Friday, August 22, 2014

Why Ferguson in three words: China, Clinton and NAFTA No. 000068

This Friday in August is an important, really important, day in Economics.

The Federal Reserve Bank of Kansas City holds its Annual Jackson Hole Economic Policy Symposium and the attendant papers are released from embargo.


The theme this year: Re-Evaluating Labor Market Dynamics.

You or I would use this title: Why there are no jobs, why this has been a jobless recovery?

At 9:30 a.m., Professor David Autor, MIT, throws a major league bean ball at the entire economics profession. Why are their no jobs? Who knew except every man, woman, and child on Main Street. Why we gave those away to China.  The money quote, on the last page of the paper:
A second is the employment dislocations in the U.S. labor market brought about by rapid globalization, particularly the sharp rise of import penetration from China following its accession to the World Trade Organization in 2001. As documented by Autor, Dorn and Hanson (2013), Pierce and Schott (2013) and Acemoglu et al. (2014), China's rapid rise to a premier manufacturing exporter had far-reaching impacts on U.S. workers, reducing employment in directly import-competing U.S. manufacturing industries and depressing labor demand in both manufacturing and non manufacturing sectors that that served as upstream suppliers to these industries. Globalization, like technological change, is not typically Pareto improving, particularly in the short run. While the long-run effects of these developments should in theory be positive, the adjustment process, as with technological adaptation, is frequently slow, costly, and disruptive.
"[N]ot Pareto improving" means many are going to lose their jobs and they won't find new ones. Wages will fall. Home values will collapse; mortgages will be foreclosed. Families will separate and divorce follows Children will miss meals at worst and college or trade school at best. You know: #FERGUSON

Note the rest of story is in the phrase, "the long-run effects of these developments should in theory be positive." Why do economists in 2014 argue for free trade based only on theory?

Because in the entire history of economics no one has every been able to conduct a study showing, in fact, free trade is a good thing. But the literature is flooded with first class studies all showing that free trade reduces jobs and cuts income in the United States.

A sampling of the literature. David H. Autor,  in the American Economic Review, China Syndrome: Local Labor Market Effects of Import Competition in the United States.

Clinton and NAFTA

I am unable to find a Democratic economist who is a free trader now that Larry Summers has based a substantial part of his theory of Stagnation on our trade deficit.

The last hold out appears to be Professor Brad Delong who impeaches himself with his own chart.

In the upper right corner you will see that Exports are a major component of aggregate demand, i.e., the sum of all demand for workers (jobs).

That means the inverse. Imports destroy aggregate demand and jobs.

Professor Delong admits to his credit that may have been wrong on Clinton's NAFTA, which is very admirable since he was a member of the Clinton Administration and supported NAFTA's passage:
3. Well, it seems that my letting my neoliberal freak flag fly on NAFTA has annoyed Robert Scott and Jeff Faux of the EPI. Lots to think about here...
Follow the links!

Here are the bloody awful facts about NAFTA from Jeff Faux writing about NAFTA's Impact on U.S. Workers, at the Economic Policy Institute Blog:

NAFTA affected U.S. workers in four principal ways. First, it caused the loss of some 700,000 jobs as production moved to Mexico. Most of these losses came in California, Texas, Michigan, and other states where manufacturing is concentrated. To be sure, there were some job gains along the border in service and retail sectors resulting from increased trucking activity, but these gains are small in relation to the loses, and are in lower paying occupations. The vast majority of workers who lost jobs from NAFTA suffered a permanent loss of income.
Second, NAFTA strengthened the ability of U.S. employers to force workers to accept lower wages and benefits. As soon as NAFTA became law, corporate managers began telling their workers that their companies intended to move to Mexico unless the workers lowered the cost of their labor. In the midst of collective bargaining negotiations with unions, some companies would even start loading machinery into trucks that they said were bound for Mexico. The same threats were used to fight union organizing efforts. The message was: “If you vote in a union, we will move south of the border.” With NAFTA, corporations also could more easily blackmail local governments into giving them tax reductions and other subsidies.
Third, the destructive effect of NAFTA on the Mexican agricultural and small business sectors dislocated several million Mexican workers and their families, and was a major cause in the dramatic increase in undocumented workers flowing into the U.S. labor market. This put further downward pressure on U.S. wages, especially in the already lower paying market for less skilled labor.
Fourth, and ultimately most important, NAFTA was the template for rules of the emerging global economy, in which the benefits would flow to capital and the costs to labor. The U.S. governing class—in alliance with the financial elites of its trading partners—applied NAFTA’s principles to the World Trade Organization, to the policies of the World Bank and IMF, and to the deal under which employers of China’s huge supply of low-wage workers were allowed access to U.S. markets in exchange for allowing American multinational corporations the right to invest there

Sum of it All.

Ross Perot was right and the election in 1992 was what created Ferguson.