Real-life economics reveals how China trade damaged US society
Empirical study flies in the face of traditional theorising — and even promotes manufacturing
Massachusetts Institute of Technology economist David Autor once referred to himself as an "ambulance chaser". It was his self-deprecating way of admitting that his work tends to focus on the big, urgent issues facing the modern economy.
Autor is one of the leaders of the empirical revolution in economics. Along with others such as Stanford’s Raj Chetty and Harvard’s Lawrence Katz, Autor has been pioneering ways to make the economics discipline more credible and relevant.
He has tackled subjects such as monopoly power and the polarisation of the job market. But perhaps his biggest bombshell has been his finding, along with co-authors David Dorn and Gordon Hanson, that opening the US economy to trade with China hurt US workers a lot more than had previously been thought.
Although that finding has been challenged by other academics, it has already changed the way economists think and talk about the costs and benefits of free trade.
Not too long ago, free trade was the one thing almost all economists agreed on. They might bicker about fiscal stimulus or the right rate for the corporate tax, but when it came to trade, they were in step.
Trade theorist Paul Krugman once wrote: "The economist’s case for free trade is essentially a unilateral case — that is, it says that a country serves its own interests by pursuing free trade regardless of what other countries may do."
If empirical studies can lead top mainstream economists to question this once-universal belief, then the profession really is shifting from theory to evidence. With this in mind, I contacted Autor to ask him how his research on China has altered his own thinking about the costs and benefits of trade.
He told me he had been astonished by his own findings. Autor, like most top economists, was once an orthodox thinker on the trade issue. He had expected US workers would adjust well to the shock of Chinese imports, finding other jobs for similar wages after a short period of dislocation.
That was largely what happened in the 1980s and 1990s in response to Japanese and European competition.
Instead, he and his co-authors found that trade with China in the 2000s left huge swathes of the US workforce permanently without good jobs — or, in many cases, jobs at all.
This sort of concentrated economic devastation sounds as though it would hurt not just people’s wallets, but the country’s social fabric.
In a series of follow-up papers, Autor and his team link Chinese import competition to declining marriage rates and political polarisation. Autor told me these social shifts make the need for new thinking about trade policy even more urgent. A large population of angry, unmarried men with deteriorating career prospects is a dangerous thing for a democracy.
The new empirical era may contain far less comfortable certitudes than the theory-driven economics of the past, and that is frightening
So, I asked, how should trade policy be changed? Autor’s answers again surprised me. He suggested the process of admitting China to the World Trade Organisation in 2000 should have been slowed down significantly. That would have given US workers and industries time to prepare for, and adjust to, China’s competitive onslaught.
He also endorsed the border adjustment tax now being considered by Congress. This would probably benefit US exporters at the expense of importers.
But Autor went quite a bit further. He told me the US government should focus attention on manufacturing industries and even use industrial policy to bolster the sector.
Traditionally, economists have looked down their noses at "manufacturing fetishism", but Autor says he thinks the sector is underrated.
He praised Sematech, the government-organised consortium that worked to boost the US semiconductor industry in the 1980s and 1990s. He also suggested that the government use military research spending and incentives for investments in automation.
Autor cited another one of his papers showing that Chinese imports had made US producers of those goods less innovative, and suggested that government policy could help reverse this trend.
This kind of talk is certain to make many economists uncomfortable. Top economists have toyed with the idea of industrial policy over the years. But explicit support for the manufacturing sector goes against decades of ingrained teaching. And a general shift from free-trade cheerleading towards a sober, nuanced weighing of trade’s costs and benefits is going to be a frightening proposition for many.
But if this change in outlook does happen, even marginally, it will be a testament to the power of empirical economics. When facts and evidence can convince fair-minded researchers such as Autor to change their own bedrock beliefs about national economic policy, it means there has been a sea change in how the profession thinks.
The new empirical era may contain far less comfortable certitudes than the theory-driven economics of the past, and that is frightening. But only by first admitting ignorance can social scientists eventually start crawling their torturous way towards the truth.
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