Open

by Kimberly Clausing

  42. See Alvaredo et al. “The Top 1 Percent,” and Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva, “Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities,” Working Paper 17616, NBER Working Papers, National Bureau of Economic Research, 2011.

  43. Poorer countries also often experience increasing inequality, but in some important cases, it occurs amidst much stronger growth. In China, economic growth has raised standards of living for even the poorest workers, even as economic inequality has increased. See “The Great Divide,” Economist, February 16, 2017.

  44. After climate change—if that is classified as an “economic” problem. Many refer to climate change as an environmental problem, though economic questions surely have an essential role to play in understanding the causes, consequences, and policy responses to climate change.

  3. The Case for International Trade

  1. For a discussion, see Yuval Noah Harari and Derek Perkins, Sapiens: A Brief History of Humankind (New York: Harper, 2015), 34–36; and “Homo Economicus?” Economist, April 7, 2005.

  2. John Mueller and Karl Mueller, “Sanctions of Mass Destruction,” Foreign Affairs 78:3 (May 1999), 43–53.

  3. During recessions, there may be a lot of “slack” in the economy, and it will be comparatively easy to raise employment.

  4. For a discussion of recent trends in labor force participation, see Stephanie Aaronson, Tomaz Cajner, Bruce Fallick, Felix Galbis-Reig, Christopher Smith, and William Wascher, “Labor Force Participation: Recent Developments and Future Prospects,” Brookings Papers on Economic Activity, Fall 2014, 197–275.

  5. For detailed data, see Council of Economic Advisers, Economic Report of the President, (Washington, DC: United States Government Printing Office, 2015), 291, 307. For more background, see Council of Economic Advisers, The Economic Benefits of US Trade, Report, May 2015.

  6. This share could be as large as 40 percent. See Robert Koopman, William Powers, Zhi Wang, and Shang-Jin Wei, “Give Credit Where Credit Is Due: Tracing Value Added in Global Production Chains,” Working Paper 16426, NBER Working Papers, National Bureau of Economic Research, 2010, Table A3. A more recent analysis suggests a share of 27 percent. See Alonso de Gortari, “Disentangling Global Value Chains,” Harvard University Working Paper, November 26, 2017.

  7. Andrew B. Bernard, J. Bradford Jensen, Stephen J. Redding, and Peter K. Schott, “Global Firms,” Working Paper 22727, NBER Working Papers, National Bureau of Economic Research, 2016.

  8. See Kenneth L. Kraemer, Greg Linden, and Jason Dedrick, “Capturing Value in Global Networks: Apple’s iPad and iPhone,” University of California, Irvine, University of California, Berkeley, and Syracuse University Working Paper, 2011.

  9. Jeffrey Hall, Jobs Supported by State Exports, 2016, Report, Office of Trade and Economic Analysis, International Trade Administration, December, 2017.

  10. Joseph Parilla and Mark Muro, “US Metros Most Exposed to a Trump Trade Shock,” Brookings Institution, January 30, 2017.

  11. Examples of such factors include whether the economy is in a recession or not, the actions of the Central Bank that determine the liquidity of the economy (monetary policy), and government decisions regarding the budget balance (fiscal policy).

  12. Paul Krugman, “The China Shock and the Trump Shock,” Blog, Opinion: The New York Times, December 25, 2016. Krugman used the joke to argue that “a protectionist turn, reversing the trade growth that has already happened, would be the same kind of shock [as prior trade shocks] given where we are now.”

  13. See David Dollar and Aart Kraay, “Trade, Growth, and Poverty,” The Economic Journal 114:493 (2004), F22–F49. Findings are updated here using more current World Bank data and the same methodology. “Rich countries” are OECD members (omitting Chile, Hungary, Mexico, and Poland) and Hong Kong, Singapore, Malta, Lithuania, and San Marino, while “globalizers” are the top twenty-four non-advanced economies in terms of trade-to-GDP ratio growth between 1975–1979 and 2000–2007. “Non-globalizers” are the remaining economies for which data are available. The seventy-four “non-advanced” economies were classified by comparing their trade-to-GDP ratio growth between these two periods. Dollar and Kraay applied this same method, but compared data from 1975–1979 and 1995–1997. Average GDP per capita growth and average unemployment rate were both population-weighted, using data from the final year of each period of observation.

  14. One intriguing study uses geographic variation across countries to identify the exogenous effects of trade on growth, finding that trade has helpful effects on economic growth. See Jeffrey A. Frankel and David Romer, “Does Trade Cause Growth?” The American Economic Review, 89:3 (1999): 379–399.

  15. These figures are from the World Bank’s World Development Indicators database; all dollar figures are in 2011 international dollars.

  16. As one example, say there are ten hours in each workday and Karen makes four units of H per hour of hunting and four units of G per hour of gathering; Peter makes one unit of H per hour or hunting and two units of G per hour of gathering. If they each spend seven hours of the day hunting and three hours of the day gathering, they will end up with thirty-five units of H ((7 hours *4)+(7 hours *1)) and 18 units of G ((3 hours *4)+(3 hours *2)). However, if they specialize by having Karen focus solely on the hunting at which she is relatively better, and Peter on the other good, the household will make forty (10 hours *4) units of H and twenty (10 hours *2) units of G, so they can have more of both goods. More generally, we can show that production of both goods can increase if each person specializes in the good that they are relatively better at producing. In this case, Karen is relatively better at hunting than gathering, and Peter is relatively better at gathering, in that his relative disadvantage in this activity is lower.

  17. Robert L. Heilbroner, Teachings from the Worldly Philosophy (New York: WW Norton, 1997), 24–28.

  18. This is true in general, but when the labor share of income (GDP) falls, this need not always be the case. While countries with higher productivity reliably have higher wages, many countries have also recently experienced declining shares of labor income, as discussed in Chapter 2. This implies that capitalists are receiving disproportionate amounts of the productivity gains. However, unless the declining share of labor income is more severe for some countries than others, countries with higher productivity gains should generally experience higher wage growth.

  4. Winners and Losers from International Trade

  1. The US government also subsidizes many farm products, including cotton, corn, soybeans, and others. Nonetheless, even absent subsidies, the high productivity of US agriculture would likely generate substantial US exports.

  2. Here I follow the professional convention of referring to less-educated workers as less-skilled. Of course, less-educated workers often have substantial practical skills. But since the term has been used so extensively in the economics literature, I continue to use it here.

  3. For an important study that documented stylized facts on the labor market outcomes of trade-displaced workers, see Lori G. Kletzer, “Trade-related Job Loss and Wage Insurance: A Synthetic Review,” Review of International Economics 12:5 (2004), 724–748.

  4. See David Autor, David Dorn, and Gordon H. Hanson, “The China Shock: Learning from Labor-Market Adjustment to Large Changes in Trade,” Annual Review of Economics 8:1 (2016), 205–240.

  5. See Daron Acemoglu, David Autor, David Dorn, Gordon H. Hanson, and Brendan Price, 2015, “Import Competition and the Great US Employment Sag of the 2000s,” Journal of Labor Economics 34 (S1): S141–S198.

  6. See David Autor, David Dorn, Gordon Hanson, and Kaveh Majlesi, 2016, “Importing Political Polarization? The Electoral Consequences of Rising Trade Exposure,” Working Paper 22637, NBER Working Papers, National Bureau of Economic Research.

  7. The numbers have since rebounded somewhat, as trade has become a less noticeable issues in the early days of the Trump Presidency. In April 2017, the numbers were 52 perc
ent good and 40 percent bad. See: http://assets.pewresearch.org/wp-content/uploads/sites/12/2017/04/24163506/Trade_agreements_topline_for_release.pdf.

  8. This section’s subtitle was inspired by the title of another study: Edward E. Leamer, Lawrence Mishel and T. N. Srinivasan, “Foreigners and Robots: Assistants of Some, Competitors of Others,” in Social Dimensions of US Trade Policies Alan V. Deardorff and Robert M. Stern, eds. (Ann Arbor: University of Michigan Press, 2000), 19–52.

  9. Jon Sheesley, “The 80’s Supercomputer That’s Sitting in Your Lap,” TechRepublic, October 13, 2008; “A Modern Smartphone or a Vintage Supercomputer: Which Is More Powerful?” Phone Arena, June, 2014.

  10. Michael J. Hicks and Srikant Devaraj, “The Myth and Reality of Manufacturing in America,” Ball State University, Center for Business and Economic Research, 2015.

  11. Brett Smith, quoted in Danielle Paquette, “The Real Reason Ford Abandoned Its Plant in Mexico Has Little to Do with Trump,” Washingtonpost.com, Wonkblog, January 4, 2017.

  12. Stanley Lebergott, “Labor Force and Employment, 1800-1960,” in Output, Employment, and Productivity in the United States after 1800 (New York: National Bureau of Economic Research, 1966), 117–204. Also see “Farm Demographics: US Farmers by Gender, Age, Race, Ethnicity, and More,” USDA Census of Agriculture, May, 2014.

  13. J. Bradford DeLong, “NAFTA and Other Trade Deals Have Not Gutted American Manufacturing—Period,” Vox, January 24, 2017.

  14. See, for example, Xuejun Liu, Albert Park, and Yaohui Zhao, “Explaining Rising Returns to Education in Urban China in the 1990s,” IZA Discussion Paper No. 4872, IZA Institute of Labor Economics, 2010.

  15. Note that while inequality is increasing in many countries throughout the world, between-country inequality is falling, as incomes are rising in poorer countries relative to incomes in richer countries, particularly when one considers the large populations in the fastest-growing poor countries.

  16. Increasing company concentration is documented across all major industries. See David Autor, David Dorn, Lawrence F. Katz, Christina Patterson, and John Van Reenen, “Concentrating on the Fall of the Labor Share,” Working Paper 23108, NBER Working Papers, National Bureau of Economic Research, 2017. There is also evidence that conventional measures of market concentration may understate the problem due to common ownership patterns of large firms, as large institutional investors hold large shares of competitor companies. For a discussion of the implications of this problem, see Jose Azar, Martin C. Schmalz, and Isabel Tecu, “Anti-Competitive Effects of Common Ownership,” Journal of Finance, 2017; Jose Azar, Sahil Raina, and Martin C, Schmalz, “Ultimate Ownership and Bank Competition,” CEPR Working Paper, July, 2016.

  17. For a discussion of these trends, see Jason Furman and Peter Orszag, “A Firm-Level Perspective on the Role of Rents in the Rise in Inequality,” presented at the “A Just Society” Centennial Event in Honor of Joseph Stiglitz, Columbia University, October 16, 2015. More evidence is found in Erling Barth, Alex Bryson, James C. Davis, and Richard Freeman, “It’s Where You Work: Increases in the Dispersion of Earnings across Establishments and Individuals in the United States,” Journal of Labor Economics 34:S2 (2016), S67–S97; and Jae Song, David J. Price, Fatih Guvenen, Nicholas Bloom, and Till von Wachter, “Firming Up Inequality,” NBER Working Paper no, 21199, National Bureau of Economic Research, 2015.

  18. Over the previous thirty years, corporate savings have increased their share of total global savings by about twenty percentage points. See Chapter 2. Also see Loukas Karabarbounis and Brent Neiman, “Declining Labor Shares and the Global Rise of Corporate Saving,” Working Paper 18154, NBER Working Papers, National Bureau of Economic Research, 2012.

  19. In the United States, corporate profits in recent years are higher as a share of GDP than they have been at any point in the last fifty years, in either before-tax or after-tax terms. Since 1980, after-tax corporate profits have increased more than 50 percent as a share of GDP, from about 6 percent of GDP to over 9 percent of GDP.

  20. Treasury economists calculate that the fraction of the corporate tax base that is excess returns averaged 60 percent from 1992 to 2002, but has since increased to about 75 percent over the period 2003–2013. See Laura Power and Austin Frerick, “Have Excess Returns to Corporations Been Increasing Over Time?” National Tax Journal 69:4 (2016), 831–846.

  21. For a discussion of the evidence, see David Autor, David Dorn, Lawrence F. Katz, Christina Patterson, and John Van Reenen, “Concentrating on the Fall of the Labor Share,” American Economic Review: Papers & Proceedings 2017, 107:5, 180–185.

  5. Trade Politics and Trade Policy

  1. See Christian Broda and David E. Weinstein, “Globalization and the Gains from Variety,” Quarterly Journal of Economics 121:2 (2006), 541–585; Shalah M. Mostashari, “Expanding Variety of Goods Underscores Battle for Comparative Advantage,” Economic Letter, Federal Reserve Bank of Dallas, 5:15 (2010).

  2. Gary Clyde Hufbauer, Diane T. Berliner, and Kimberly Ann Elliott, Trade Protection in the United States: 31 Case Studies, Washington: Peterson Institute for International Economics, 1986.

  3. See Gary Clyde Hufbauer and Sean Lowry, “US Tire Tariffs: Saving Few Jobs at High Cost,” Policy Brief PB 12-9, Peterson Institute for International Economics, 2012.

  4. See Edward Gresser, “Toughest on the Poor: America’s Flawed Tariff System Comment,” Foreign Affairs 81:6 (2002): 9–14.

  5. See Pablo D. Fajgelbaum and Amit K. Khandelwal, “Measuring the Unequal Gains from Trade,” The Quarterly Journal of Economics 131:3 (2016): 1113–1180.

  6. See Jason Furman, Katheryn Russ, and Jay Shambaugh, “US Tariffs Are an Arbitrary and Regressive Tax,” VoxEU.org. January 12, 2017.

  7. See J. Bradford DeLong, “NAFTA and Other Trade Deals Have Not Gutted American Manufacturing—Period,” Vox, January 24, 2017.

  8. See M. Angeles Villarreal and Ian F. Fergusson, “The North American Free Trade Agreement (NAFTA),” R42965, Congressional Research Service, April 16, 2015; Gary Clyde Hufbauer, Cathleen Cimino, and Tyler Moran, “NAFTA at 20: Misleading Charges and Positive Achievements,” PB 14-13, Peterson Institute for International Economics, 2014.

  9. For one example, see Andrew K. Rose, “Do We Really Know That the WTO Increases Trade?,” The American Economic Review 94:1 (2004): 98–114.

  10. Andrew Rose, the author of the WTO study, notes that countries’ desire to join the “club” may affect trade in prior years in a manner akin to how the author’s child gained access to an airport lounge based on good behavior ahead of time. Once they are in, there is no longer any incentive to behave well; it is prior to joining that behavior improves.

  11. The European Union is integrated in many ways that go further and deeper than a mere customs union. For instance, there are agreements establishing a single market, allowing free labor mobility, and adopting a common currency. The adoption of the Euro is considered by many economists to have been a step too far in terms of economic integration, since it is unclear that Euro member countries were well suited to share one monetary policy. For a review of some of the related troubles, see Joseph E. Stiglitz, The Euro: How a Common Currency Threatens the Future of Europe (New York: W. W. Norton & Company, 2016).

  12. Under a free trade agreement (FTA), members are free to determine their own trade policies on other (non-member) nations independently. This necessitates rules of origin—that is, agreed criteria to assign nationality to products, since goods are often transshipped from a country outside the FTA to a member country through another member country.

  13. WTO members generally agree to treat other members as “most favored nations,” so they are not allowed to single out particular members for more or less advantageous trade treatment. There are, however, various exceptions, including provisions that allow free trade agreements so long as all trade among members of such agreements is completely liberalized.

  6. Who’s Afraid of the Trade Deficit?

  1. Figur
e 6.1 shows the current account balance, which is a broader measure than the simple balance of traded goods and services. It also includes investment income, which can be loosely thought of as trade in the services of financial capital, and net international transfers such as foreign aid.

  2. Such tariffs sometimes result from “antidumping” disputes, for example, which accuse foreign exporters of selling goods abroad at prices lower than what their domestic customers pay. These disputes are often protectionist moves in disguise, as dumping rulings typically have little to do with whether the foreign firm engaged in predatory pricing practices. See Douglas A. Irwin, Free Trade under Fire: Fourth Edition. (Princeton: Princeton University Press, 2015), 164–194.

  3. See, as one example, the meta-analysis by Ross Levine and David Renelt. “A Sensitivity Analysis of Cross-Country Growth Regressions,” American Economic Review 82:4 (1992): 942–963.

  4. See “China and Currency Manipulation,” Economist. March 2, 2017; and Eduardo Porter, “Trump Isn’t Wrong on China Currency Manipulation, Just Late,” New York Times, April 11, 2017.

  5. 529 plans are so called because they are authorized by Section 529 of the Internal Revenue Code; likewise, 401K plans are named for the subsection that describes them.

  6. Governments, like individuals, would be wiser to finance investments with their borrowings than to spend on greater consumption. A person who takes out a student loan, for example, may spend more than he or she earns while in school, but the investment in education typically yields greater income in the years that follow. The person who goes into debt throwing lavish parties, by contrast, does not typically benefit from financial returns later.

  7. Multinational Corporations