. Americans have a far greater capacity to buy goods than do consumers in Mexico. It should come as no surprise that we do exactly that."

Okay, we have a trade deficit simply because we are a rich country. I suppose someone forgot to tell Germany that it is a rich country since it has a massive trade surplus of more than 8 percent of GDP (roughly $1.6 trillion in the U.S. economy.)

He then tells us that our imports frrom Mexico will help it to grow and eventually make Mexico a better market for U.S. products. While this is true, Mexico's economy has actually grown less rapidly on a per person basis than the U.S. since NAFTA went into effect in 1994. While NAFTA may not be the cause of weak growth in Mexico, it apparently has not prevented the two economies from diverging further.

Then we get some of the standard confusion pushed by denialists:

"Foreign investment also tilts the trade-balance calculation. Because we have the world’s largest economy and the strongest currency, more money comes into the United States than goes out. This surplus of investment adds to our trade deficit, even though this foreign cash stimulus is a positive for our economy.

"When a Canadian company decides to invest in a U.S.-based company, it increases our trade deficit. Similarly, when the Mexican government buys U.S. Treasury bonds (as most of the world does), the likelihood of an American trade deficit increases. Investments such as these are indicative of a strong economy.

"It should be an encouraging sign that we are by far the world’s largest receiver of foreign direct investment. Our trade deficit means, in part, that U.S. companies are considered to be a better investment than companies in other countries. More investment in American businesses means more jobs and higher wages for American workers."

Actually, there is no direct relationship between the decision to invest in a U.S. company by buying its stock and bonds and investment in the economy. The stock market has soared in the recovery, but investment is at best mediocre. Companies invest when they see more demand for their output, not when their stock price rises.

CEPR / August 15, 2017