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THE ECONOMIST: “Trade at what price?” (2April2016)

Lafayette

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Unless you subscribe to the Economist, it is unlikely (I think) that you can read this article entirely. But, it seems to be a subject that interests many on this forum, so I have excerpted snippets, which follow:

Sub-headliner: America’s economy benefits hugely from trade. But its costs have been amplified by policy failures

Since the 1980s, America’s economy has gradually opened up to cheap imports. This accelerated in 1993, when President Bill Clinton signed the North American Free-Trade Agreement (NAFTA) with Mexico and Canada. The deal, America’s first broad trade accord to include a poor economy, eliminated most tariffs on trade between the three countries over a decade. Coincidentally, within a year of the start of tariff reductions, the peso collapsed, making Mexican imports cheaper still. Excluding fuel (which America had to buy from somewhere) imports from Mexico grew by about five times between 1993 and 2013, according to the Peterson Institute, a think-tank. Exports to Mexico grew by about three-and-a-half times. As a result of the disparity, a bilateral trade deficit worth $23 billion (then, 0.2% of America’s GDP) opened up within five years.

Many blamed the yuan’s peg to the dollar for creating a trade imbalance. By 2014 China had accumulated nearly $4 trillion in foreign currency to sustain the peg. Economists have always struggled to formalise the allegation that China manipulates the yuan. Over time, higher wage inflation in booming China should undermine the advantage of a weak currency. Wages have indeed risen much faster in China than in the West. China’s current-account surplus, which reached 10% of GDP in 2007, is often cited as proof of fiddling. But Chinese surpluses and American deficits are—as a matter of accounting—the difference between saving and investment in those countries. So China’s vast surpluses in part reflected its extraordinary propensity to save.

In any case, cheap imports were a windfall for American consumers. Excluding food and energy, prices of goods have fallen almost every year since NAFTA. Clothes now cost the same as they did in 1986; furnishing a house is as cheap as it was 35 years ago. More trade brought more choice, too. Robert Lawrence and Lawrence Edwards, two economists, estimate that trade with China alone put $250 a year into the pocket of every American by 2008. The gains from cheap stuff flowed disproportionately to the less well-off, because the poor spend more of their incomes on goods than the rich.

For other economists, the impact of trade on jobs was a growing concern. The sharp decline in American manufacturing employment began in 2000, just as Chinese imports took off (see chart). Yet on the extreme assumption that every dollar spent on imports replaced a dollar spent employing an American, Mr Lawrence calculates that between 2000 and 2007 Chinese imports caused, at most, 188,000 of 484,000 annual manufacturing-job losses. A recent, more detailed, estimate by Daron Acemoglu, David Autor and others chalks up about 1m of 5.5m manufacturing jobs lost between 1999 and 2011 to Chinese competition (with similar-sized job losses in other industries).

Mirror Image:
Mirror Image - Economist 2April2016.jpg

How does this bear on today’s trade-policy debates? Economists were wrong to think in the 1990s that the concentrated costs of trade, which textbooks always predicted, had somehow been avoided. It is now clear that they can be, in fact, worse than first thought. But the gains from trade, which are larger still, were never an illusion. Trade sceptics sometimes seem to suggest that workers were better-off before the 1980s, because protectionism was rife but growth stayed high. Yet living standards today are far higher. Trade barriers, which prevent such advances, are a futile, self-defeating way to help the unskilled.
 

Lafayette

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And there is this bit (excerpted below) that I post separately because we keep returning to this same theme in this forum: If you don't get degree qualifications, essentially - in this new day and age - you are giving up on yourself.

Tertiary Education is an expense (like Primary and Secondary) that must be assumed by the Federal Government, because our tax-dollars pay for it. For all comers, Tertiary Education of the public-kind should be run by the states at the lowest possible cost for the best possible result.

However, the Federal Government, instead of buying F-35s, should be subsidizing Tertiary Education (vocational, 2- & 4-year) managed by the states. And the metric applied should be, "The Federal Government subsidizes the state program for as long as at least 70% of all high-school graduates apply." Whether they graduate, or not, is their personal challenge for which they are entirely responsible.

Excerpt:
But many workers displaced by Chinese imports did not simply find another job. Mr Autor and his colleagues have shown that, at local level, employment falls at least one-for-one with jobs lost to trade, and that displaced workers are unlikely to move to seek new work. The lowest-skilled who do find new jobs tend to move to similar, and thus similarly vulnerable, employment. One reason for this immobility could be that the economy is now an unwelcoming place for jobseekers without a university degree. The housing collapse of the late 2000s, which left many Americans trapped in negative equity, may have made things worse. This new strain of research has lent support to the claim of Dani Rodrik, a globalisation sceptic, that “If you are of low skill, have little education, and are not very mobile, international trade has been bad news for you pretty much throughout your entire life.”
 
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KevinKohler

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Living standards have gone up, yes, but more due to increases in technology, than due to the buying power of the average american.

Also, how many hours are we working now to maintain our higher standard of living?

I know that my parents never worked as much as I do. I know that daycare is increasing in demand such that they can nearly charge whatever they want. But those are just my personal observations.
 

JohnfrmClevelan

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In any case, cheap imports were a windfall for American consumers. Excluding food and energy, prices of goods have fallen almost every year since NAFTA. Clothes now cost the same as they did in 1986; furnishing a house is as cheap as it was 35 years ago. More trade brought more choice, too. Robert Lawrence and Lawrence Edwards, two economists, estimate that trade with China alone put $250 a year into the pocket of every American by 2008. The gains from cheap stuff flowed disproportionately to the less well-off, because the poor spend more of their incomes on goods than the rich.

But the poor spend most of their incomes on domestic stuff - rent, utilities, food, gas, insurance, etc. Go up a tier or two, and people get the benefit of cheap electronics, clothing, and other imports. That exclusion of food and energy is a big exclusion, and I think it distorts the true picture.

I'm in the upper-middle class, and I benefit greatly from cheap imports. My house is full of them - far more than I need, btw. I'm sure that I could be just as happy with less stuff, the way it was when I was growing up.

For other economists, the impact of trade on jobs was a growing concern. The sharp decline in American manufacturing employment began in 2000, just as Chinese imports took off (see chart). Yet on the extreme assumption that every dollar spent on imports replaced a dollar spent employing an American, Mr Lawrence calculates that between 2000 and 2007 Chinese imports caused, at most, 188,000 of 484,000 annual manufacturing-job losses. A recent, more detailed, estimate by Daron Acemoglu, David Autor and others chalks up about 1m of 5.5m manufacturing jobs lost between 1999 and 2011 to Chinese competition (with similar-sized job losses in other industries).

International trade certainly makes the overall pie bigger, but that does not mean that American labor is benefiting. Trade deficits are still a demand leakage.
 

Orly?

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Trump is right..
 

Hawkeye10

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Trump is right..

Of course Trump is right

In conventional economic theory, the free market should resolve such trade imbalances by adjusting the exchange rates until the deficits vanish. But it has failed to do so, most notably, because China is eager to send us its products for I.O.U.s and has kept its currency artificially low so that its products remain inexpensive. That’s not a free market. That’s a rigged market. And we’ve stood by and allowed the rigging to continue. That’s not in the comparative advantage theory either.

Advocates of free trade often argue that America benefits from foreign trade. But in counting benefits, they add the dollars gained and dollars lost, without looking at who gained and who lost. So if one person gains $10 million dollars and 300 people lose $30,000 each (for a total loss of $9 million) that would be counted as a gain of $1 million, even though those who lost money outnumber those who gained by 300 to 1. That does not sound very democratic. And of course, if the $10 million goes to someone who is already a millionaire, his or her life-satisfaction would not increase substantially, but for the 300 people who lost money, their losses could very well be their livelihoods and mean a devastating decline in their living standard. The accounting of gains and losses should be done in a more democratic fashion.

The buy-now-pay-later strategy has been a weapon of mass destruction across the Rust Belt, destroying neighborhoods and annihilating millions of jobs. Detroit and Baltimore are two key examples. As a trophy of urban blight there are now 17,000 homes (or 8 percent of the housing stock) unfit for habitation and abandoned in Baltimore. Detroit has 70,000 abandoned houses and 90,000 vacant lots, and 40 percent of the street lights do not work. The Soviet Union was not powerful enough to do such damage; nor were our other enemies, the Empire of Japan or the Third Reich. China, however, has outsmarted U.S. by turning our capitalist-free trade ideology into a weapon against us. A brilliant move for which we were unprepared—welcome to real world economics.\
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We know that standard economic theory is not working. We know very well that slogans about growing the economy are not working. We know that the U.S. underemployment rate is still 11 percent and among African Americans it’s about 22 percent. We know that median household income has shrunk by $5,000 since 1999. We know that the economy shrank in the first quarter of this year. How long are we going to wait before we actually do something about it? It’s high time to stop stimulating the rest of the world’s economy with our dollars. We need to keep the purchasing power at home, which will create millions of jobs. Giving the President fast-track authority to negotiate the Trans-Pacific Partnership is a dead-end policy. Instead, Congress should insist on fair trade that is balanced trade.
Why trade deals hurt Americans | PBS NewsHour


John Komlos is a professor emeritus of economics and of economic history at the University of Munich, and the author of the new textbook, “What Every Economics Student Needs to Know and Doesn't Get in the Usual Principles Text.” He’s also taught at Harvard, Duke and the University of Vienna.
 

Hawkeye10

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Living standards have gone up, yes, but more due to increases in technology, than due to the buying power of the average american.

Also, how many hours are we working now to maintain our higher standard of living?

I know that my parents never worked as much as I do. I know that daycare is increasing in demand such that they can nearly charge whatever they want. But those are just my personal observations.

More to do with financing living with debt than anything else, that and skimping on maintenance.
 

SocialD

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Living standards have gone up, yes, but more due to increases in technology, than due to the buying power of the average american.

Also, how many hours are we working now to maintain our higher standard of living?

I know that my parents never worked as much as I do. I know that daycare is increasing in demand such that they can nearly charge whatever they want. But those are just my personal observations.

I have to agree with that. I know what kind of wages a blue collar person was making in the early to mid 80s. My step dad was making around 50k in a coal mine 30 years ago. buying power equivalent today is 110k per the BLS CPI inflation calculator.
If it wasn't for cheap products and the increases in technology we would be really in bad shape.
 

Lafayette

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TIMES CHANGE!

We know that standard economic theory is not working.

Of course it is not working, but we are no longer in "standard time" either.

The world is going through an Age Change - from the Industrial to the Information Age. Which means, ipso facto, that jobs are being displaced and others are being created.

Did anyone read about all the chagrin that occurred when the US left the Agricultural Age for the Industrial Age in the mid-19th century. Not that much, I'll bet. Because it was not provable either. It is virtually impossible to do a google search on documents that were not even in digital format - which is EXACTLY the point I am trying to make!

Times change and we must change with them!

There are jobs that have left and are never coming back. Even the farmstead of the 19th century no longer exists, because agricultural has gone through a period of mass-mechanization. Machines today do the work of hundreds if not thousands of hands yesteryear.

That is the way of the world, and Uncle Sam is no exception. So, what's a country to do?

GO UPMARKET! Which means we need to train our people to a higher category of skills/competencies - where the jobs are today. And that training should be free, gratis and for nothing.

Because that is very same reason that primary/secondary schooling was made free in the 20th century when we realized that industrialization needed a higher level of skilled manpower.

So, instead of complaining about how "unfair Trade" is, let's get on with implementing the solution. It is sheer stupidity that - today - a Tertiary Education (vocational, 2- or 4-year) should be prohibitively expensive.

Here is an infographic from our National Center for Education Statistics, titled "Average total cost of attending degree-granting institutions for first-time, full-time students, by level and control of institution and student living arrangement: Academic year 2013–14":
figure-cua-1.gif


Which is indicating that:
*The high-cost of postsecondary education is the clear road-block to the skills necessary for our youth to find decent jobs. And,
*Tertiary Education should be as low-cost as humanely possible, which means it should be heavily subsidized by the state educational system so as to enhance accessibility by any of our youth with a High-school Diploma.

Instead of toys-for-our-boys at the DoD ...

SECONDARY EFFECTS

I remain convinced that were we to make the necessary investments in a very low-cost Tertiary Education programs provided at the state-level, then we would be recuperating the cost in Unemployment Insurance not paid!
 
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James972

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This is why I subscribe to The Economist.

why so you can cut and paste articles when you cant make an argument yourself? Why not try to tell us what the point of the article was???
 

James972

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John Komlos is a professor emeritus of economics and of economic history at the University of Munich, and the author of the new textbook, “What Every Economics Student Needs to Know and Doesn't Get in the Usual Principles Text.” He’s also taught at Harvard, Duke and the University of Vienna.

and what is his most significant conclusion??
 

James972

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Free trade creates dislocations but is on balance a positive thing.

yes and this is of course why the entire world has largely embraced free trade. Liberals often oppose not understanding that the more people you can buy from and sell to the richer you get.
 

I'm Supposn

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Lafayette, I do not doubt the net benefits of global trade but annual trade deficits are ALWAYS net detrimental to their nation’s economy. A nation can choose to participate in global trade and choose not to endure annual trade deficits of goods.

Opponents of the Import Certificate proposal are disingenuous when they pretend the benefits of global trade justify USA’s tolerating our chronic annual trade deficits’ net detriments to our economy. We can keep the good and discard the bad.

USA’s adoption of the Import Certificate proposal could temporarily reduce our volume of global trade but it would also soon begin increasing our GDP, numbers of jobs and that would be additionally reflected within our median-wage.

Due to USA’s adoption of the Import Certificate policy, within a comparatively short time USA's volume of global trade would regain and then exceed what it would otherwise be. We (more than otherwise) will enjoy significant improvement of our total global trade, GDP, numbers of jobs and median-wage; (“total global trade” being volumes of imports plus exports).

Refer to Wikipedia’s article “Import Certificates”
And/or
the paragraphs entitled “Trade balances affects upon their nations economies” within Wikipedia’s “Balance of Trade” article.

Respectfully, Supposn
 
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