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Article Artículo

Trade and Jobs In Pennsylvania

Adam Davidson had an interesting NYT Magazine piece on Donald Trump and the central Pennsylvania economy. His basic point, that Trump's proposals for high tariffs will not revitalize the region is undoubtedly correct, but there are a few points that should be made.

First, productivity and technological change has been far more important for jobs in manufacturing than trade, but that doesn't mean trade has not still been a big deal. We have seen rapid productivity growth in manufacturing through the whole post-war period, but the number of jobs in the sector remained roughly constant, with cyclical fluctuations, from the late 1960s until the end of the 1990s. Since the labor force was growing over this period, it did mean that the manufacturing share of employment was falling.

However, the absolute number of jobs plummeted at the start of the last decade as the trade deficit exploded. The drop was more than 20 percent even before the 2008 recession.

Jobs in Manufacturing

manu jobs2Source: Bureau of Labor Statistics.

This sharp decline in manufacturing employment had negative effects in many regions of the country, although it's possible that the impact in central Pennsylvania was less than in other manufacturing regions. Also, the threat of job loss, often due to trade, is an important factor affecting workers' bargaining power and therefore their ability to secure pay increases.

CEPR / July 07, 2016

Article Artículo

Economic Growth

United States

Already Low Inflation Ticks Downward

Since the Fed first announced its 2 percent inflation target on January 25, 2012, inflation has consistently run too low. In fact, the Fed has undershot its target in 48 of the 51 months since its announcement. 

The most recent data from the Consumer Price Index (CPI) show that inflation over the past year has been just 1.0 percent. Part of this weakness is due to the volatile energy (down 10.1 percent from one year ago) and food (up 0.7 percent) aspects of the index. The Fed typically pulls out these components and looks at the “core” CPI. This measure shows a somewhat higher rate of inflation with a modest increase over the last year.

CEPR and Nicolas Buffie / July 05, 2016

Article Artículo

Paul Krugman on Trade and Jobs

Paul Krugman has again waded into trade and employment turf in his latest blog post. I agree completely with the post-Great Recession story where Krugman acknowledges that the trade deficit creates a demand gap that we have not been able to fill.

The problem is that fiscal policy is limited by a bizarre austerity cult that works to prevent larger budget deficits even though the economy clearly needs them to reach full employment levels of output. Monetary policy has been helpful, but with the Fed up against the zero lower bound there is not much more the Fed can do by way of traditional monetary policy to boost the economy. As a result, the trade deficit really does mean lost jobs.

Where I differ with Krugman is in his assessment that the trade deficit did not cost the economy jobs in the pre-recession period. He argues that we were pretty much at full employment in the period prior to the 2008 recession.

"Up through 2007 we basically had a Fed which raised rates whenever it thought the economy was overheating; in the absence of the China shock it would have raised rates sooner and faster..."

Just to refresh folks' memory, the unemployment rate was 4.0 percent as a year-round average in 2000. In the recovery, we bottomed out at 4.4 percent for several months in 2006 and 2007, although we didn't get back below 5.0 percent until the end of 2005. But the unemployment rate doesn't really tell the whole story.

The employment rate for prime age men (ages 25–54) peaked at 89.5 percent at the start of 2000. In the recovery, it never crossed 88.0 percent. When the recession hit at the end of 2007 it was at 87.2 percent, more than two full percentage points below its 2000 peak. This gap corresponds to a drop in employment among this group of more than 1 million.

CEPR / July 04, 2016

Article Artículo

Neil Irwin Is Far Too Generous to Economists: They Only Care About Efficiency When the Policy Redistributes Income Upward

Neil Irwin raises the question of whether economists have been too single-minded in pushing efficiency, while ignoring issues of distribution. This is way, way too generous to economists. In fact, economists have been totally happy to ignore efficiency considerations when the inefficiencies redistribute income upward. This situation pops up all the time.

As I frequently point out in comments here and elsewhere, we protect doctors, dentists and other highly paid professionals from competition with their lower paid counterparts in the developing world or even other wealthy countries. We have maintained these protections even while our trade negotiators did everything they could to make steel workers and textile workers compete against their low-paid counterparts in Mexico, China, and other developing countries.

This protectionism is obviously inefficient and cost U.S. consumers more than $100 billion a year in higher medical bills and other costs. Yet economists act really dumb when questioned about it. Apparently, it never occurred to them that competent doctors could be trained in Mexico, India, or even Germany. Sorry folks, economists don't give a damn about efficiency in this case. They want to protect the income of highly paid professionals.

CEPR / July 02, 2016

Article Artículo

David Brooks' Class Bias Is So Deep He Doesn't Even Realize He Is a Protectionist

David Brooks apparently thinks he has things down. The major divide isn't between supporters of big government and small government, it's a debate between supporters of an open economy that looks to increase trade and a closed economy that looks to protectionism. This is the theme of his column that tells us about "the coming political realignment."

To make his case, he gets a lot of things wrong. For example, he seriously misrepresents research on the impact of trade liberalization. Brooks refers to a study by the Peterson Institute that "found that past trade liberalization laws added between $7,100 to 12,900 in additional income to the average household." The vast majority of the gains estimated from liberalization by this study occurred before 1980, a point at which trade was largely non-controversial. The gains estimated from the trade deals of the last quarter century (post-NAFTA) have been far more limited.

Brooks then notes a study from the Peterson Institute for International Economics which projects that the Trans-Pacific Partnership (TPP) would increase national income by $131 billion. It would have been useful to point out that this gain is projected for 2030, a point at which it would be equal to 0.5 percent of GDP. This means that if the study projections are correct, we will as wealthy on January 1, 2030 with the TPP as we would be in mid-March of 2030 without the TPP.

It is also worth noting the Peterson Institute's projection of gains from the TPP assumes the economy is at full employment. It also does not calculate any costs associated with the increased protections in the TPP as a result of stronger and longer patent and copyright protections. This increased protectionism could easily offset the projected gains from the modest tariff reductions in the TPP. It is also worth noting that the non-partisan International Trade Commission projected gains that were less than half as large (roughly one month's growth) also while assuming full employment and not counting any negative impact from the increased protections in the TPP.

CEPR / July 01, 2016

Article Artículo

Paul Krugman, Brexit, and Bubbles

Paul Krugman has an excellent blog post ridiculing the doomsayers on Brexit. I agree with just about everything he says. His basic point is that, while the UK will pay a substantial economic price if it leaves the European Union (especially if the EU imposes punitive tariffs), there is not a plausible story that Brexit will lead to a near-term recession.

Krugman furthermore makes the point that many economists feel the need to exaggerate their case when arguing on trade. The point is that they believe their "free trade" policies to be good and therefore are willing to sort of make stuff up to advance their case. (Can you say "TPP?")

This is all very well-taken and I agree with Krugman 100 percent on these issues. Where I would differ is on the assumption that Brexit won't lead to a recession in the near-term. The argument is not that the reduction in trade resulting from the withdrawal would be so large as to lead to a recession. Rather, the reason stems from the fallout of collapsing bubbles.

There is a very credible case that the UK was experiencing a serious housing bubble, especially in the London market. Brexit may be bringing this to an end for two reasons.

First, UK real estate was seen as a safe haven for rich people across the globe. Therefore, they were willing to sink large chunks of money to purchase condos and houses in the UK. This perception of safety may no longer hold in the post-Brexit world. Instead of money flowing into London real estate it may start to flow out.

The other reason has to do with the strength of the London economy. It is virtually certain that the financial industry will take a big hit from the Brexit vote; the only question is how large a hit. The London finance boys were big buyers of London real estate. If they have to relocate to Paris, Frankfurt, or elsewhere, it could send London prices plummeting. 

The net effect of a plunge in real estate prices could very well be a recession. The construction sector will see a sharp fall in demand, leading a major contraction and large-scale layoffs. Similarly, as millions of homeowners see their house prices plummet they will cut back spending in response to the loss of wealth. (Have we ever seen anything like this?)

CEPR / July 01, 2016

Article Artículo

FedWatch: John Williams, President of the Federal Reserve Bank of San Francisco

This is the seventh in a series of profiles of the members of the Federal Reserve Board’s Open Market Committee [FOMC]. The profiles will focus on their writings, public statements, and voting records as members of the FOMC.

John Williams took over as President of the San Francisco Federal Reserve in March 2011, five months after Janet Yellen’s departure from the post. Williams, who previously served as Yellen’s director of research, is generally considered a moderate dove. He upholds the employment side of the Fed’s dual mandate and has consistently supported quantitative easing and a gradual path for interest rate normalization. The exception to Williams’ more dovish views is that he has called for rate hikes to begin at a relatively early date; however, this is largely because of Williams’ aforementioned support for a slow, gradual course of rate hikes.

Williams has published extensively on monetary policy. In 2006 — about two years before the Fed would reduce the federal funds interest rate to almost zero percent — Williams published a paper warning about the dangers of the zero lower bound (ZLB) on interest rates.[1] He found that the ZLB can be a significant constraint on monetary policy when the general public has imperfect knowledge of policy and the economy; in the paper’s conclusion, Williams noted that the ZLB placed greater emphasis on “the potential use of fiscal policy interventions,” i.e. deficit spending.[1]

CEPR and Nicolas Buffie / June 30, 2016