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IN
his recent book "Economics Rules,"
Harvard economist Dani Rodrik laments how
economists often portray a public consensus
while disagreeing strongly in private. In
effect, economists behave like scientists
behind closed doors, but as preachers when
dealing with the public, says Noah Smith,
a Bloomberg analyst, whose views were not
necessarily espoused by the company.
Nowhere
is this evangelism clearer than on the issue
of trade, he says. Ask any economist what
issue they agree on, and the first answer
you're likely to hear is "free trade
is good". The general public disagrees
vehemently, but economists are almost unanimous
on this point.
But
look at actual economics research, and you
will find a very different picture, said
Mr Smith. The most recent example is a paper
by celebrated labour economists David Autor,
David Dorn and Gordon Hanson, titled "The
China Shock: Learning from Labour Market
Adjustment to Large Changes in Trade."
The
study shows that increased trade with China
caused severe and permanent harm to many
American workers: "Adjustment in local
labour markets is remarkably slow, with
wages and labour-force participation rates
remaining depressed and unemployment rates
remaining elevated for at least a full decade
after the China trade shock commences. Exposed
workers experience greater job churning
and reduced lifetime income. At the national
level, employment has fallen in US industries
more exposed to import competition, but
offsetting employment gains in other industries
have yet to materialise."
Autor
et al show powerful evidence that industries
and regions that have been more exposed
to Chinese import competition since 2000
- the year China joined the World Trade
Organisation - have been hit hard and have
not recovered. Workers in these industries
and regions don't go on to better jobs,
or even similar jobs in different industries.
Instead, they shuffle from low-paid job
to low-paid job, never recovering the prosperity
they had before Chinese competition hit.
Many of them end up on welfare. This is
very different from earlier decades, when
workers who lost their jobs to import competition
usually went into higher-productivity industries,
to the benefit of almost everyone.
In
other words, the public might have been
wrong about free trade in the 1980s and
1990s, but things have changed. Popular
opinion seems to be exactly right about
the effect of trade with China - it has
killed jobs and damaged the lives of many,
many Americans.
Economists
may blithely declare that free trade is
wonderful, but our best researchers have
now shown that public misgivings about these
smooth assurances have been completely justified.
Why
are economists so willing to declare to
the world that free trade is good, even
after reading papers like the one by Autor
et al? Part of the problem is the definition
of "good".
According
to most models of trade, reducing trade
barriers raises efficiency - which is to
say, total gross domestic product. But efficiency
says nothing about fairness, and almost
any model of trade will show that some people,
industries and regions lose out.
If
most Americans experience slight gains from
lower import prices, and a few lose their
livelihoods and have to go on welfare, economists
call that a "good" outcome, because
they are so focused on the concept of efficiency.
But because the public cares about a lot
more than efficiency, the job losses in
industries and regions knocked out by China
since 2000 have made economists seem increasingly
callous and out of touch.
But
this is only part of the problem. Economists
are also stubbornly unwilling to question
their benchmark theories, even when the
evidence presents a challenge to these theories.
The fact that Autor et al find total national
employment declining in response to trade
with China should be cause for concern.
Standard trade models, especially the simple
ones taught in Econ 101, predict that this
shouldn't have happened.
Autor
et al sternly rebuke the economics profession
for relying too much on theory, and not
enough on evidence, when it comes to the
issue of trade: "We argue that having
failed to anticipate how significant the
dislocations from trade might be, it is
incumbent on the economics literature to
more convincingly estimate gains from trade,
such that the case for free trade is not
based on theory alone, but on a foundation
of evidence."
The
authors suggest that real-world economies
may simply be much worse at adjusting to
big changes than most economic models assume.
It is expensive and time-consuming for workers
to train for new jobs and to move to new
locations. It also takes time and money
for businesses to figure out how to change
their business models in response to the
new landscape presented by a global economy
with China in it. These adjustment costs
might overwhelm the gains from trade.
In
the case of China, Autor et al's warning
may come too late. China's economy is slowing
and its costs are rising rapidly. No new
prospective trade partners will be able
to replicate anything close to the China
shock. In other words, the unique problems
created by trade with China might have been
a one-off event. But economists should still
re-evaluate their benchmark theories, and
ease up in their adamant rhetoric in favour
of free trade.
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