First, the gains of international trade are fairly small for a large economy like that of the United States. Second, while the gains are potentially much larger for smaller and poorer countries, there is no magic bullet. Just as we saw in the chapter on migration that opening a border widely would not be enough to get everyone to move, removing trade barriers is not enough to ensure new countries can join the party. Declaring trade is free is not the magic bullet for development (or even for trade). Third, the redistribution of gains from trade has proven extremely tricky, and people negatively affected by trade have suffered, and are still suffering, a great deal.
Taken together, the exchange of goods, people, ideas, and cultures made the world much richer. Those lucky enough to be in the right place at the right time, with the right skills or the right ideas, grew wealthy, sometimes fabulously so, benefitting from the opportunity to leverage their special gifts on a global scale. For the rest, the experience has been mixed. Jobs were lost and not replaced. Rising incomes have paid for more new jobs—as chefs and chauffeurs, gardeners, and nannies—but trade has also created a more volatile world where jobs suddenly vanish only to turn up a thousand miles away. The gains and the pains ended up being very unequally distributed and they are, very clearly, starting to bite back at us; along with migration they define our political discourse.
So do protectionist tariffs help? No. Reintroducing tariffs now will not help most Americans. The reason is simple: one of our main argument so far has been that we need to worry about transitions. Many of those displaced by the China shock never really recovered because the sticky economy meant they could not move sectors or regions to get back on their feet, and the resources could not move to them.
But shutting off trade with China now will clearly create a new set of displacements and many of those new losers will be in counties we have not yet heard anything about, simply because they are doing just fine. Indeed, among the 128 products on which China announced tariffs on March 22 and April 2, 2018, the majority were agricultural: a.p.p. (apples, pears, and pork), rather than apps. US exports in agriculture have risen steadily over the last few decades (from $56 billion in 1995 to $140 billion in 2017). Today a fifth of US agricultural production is exported. And the biggest export destination is East Asia. China alone buys 16 percent of US agricultural exports.74
The first-order effect of a trade war with China is therefore likely to be a loss of jobs in agriculture and in the industries supporting it. The US Department of Agriculture estimates that in 2016, agricultural exports were responsible for over a million jobs in the United States, almost three-quarters of which were in the nonfarm sector.75 The five states with the largest share of agricultural employment are California, Iowa, Louisiana, Alabama, and Florida.76 For precisely the same reasons people who lost their manufacturing jobs in Pennsylvania were not able to get other jobs near home, these agricultural jobs will not be replaced by manufacturing jobs in the region. And we know from everything we have seen in this chapter and the previous one that just as manufacturing workers did not move when their jobs were lost, farm workers would probably not move. Alabama and Louisiana are two of the ten poorest states in the United States,77 and a trade war would throw them under the bus.
For the United States, a trade war would not be the end of the world as we know it. But while it may save some jobs in steel, it would likely cause significant new damage to others. The US economy will be fine. Hundreds of thousands of people will not.
IF NOT TARIFFS, WHAT? EASE MOBILITY, ACCEPT IMMOBILITY
Since the main problem with trade is that it creates many more losers than the Stopler-Samuelson theory suggests, it seems any solution should involve either limiting the number of losers by helping them move or change jobs, or finding a way to compensate them better.
One side benefit of the negative effect of trade being so concentrated is that we actually know where to look for the victims. Why not target some help directly to the workers in industries that lost out to the China shock? Indeed, this was the idea behind the Trade Adjustment Assistance program. The TAA pays for training (up to $10,000 a year) and the trained workers get up to three years in unemployment benefits, precisely to give them some time to land on their feet. The only problem, as we saw, is that the program remained tiny.
Sadly, this was not because TAA was ineffective as a concept; it was just severely underfunded. To qualify for the program, a worker must petition the Department of Labor. A caseworker is then allocated the worker’s file and tasked with determining whether in this case the job in the worker’s former firm disappeared because of competition from imports, the offshoring of jobs, or ripple effects from the trade-induced distress of other companies that either bought from or sold to that firm.
A complex judgment goes into this decision, and some caseworkers are much more willing than others to rule in favor of the worker and allocate them aid. One study makes the case that the assignment of a petition to a particular caseworker, and therefore the eventual judgment, is more or less random.78 Using a database of 300,000 petitions, it compares workers assigned to more or less lenient caseworkers. Workers assigned to more lenient caseworkers are more likely to receive the TAA and therefore more likely to be trained, move sectors, and earn more money. Overall, workers awarded TAA initially had to forego $10,000 in earnings (since they could not work while they got the training), and the government spent some money for the training, but over the next ten years the retrained worker earned $50,000 more than the untrained worker. It took ten years for the salary levels of the retrained and untrained workers to converge. This was thus a worthwhile investment for them, although not one they could undertake without the government’s support, since getting a bank loan for this purpose would have been very difficult.
So why was an effective program like the TAA underfunded and underused? Partly because neither policy makers nor the public knew it worked until that study came out, quite recently. This probably reflects the lack of interest in these kinds of policies among trade economists. Economists also don’t like programs that rely so much on a judgment call; they worry about potential abuse. At a political level, spending large sums of money on trade adjustment would have made it more explicit that trade adjustment costs are in fact large, and this may not have been palatable.
One obvious path is therefore to expand a program like the TAA, making it both more generous to individuals and more easily awarded. For example, the revamped TAA could be modeled on the GI bill, paying enough for someone who is a “veteran” of a trade shock to get a new start with their education. The GI Bill provides up to thirty-six months of education benefits, pays for full tuition at public schools, and up to $1,994 toward tuition for a full-time student (and a prorated rate for part-time programs), as well as a stipend for housing.79 The new TAA could be something like that, combined with extended unemployment insurance for the duration a person is in school. And since we know there are strong local market effects from trade disruptions, the TAA could be more generous in regions known to have been particularly affected by trade shocks, to avoid sending the affected labor markets into a downward spiral.
More generally, much of the hardship caused by trade is related to the immobility of both people and resources. The free movement of goods across borders is not matched by movement within countries. All the solutions we discussed at the end of chapter 2 to encourage internal migration, and the seamless integration of movers (subsidies, housing, insurance, help with childcare, etc.) would help in adjusting to trade shocks.
But it is also clear that mobility, TAA induced or not, is not the ideal solution for all workers. Some may not want to, or not be able to, be retrained; others may not want to change their job, particularly if this involves moving. This may be especially true for older workers. For them retraining would be difficult, and they might be less likely than younger workers to find a new job afterward. Indeed, a study found that after mass layoffs, older workers find it very difficult to fi
nd another job. Two and four years after losing their job, men and women swept in a mass layoff at age fifty-five were at least twenty percentage points more likely to be unemployed than those lucky enough to escape job loss at fifty-five.80 This kind of job loss has a permanent effect on younger workers as well, but the impact is nowhere near as large.81
Older workers who get fired also tend to be those who spent a long career working at a particular job. For them, the work they do provides a sense of pride and identity and defines the place they have in their communities. It is difficult to compensate them with an invitation to be trained to do something entirely different.
Why not then offer to subsidize firms adversely affected by trade (particularly those located in the most affected regions) as long as they keep employing older workers? Larry Summers (the head of the National Economic Council from 2009 to 2012) and Edward Glaeser have recently argued for a payroll-tax reduction in some specific areas.82 A tax reduction may, however, be insufficient to convince a firm to keep its employees if it has become uncompetitive. By being more specific about the sector and the areas, and by restricting the program to already employed workers between the ages of fifty-five and sixty-two (when they can claim social security and retire), it would be possible to spend much more money on each person, possibly compensating the firm for more than the cost of a full-time worker if that is what it takes. That won’t save every firm, but it might preserve a significant amount of employment where it matters the most, prevent communities from falling apart, and be part of the necessarily long transition to a new path. The right way to pay for this is to use general tax revenue. To the extent we are all benefitting from trade, we should collectively pay for the cost. It makes no sense to ask agricultural workers to lose their jobs just so steelworkers can keep theirs, which is what tariffs accomplish.
Of course, the proposal is not without practical difficulties. Affected firms would need to be identified, and there would certainly be lobbying and attempts to circumvent the rules. The proposal may be seen as a form of trade protection and run afoul of WTO rules. But these issues could be solved. The principle of identifying firms that have been subject to trade shocks is already accepted by the TAA program, which has developed a mechanism to adjudicate claims. To avoid casting it as trade protection, the provision could be extended to jobs lost due to technological disruptions.
The overarching takeaway is that we need to address the pain that goes with the need to change, to move, to lose one’s understanding of what is a good life and a good job. Economists and policy makers were blindsided by the hostile reaction to free trade, even though they have long known that as a class workers were likely to suffer from trade in rich countries and benefit from it in poor countries. The reason is they have taken it for granted that workers would be able to move jobs or places, or both, and if they were not able to do this, it was somehow their failing. This belief has colored social policy, and set up the conflict between the “losers” and the rest that we are experiencing today.
CHAPTER 4
LIKES, WANTS, AND NEEDS
THE INCREASINGLY OPEN EXPRESSION of unvarnished animus toward people of different race, religion, ethnicity, and even gender has become the staple of populist leaders throughout the world. From the United States to Hungary, from Italy to India, leaders who offer little more than racism and/or bigotry as their policy platform are becoming a defining feature of the political landscape, a ground force that shapes elections and policies. In the United States, in 2016, the degree to which a person deeply identified as white was one of the strongest predictors of support for Donald Trump among Republicans, much more than, for example, economic anxiety.1
The vicious vocabulary our leaders employ daily legitimizes the public expression of views some people probably had already, but were rarely spoken or acted upon. In one instance of everyday racism, a white woman in a supermarket in the US called the police on a black woman whom she suspected, on the basis of a phone conversation she was overhearing, was trying to sell food stamps—and in the process rather tellingly exclaimed, “We are going to build this wall.” On the face of it, the comment made no sense: the accused was an American citizen who belonged on the same side of the hypothetical wall as her white critic.
But of course we all know what she meant. She was expressing her preference for a society free of people different from her, with President Trump’s metonymic wall separating the races. This is why the wall has become such a flashpoint in American politics, an image of what one side dreams of and the other fears.
Preferences, at one level, are what they are. Economists make a sharp distinction between preferences and beliefs. Preferences reflect whether we prefer cake or cookies, the beach or the mountains, brown people or white. Not when we are ignorant of the merits of each and may therefore be swayed by information, but when we know everything we could possibly need to know. People can have wrong beliefs but they cannot have wrong preferences—the lady in the supermarket can insist she is under no obligation to make sense. Yet it is worth trying to understand why people have such views before we sink deeper into the morass of racism, especially because it is impossible to think about the policy choices we will confront in this book without getting a handle on what these preferences represent and where they come from. When we discuss the limits of economic growth, the pain of inequality, or the costs and benefits of protecting the environment, there is no way to avoid dealing with the distinction between what individuals need and what they want, and how society at large should value those desires.
Unfortunately, traditional economics is ill-equipped to help us here. The attitude in mainstream economics has been very much one of tolerance of people’s views and opinions; we may not share them, but who are we to pass judgment? We can shout out the facts to make sure people have the right information, but only they can decide what they like. Moreover, there is often a hope the market will take care of the problem of bigotry. People who happen to have petty, narrow-minded preferences should not survive in the marketplace, since being tolerant is good business practice. Take, for example, a baker who does not want to bake cakes for same-sex weddings. He will lose sales from all same-sex weddings, which will go to other bakers. They will make money; he will not.
Except it does not always work that way. Bakers who don’t want to bake for same-sex weddings don’t go bankrupt, in part because they win support from like-minded people. Bigotry can be good business, at least for some, and it seems to be good politics as well. As a result, economics in recent years has had to reckon with preferences, and we have gained some useful insights about how we might be able to get out of this mess.
DE GUSTIBUS NON EST DISPUTANDUM?
In 1977, in a famous piece titled “De Gustibus Non Est Disputandum” (usually translated as “There Is No Accounting for Tastes”), Gary Becker and George Stigler, Nobel Prize winners and founders of the Chicago school of economics, made an influential case for why economists should avoid getting entangled in trying to understand what lies behind preferences.2
Preferences are part of who we are, Becker and Stigler argued. If, after we go over all the information we have, two of us still disagree on whether vanilla is better than chocolate or polar bears are worth saving, the presumption ought to be this is something intrinsic to who we each are. Not a whim or a mistake or a response to social pressures, but a considered judgment reflecting what we value. While they recognized that this is surely not always true, they argued that it is still the best place to start when we set out to understand why people do what they do.
We have some sympathy for the idea that people’s choices are coherent, in the sense of being thought out rather than a collection of random acts of whimsy. It is both patronizing and wrong-headed, in our view, to assume people must have screwed up just because we might have behaved differently. And yet society routinely overrules people’s choices, especially if they are poor, supposedly for their own good, for instance when we give them food o
r food stamps rather than cash. We justify this on the grounds we know better what they really need. To partially combat this attitude—only partially, because we don’t deny there are many misjudgments in the world—in our book Poor Economics we took some pain to argue that the choices of the poor often make more sense than we give them credit for.3 For example, we told the story of a man in Morocco. After he made a compelling case that he and his family really did not have enough to eat, he showed us his largish television with a satellite connection. We might have suspected the television was just an impulse purchase he had subsequently regretted. But that was not at all what he said. “Television is more important than food,” he told us. His insistence made us ask how this could make sense, and once we went down that road it was not that hard to see what was behind this preference. There was not much to do in the village, and given he was not planning to emigrate, it was not clear that better nutrition would buy him much more than a fuller stomach; he was already strong enough to do the little work that was available. What the television delivered was relief from the endemic problem of boredom, in these remote villages where there was often not even a tea stall to relieve the monotony of daily life.
The Moroccan did very much insist his preference made sense. Now that he had the television, any more money, he told us several times, would go to buying more food. This is entirely consistent with his view that televisions serve a greater need than food. But it flies in the face of most people’s instincts and many of the standard formulations in economics. Given that he bought a television when there was not enough food in the house, the presumption would be that any extra money in his hands would go even faster down some drain, since he evidently was the sort of person given to irrational impulses. This is at the base of the case against giving money to poor people. And yet, a number of recent studies from across the world, published after we made the case in Poor Economics that he knew what he was doing, have found that when randomly selected very poor people get some extra cash from government programs, they do spend a very large fraction of this extra money on food.4 Maybe after they buy that TV, exactly as the Moroccan man had promised.
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