Economics

The Future of Technological Advancement

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Not the most profound example, but it works.

Many critics today believe the notion that the days of economic growth and technological innovation are behind us. Yet, Oxford’s Ian Goldin and Chris Kutarna argue that these critics are mistaken.[ref]Economic historian Joel Mokyr also thinks the critics’ arguments are overblown.[/ref] The critics, they argue, imagine “technological innovation to be like pulling balls from an urn, each ball representing a new idea. In the beginning, the urn was full and the spheres were large, but each time we’ve gone back to the urn, we’ve had to reach deeper than the last, and the spheres have dwindled into marbles.” In their view, however,

this metaphor, while intuitive and compelling, is backwards (Goldin and Kutarna 2016). Innovation is more like mixing compounds in an alchemist’s lab. Each compound is an existing idea or technology, and in the beginning we had just a few – maybe some salt, sugar, and common liquids. But then we tried mixing them together, and some of them reacted with one another to form new compounds…This metaphor is far closer to the present experience in research laboratories. Across the sciences, the pace of discovery is generally rising, not falling. For reliable evidence, consider the pharmaceuticals industry (a good litmus test because it invests more into R&D than any other industry, except aerospace). The year 2013 set a new record for total drugs launched world-wide (48) – a record that was promptly beaten in 2014 (61). With another 46 drugs launched in 2015, the last three years have been the industry’s three most productive in its history. Recent major discoveries include new weapons against heart failure, which in an aging world is now the leading cause of death; immunotherapies, which help to defeat cancers by boosting the body’s own immune response; and a viable pathway to effective Alzheimer’s medications within a decade. In part thanks to the accelerating pace of pharmaceutical achievements like these, average life expectancy across advanced economies is now rising an unprecedented four to five hours per day.

Goldin and Kutarna defend their view in a way that would make Julian Simon smile:

The broader cause for these emerging paradigm shifts is the inflation in human brainpower that has taken place over the past 25 years. Thanks to giant medical successes against childhood disease and aging over the past quarter-century, the present global cohort of adults is humanity’s largest and healthiest ever. It is also the best-educated. In just a generation, illiteracy has fallen from nearly half to just one-sixth of humanity. In 30 years, we’ve added three billion literate brains to our ranks. Meanwhile, the rapid expansion of higher learning in Asia means that the number of people alive right now with a university degree is greater than the total number of degrees awarded in history prior to 1980. Most importantly, the present generation is history’s best-connected, thanks principally to a quartet of big events – the end of the Cold War, waves of democratisation across Latin America, much of Asia and sub-Saharan Africa, China’s emergence from autarky, and the advent of digital communications.

Neither history, nor the present-day pace of scientific discovery supports the notion of diminishing returns to technological innovation. The challenge for growth economists is that analytic models are poorly suited to capture, and set society’s expectations for, these impending disruptions…Growth economics is powerful. At its best, it is an empirical science that helps determine how to lift human wellbeing – one of civilisation’s most important tasks. But it is unable to capture the dynamism of our new age of discovery for a reason. Much that matters is still beyond its sight.

We need an economy and a government that support dynamism and provide fertile ground for innovation.

CBO on Trade

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How Preferential Trade Agreements Affect the U.S. Economy

The Congressional Budget Office (CBO) released a new report in September titled “How Preferential Trade Agreements Affect the U.S. Economy.” The report is timely given rising hostility toward trade among voters and presidential candidates. The report states the following:

International trade yields several benefits for the U.S. economy. Trade increases competition between foreign and domestic producers. That increase in competition causes the least productive U.S. businesses and industries to shrink; it also enables the most productive businesses and industries in the United States to expand to take advantage of profitable new opportunities to sell abroad and obtain cost savings from greater economies of scale. As a result, trade encourages a more efficient allocation of resources in the economy and raises the average productivity of businesses and industries in the United States. Through that increase in productivity, trade can boost economic output and workers’ average real (inflation-adjusted) wage. In addition, U.S. consumers and businesses benefit because trade lowers prices for some goods and services and increases the variety of products available for purchase.

Not everyone benefits from trade expansion, however. Although increases in trade probably do not significantly affect total employment, trade can affect different workers in different ways. Workers in occupations, businesses, and industries that expand because of trade may make more money, whereas workers in occupations, businesses, and industries that shrink may make less money or experience longer-than-average unemployment. Such losses can be temporary or permanent. Nevertheless, economic theory and historical evidence suggest that the diffuse and long-term benefits of international trade have outweighed the concentrated short-term costs.[ref]I address these short-term costs here.[/ref] That conclusion has consistently received strong support from the economics profession.

The rhetorical war on trade needs to stop.

An Old, Old Wooden Ship and Economic Institutions

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Last week, I made the unfortunate decision to engage in a political/economic debate on Facebook. I rarely do this because (1) it makes friends into enemies, (2) it sucks up a lot of time with continual responses, and (3) it slowly turns me into a hostile person. Nonetheless, one of the topics discussed was immigration. The concerns expressed by my debate opponent were that new immigrants may not be assimilating and could very well undermine the values and culture that make America work. Having already explained what the economic literature says about immigration, I reminded him that there has been surprisingly little research on the effects immigrants have on institutions. But the research we do have[ref]An earlier version of this paper can be found here.[/ref] suggests that immigrants not only have no negative effects on institutions, but may even have positive effects on institutional quality.

A brand new study published this August could lend support to the findings above. From the abstract:

Using several measures of diversity, we find that higher levels of ethno-linguistic and cultural fractionalization are conditioned positively on higher economic growth by an index of economic freedom, which is often heralded as a good measure of sound economic management. High diversity in turn is associated with higher levels of economic freedom. We do not find any evidence to suggest that high diversity hampers change towards greater economic freedom and institutions supporting liberal policies. The effect of diversity, moreover, is conditioned positively by higher democracy. Our results raise serious doubt about the centrality of social diversity for explaining economic failure, nor is there evidence to suggest that autocratic measures are required under conditions of social diversity to implement growth-promoting policies. This is good news because history and culture seem to matter less than rational agency for ensuring sound economic management.

While this is mainly discussing development economics, I think the correlation between high diversity and high economic freedom is important. Barring members of other ethno-linguistic groups and cultures from entering the country may actually be holding back higher-quality institutions.

You can see an older, ungated version of the paper here.

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Let Their People Come

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Earlier this year, The New York Times reported that “[o]ne of the strongest predictors of Trump support is the proportion of the population that is native-born. Relatively few people in the places where Trump is strong are immigrants — and, as their answers on their ancestry reveal, they very much wear Americanness on their sleeve.” In other words, those opposing immigration the most live in areas with very few immigrants (similar to Brexit voters). A new Gallup study supports these findings. The Washington Post reports, “According to this new analysis, those who view Trump favorably have not been disproportionately affected by foreign trade or immigration, compared with people with unfavorable views of the Republican presidential nominee. The results suggest that his supporters, on average, do not have lower incomes than other Americans, nor are they more likely to be unemployed.” However, while

Trump voters tend to be the most skeptical about immigration, they are also the least likely to actually encounter an immigrant in their neighborhood. 

Rothwell finds that people who live in places with many Hispanic residents or places close to the Mexican border, tend not to favor Trump — relative to otherwise similar Americans and to otherwise similar white Republicans.

Among those who are similar in terms of income, education and other factors, those who view Trump favorably are more likely to be found in white enclaves — racially isolated Zip codes where the amount of diversity is lower than in surrounding areas.

These places have not been affected much by immigration, and Rothwell believes that is no coincidence. He argues that when people have more personal experience of people from other countries, they develop friendlier attitudes toward immigrants.

All this makes yesterday’s outstanding article in The Washington Post all the more important. “For many economists,” the author writes, “it’s the simplest and most effective way to make the world richer and reduce poverty. For those in government, it’s a political landmine.” She goes on to present the case in favor of loosening immigration restrictions:

Some economists have suggested that allowing people to work where their labor is most highly valued — something that is hardly realistic, given the political environment in the developed world— could double the size of the global economy. More than a dozen studies reviewed by economist Michael Clemens, a senior fellow at the pro-immigration Center for Global Development, suggested that eliminating barriers to global mobility would increase world gross domestic product by between 67 and 147 percent.

Clemens says the benefits are huge even for a more modest loosening of restrictions on immigration. His research suggests that allowing just 5 percent of the people now living in poor countries to work temporarily or permanently in richer countries would add trillions of dollars to the global economy. The economic gains would be greater than those from dismantling every remaining barrier to trade and investment around the world.

While some critics like Harvard’s George Borjas reject this kind of optimism, the evidence leans in favor of those pushing for fewer restrictions:

First, the same worker can create more economic value in some places than in others, because of differences in factors that affect the productivity of businesses, such as natural resources, infrastructure, technologies and laws…Differences in productivity are reflected in the vastly different wages people can earn for similar types of work across the world. According to estimates by Clemens, Claudio Montenegro and Lant Pritchett, who examined a data set of more than 2 million workers, the average Peruvian can make 2.6 times as much in the United States as in Peru, while a Haitian can make seven times more.

Second, many economists say that an influx of immigrants can expand an economy, potentially even raising wages for the native born…An expansive study released by the National Academies of Sciences in September found that immigration has mostly helped the U.S. economy in recent decades and had little effect on the wages or employment of native-born Americans. According to the study, the main group negatively affected by newly arriving immigrants was actually earlier waves of immigrants with similar language skills. To a lesser extent, new immigrants also competed for work with the lowest-skilled Americans, such as high-school dropouts. But in general, immigration left the native population slightly better off.

The article concludes:

While Clemens says he is troubled by the idea of discriminating against people based on where they are born, he doesn’t advocate “openborders,”[ref]See his and Lant Prichett’s newest publication “The New Economic Case for Migration Restrictions: An Assessment.” While empirical evidence may not back complete open borders, it does support the relaxing of current restrictions.[/ref] a term that is often used as a synonym for anarchy — no background checks, no deportation and no restrictions on immigration. In reality, few politicians are advocating even moderately higher levels of immigration, and the world won’t see anything like open borders anytime soon. But he says people still should recognize the substantial trade-offs of the current system.

Clemens draws an analogy with the rights of women. In the United States, laws prevented women from owning property, inheriting wealth and entering many professions until the late 1800s. Although some male workers may have suffered from the entry of women into the workforce during the 20th century, no one would deny that it has provided enormous benefits to the country and the economy. Yet restrictions on women had still persisted for millennia.

To borrow the title from Lant Prichett’s book:[ref]Prichett’s book was really influential in changing my views of immigration.[/ref] let their people come.

IMF: Stop With the Protectionism

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Image result for protectionismA new IMF publication finds that “[t]he waning pace of trade liberalization over the past few years and the recent uptick in protectionist measures could be limiting the sustained policy-driven reductions in trade costs achieved during 1985–2007, which provided a strong impetus to trade growth (Evenett and Fritz 2016; Hufbauer and Jung 2016)” (pg. 63). Their suggestion? “[R]esisting all forms of protectionism and reviving the process of trade liberalization to dismantle remaining trade barriers” in order to “provide much-needed support for trade growth, including through possibly kicking off a new round of global value chain development” (pg. 86). The Wall Street Journal reports,

Rising protectionism, record debt levels and a continuing economic malaise in wealthy countries will drag on global growth next year despite a turnaround in several key emerging markets, the International Monetary Fund said Tuesday. Global growth should only marginally pick up in 2017 to 3.4% from 3.1% this year, the fund said in its latest World Economic Outlook, despite policy makers pushing central bank stimulus into uncharted territories…A political backlash against the perceived negative effects of globalization threatens to undermine an already-weak and precarious recovery, the IMF warned.

“Subpar growth at recent levels risks feeding on itself through the negative economic and political forces it is unleashing,” IMF chief economist Maurice Obstfeld said, referring in large part to the surge in trade barriers around the world and the rise in opposition to free trade and immigration in the politics of the U.S. and Europe. Fearful of a trend toward protectionism when the global economy is already struggling with deflation risks, the IMF highlighted the potential shocks to growth from a sudden increase in tariffs and other trade barriers.

…The IMF also took pains to caution policy makers against the temptation to revert to protectionism as trade growth stalls in the low-growth era. Such anti-trade trends risk tilting the world economy deeper into a long-term funk. The fund estimated that a surge in trade barriers around the globe that pushed up import prices by 10% could sap nearly 2 percentage points off world growth over five years, force a 15% decline in exports and pull investment down by more than 4%.

This makes the anti-trade rhetoric of politicians all the more frightening. For example, take Donald Trump’s ill-conceived anti-NAFTA stance, especially in regards to the automobile industry. The WSJ again:

U.S. automotive competitiveness is highly dependent on global free trade. According to the Mexico City-based consulting firm De la Calle, Madrazo, Mancera, 37% of the U.S.’s imported auto components came from Mexico and Canada in 2015. This sourcing from abroad is important to good-paying U.S. auto-assembly jobs. But parts also flow the other way. U.S. parts manufacturers sent 61% of their exports to Mexico and Canada in 2015.

This synergy has made the U.S. auto industry attractive for investment. In the aftermath of the 2008 financial crisis investment in the auto sector contracted. But from 2010-14 almost $70 billion was invested in the North American automotive industry. Mr. Trump claims that investment is going to Mexico but two-thirds of it went into the U.S., according to a January 2015 report by the Michigan-based Center for Automotive Research.

This investment dynamism helped generate 264,800 new U.S. jobs in motor-vehicle production and parts between January 2010 and June 2016, according to the Bureau of Labor Statistics. That’s a 40% increase in employment despite the increasing trend toward robotics in the industry. Shut down Nafta and these workers and future job seekers will pay.

The kind of protectionist rhetoric and policies we’ve seen in both Europe and the U.S. is worrisome to IMF managing director Christine Lagarde and World Bank president Jim Yong Kim, with Lagarde going so far as to call it “economic malpractice.”

Let’s hope these recent populist movements are just a blip amongst the increasing economic freedom worldwide.

Discrimination and Firm Performance

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Image result for politically incorrect guide to capitalismIf an employer has an opening that pays $50,000 in salary, and the Christian applicant will bring in $51,000 in extra revenue to the firm while the Muslim applicant will bring in $55,000, then to discriminate against the creed of the latter will cost the employer $4,000 in potential profits…No government inspector or watchdog agency is required: by definition, discrimination is automatically “fined” in the free market. In addition, not only does the market catch discrimination whenever it occurs, but the amount of the “fine” is also exactly proportional to the severity of the discrimination…In short, employers are free to discriminate in the free market, but this discrimination certainly isn’t free.

– Robert Murphy, The Politically Incorrect Guide to Capitalism, pg. 31.

It turns out there is good evidence for this theory. As economist Alex Tabarrok reports at Marginal Revolution,

A nice test of the theory can be found in a paper just published in Sociological Science, Are Business Firms that Discriminate More Likely to Go Out of Business? The author, Devah Pager, is a pioneer in using field experiments to study discrimination. In 2004, she and co-authors, Bruce Western and Bart Bonikowski, ran an audit study on discrimination in New York using job applicants with similar resumes but different races and they found significant discrimination in callbacks. Now Pager has gone back to that data and asks what happened to those firms by 2010? She finds that 36% of the firms that discriminated failed but only 17% of the non-discriminatory firms failed.

The sample is small but the results are statistically significant and they continue to hold controlling for size, sales, and industry.

discrimination

So don’t discriminate. Not only is it unethical, it’s bad for business. But if you do, I hope you go out of business.

Paying Their Fair Share

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Making “the rich” pay their “fair share” has been a talking point for some time and became a bit of a slogan during the presidential race. Drawing on the Congressional Budget Office’s most recent report, the Tax Foundation posts,

One of the main takeaways from this year’s report is that the richest Americans pay a lot in taxes. In 2013, the top 1 percent of households paid an average of 34.0 percent of their income in federal taxes. To compare, the middle 20 percent of households paid only 12.8 percent of their income in taxes.

Moreover, taxes on the rich are much higher than they’ve been in recent years. Between 2008 and 2012, the top 1 percent of households paid an average tax rate of 28.8 percent. However, in 2013, this figure spiked to 34.0 percent, as a result of tax increases in the “fiscal cliff” deal and the Affordable Care Act.

We’ve known for a while that taxes rose on the rich in 2013, but the new CBO report puts in perspective exactly how high taxes on the rich are now, compared to the last three decades. For instance, in 2013, the top 1 percent of taxpayers paid a higher tax rate (34.0 percent) than in the year President Reagan took office (33.2 percent).

According to the CBO, the federal tax system is now “the most progressive it has been since at least the mid-1990s.” Writing in The Atlantic, Derek Thompson notes that “the government is doing more to fight inequality right now than any year on record.”

Economist Mark Perry provides additional insights (as he has in the past) to the CBO report. For example,

  • The bottom three income quintiles are net recipient households, meaning they receive more in transfer payments than they pay in federal taxes. The top two could be designated as net payer households. The top income quintile in particular “finance[s] almost 100% of the transfer payments to the bottom 60%, as well as almost 100% of the tax revenue collected to run the federal government.”

  • The bottom three quintiles receive “more than $1 in government transfer payments for every $1 paid in federal taxes in 2013. The fourth quintile consists of minor net payer households, receiving “slightly less than a dollar in transfer payments on average ($0.85) for every $1 paid in federal taxes. In contrast, “net payer households” in the top income quintile received only $0.17 in government transfer payments per $1 paid in federal taxes in 2013.”

 

  • “Adjusting for government transfers received, the light blue bars in the chart are calculated by dividing “Federal taxes paid minus government transfers received” (row 6 in the table) into Before-Tax Income (row 3), and show average federal tax rates by income quintile after government transfers. For example, the average “net recipient household” in the lowest income quintile received a “negative tax” payment of $8,800 in 2013, had an average before-tax income of $25,400, for a negative federal tax rate of 35%…This further demonstrates that after transfer payments, Americans in the bottom 60% by income are “net recipient households” with negative federal income tax rates, while only households in the top two “net payer” income quintiles had positive federal income tax rates after transfers in 2013.”

Perry concludes,

The CBO study released [in June] provides ample evidence that the richest Americans are paying their “fair share” of federal taxes. In fact, the richest 20% of Americans by income aren’t just paying a share of federal taxes that would be considered “fair” – it goes way beyond “fair” – they’re shouldering almost 100% of the entire federal tax burden of transfer payments and all other non-financed government spending.

…It’s also important to note here that the US has the most progressive federal tax system among all OECD-24 countries, see Tax Foundation president Scott Hodge’s article “No Country Leans on Upper-Income Households as Much as the US.” Specifically, the top 10% of American households pay 45.1% of all income taxes (both personal income and payroll taxes combined), which is the highest tax share for that group in any of the OECD-24 countries and far above the 31.6% average for the tax burden of the top income decile. Accounting for the income share of the top income decile, the US also has the highest ratio of the income tax share of the top 10% (45.1%) to the total income share of that group (33.5%) of 1.35 times, compared to the OECD average ratio of only 1.11.[ref]You can see more commentary on the CBO report in Scott Winship’s Forbes article.[/ref]

Healthcare Inequality

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Image result for healthcare insuranceA June 2016 study from George Mason University’s Mercatus Center finds “that both scholars and politicians have largely overlooked a key contributor to earnings inequality: the role of rapidly increasing healthcare costs.” The study “analyzes the link between earnings inequality and rising healthcare costs using unpublished data from the Bureau of Labor Statistics. The study finds that the increasing cost of employer-provided healthcare benefits accounts for a significant portion of rising earnings inequality.[ref]It doesn’t help that premiums have been increasing under Obamacare.[/ref] The study urges policymakers interested in addressing earnings inequality to shift their focus from failed redistributive policies to policies aimed at lowering the cost of healthcare benefits.” The key findings:

  • Most previous analyses of inequality focused exclusively on earnings, ignoring total compensation (including healthcare benefits). This oversight significantly inflated the perceived severity of workers’ earnings inequality.
  • While dollar earnings have grown significantly faster for higher-income workers than for lower-income workers, total compensation (including increasingly expensive healthcare benefits) has not.
  • Surging healthcare costs have depressed the annual earnings growth rate for lower-paid, full-time workers four times as much as for the top 1 percent of workers.
  • Redistributive policies do not address the root cause of the apparently increasing inequality, and may be counterproductive because of their negative implications for overall economic growth.
  • The key to lessening earnings inequality is to reduce the rate of increase for healthcare costs.

Check it out.

What Happened?: Republicans on Trade

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I’ve mentioned in passing the oddity of Democrats being more supportive of free trade than their supposedly capitalism-loving Republican opponents. A brand new poll by POLITICO and the Harvard T.H. Chan School of Public Health further confirms this shift. Some of the findings:

  • 47% of Republicans think free trade has hurt their communities, twice that of Democrats (24%). Only 18% of Republicans think free trade has helped, while nearly twice as many Democrats do (33%).
  • When broken down by country (Canada, EU, Japan, South Korea, Mexico, China) and by party, Republicans exceed both Democrats and Independents on every country in claiming that trade hurts. Over 60% of Republicans think trade with Mexico and China have hurt Americans. Democrats were surprisingly the lowest on every country.
  • “54% of Democrats believe that free trade has lost more U.S. jobs than it has created, compared to 66% of Independents and 85% of Republicans. Similarly, 38% of Democrats believe free trade has lowered U.S. wages, compared to 50% of Independents and 66% of Republicans. Only 8% of Republicans, 11% of Independents, and 19% of Democrats think free trade has led to higher wages for U.S. workers” (pg. 3).

There’s much more, including attitudes about the state of the economy and the Affordable Care Act. As one who grew up in a conservative household, I find this all rather worrying. As Trump’s senior policy adviser and economist Peter Navarro told POLITICO, “There’s been a schism for a long time between registered Republicans and the party leadership. That was the essence of the primary election. You had a group of insider politicians singing the same old globalization song. And one candidate saying the emperor has no clothes.” The problem, of course, is that the emperor is fully–clothed.

The Republican party has become a party of mercantilists.

Who Benefits From Trade?

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A new study published last month in The Quarterly Journal of Economics attempts to answer that question. Their results?:

We find a pro-poor bias of trade in every country. On average, the real income loss from closing off trade is 63% at the 10th percentile of the income distribution and 28% for the 90th percentile. This bias in the gains from trade toward poor consumers hinges on the fact that these consumers spend relatively more on sectors that are more traded, whereas high-income individuals consume relatively more services, which are among the least traded sectors. Additionally, low-income consumers happen to concentrate spending on sectors with a lower elasticity of substitution across source countries. Larger expenditures in more tradeable sectors and a lower rate of substitution between imports and domestic goods lead to larger gains from trade for the poor than the rich (pgs. 1116-1117).

From the authors’ Vox article.

Previous studies have found net benefits to average Americans. For example, according to a 2005 study,

Estimated annual gains are on the order of $1 trillion. The estimated gain in 2003 income is in the range of $2,800 to $5,000 additional income for the average person and between $7,100 and $12,900 for the average household. Future gains are harder to quantify, not surprisingly since the future is always difficult to predict. The estimates range from $450 billion to $1.3 trillion (pg. 68).

While some recent studies (such as Autor et al. 2016) have looked at the job loss caused by trade, some economists have expressed skepticism and even confusion over the claims and models used. An article in the NBER Reporter earlier this year summarizes the debate:

The rise in exports from China has been one of the most significant events in international trade in recent decades. This trend has accelerated since that country’s entry into the World Trade Organization (WTO) in 2001. Even before that date, by a vote of the U.S. Congress China received the low-tariff, most-favored-nation status associated with WTO membership each year. But with WTO membership, Chinese firms experienced a reduction in the uncertainty associated with the outcome of that vote. This contributed importantly to the surge in exports to the United States, according to studies by Justin Pierce and Peter Schott and by Kyle Handley and Nuno Limão; their hypothesis is supported by empirical work by Ling Feng, Zhiyuan Li, and Deborah Swenson. Pierce and Schott observe that the surge in Chinese exports to the United States coincides with a substantial decline in U.S. manufacturing employment. Handley and Limão find that the welfare gain for consumers due to this increase in Chinese imports is of the same order of magnitude as the U.S. gain from new imports in the preceding decade. These initial findings highlight the dual role that Chinese imports play for the United States: on the one hand, they create import competition with associated labor-market dislocation; on the other, they benefit U.S. consumers.

The first of these roles is explored in a series of papers by David Autor, David Dorn, and Gordon Hanson. They analyze the impact of Chinese import competition between 1990 and 2007 on local U.S. labor markets, exploiting geographic differences in import exposure that are due to initial differences in industry specialization. Higher exposure increases unemployment, lowers labor force participation, and reduces wages…At the aggregate level, a conservative estimate is that the import surge accounts for one-quarter of the decline in U.S. manufacturing employment. The regional concentration in the decline in manufacturing employment is inconsistent with some alternative explanations of this phenomenon, notably the possibility of a systemic technology shock. The trade effects on unemployment are confirmed by examining worker-level evidence. Most recently, in joint work with Daron Acemoglu and Brendan Price, these authors find that the import surge from China also contributed to unusually slow employment growth in the United States following the global financial crisis and the Great Recession.

While these papers have explored the impact of import competition from China, they do not incorporate the consumer gains or the export opportunities created by expanded Chinese exports. The first attempt to put the surge in Chinese exports into a general equilibrium context is that of Lorenzo Caliendo, Maximiliano Dvorkin, and Fernando Parro. Their computable general equilibrium model incorporates labor mobility frictions and dislocation costs. They find that growing Chinese import competition resulted in a 0.6 percentage point reduction in manufacturing’s share of total employment, or approximately one million jobs lost, which is about 60 percent of the change in manufacturing employment not explained by a secular trend. At the same time, the China shock increased U.S. welfare by 0.2 percent in the short run and 6.7 percent in the long run, with very heterogeneous effects across labor markets. Despite the fact that employment impacts and labor market dislocation are much stronger in some areas, the consumer gains and export opportunities mean that nearly all regions experience net benefits from rising Chinese imports.

While there may be certain steps we can take to diminish the temporary blow to some American workers, we should not lose sight of the fact that trade is a net benefit to Americans and particularly the poor.