Ivory Tower Economists, Free Trade, and Workplace Woes

June 14, 2016 4:30 PM

In the midst of debate over the Trans-Pacific Partnership (TPP) and Donald Trump’s promise to impose high tariffs on imports from Mexico and China, media commentators commonly assert that ivory tower economists have acclaimed free trade pacts but ignored workers who were victims of the North American Free Trade Agreement (NAFTA) and other trade deals. Such commentators are correct in saying that mainstream economists support trade liberalization, but they are wrong in asserting an indifference to displaced workers.

Along with other mainstream think tanks, the Peterson Institute for International Economics has championed multiple initiatives to foster freer trade. At the same time, the Institute’s research has highlighted public policies that enable affected workers to find new jobs. This blog summarizes the Peterson Institute’s contributions, but the Brookings Institution and other halls of mainstream economics can offer similar accounts. 1

Thirty years ago, in March 1986, the Institute released Policy Analysis 15, Trade Policy for Troubled Industries, by Gary Clyde Hufbauer and Howard F. Rosen. PA 15 offered observations and recommendations that remain relevant today (pp. 30–43):

  • Displaced workers incur significant income losses owing both to long unemployment and lower wages in their next job (where their acquired skills may be irrelevant);
  • They also lose assets, in the form of forgone pensions, healthcare benefits, and depressed home values;
  • Displaced workers are concentrated in relatively few industries (e.g., apparel, steel, auto parts, electrical equipment) and relatively few states (e.g., Michigan and the mid-Atlantic states);
  • Trade Adjustment Assistance (TAA) as it existed then was completely inadequate to answer the needs of displaced workers. The same is still true.

In March 1992, the Institute released North American Free Trade: Issues and Recommendations, by Hufbauer and Schott, which previewed and applauded the NAFTA pact. Chapter 10 of this book, titled Labor, summarized the expected adjustment burdens, reviewed US, Canadian, and Mexican labor programs, and called for more relief and training funds. Specifically, the authors called for new outlays of $900 million over five years to assist some 112,000 additional displaced workers. Congress never appropriated the funds, even though the adverse impact of NAFTA was greater than anticipated, roughly 50,000 workers per year over the ensuing decade. 2

As Congress was debating NAFTA in 1993, the Institute published NAFTA: An Assessment, by Hufbauer and Schott. The authors rehearsed the expected adverse impact on workers in select industries, with detailed estimates (table 2.1 in the book). Their summary calculation was 145,000 jobs displaced over five years (a figure that was too low), while other authors put the number as high as 490,000 (too high). To deal with displacement, President George H.W. Bush called for $1.67 billion over five years in the Job Training Program to accommodate workers displaced by NAFTA. Again the funds were not forthcoming.

In March 2001, then Institute Visiting Fellow Lori G. Kletzer and Robert E. Litan, then director of the Economic Studies Program at the Brookings Institution, put forward a bold proposal for wage insurance to compensate displaced workers for part of the loss in earnings when they took their next job, plus health care for these workers. They projected an annual cost for both programs at around $3.0 billion to $3.5 billion.

Neither program found legislative favor in the expansive form advocated by Kletzer and Litan, but not for lack of trying. The Trade Promotion Authority (TPA) Act of 2002, at the insistence of Senator Max Baucus (D-MT), renewed TAA, and contained an experimental wage insurance program, called the Alternative Trade Adjustment Assistance (ATAA) program, along with health insurance benefits for displaced workers. The programs were most recently renewed in the TPA Act of 2015, which renamed wage insurance as Readjustment Trade Adjustment Assistance (RTAA). However, the program is limited to workers 50 and older, annual benefits are capped at $10,000, and no benefits are available for workers earning more than $50,000 annually, so RTAA has rightly not been hailed as an effective answer for displaced workers.

In his telling of the NAFTA debate, Steven Weisman (2016, chapter 10) paid considerable attention to the job losers and their spokesmen (starting with Ross Perot and his famous “great sucking sound”). After casting a skeptical eye on President Clinton’s claim of 200,000 US jobs from NAFTA, Weisman summarized the political debate as all about jobs (p. 153):

Thus the arguments made by the president and NAFTA’s critics came down to jobs at home versus jobs abroad, jobs for middle-class Americans versus jobs for poor Mexicans, jobs for some parts of the country versus job losses for other parts.

While jobs dominated the political debate, Peterson Institute economists then and now (like other mainstream economists) emphasized the miniscule net effect of NAFTA on total employment and instead stressed the broader though diffuse gains to productivity, wages and consumer prices, yet recognizing the adjustment burdens. In this vein, Weisman (pp. 149–150) stressed TAA’s checkered history and parsimonious budget. 

Howard Rosen, long an Institute fellow, spent years researching TAA and other labor measures, and advising the TAA Coalition, which tried to improve the program—to no avail.

Thus the US failure to address worker displacement cannot be laid at the doorstep of mainstream economists, certainly not those at the Peterson Institute. On multiple occasions they have stressed that the national dividend from open trade exceeds by at least 10 times what it would cost to meaningfully assist workers who lose their jobs to import competition. 3 The failure must be laid at the doorstep of successive Congresses, which for 50 years have enacted token programs that now fuel a powerful backlash against trade liberalization.

Congressional indifference to meaningful trade adjustment is just one part of the larger American skepticism toward public safety nets. In fact, American skepticism is so strong that the United States has the most porous safety net among advanced countries. 4 Many Americans believe that able-bodied citizens who are out of work should pull themselves up, with little help from government agencies. 5

Approximately 1.5 million workers are displaced annually, not because of personal faults but because firms are badly managed, or because technology takes their jobs, or because imports replace US production. In the past five years (2010–15), US merchandise imports have increased by an average of $60 billion annually. Even if every shipment of imported merchandise displaced American workers—a vast exaggeration—the contribution of increased imports to job displacement would amount to 300,000 annually, just one-fifth of the annual displacement toll.

The current spasm of anti-globalization politics may derail the TPP and create barriers that sharply curtail the annual growth of imported merchandise. Even so, at least four-fifths of displaced workers will find no relief, while American productivity and living standards will be slowly eroded. These are high costs for a persistent policy failure.

Notes

1. The Brookings Institution’s 30-year record of advocating public policies to assist displaced workers is summarized by Stephen A. Wandner, 2016, Wage Insurance as a Policy Option in the United States.

2. See Gary Clyde Hufbauer, Cathleen Cimino-Isaacs, and Tyler Moran, 2014, NAFTA at 20: Misleading Charges and Positive Achievements, Policy Brief 14-13, Peterson Institute for International Economics.

3. For calculations of the cost/benefit ratio in the context of the TPP pact, see Robert Z. Lawrence and Tyler Moran, 2016, Adjustment and Income Distribution Impacts of the TPP, In Assessing the Trans-Pacific Partnership, Volume 2: Innovations in Trading Rules, PIIE Briefing 16-4, Peterson Institute for International Economics.

4. For analysis of the impact of US social spending on overall income inequality and healthcare outcomes, see Jacob Kirkegaard, 2015, The True Levels of Government and Social Expenditures in Advanced Economies, Policy Brief 15-4, Peterson Institute for International Economics.

5. For details on public perceptions of the US social safety net, see Bruce Stokes, 2013, Public Attitudes Toward the Next Social Contract, New America Foundation.

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