In 1833, the religious leader and founder of The Church of Jesus Christ of Latter-day Saints, Joseph Smith, wrote a brief document which he reported to be inspiration from the Almighty. The declaration, known today as the “Word of Wisdom,” was to become the health code for the church’s members.
One element of the code includes the admonition that human consumption of tobacco is harmful to humans, yet useful for administering to sick cattle. While followers of Smith are likely to adhere to such advice without empirical research, people of science understandably prefer to see evidence of a more substantive nature.
Such evidence was compiled during the early 20th century. In 1962, the Kennedy administration assigned a task force to examine all available scientific papers. The task force worked from November of that year until January 1964. Its findings, the famous surgeon general’s report, was announced on Jan. 11, 1964, making quite a media moment. It confirmed what many already suspected.
This, in a sense, parallels the economic community’s experience with international trade and its impact on labor markets. As we noted last week, some of the greatest economic minds of the 20th century, including Paul Samuelson, theorized that opening up trade would bring benefits to consumers, but also redistribute income in predictable yet potentially negative ways.
As with the tobacco issue, neither theory nor inspiration is sufficient to sway men of science. We need empirical proof. And proof was slow in coming. As economists evaluated the international trade data and labor markets, a consensus, what economist John Kenneth Galbraith called “conventional wisdom,” emerged in the late 1990s.
The “wisdom” included, first, that international trade in recent decades had not contributed to the decline of manufacturing nor to the rise of wage inequality in developed nations such as the U.S.; second, that workers who had lost jobs could easily relocate to other industries; and third, that other jobs at comparable wages should be available in other industries not affected by trade.
This consensus among economists came from a few observations. First, manufacturing peaked in 1944 and had been in decline for many years. Yet trade with low-cost countries did not get underway until the 1970s. Thus, the drop in developed-nation manufacturing was not coincident with the rise in trade. Second, wage inequality began its rise (around 1980) just as the rise in international trade leveled off. If trade had been a source of income inequality, one would have thought that the rise in one would be associated with a rise in other. But this was not so. Third, developed nations seemed to have a large increase in demand for highly skilled and educated workers as a result of new technologies such as computers. This was assumed to be the main driver of wage inequality.
And then came the sleeping dragon, China. During the past 20 years, China’s share of the world’s “manufacturing value added,” i.e., the additional value added to both raw materials and parts, has risen from 5 percent to almost 25 percent. This world economic “experiment” has given economists a new and robust data set to better examine the genuine effects of trade.
During the past few years, numerous studies have surfaced that have dissected data in various ways and means to yield consequential conclusions. Economists David H. Autor, David Dorn, and Gordon H. Hanson, in their recent working paper, “The China Shock,” examined individual regions most affected by trade with China. As anyone here would guess, most of Maine was in the top quartile of exposure to trade.
According to their study, trade with China has had some important consequences. First, contrary to the turn-of-the-millennium consensus view, trade with China and other low-cost-labor trading partners has contributed to income inequality in the U.S. Second, workers affected by trade experience lower lifetime earnings than would have been the case without trade.
Third, regions that are most exposed to international trade experience chronic unemployment, lower employment participation rates, and significantly higher public costs for retirement, Medicaid, and disability. Suffice it to say, they get their money’s worth out of their FICA withholdings.
Much of these negative consequences were assumed, by most economists, to be tempered by the mobility of our labor force. Jobs should be available elsewhere. Employment should be plentiful in places unexposed to trade with low-wage nations. But the actual experience has been different.
Economic trade theory is usually predicated on a trade balance. In other words, theorists assume that when trade barriers between two countries diminish, both countries will buy from each other. But in the case of China, they sold to us without buying from us. They chose to run a large trade surplus and impose a trade deficit on us.
Further, when a worker loses his or her job at the mill in Millinocket, it is one thing to relocate to Bath Iron Works. It is a completely different matter to move to the Mercedes Benz factory in Alabama, where family, friends, and familiar faces are left behind; where even the brand of English is all but a foreign tongue alongside our delightful New England dialect.
What could have been done, had policymakers assumed some of these consequences which were widely anticipated by economic theory? What policy prescriptions could have mitigated the effects caused by the opening and liberalizing of free markets?
In the case of Maine, one of the hard-hit states, an increase in federal contracts at BIW would have been helpful. Federal incentives to bring manufacturing of ship and aircraft parts to Maine would have also aided us. In short, some type of job-creating public intervention was needed to moderate the costs and employment burdens borne by regional workers coincident to the liberalizing of trade with China.
It would appear that Samuelson and his colleagues were correct in their theory regarding the effects of trade liberalization. It would also appear that Smith was onto something with his health code. According a 25-year study published in 2008 in the Journal of Preventative Medicine, adult men and women who follow the LDS Church’s Word of Wisdom live 9.8 and 5.6 years longer than U.S. white males and white females, respectively. Of course, that also means that they don’t get their money’s worth out of their life insurance policies.
Next week we examine the positive side of trade liberalization.
(Marcus Hutchins is a former economist, treasury bond arbitrage trader, and hedge fund manager. He retired to Southport in 1997, where he resides with his wife, Andrea, and youngest daughter, Abbey. He welcomes feedback at email@example.com.)