Reality begs to differ

Scott Lincicome writes at National Review a very important explanation of the American labor market's lack of dynamism.

It is virtually impossible to tune in to political TV or radio without hearing presidential hopeful Donald Trump promise to restore American manufacturing glory by imposing punitive tariffs on imports from China, Mexico, and any other country that pops into his golden dome. Trump’s shtick, repeated ad nauseam since he first started toying with a presidential run in the 1990s, is replete with errors and myths. But buried therein is an important kernel of truth about America’s labor market and its distressing lack of dynamism — a problem exposed, though certainly not caused, by free trade.

There remains no evidence that imports are the primary driver of U.S. manufacturing-job losses, or that the U.S. manufacturing sector is actually in decline. In fact, American manufacturers began slowly and steadily shedding workers as a share of the U.S. work force in the late 1940s and in sheer numerical terms in 1979 — long before the North American Free Trade Agreement existed or Chinese imports were more than a rounding error in U.S. GDP. By contrast, the United States has gained about 54 million jobs since 1980, 30-plus million of which came after the creation of NAFTA and the World Trade Organization in the mid 1990s.

Meanwhile, it is a myth that the United States “doesn’t make anything anymore” or that trade agreements have caused a “giant sucking sound” as investment and jobs go elsewhere. Our manufacturers continue to set production and export records, and the United States is the world’s second-largest manufacturer (17.2 percent of total global output) and third-largest exporter. America also remains the world’s top destination for foreign direct investment ($384 billion in 2015 alone) — more than double second-place Hong Kong and almost triple third-place China. Much of this investment went to U.S. manufacturing assets, as shiny new BMW, Toyota, and other foreign-owned plants across the American South attest.

For these and other reasons, it is widely accepted that U.S. manufacturing “decline” has been limited to employment, and that these losses were primarily caused by productivity gains, not trade.

The consumer gains from trade disproportionally accrue to America’s poor and middle class. A 2015 study by Pablo Fajgelbaum and Amit Khandelwal finds that these groups, because they concentrate spending in more-traded sectors such as food and clothing, enjoy almost 90 percent of the consumer benefits of trade. These benefits are even more concentrated for Chinese imports, since poor and middle-class American consumers are more likely than their richer counterparts to shop at “big box” stores such as Target and Walmart that carry a lot of made-in-China goods.

American businesses, of course, also benefit. More than half of all imports (including those from China) are inputs and capital goods consumed by other American manufacturers to make globally competitive products.

David Autor in 2012 stated, “I’m not anti-trade, but it is important to realize that there are reasons why people worry about this issue.” He elaborated: “We do not have a good set of policies at present for helping workers adjust to trade or, for that matter, to any kind of technological change.” His co-author Gordon Hanson told the New York Times earlier this year: “The problem is not trade liberalization. . . . The problem is that labor-market adjustment is too slow.”

Total non-farm job openings, for example, are at their highest point on record (including well over a million unfilled jobs in “blue collar” fields such as manufacturing, construction, and transportation) and continue to outpace hirings. ...workers have become less likely to move to areas with better employment opportunities, choosing instead to remain in places hit hard by the Great Recession and to drop out of the labor force entirely.

Meanwhile, the costs of health care, child care, and education — all highly subsidized, protected, and regulated — have risen far faster than the rate of inflation, and there is little doubt that government intervention has played a role in this trend. The New York Fed in 2015, for example, found a strong link between federal student aid and the skyrocketing cost of tuition. Such cost increases disproportionately harm poor and middle-class Americans and force them to spend more of their stagnating wages on these essential services — money that could have gone into a savings account. Indeed, the rampant inflation in these sectors stands in stark contrast to the declining prices of other goods, such as clothing, toys, and electronics, that are less subsidized, more open to competition (foreign and domestic), and less subject to onerous government regulation.

Second, government policy actively discourages Americans from finding work in burgeoning fields. Perhaps the most brazen example of such policies is the federal tax code’s business deduction for work-related education, which permits a worker to deduct education and training expenses from his taxable income, but only if they relate to his current job.

...According to one recent study, a big cause of the recent collapse of business dynamism is the federal government’s response to the Great Recession, which involved “defensive policies to protect large firms and existing employment, rather than proactive policies to encourage entrepreneurship and new venture/job creation.” None of this is good for people looking for a job or considering a career change.

Free trade — with China or any other country — has demonstrable benefits for American families and businesses. To the extent he denies this, Donald Trump is entirely wrong. However, the economic anxiety propelling Trump reflects very real problems in America’s labor market — problems caused not by Chinese imports or any other type of creative destruction but by multiple government-policy failures and a resulting collapse of labor dynamism. The solutions to these problems are complex and deserving of substantial debate.

Protectionism not only would ensure that these problems aren’t fixed but would actually make things far worse.

Read more here.