The Impact of Trade on U.S. Labor Markets: What Do We Know?
The Future of U.S. Trade Policy
The Harvard Kennedy School’s Robert Z. Lawrence and the Federal Reserve System’s Board of Governor Member Justin R. Pierce join Steven R. Weisman, vice president for publications and communications at the Peterson Institute for International Economics, to discuss the relationship between U.S. trade policy and labor markets. Experts discuss the the impact on the U.S. labor market of the opening with China and the future of U.S. trade policy.
Robert Z. Lawrence, Professor of International Trade and Investment, Harvard Kennedy School
Justin R. Pierce, Senior Economist, Board of Governors, Federal Reserve System
Steven R. Weisman, Vice President for Publications and Communications, Peterson Institute for International Economics
This symposium, presented by the Maurice R. Greenberg Center for Geoeconomic Studies, is made possible through the generous support of the Bernard and Irene Schwartz Foundation.
WEISMAN: Thanks very much. Let me welcome you all to the CFR symposium on “The Future of U.S. Trade Policy.” Thank you very much for being here. My name is Ted Alden. I’m a senior with the Council here in Washington. I’m delighted to be hosting this event, along with my colleague, Miles Kahler.
We have been asked to remind you all, this event is on the record. It is being livestreamed. So, you know, a number of CFR events we do are not on the record, so this one is on the record. So if you ask a question, it will be there for eternity on our stream. I actually—I’m going to slightly overrule the previous message about phones. If you want to keep your phone on vibrate, if you’re inclined to tweet this on social media, you are free to do that. Just make sure it’s not on so that calls are going to disrupt the event.
I want thank at the outset the Bernard and Irene Schwartz Foundation for their generous funding which has made this symposium possible, and the broader work of the Renewing America Initiative here at the Council. And a special thanks to our meetings team here at the Council for putting this together under the leadership of Dexter Ndengabaganizi. And I really appreciate all the work that you have done in pulling this together. So thank you to our meetings team.
This symposium I think is unfortunately timely. Anyone who watched the debate on Monday night noticed that trade featured rather prominently. We are in the midst of what I think is certainly the deepest questioning of the benefits of open global trade and investment, certainly that I have seen during my career. And as Miles will talk about, this is no way confined just to the United States. But as he and I both agreed in working on this symposium, and another follow-on meeting we are planning for the spring, the United States remains the lynchpin of the global trading system. If the United States turns inward and backs away from the leadership role it has played for decades on global trade, the world is going to look very different. And in all likelihood, both Americans and the rest of the world will be worse off as a result.
So the question we had hoped to address in organizing this event today was how did the United States arrive at this position? What has happened in the U.S. economy, in U.S. politics, that has led to this seeming growing skepticism of trade and globalization. Why has congressional support for trade continued to weaken? And what are the possibilities and options for rebuilding a stronger consensus? And as we will discuss this afternoon with Jeff Immelt of General Electric, what role can and should American business be playing?
I wanted to do just a brief advertisement for some of the work that we have been doing here at CFR on these issues through our Center for Geoeconomic Studies, and for the Renewing America Initiative. I have a new book—a shameless self-promotion—I have a new book coming out in a few weeks that’s titled “Failure to Adjust: How Americans Fell Behind in the Global Economy,” which is my effort to tell the history of how we got to this point in the trade debate. It might more accurately—it probably wouldn’t have sold as well—but it might more accurately have been subtitled, how some Americans fell behind in the global economy, because obviously many have done rather well. But the book argues that far too little has been done for those Americans who did not fare so well. And they are not a small number.
On a more positive note, my colleague, Adjunct Senior Fellow Bob Litan, and I have just published a new paper, out there on the table as you come in, titled, perhaps immodestly, “A Winning Trade Policy for the United States,” which argues that more consistent trade enforcement and more generous efforts to help those who lose their jobs due to trade and technology are needed to rebuild public support for trade. And the Renewing America program, that I’m part of, in the spring released a short book called “How America Stacks Up: Economic Competitiveness in U.S. Policy,” which looks at how the United States is doing compared to other advanced nations in those policy areas that are critical for succeeding the global economy, such as education, infrastructure, worker retraining, corporate tax policy, and support for innovation.
There’s a lot of other stuff going on here. My colleague, Jennifer Harris, has a fine new book out on economic statecraft. Sebastian Mallaby has a book coming out in a couple of weeks looking at Alan Greenspan and the history of modern finance. Our new CGS director, Brad Setser, is back at CFR writing his blog, “Follow the Money,” which I highly recommend, looks particularly at the issue of global imbalances. Tom Bollyky, who’s here with us today, is doing some cutting-edge working on the thorny issues of how to deal with regulations in trade negotiations, which is something he was involved in as a USTR negotiator. This is far from an exhaustive list. I just want to let you know we are all doing our best here at CFR to shed some light on these very challenging issues.
We have a great lineup for speakers for you. So I don’t want to keep you any longer. I would just like to say a special thanks to our moderators. So thanks to Steve Weisman of the Peterson Institution who will be moderating the first session here. He has his own excellent new book out on the moral dilemmas of globalization, which I highly recommend. My former Financial Times colleagues, Ed Luce, who will be moderating the next panel, his book from several years ago, “Time to Start Thinking,” proved to be unfortunately prescient, if we look at what’s played out in the campaign this year. And then my colleague Heidi Crebo-Rediker, who has done some fabulous work on infrastructure that has led to some very important advances in government policy.
So I want to thank you for attending what should be a very interesting half-day here. And I’m going to turn it over to Miles to make a few opening comments as well. Thank you.
KAHLER: Thanks, Ted. And permit me to join Ted Alden in welcoming you to the symposium on “The Future of U.S. Trade Policy.” Our discussions today will concentrate on trade policy and politics in the United States. It’s important to bear in mind, however, that our national debate has occurred and will continue to occur before a global audience. Like many of you, I discovered in the course of my travel this summer—in my case, to Europe and Australia—that the challenges to trade policy and globalization in the United States have induced widespread anxiety that this country, the anchor of an open global economy, may no longer play that role.
In countries outside the United States, anxiety and fear are aggravated by similar challenges from both left and right to globalization—left and right to globalization, to immigration, to European integration, and to foreign investment. You’re familiar with many of these challenges: UKIP, which was a fringe movement in the United Kingdom, spearheaded a successful referendum for Brexit in the United Kingdom this summer; the candidacy of Marine Le Pen and the Front National in France, which faces national elections next year; the sudden appearance of the Alternative for Deutschland in Germany; Europe-skeptic governance in Poland and Hungary; and in Australia, where I spent part of the summer, three parties which range from anti-TPP to xenophobic to protectionist now hold the balance of power in their senate after the elections that they held this year.
Now, it’s important to note that with the possible exception of Brexit, none of these critical movements hold the majority in their countries at this time. Nevertheless, even if they remain plurality or minority movements, their influence on mainstream parties can be considerable. In all of these cases, as in the United States, we are witnessing a revolt by those who perceive themselves to be either threatened by or left behind by globalization. We’re also witnessing, it seems to me, a historic weakness on the—in the case, political and economic, that is made for economic internationalism by its proponents. It is ironic to me that today one might find a more enthusiastic embrace of globalization and an open trading system in countries that have historically been very skeptical of that system—in Latin America, in India, and in East Asia.
The U.S. debate over trade also has implications for the global and regional architecture of trade. And that is the second part of the project that I’m organizing with Ted Alden, which will be the subject of a second Council on Foreign Relations symposium in early 2017. Ted and I will organize a discussion of the role of the World Trade Organization after the Doha Round, whether major regional trade agreements such as TPP and TTIP have a future after the 2016 elections, what the trade strategies of the emerging and developing economies will be when the architecture of trade globally is in such flux.
We hope that you enjoy today’s discussion, and we invite you to join us next year for the second act. And now, let me introduce Steven Weisman, vice president for publications and communications at the Peterson Institute for International Economics, who will moderate the first panel. Steven.
WEISMAN: I won’t subject you to opening remarks. We’ll just gather here on the stage.
Well, good morning, everybody. Thanks for coming out on a dismal day, at least in terms of weather. It’s an honor to be back at the Council, where I have been a member for a long time and had the honor of presiding on panels over the years. And it’s a special honor to be here with Justin Pierce and Robert Lawrence. And Robert is an old friend and colleague at the Peterson Institute.
I don’t need to tell this group of members the importance of trade. And we’ve just been talking about that. Today, this week, this year, it’s for the first time in I think anyone’s memory, risen to the top of the agenda of the presidential campaign, after decades where trade was hardly an issue. We’ll have the TPP possibly coming up before the lame duck Congress. So let’s plunge into it.
Everybody knows, and no one can deny, that there has been an impact of trade on the U.S. labor market. But the title of this panel is, What Do We Know? How big of a factor has it been? What might be the other factors? So let’s start right away with Justin Pierce, who’s done terrific research on very specifically the impact on the U.S. labor market of the opening with China, especially starting after the year 2000 when China joined the World Trade Organization.
Justin, how big a factor has the opening of China and the tremendous export machine that they’ve built up been in the U.S. labor market—both good and bad?
PIERCE: Yeah. So first of all, because I work for the Federal Reserve I need to with the disclaimer that these are my own views, not the Federal Reserve’s. But, yeah, I mean, if I could tell you about some of my research on this topic—
WEISMAN: Please do.
PIERCE: So, you know, part of the reason that I’m here is that my work with Peter Schott is part of this recent batch of research that’s looked at some distributional impacts of trade competition, especially trade competition with China and its effect on U.S. manufacturing employment. So what we do is we link this sharp decline in U.S. manufacturing employment that happened after 2000 to a specific U.S. trade liberalization, the granting of permanent normal trade relations to China, which was passed by Congress in that same year. And, you know, I’ll tell you a little bit about that policy, since we’re focused on policy here.
It wasn’t a traditional trade liberalization. You know, it didn’t change the tariffs that were applied on U.S. imports from China. But the setup is, before PNTR U.S. imports from China could come into the U.S. at the MFN rates that were available to most trading partners—you know, to WTO members. But China had this special situation where to keep those low rates, it had to have an annual renewal each year by the president that could be overturned by Congress. And especially after Tiananmen Square, those renewals got really contentious, and their outcome was uncertain. And if those renewals had failed, tariffs would have increased substantially from 4 percent on average to 37 percent on average.
So PNTR eliminated the need for those annual renewals. It locked in the low rates. And what we found is that after that, this sort of pent-up demand for relocation of U.S. production to China and entry by Chinese exporters to ship to the U.S. was released, and we found relative increases in imports from China and relative declines in U.S. manufacturing employment in the industries that were more affected by the policy change, the ones that had been subject to the highest tariffs increases before.
And, you know, in terms of economic magnitude, what we find—we can’t sort of quantify the overall effect on jobs, but what we find is that if you move for an industry from the 25th percentile to the 75th percentile in terms of exposure, it would lower manufacturing employment by 8 percent.
WEISMAN: Now the parallel study that you cited by Hanson, Dorn and Autor, have—did quantify the number of jobs lost, if I’m not mistaken. Do you remember that number? It’s something in the range of 1 or 1 ½ million over that decade, something like that.
LAWRENCE: It’s about a million over the decade.
WEISMAN: So Robert, we always see these—this influx of imports connected to trade, especially—we can talk about it in a second—this is a period when China was accused of manipulating its currency, so some people say that that’s the specific problem there, not just those factors that you mentioned. But Robert, you’ve studied other factors that have been involved in lowering employment in the manufacturing sector and have found that trade is a factor, but one of many. Why don’t you address that?
LAWRENCE: Yeah. I mean, for me, trade, as you expressed it, is a part of the story of the decline in the share of manufacturing employment. But if you look the Autor/Hanson number of a million, recall that after 2000 employment in U.S. manufacturing fell by 5 ½ million (dollars.) So what I believe is that if you want to ascribe a reasonable number to trade, you’re talking about something around a fifth of less of the employment decline. So that naturally raises the question of what else is causing this decline in manufacturing employment. And my research suggests that it’s a combination of two things.
On the one hand, productivity growth is very rapid in manufacturing, and has been rapid historically. Well, if I tell you that there’s rapid productivity growth, sometimes people identify it with automation, you can ask: Is that going to increase employment or decrease employment? And actually, the answer in economic theory is it’s ambiguous. It all depends how demand responds to those falling prices. If people are eager to buy more they’ll increase demand enough and you could see employment growth. But it actually turns out that the demand for goods is inelastic. That is to say, when prices fall people don’t compensate by spending more on goods. They actually spend less. They do increase the quantity, but they spend less.
So to give you some numbers, in 1960, Americans spent almost 60 percent of their consumption on goods. Today they are spending a third. And by the way, it isn’t only the United States. You can see this globally. So what’s happening is we’re getting rapid productivity growth in goods production, demand is not very responsive to that. And the consequence is there are fewer and fewer employment opportunities. The dynamic is very similar to the one we saw in agriculture, and we’re very familiar with. We’re not depriving ourselves of food, but as we became more productive in agriculture, what we saw was we could meet our needs for food with fewer and fewer workers.
So I would say, you know, if you look at the big story—and by the way, the declines in manufacturing—in the United States, Justin’s research, you know, puts an emphasis on American policy, which involves giving China permanent normal trade relations. But actually, if you look at the decline in the share of manufacturing employment, in every industrial economy you’ll see there is a decline since 1973 of about 15 percentage points. And it’s primarily being driven by these underlying forces, a combination of rapid productivity growth, which everyone points to.
But what they miss is the demand side, this declining share of expenditure. And I can ask you, would you rather have the money that you paid for your iPhone, you know, or your telephone, the thing they want to give you for free, or the money that you pay to use it? Would you rather have the money you paid for your television or the money you pay to the cable company? So even where we have had innovation in goods, it has generated a disproportionate demand for services.
So in my view, yes, trade has been a part of the story—but actually, nowhere near the biggest part of the story.
WEISMAN: So it’s very difficult to disaggregate these factors in an economy in flux, but Justin, what say you to that analysis? And also, not to be overly political, but the currency—this was a period where China manipulated the value of its currency in order to pump out exports. How—was that a factor as well as the ones you cited?
PIERCE: Yeah, so first of all, I mean, I completely agree with what Robert was saying—you know, this change in trade policy can explain—cannot explain these longer-term trends in terms of the decline of manufacturing employment as a share of total employment. You know, what I think is—what I think it can explain is the sudden decline in the level of manufacturing employment. So if you look at the three years after passage of PNTR, manufacturing employment declined by 3 million out of a total of, you know, something like 17 million manufacturing jobs. And you know, that’s something—as I say, the share had been declining for quite some time.
But it’s something where, you know, I think it highlights a potential distributional consequence of trade and, in fact, maybe, you know, the fact that this adjustment to trade had been held back by these annual renewals of China’s MFN status before, which are sort of protecting industries, that may have had the sort of perverse effect of making the adjustment more sudden after that policy change, and leading to, you know, more disruptive labor market effects.
And I guess coming back to the idea of currency manipulation, that could be having an effect too. In general, all these things—you know, internal reforms in China, technological changes in the U.S., you know, exchange rate policy—those could all be factors that are making China more attractive as a location for production. And it’s just that the policy change is really what had the effect on the timing of the adjustment to that and that that could be what has the big effect.
WEISMAN: Well, I—
LAWRENCE: If I could comment on—
WEISMAN: Yes, go ahead, Robert.
LAWRENCE: —on currency manipulation: I think much too much weight is placed on the ability of a country to change its exchange rate and to achieve a very, very long-run change in its overall trade balance because what we know is a trade balance, a trade surplus requires an increase in national saving relative to national investment. So the Chinese did intervene and clearly kept their exchange rate weak, but they also generated huge increases in national saving within China. And it was that combination, in addition to false productivity growth, that led them to run large trade surpluses in the—over the period that we’ve been studying.
So I think—because you see, if you—there’s a second thing that’s going to happen. If you manipulate your exchange rate and somehow cause—and you don’t accompany it with increased national saving, what’s going to happen is prices will rise, and the real exchange rate, the exchange rate corrected for inflation, will respond and offset that manipulation. So to talk about, you know, currency intervention alone, as if it is the major factor, ignores this underlying change in the Chinese saving rate, which I think played a huge role in the—in their running surplus. And it’s one that’s, as we’ve seen, has now changed over time.
WEISMAN: Well, in the department what Ted Alden just said was the shameless self-promotion—he gave you permission to cite my book, “The Great Tradeoff,” published by the Peterson Institute. And my friend Strobe Talbott said last week that I should change the name to “Let’s Make Globalization Great Again.” (Laughter.)
In the—in that light, let’s expand the sphere of what we’re talking about. Is there a way of seeing these trends as good for the global economy and for the world’s population and for global stability? This is not necessarily an area that we’re—I mean, this is—these are political and even moral choices, but I’m still going to subject you to them, to talking about them, because I think we have to in this—in this election year.
So Justin, Robert, which—who wants to address that?
PIERCE: I mean, I can be quick, I think, because my research doesn’t look directly at this question, but, I mean, there is no doubt that trade has played a role in rising incomes globally and that that can have a big effect on stability.
I think an interesting line of research would be seeing, you know, to what extent increases in employment in, you know, certain manufacturing sectors across industries, increases in employment in other countries, are sort of offsetting the declines that we’re seeing in the U.S., or whether there’s growth in other sectors that’s sort of being created by the liberalization of trade, the expansion of global value chains. I think that’s an interesting question to look at.
LAWRENCE: Let me look at two parts to that. The first is the rest of the world. And I think it’s unquestionable that what we’ve seen is since 2000 an amazing improvement in global inequality, an amazing increase in global economic growth. So if we want to take—if we want to answer the big picture, you know—has globalization been good for the world, for alleviating poverty—we blew through the millennium goals, you know, with 10 years to spare because of what happened in India and China and in no small measure related to their ability to adopt globally oriented policies. And I think Miles referred—their enthusiasm for globalization continues today, if anything is even greater than it used to be. So as we think about the future, you know, the real question comes back to what’s going to be the role of the advanced economies in the global economy because it’s definitely on the—in the aggregate generating benefits and growth.
Now, I personally believe that trade agreements, like the one we’re currently considering with respect to the Trans-Pacific Partnership, have the ability to provide us with modest improvements in living standards as compared to not having that agreement. And for me, the issue is, is that agreement—that agreement also will have costs for—in the labor market. There will be dislocation. And we know that for workers who are dislocated, it’s very painful.
A reasonable estimate is that workers who get displaced could lose something like 1.4 times their annual income, when the unemployment rate is around 6 percent. That’s suggested by a Brookings study. You lose not only because you’re—you lose your job. You experience unemployment; that’s costly. You have to find a new job, and many will find jobs at lower wages. Others will be forced to leave the labor market. And, for those who find their new jobs, their lifetime trajectories are going to be lower. So you have to take all of that into account. And what you get is something like 1.4 times annual income for the dislocation of a—of a male who’s been working for three years.
Now, I use that number, and then estimate how many workers are likely to be dislocated as a result of the Trans-Pacific Partnership, and I come up with a cost. And then I weigh that against the potential benefits that come from things like—well, the study that we have by Peter Petri and his colleague Michael Plummer, which suggests that the benefits come from improvements in productivity growth, improvements in variety and choice for consumers, improvements in employment in export industries which pay higher wages. And when you evaluate the agreement in those terms—in terms of costs and benefits—what you find is that the benefits overwhelmingly outweigh the costs.
So I believe we as Americans are facing an economy whose productivity is slowing down, whose growth potential is now estimated to be under 2 percent, and we have to use every mechanism we know to raise that living standard. And one of those is trade. I don’t think it’s the only one. I think we need more investment in research and development and in infrastructure. But trade is one of those. And on balance, it is beneficial and will help in raising our living standards.
PIERCE: If I could follow up on that—
WEISMAN: Please, yeah.
PIERCE: So my co-author, Peter Schott, has what I think is a really good line on this, which is don’t protect the job; protect the worker. And the idea is that there are, you know, gains from trade. The new research, including our own, is not saying that there are not gains from trade, but it is highlighting that there are, you know, distributional costs and adjustment costs that maybe were not fully appreciated before. And so, you know, hopefully part of the benefit of this new line of research is that when we think about new trade agreements, expanding trade agreements, we’ll also be thinking about addressing those distributional and adjustment costs, because people are thinking about them more and more, as we know.
LAWRENCE: You know, Robert Litan and I wrote a book in 1980s called “Saving Free Trade,” and precisely because we were concerned that at that time the dislocation was very painful and could be—could result in protectionism. And we had a program in the United States. It was trade adjustment assistance, which was isolating trade as a source of change. And the way the trade adjustment assistance program worked was it extended unemployment insurance.
And, you know, when we thought about that, that was actually trade non-adjustment assistance. It didn’t really help workers to get new jobs and it didn’t—and what was happening was the workers were hanging around the plants, particularly autos and steel, because they could get higher wages there by waiting than by moving to other occupations.
And that was why we came up with this idea of wage-loss insurance—we called it wage insurance at the time—the notion that, as part of a package, workers who get a new job, one that pays a lower wage, would receive some form of compensation. And Bob has done a lot of additional work on that, and I presume it’s part of this new study that’s coming out. And so I think this needs to be a component of facilitating change.
But let’s not lose sight of the fact that most of the change that takes place in the United States, most of the dislocation, is not due to trade. Trade only accounts for a relatively small share of the total amount of dislocation. Just remember, each week we get the data on new additions to the unemployment claims. And, you know, even under normal circumstances, those are on the order of magnitude of a quarter of a million each week. And that’s 20 million new claimants per year.
Now, if you estimate that any reasonable number of how many people are being dislocated as a result of trade, you’ll get something on the order of 5 percent of the total dislocations. So the U.S. economy is churning workers. And, by the way, in order to qualify for unemployment insurance, as you know, it has to be an involuntary discharge. So these are not workers, in a sense, who are quitting voluntarily. They’re being laid off for reasons beyond their control.
So I think—I agree exactly with Justin. We need to really think about how we deal with that adjustment issue and how we compensate the losers, because we really can if you look at the gains that we get from the trade agreements.
And then there’s an additional thing which we do very poorly, which relates to training. So the way they revised the trade adjustment assistance, they did put in a small wage-loss insurance component. But now they say, well, workers, in order to qualify, you need to go to training.
Now, training is good for some people but not for others. And on-the-job training is actually often much better than training before you know what kind of job you’re going to get. So we need to improve all of those policies, and they really should be scrutinized together with our appraisal of our trade agreements.
WEISMAN: We’re in the midst of a presidential campaign, of course, that’s exaggerated things left and right. But I’m struck by a couple of things. One is that a lot of the polls by the Pew Research Center and others show that the public supports trade more than the presidential candidates, in a general way.
On the other hand, the polls show that they support it generally but not necessarily in practice. People are skeptical of these trade agreements. And I sometimes wonder whether we’re excessively talking to each other about these theories and economic tradeoffs and we’re not communicating it, you know, to the audience that is receptive to the presidential campaign slogans.
And I also think that there’s somehow a lack of, even for those of us who advocate globalization and the benefits of trade, whether we’re really coming to grips adequately with the pain that is felt, for a variety of reasons in large parts of the country, where trade gets the blame, unfairly and inaccurately.
So I know it’s beyond the scope of this—the expertise of every—you know, all of us, but what—I still want to ask you, how do we get out in front of this issue? I’m really asking a political question. And both of you are economists, but I’m going to ask it anyway, because I think that’s the uppermost topic on our minds. And you’ve studied labor markets. We’ve been talking about trade adjustment, as you pointed out, Robert, for decades with your book of three decades ago. What do we do? How do we get out in front of this problem?
PIERCE: Well, I think one thing that Robert pointed out to me yesterday is that there are sort of differences in how people view trade in polls. I think you’re right that they are—you know, maybe surprisingly, people are—overwhelmingly have a positive view of trade. And even trade agreements are supportive of, you know, some of the trade agreements that we’re considering. But the place that they are more negative is its effect on increasing employment and, you know, sort of stability of employment.
And that’s actually a pretty nuanced view, I think, that’s sort of getting at the idea of what some of this latest research has shown, that there are overall gains from trade. But with the employment stuff, I think they’re picking up on the distributional impacts, you know, and the adjustment effects of people having to switch jobs, switch industries, if they’re displaced from trade.
So, you know, I think the thing to do is talk about these policies that will improve the moving of people from, you know, a sector where they get displaced by trade into sectors that are growing. And, you know, there might even be specific reasons to care about trade—you know, adjustment to trade in particular just if trade adjustments and trade agreements lead to more abrupt changes in, you know, competition relative to other sorts of shocks and whether, you know, people who are working on trade-impacted industries have more industry-specific skills that aren’t necessarily as transferable to other industries.
LAWRENCE: Let me make two points.
WEISMAN: —let me phrase it this way. I have a friend who is a steel-company executive who ran a steel mill in West Virginia for many years that—where the employment level has just collapsed over the last 25 years. And in West Virginia, though, until fairly recently, there have been lots of job opportunities for these workers, for instance, in fracking. Whatever you believe about fracking and the value of it, there are a lot of jobs in West Virginia for people who lost these jobs.
But he went back to that mill and said that the men especially, in their 40s and 50s, who lost their jobs at the steel mill were just not able to take these other jobs. They were too physically demanding or technically demanding, or maybe they had to move. And we talk about trade adjustment and retraining, but it’s easier said than done.
LAWRENCE: So I actually think trade is getting the blame for much more deeply rooted failures in economic performance, and it’s a convenient narrative. It somehow fits the facts. We’ve had very weak wage growth; plausibly international competition. We’ve had a huge decline in manufacturing employment; plausibly international competition. The fundamental reason is not international competition.
I agree. I don’t think that we’re going to get a lot of new manufacturing jobs because of my view of the structural changes that are taking place in the economy. And that—and, by the way, the jobs that are going to be available, if you look, are increasingly more skilled.
The thing about trade—the thing about manufacturing was a major source of inclusive growth, because it allowed men with less than a college education to build up families and to move into the middle class. And if we look back into the 1960s, 30 percent of men were employed in manufacturing. And today it’s around 12 (percent). So that’s not going to change. And therefore—and I don’t think we’re ever going to make those men who lost those jobs, who were aged, you know, in their 50s, happy again.
But if we look about—think about the future of our economy, it seems to me that what we have to look at are broader drivers of economic growth, because I think it’s really trade taking the blame for much broader failures in generating growth that is widely shared. So—
WEISMAN: Let me interrupt you for a second—
LAWRENCE: I just wanted to make—
WEISMAN: —because we have to go to the questions.
LAWRENCE: —one other point—
WEISMAN: Yeah, go ahead.
LAWRENCE: —about public opinion.
WEISMAN: Yeah, sure.
LAWRENCE: There is—you know, one of the themes of this campaign is—and we suddenly realized, you know, there’s this huge chasm between what the people think and what their leaders, their representatives in Congress, are doing. And if you want to see a dramatic evidence of that, look at the polls on trade. Where—who are the majority supporters for trade and trade agreements? Democrats. How do their representatives vote in the Congress? Uniformly, almost, against. Where is the skepticism for trade arising now politically? In the Republicans, among the Republicans. How are their representatives voting?
So something is intervening between the opinions of people and the way their representatives behave. And I actually think it’s got a lot to do with the way interest groups affect our political system. And they are much more influential, ultimately, in the policies that we are seeing than what people think. And remarkably, if you look at what young people feel about trade, there is something close to 70 percent support for trade agreements. That’s similar to what you saw in the Brexit.
WEISMAN: In the Brexit vote, yes.
LAWRENCE: So I actually think we already oriented ourselves towards the future, and I—by the way, I was very proud of the way we have behaved in response to the great—to the global financial crisis, because we haven’t seen an eruption in protectionism. And if you compare it to what they did in the 1930s with the emergence of fascism, you know, we seem to be doing much, much better.
But we know—but what we’re seeing is that, in my view, that the adjustment may have been suppressed, but it’s now starting to emerge. The world we’re living in today is eerily resembling the 1930s, with demagogues and others who are able to provide a narrative. You know, in the 1930s it was the Jews. Today it’s immigrants and trade which are being used as part of a narrative. But underlying all that is a—was a deep financial crisis that had nothing to do with trade but has left a legacy which resembles, you know, the kind of responses that we’ve seen before. And I think the ultimate cure is not about trade, but it’s about generating economic growth that is widely shared.
WEISMAN: Well, on that bleak note—(laughter)—it’s time to invite members to join the discussion. I’d like to remind you, as I am being reminded, that this meeting is on the record. Please wait for the microphone. Speak directly into it. Please stand, state your name and affiliation. And please limit yourself to one question and try to keep it concise and make it, as one of my—as my colleague Adam Posen said, at least sound like a question. (Laughter.)
OK. Yes, right here.
Q: Hi. Good morning. I’m Paula Stern.
WEISMAN: Hello, Paula.
Q: Good morning to everybody. I feel like I have a sense of déjà vu all over again. And thank you for the very important discussion this morning.
I wanted to push a little further, Robert, about the solution—investment, you said, more in infrastructure and in R&D. I’d like us to think more also about how we are educating our kids from K-12 all the way through the community colleges, et cetera. Computer science, for example, is not in our curriculum. And I’ve been working really hard on this now for the last decade or so, and I think we’re making a change.
I’d like you to address how you think, particularly Robert, how you would redesign our adjustment-assistance program so that it does deal with the natural and desirable churn that we have in our economy.
Q: Thank you.
LAWRENCE: No, so I agree with you. It’s investment in the generators of growth, and that’s human capital. That’s skills, education, and a variety levels of that for different kinds of people. It’s investment in physical capital, and that’s public capital and private capital.
I actually have rather idiosyncratic views, because I believe that the best way to improve the distribution of income between profits and labor is to encourage investment, because it makes workers more productive. And I have papers on that, and it’s a whole technical area.
We—I don’t think there’s a single silver bullet when it comes to, you know the challenge of taking dislocated workers and sort of giving them a new life. I think it has to be a multiplicity of different approaches, because it’s—and actually it’s really a task that needs to be done at the state level as much as something which the federal government can be doing, because it’s about connecting the labor market and the workers. It’s about connecting the workers with the labor markets, and the labor markets are often local labor markets. So it requires a sense of the firms—and it varies across the country, you know, in terms of the sense of corporate cooperation with the schools. And that’s a critical part of the story.
So I don’t have a single prescription to give you, but definitely what I believe is that we should—and I sure as hell wouldn’t get elected anywhere—we need to educate our public and get them off the illusion that the way to restore prosperity is to restore manufacturing. We need them to understand that there are many avenues for prosperity that we have and opportunities. And advanced manufacturing can play some role. But the idea and the association of all good jobs with manufacturing is a myth that is continuously perpetuated. And it’s misleading people as to where the opportunities lie.
WEISMAN: Unless you want to address that, shall we go to the next question?
PIERCE: I mean, I would say that the general thing is I agree with you about the importance of education for this. The problem—you know, the problem that some of the recent research has highlighted are the adjustment costs of trade; that people who lose their jobs in the steel mill can’t get jobs in other industries because they don’t have the skills. To the extent that education policies can improve that, it’s fantastic.
WEISMAN: OK. Let’s go over to this gentleman here.
Q: Irving Williamson, the U.S. International Trade Commission.
I agree completely with all the things Professor Lawrence has said, so I won’t comment on that. But I do want to go to the points that Mr. Pierce has made about WTO accession—China’s WTO accession. And I think it’s way overstated. And I think that it’s dangerous, because—this is my question for you, I guess—because it’s another trade agreement. And this misunderstanding that people have about the roles of trade agreement is probably why we’re in the difficult situation that we’re in now. And all the studies about the impacts—and we’ve done at the ITC a number of studies—is pretty small compared to the global economy.
But my question is, given the fact that American companies were investing in China, that we’re looking at that huge Chinese market, the fact that back in the ’90s most of the American companies—the many who were sourcing from China were actually—their Taiwanese suppliers moved their factories to China, and this was because we did a retaliation on this in ’93, about $3 billion, and we saw that many times. And that includes components and others.
So what I’m saying is—and given the fact that exports in general in the 2000s, everybody was going up—haven’t you overstated China’s role in the WTO, the impact of China’s accession to the WTO?
PIERCE: Well, I mean, I guess I will go back to the point that I was saying before, that I don’t think that—you know, there are a lot of things that China’s accession to the WTO can’t explain; you know, these longer-term trends in manufacturing employment. I think it also doesn’t explain, you know, what has been called sort of the rise of China as a global exporter.
I think that what it helps explain is if you look at the ’90s, there are all these, you know, media reports, GAO reports, from U.S. firms saying, you know, we want to invest in China, but we’re worried that tariffs are going to go up next year, so we can’t do it. And so I think that, you know, one of the roles that this policy change had was just making the adjustment more abrupt and, you know, that that can have some of the more disruptive effects on labor markets.
WEISMAN: Let me ask a variation of that, because David Autor and his team has come to the Peterson Institute, and they sort of imply that this is a kind of a one-time-only development and not likely to continue. And although I’m not sure whether you have addressed that, but can you tell us what you think about that?
PIERCE: You know, I guess I don’t have a strong position on whether it’s a one-time thing. I will say that I think one of the implications of this adjustment that may have happened to trade is that, you know, changes in trade competition, changes in technology, I think, go together. They’re driven by one and another. It’s not that they are happening completely in different worlds.
And so the fact that the U.S. labor market has already had this adjustment to trade with developing countries, which has sort of particularly affected, you know, labor-intensive industries, that might make the U.S. more flexible and sort of less likely to be—you know, have abrupt adjustments to technological changes that would also, you know, reduce employment. So that sort of flexibility from already adjusting to trade could be a benefit.
Go ahead, Robert. But let’s—
LAWRENCE: Well, no, I think, you know, I calculate that something—we virtually have no footwear industry in the United States. Something like one third of the value added of the clothes that we consume are made in the United States. Two thirds are made abroad.
So if you think about it, I tend to be on the side of Autor and Hanson when they make the statement, if you think about the next generation of emerging economies who arise, the natural areas in which they’re likely to move are going to be—and indeed, where the supply chains are moving out of China in order to produce the products—those are the products that we are already importing.
So once a country is fully specialized, you know, and it doesn’t make the goods at home, then cheap imports are good for it; doesn’t have the detrimental effects. So we’ve done a huge amount of adjustment to labor-intensive industries in the United States. And that leads me to believe that on the import-competing side, the major part of the adjustments are likely to be more modest.
WEISMAN: Let me—
LAWRENCE: However, we will increasingly meet competition for our exports, as the Chinese and others move up the technology ladder. And just as our frictions with Japan sort of shifted into more sophisticated areas, it is most likely that we will get more competition coming from that source. But we haven’t seen that yet.
WEISMAN: But also outsourcing of services, no? I mean, offshoring of services; I mean—
LAWRENCE: Yes, so—
WEISMAN: —Alan Blinder’s point that the next wave—
LAWRENCE: So if you—
WEISMAN: —is going to affect people and services.
LAWRENCE: So if you take Alan Blinder’s estimates of the share of the economy that is going—that is currently exposed to trade and that could potentially be exposed because of services, his number is that it’s—and Brad Jensen has a similar estimate—
LAWRENCE: —they get to numbers like about 25 percent of the labor force. And Alan argued that this was gigantic; it was a big change. In fact, in 1970, 30 percent of Americans were working in manufacturing, which was exposed to international trade. So we already know our labor market has actually been closing rather than opening, paradoxically, because as the manufacturing sector has shrunk, fewer and fewer workers are exposed in manufacturing. True, more and more are exposed in services. But if you actually do the balance, you find on balance we’ve been closing.
So I don’t think that—and when people say, you know, the future of our children is going to depend on how they compete with the Chinese and international competition, and that’s why they need to be educated, I think they’re pointing in the wrong direction.
Q: Hi. Ava Feiner.
So to get back to the issue of labor adjustment, I think I would agree with Robert very heartily that we—the prospect for people approaching retirement, particularly in manufacturing, is a closed issue. So the question for them is very different than young people, particularly entering the workforce. Young people—the markets will adjust. The markets—you know, companies will offer jobs, training, opportunities.
But the important point for those who are near retiring or have retired is access, it seems to me, to investment. And perhaps this is a Federal Reserve question. I think our policies for the last nearly a decade have suppressed the return for individuals to investment. It’s been very nice for companies, who are able to make low-cost investments.
WEISMAN: So would you like to phrase that—
Q: But for savers—
WEISMAN: —as a question?
Q: For savers, it’s been a disaster. And those are largely older people, people close to retirement. So my question is, isn’t it time to let the financial markets adjust to reality, to stop giving the benefit to those who borrow?
And secondly—and this is more to Robert—is there a way—and I always like markets rather than government policies—but is there a way to tilt remuneration or pensions toward more investment, to more holding of equities and assets for people who are older, rather than just severance pays or, you know, giving them—
Q: —sending them off?
WEISMAN: OK, thanks.
Justin, what’s your view of reality?
PIERCE: I’m going to have to dodge the question about—that’s a question for one of my principals, I think, but—
LAWRENCE: Well, I think you—the—on the interest-rate side, you know, the wise people—and all of the investment kind of firms tell people to hold almost the inverse of their age in bonds, and that as you get older you’re supposed to be holding more bonds and less equity. And it’s turned out to be extremely bad advice, which I never believed in the first place. I actually think people should be much more in equities all along.
WEISMAN: That’s not an official position of the Council on Foreign Relations. (Laughter.)
LAWRENCE: So—but—so—and I think actually people who have held equities have done quite well. So it is the form in which people are holding their savings. And I actually am concerned that those who have been advised to hold bonds, should the Federal Reserve now start to raise interest rates, are going to suddenly discover that the capital value of their bonds are starting to decline. So there was sort of nowhere to put your money if you listened to your advisers, who were telling you that you needed to be in debt rather than in equity.
WEISMAN: Well, I think we’re getting away—
WEISMAN: —from U.S. labor markets.
LAWRENCE: But it’s—(laughs)—
WEISMAN: We’re now talking about capital instead of labor. So—
LAWRENCE: Well, but pensions—
WEISMAN: Oh, OK.
LAWRENCE: —and 401Ks are a critical element in the difficulties that people have, you know, when they’re dislocated. So I think there’s a relationship.
WEISMAN: This gentleman here.
Q: Thank you. Francisco Martin. I work for the Boston Consulting Group. Thank you again for your comments.
I think two of the broad themes you identified is, you know, this lack of mobility inside the United States. You know, you lose jobs in West Virginia. Could you move to northern Virginia, for example? And then the other idea is this idea of retraining or upscaling. Do you have any information as to, whether it’s percentages or, you know, policy ideas, as to what part of the dislocation, you know, that comprises? Does that make sense?
LAWRENCE: It does. But maybe you—do you have any idea?
PIERCE: Yeah, but I’ll let you.
LAWRENCE: Well, I think it’s interesting. You know, the Autor study showed that a lot of the pain was felt locally in communities. And the reason it took so long for the adjustments to take place was basically because wages didn’t adjust, people had to move. So I think mobility is a crucial part of the adjustment. And actually there were earlier studies in the early ’90s by Lawrence Katz and Olivier Blanchard, and they had found very similar results, that the way a lot of people adjust is to move.
Now, if you combine that with a housing market where a lot of people’s houses have gone underwater so that they can’t sell, I think that that can help explain why adjustment has become more difficult. Americans have historically been very mobile and have moved to where the jobs are. But the housing market’s problems have really hindered people’s ability to move.
I don’t know the relative magnitudes of the deficiencies of skill. But, by the way, one of the things that you can see is that the number of unfilled positions in manufacturing is rising over time, so that clearly there are skill shortages where people—so we’re creating the jobs, but it’s only part of the solution, because we also have to train the people to fill those jobs.
WEISMAN: I shouldn’t have been so flip before, just to make a—if I may make my own point here about capital versus labor, because as you or someone pointed out, one of the big drivers of corporations to maximize their profits and offshore their work are the pension funds, and in some cases the union pension funds, that are underfunded and pushing their investments to be more profitable.
So, Ted, did you want to ask something?
Q: Thanks very much, Steve. Ted Alden from CFR. Thank you to the panelists for a very insightful discussion.
I want to push a little harder on the wage piece, I mean, because to the extent that the manufacturing story is driven in part by productivity, you would have expected workers’ wages to go up. But we know there’s been this broad wage stagnation. We know that in manufacturing, wages have not been going up. They’ve been flat or they’ve been going down.
What’s going on there? Some of that, it seems to me, has to do with the weakening of unions, which probably has knock-on effects in other parts of the economy. And some of the weakening of unions is probably associated with international competition, because the companies have alternatives if they can’t get the wage concessions they want from the unions and they have other investment alternatives.
I’m just wondering how you explain the wage piece in all of this, which, as we all know, has been weak for very long.
LAWRENCE: So there is—I think it is a misconception to believe that if wages rise in an industry—if productivity rises in an industry, the wages of workers in that industry will rise in terms of their general buying power. Workers—so let’s think about a worker in the computer industry. So suppose we’ve had a tremendous decline in—we’ve had a tremendous improvement in productivity in the computer industry, and what that means is the worker in the computer industry can actually buy more computers. But so too can all other workers.
What I’m trying to suggest is—and, in fact, I have a paper coming out, published by the American Enterprise Institute, next month in which I find that, in the aggregate, wages have actually reflected productivity growth in the aggregate. Blue-collar workers have not seen big increases in their wages. But educated workers and skilled workers and the top 1 percent of people who earn wage income have seen increases in their wages, so that, in fact, wage growth in general in the U.S. economy from 1970 until 2000 has actually tracked productivity growth. So there is no mystery as to, you know, why wages have increased slowly in the aggregate. It’s slow productivity growth. And when it—but there is growing wage inequality. And so some workers have done particularly poorly.
Now, I believe that an indicator of bargaining would be what’s been happening to the wages of unionized workers in the tradable-goods sector. The hypothesis that you put forward was—and we often hear it from unions—that their bargaining power has been depressed because firms can threaten to move offshore. But if you actually look at the data on wage growth of unionized workers, up until the auto crisis, you don’t see that they failed to keep up. They continued to command premiums. The big adjustment took place in the loss of membership, not in the wage growth.
So I’m skeptical of that argument. Although I’ve always thought it was plausible, I can’t find it in the data.
WEISMAN: Do you have a view of this, Justin? I mean—
PIERCE: Yeah. Well, I guess I’ll—
WEISMAN: This is a controversial and much-debated subject, the phenomenon that Ted mentioned.
PIERCE: Yeah. I mean, I think that some of the strongest evidence for an effective trade on labor markets—you know, both employment and wages comes from looking at, you know, variation across industries or across labor markets. So, you know, in my work with Peter Schott, we found that, you know, it’s not just that employment declined at the same time that trade increased. It’s that the industries that were most affected by the policy change had the biggest declines in employment. And, you know, looking at the work of Autor, Dorn, and Hanson, they’re looking across these local labor markets in the U.S. And the labor markets that are the most affected have increases in the unemployment rate, decreases in wages, decreases in labor-force participation.
So that sort of—that variation, I think, suggests a role for trade. Again, that to me does not suggest that, you know, protection is the answer. It just suggests that, you know, maybe there are some effects here that we weren’t fully appreciating before.
WEISMAN: OK. Sherm.
Q: Thanks very much. Sherm Katz, Center for Study of the Presidency.
This is in a gloomy context so far. This is just a positive story about companies and the Labor Department and community colleges working together. In Tennessee, Motlow Community College, with the benefit of Siemens, a course they had invented about something called mechatronics, and that’s how workers can service automated lines. The community college got together with Bridgestone and created a training program, and it was 72 percent got jobs.
My point is to ask you, what can we do, if anything, to incentivize business to take a larger role in helping the labor force move forward? And one can argue that since business is one of the greatest beneficiaries of trade, among other things, business has some responsibility.
WEISMAN: Thanks. You mentioned Siemens. And Robert, I think you studied German response to this as well. So that’s a good question. What can we do?
LAWRENCE: Well, I think there’s—
WEISMAN: Business do?
LAWRENCE: Firstly, I think the observation is right. I mean, it’s interesting that it is Siemens that is doing this, because the people who have really succeeded in reducing youth unemployment, if you look at all of the data, are the Germans, the Austrians. And they have these traditions where there’s this close integration between the firms and the educational institutions at various levels, both people who are going to college and people who do—who go to technical high schools.
And so your question was, what could the federal government do? One possibility, one idea you could think about, is sort of a training subsidy that firms would be able to write off, the provision of certain kinds of training. Our tendency is not to want to pay firms for things that they would do anyway. And so there’s a reluctance to give them grants when they give specific training. You know, it’s more likely that you’ll say, well, if the firm—if the worker gets a general skill or if the worker is trained in some other institution, you know, an accredited institution, then you’ll allow for that kind of a write-off.
So there are problems in paying firms to do things they would otherwise do. But nonetheless, I think if you identify this as a serious problem, you know, it may well be a leaky bucket. You may not be able to target precisely. But it is an area where you could—where we need to think more about how we achieve this.
WEISMAN: We have time for one more question, provided it is very succinct and is a question.
Yes, sir, here.
Q: Thanks a lot. I’m Shaun Donnelly from the U.S. Council for International Business.
I just wanted to follow up with Robert and make one of his points more explicit and see if you agree with it. The structural change from manufacturing to non-manufacturing sectors also has the clear thing that manufacturing is the most unionized sector. And given the fact—so if more jobs are going to be in non-unionized sectors, given the fact—or organized labor is a major influence in one of our political parties—does that play into the politics of the issue as you were referring to it? Thanks.
LAWRENCE: Yeah. Now, actually, the most unionized sector today is the public sector. That’s where most of the union members are. Manufacturing has seen an overall decline, actually, in the share of unionized workers. But I think, undoubtedly, politically, that unions are very important, and especially when it comes to trade policy. And they have been very active in trade policy.
And so I do think that they are part of the explanation for this, in a sense, mismatch between the broad opinions of the Democratic constituents and the behavior of the Democratic representatives. But I wouldn’t only single out unions. There are numerous organizations that intervene between the people and their representatives. And business—and particular sectoral interests are just as powerful, if anything sometimes more powerful, and not only on the side of free trade; often on the side of protection.
WEISMAN: That’s a sort of political question. But Justin, do you want to make a concluding comment before we—
WEISMAN: Of that or anything else?
PIERCE: Well, I guess I’ll just make a concluding comment, not so much specifically about that, but, you know, just the point that some recent research has highlighted, you know, these distributional effects of trade competition that maybe we didn’t fully appreciate before.
For people who are interested in promoting trade and promoting trade agreements and the benefits of them, I think it’s important to think seriously about how we can—you know, how we can help people who are displaced by trade adjust and move to other sectors of the economy that are growing.
LAWRENCE: And I would agree with that prescription, although I’m still pessimistic that only doing that is actually going to solve this problem. I think ultimately it depends on getting more vigorous economic growth and driving the labor market to full levels of employment, because that’s going to be really key to wage gains. That’s what we’re starting to see now.
So I think really succeeding macroeconomically, on the one hand, and stimulating productivity growth, on the other, is really the key, ironically, to alleviating a lot of the pressures that are currently manifesting themselves through trade.
WEISMAN: Well, thank you both. And thank you, members here, many of whom have thought about these issues and written about them for a long time. And thank the Council for inviting me. And we now have a coffee reception that we hope you all can join before the next session.
Thanks very much. (Applause.)
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