Economics Has Failed America
When it comes to the impact of global trade, the dismal science has done a dismal job explaining how to help workers hurt by globalization
DANIEL ALTMAN MAY 19, 2016
As a recovering economist writing on behalf of my erstwhile field, I would like to apologize to every American who has lost a job or a livelihood because of globalization. Economics has failed you. It has failed you because of ideology, politics, and laziness. It has failed you because its teachings are woefully incomplete, and its greatest exponents have done almost nothing to complete them.
There are “positive” questions in economics that have mathematical answers — things that simply must be true — and then there are “normative” questions that amount to value judgments on points of policy. In economics classes, we teach the former and usually stop short when faced with the latter. This leaves a hole in any discussion of economic policy; students acquire first principles but rarely consider real-world applications, because to do so would presuppose a social or political point of view.
In the case of free trade and globalization, this omission has been disastrous. All first-year students of economics learn the theory of comparative advantage and gains from trade. They see a mathematical proof showing that when two countries trade goods or services, the benefits to the winners outweigh the costs to the losers. They are assured, correctly, that this result allows everyone to be made better off — or at least no worse off — by trade.
Yet the redistribution required to generate this broad improvement in living standards is hardly addressed, or sometimes even mentioned. To do so would be to step into the muddy mire of normative questions. Should the government take from some people in order to give to others? Who should give the most, and who should receive? What exactly should they receive?
Should the government take from some people in order to give to others? Who should give the most, and who should receive?
Even putting politics aside, these are not easy questions. No one has figured out a foolproof way to make workers hurt by globalization whole again. In theory, everyone who benefited from globalization — every consumer who bought cheap imported products, every producer who used cheap imported inputs, every exporter — would have to chip in. Likewise, everyone who suffered — every worker whose job moved abroad, every shareholder whose company’s prices were undercut by foreign competition — would be in line for compensation. Moreover, society would have to agree on the value of all these benefits and costs, not in dollars but rather in terms of well-being.
This might be heavy going for first-year students, not to mention their professors, so we move on to the next model. Consider the following passages from recent first-year economics textbooks — after several pages on comparative advantage and gains from trade, these are virtually all the words the authors chose to devote to the nettlesome issue of winners and losers:
Tyler Cowen and Alex Tabarrok of George Mason University offer this breezy guidance: “Job destruction is ultimately a healthy part of any growing economy, but that doesn’t mean we have to ignore the costs of transitioning from one job to another. Unemployment insurance, savings, and a strong education system can help workers respond to shocks.” It may be worth noting that Cowen is a frequent critic of unemployment insurance on his blog.
Nobel laureate Paul Krugman and his wife, the economist Robin Wells, are even less specific: “The great majority of economists would argue that the gains from reducing trade protection still exceed the losses. However, it has become more important than before to make sure that the gains from international trade are widely spread.” Perhaps the book’s brevity owes something to Krugman’s opinion
that gains from trade have pretty much been exhausted anyway.
More realism comes from N. Gregory Mankiw, the former chairman of George W. Bush’s Council of Economic Advisers, who sounds resigned
: “But will trade make everyone better off? Probably not. In practice, compensation for the losers from international trade is rare. Without such compensation, opening up to international trade is a policy that expands the size of the economic pie, while perhaps leaving some participants in the economy with a smaller slice.”
Finally, R. Glenn Hubbard, Mankiw’s predecessor in the White House, and Anthony Patrick O’Brien of Lehigh University are the only ones who mention
the program designed to accomplish redistribution: “It may be difficult, though, for workers who lose their jobs because of trade to easily find others. That is why in the United States the federal government uses the Trade Adjustment Assistance program to provide funds for workers who have lost their jobs due to international trade. These funds can be used for retraining, for searching for new jobs, or for relocating to areas where new jobs are available. This program — and similar programs in other countries — recognizes that there are losers from international trade as well as winners.”
The Trade Adjustment Assistance (TAA) program has a budget of about $664 million
, or roughly 0.004 percent of gross domestic product. This means one dollar of every $25,000 in income generated by the United States goes to help people here who have been hurt by globalization. They don’t receive the cash directly; they just have to hope that the program — which offers retooling, retraining, and relocation, among other services — will aid their transition to new jobs.
This means one dollar of every $25,000 in income generated by the United States goes to help people here who have been hurt by globalization.
There aren’t many beneficiaries, either. Even in the dark economic days of 2010, fewer than 300,000 Americans
received TAA. Yet to judge by the political climate, millions more have grievances related to globalization. Across the country, Bernie Sanders and Donald Trump have garnered applause and probably votes as well by attacking the North American Free Trade Agreement and potential new deals with Europe and Asia.
This should not come as a surprise to economists. I’ve lost count of the times I’ve written
that globalization reduces inequality among countries and increases inequality within countries. The wealthiest, most highly educated, and most internationally connected people are always the best equipped to claim the biggest gains from trade. In poor countries, these gains from trade often come from the exports of labor-intensive industries, and the millions of people who work in these industries may benefit as well. That used to happen here, too, but not anymore.
In the United States, the big losers from the current wave of globalization have been working- and middle-class people, as Branko Milanovic
of the City University of New York details in his new book, Global Inequality
. Many of them have gravitated to the insurgent campaigns of Trump and Sanders, whose proposals have left economists shaking their heads and wringing their hands.
But we have only ourselves to blame. We never told our students the importance of managing the transition to a more integrated global economy. We never really told them how to do it, either. If we had done our jobs, it needn’t have been this way.
Writing Chinese characters using brush, Xingping, Guangxi
Brushing up: Confucius Institutes promote Chinese culture
“China is the key for your future,” reads a notice pinned to the wall, jostling for attention alongside a toy panda, Chinese wall hangings, and plastic bamboo.
On a Tuesday evening at this Almaty language school several small groups are engaged in learning Chinese.
Viktoriya Nazarchuk, a 33-year-old painter, says she became interested in the language through an enthusiasm for Chinese calligraphy. Like most students of Chinese in Kazakhstan, however, she also has an eye on Beijing’s growing economic clout.
“We need to get acquainted with their culture, history and language,” she says. “When my level is high enough I plan to teach my little son Chinese, too. He will need it in his future life.”
As China’s economic power in the region grows, Ms Nazarchuk is one of a growing number of central Asians looking to learn Chinese. Nurzhan Baitemirov, founder of East-West Education Group, which owns the language school where Ms Nazarchuk is studying, says his focus is shifting. The company once specialised in teaching English to Kazakhs, but it is now increasingly educating them in Chinese.
“West Kazakhstan [the country’s main oil-producing region] used to be Canadian companies, but they have shifted and it is now majority Chinese companies. It’s better if you speak Chinese if you want to get a position,” says Mr Baitemirov, who has a masters degree from Wuhan. The number of students learning Chinese is increasing by 5 per cent a month, he estimates. “Parents do understand that if their child has a good education in Chinese they have good job prospects,” he says. “They’re seeing there are a lot of Chinese investments here.”
The number of Kazakh citizens studying in China has risen more than fivefold in the past decade to 12,000, according to the China Scholarship Council, a government body that helps overseas students study in China. Beijing, meanwhile, has set up 11 Confucius Institutes to promote Chinese language and culture in the five Central Asian “stans”.
‘It is better if you speak Chinese if you want to get a position,’ says provider Nurzhan Baitemirov
Even Kazakhstan’s first family has endorsed learning Chinese: Dariga Nazarbayeva, deputy prime minister and daughter of the country’s president, in February said that Kazakh children should learn Chinese in addition to Kazakh, Russian and English. “China is our friend, our trading partner and the biggest investor in the economy of our country,” she said. “In the near future, we all need to know Chinese.”
Not everyone is convinced. According to public opinion surveys funded by the Eurasian Development Bank, only one in six Kazakhs see China as a “friendly country”, compared to 84 per cent for Russia and 48 per cent for Belarus. On the other hand, China was among the top three nations most likely to be named as an “unfriendly country”.
“Statistically China is a very important trade partner of Kazakhstan. But a lot of people in Kazakhstan don’t think of China as a big investor. They think of China as a big problem — people here believe China tries to increase its economic influence without any benefit to our countries,” says Dosym Satpayev, a Kazakh political scientist who heads the Almaty-based Risk Assessment Group.
China seeking to revive the Silk Road
Illustrated map depicting the journey of the Venetian merchant Marco Polo (1254 - 1324) along the silk road to China.Beijing’s initiative has led to both welcoming and wary reactions
Part of the reason is historical: when their countries were part of the Soviet Union, Central Asians looked to Moscow for work, education and culture. Those ties have persisted after independence — as have Soviet-era clichés that paint China as a threat. Indeed, Sinophobia could be one of the greatest challenges for Beijing’s Silk Road project.
A proposal for China to lease a large area of land for agriculture triggered public protests in Kazakhstan in 2010. This year there was uproar in the north-western city of Aktobe after it was reported that the local affiliate of China National Petroleum Corporation was requiring workers to take Chinese language tests.
The “people-to-people bond” is officially one of China’s five goals in the region. But analysts say efforts to expand soft power have fallen short. “I do not think China has done enough. They have work to do to create a favourable image,” says Zhao Huasheng, director of the Centre for Russia and Central Asian Studies at Fudan University.
At the language school in Almaty, though, Beijing has no image problem. “Chinese people are simple, open and friendly,” says Yulia Abritsova, a 36-year-old interpreter who visited China for the first time last summer and plans to return for a degree. “It’s a bit like the Soviet Union.”