The economic-policy consensus that prevails in the US is right about one thing. Over the course of recent decades, industrial dislocation, sluggish incomes and diminished opportunities have left many Americans stranded. More surprising is that Republicans and Democrats, despite their mutual loathing, mostly agree about how to put this right. That’s too bad, because the consensus they’ve reached is wrong.
The crux of the problem, according to both sides, was reckless trade liberalization that led to the collapse of US manufacturing. Thanks to surging imports, many good, high-wage factory jobs disappeared, and nothing came along to take their place. The worst-affected regions of the economy fell into steep decline. What’s the remedy for a sickness caused by too much trade? Use tariffs and subsidies to protect the factory jobs that remain and, better still, to create new ones. If market forces and foreign competition were the problem, trade and industrial policies are the solution.
In a splendid new book, Behind the Curve, Robert Lawrence of Harvard and the Peterson Institute for International Economics counts the many errors in this way of thinking.
For a start, trade liberalization wasn’t the main killer of factory jobs. As economies develop and grow more prosperous, changes in the structure of employment follow a similar pattern almost everywhere. Farm jobs give way to factory jobs, then factory jobs give way to service jobs. In the first phase, agricultural productivity rises, fewer farm workers are needed, food prices fall and higher real incomes shift demand toward manufactures. Then the same thing happens in manufacturing: Productivity rises, factory jobs go away, goods prices fall and higher real incomes shift demand toward services.
In country after country, over the course of many decades, the share of factory jobs in total employment first rises then falls, tracing an inverted U (hence “behind the curve”). A declining share of manufacturing employment is a feature of rising prosperity, not a bug. Politicians who want to get workers back into factories could perhaps be asked why they don’t aim higher and strive to get workers back on the land.
To be sure, international trade can hasten these transitions – another way of saying that trade is pro-growth. But it isn’t the principal driver. In the US, the share of manufacturing jobs in total non-farm employment fell from more than 30% in 1950 to less than 15% by the late 1990s. Note, that was before China’s accession to the WTO in 2001. Following China’s full entry into the global trading system, US manufacturing imports surged – the notorious “China Shock.” The share of manufacturing employment fell to 9% by 2010 and then appeared to level off. For a while, at least, the rate of decline did accelerate. Even so, in aggregate terms, the trade shock was in line with the long-established downward trajectory of factory jobs.
The fact that this decades-long decline was structural rather than induced by trade policy should not be allowed to disguise the economic impact of disappearing factory jobs, whatever the cause, on particular cities, regions and kinds of worker. MIT’s David Autor and colleagues brought the China Shock to policy-makers’ attention with seminal papers starting in 2013 and put the focus squarely on local and regional consequences. Those effects have often been both severe and persistent – and, as nobody needs reminding, political consequences have flowed from that.
Yet don’t count on trade and industrial policies aimed at reviving manufacturing employment to address these setbacks. Earlier this year Autor and co-authors published a study of the “2018-2019 trade war” between the US and China, again with the focus on local impacts. They find: “The trade war has not to date provided economic help to the US heartland: Import tariffs on foreign goods neither raised nor lowered US employment in newly protected sectors; retaliatory tariffs had clear negative employment impacts, primarily in agriculture; and these harms were only partly mitigated by compensatory US agricultural subsidies.” In short, the policy made things worse.
The Biden administration left President Trump’s trade barriers in place but shifted the emphasis from tariffs toward enormous subsidies for specific manufacturing investments. There’s a case for some such subsidies – in particular, where the goal is to accelerate the clean-energy transition, or national security is implicated (production of high-end computer chips, for example) or investments might cause spillovers that promote growth more broadly. Trouble is, well-targeted subsidies of these kinds might raise manufacturing output but won’t do much for manufacturing employment.
The Biden administration has boasted about the jobs its various subsidy programs have already created, and it promises more to come. Since the economy is already running at or above full employment, these gains are mostly illusory. The subsidies are shifting workers, not creating net jobs. Granted, they’re adding to overall labor demand, which will push up wages a bit. But that will push prices up a bit, requiring the Fed, other things being equal, to offset the inflationary pressure. Meantime, the subsidies must be paid for, which means either bigger budget deficits (hence higher interest rates) or higher taxes (hence less demand for labor). One way or another, in macro terms, you end up in much the same place.
An advocate of subsidies might say the point is to help especially deserving places and kinds of workers, even if the aggregate employment gains, if any, are small. Again, though, this is questionable. High-tech manufacturing – the kind that plausibly offers environmental, national-security or economic-spillover benefits – tends to be capital-intensive, not labor-intensive. And as Behind the Curve points out, Bidenomics hasn’t aimed its new subsidies mainly at the rust-belt states that saw the biggest falls in manufacturing employment in recent decades.
Government should indeed address the pressures on stranded workers and communities, but attempting a rebirth of manufacturing is not the way. Equipping people with the skills they need to prosper in a service-based economy is the answer – meaning first and foremost better schools, more and better opportunities for occupational training and retraining, and fewer obstacles to relocating for work. Support displaced workers more generously. Relieve financial stress with a stronger social safety-net.
America’s best future demands a more prosperous and secure middle class. That doesn’t mean more jobs in factories.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
More Asian/European Markets Topics >
