Stagnant Wages and Ohio: NAFTA Isn't the Problem

An excellent column by David Leonhardt:

The Politics of Trade in Ohio: Now come Mr. Obama and Mrs. Clinton... tough talk about foreign trade... you'd have to conclude that they believe that Nafta and other trade agreements have caused Ohio's huge economic problems.

"She says speeches don't put food on the table," Mr. Obama said in Youngstown. "You know what? Nafta didn't put food on the table, either." Later, he went further, claiming that Ohio's workers have "watched job after job after job disappear because of bad trade deals like Nafta."

Mrs. Clinton's advisers, meanwhile, have been putting out the word that she tried to persuade her husband not to support Nafta -- which liberalized trade with Mexico and Canada -- when he was running for president....

[However, n]either candidate calls for a repeal of Nafta, or anything close to it. Both instead want to tinker with the bureaucratic innards of the agreement.... They call the country's trade policy a disaster, and yet their plan to fix it starts with, um, cracking down on Mexican pollution....

The first problem with what the candidates have been saying is that Ohio's troubles haven't really been caused by trade agreements. When Nafta took effect on Jan. 1, 1994, Ohio had 990,000 manufacturing jobs. Two years later, it had 1.03 million. The number remained above one million for the rest of the 1990s, before plummeting in this decade to just 775,000 today. It's hard to look at this history and conclude Nafta is the villain. In fact, Nafta did little to reduce tariffs on Mexican manufacturers, notes Matthew Slaughter, a Dartmouth economist. Those tariffs were already low before the agreement was signed.

A more important cause of Ohio's jobs exodus is the rise of China, India and the old Soviet bloc, which has brought hundreds of millions of workers into the global economy.... [Y]our credit card's customer service center isn't in Ireland because of a new trade deal. All this global competition has brought some big benefits, too. Consider that cars, furniture, clothing, computers and televisions -- which are all subject to global competition -- have become more affordable, relative to everything else. Medical care, movie tickets and college tuition -- all protected from such competition -- have become more expensive.

So what can be done for Ohio?

There is actually a fair amount of agreement among economists on this question. The solution should involve more government investment in infrastructure, the medical sciences, alternative energy and other areas that could produce good new jobs. A more strategic approach to investment, one less based on the whims of individual members of Congress, would also help....

Over the last week, the candidates' talk has, at times, been silly and even inaccurate. And Ohio's problems would certainly be easier to solve if, as Luis Proenza, president of the University of Akron put it, the candidates were "more true to reality and less prone to invective." But the larger problem is that Ohio%u2019s voters have good reason to be angry. For years, they have been promised that globalization was making the United States a richer country. They're still waiting for their share of the bounty.

Comments

[jerry]

There is actually a fair amount of agreement among economists on this question. The solution should involve more government investment in infrastructure, the medical sciences, alternative energy and other areas that could produce good new jobs. A more strategic approach to investment, one less based on the whims of individual members of Congress, would also help....

How often do free traders say this sort of thing? And when was the last time we saw government investment of this sort? And what is your definition of insane?

All else being equal how would you compare the US Air Quality Standards with Mexico's? How would you describe the profit potential of a company working under US standards compared to Mexican standards? Is there some reason that American taxpayers shouldn't consider the Mexican standards as a Mexican government subsidy of their business? Wouldn't ensuring that US and Mexican air standards are similar be placing the two countries on similar, level, playing fields, if not just the right thing to do on a human rights basis?

Regarding delays in Ohio's manufacturing levels, so you're telling me that economic theory suggests that NAFTA's impacts were felt immediately and weren't buffered by other forces over time until they led up to a collapse? The Minneapolis Bridge didn't fall because of what happened the day of the collapse. The Hayward Fault will not fault because of what happened the day of it's fault. Does economic theory really rule out delays and buffering?

[whomever1]

I can more or less accept that the Democratic candidates plans for NAFTA and similar agreements are not fundamental, but surely they're helpful? By requiring other countries to let their workers unionize and to force foreign industries to control pollution better we would simultaneously be reducing the incentive for U. S. industry to move abroad, and making the other countries' people more likely to be able to buy our goods. Of course it would also help if we were not impoverishing Mexican farmers by exporting subsidized grain--I'm not clear on how much NAFTA is responsible for that.

[Julian Elson]

It's true that, as you say, NAFTA isn't the villain in Ohio's woes. It's also true, as Obama says, that NAFTA hasn't put food on the table either; neither the benefits nor the costs are all that large.

Free trade between Canada, Mexico, and the U.S. is all fine and good, but NAFTA's provisions include restrictions on domestic policy like requiring that foreign companies be compensated for lost profits if new regulations impinge on them. Overall, I've guardedly shifted to the anti-NAFTA side. I think the benefits of trade are small but real, and the costs of protectionism of the sort that results from congressional horse trading similarly small but real, but in my view the costs in terms of restrictions on domestic policy aren't worth the benefits in terms of slightly smoother trade transactions. I would support a "simple" free trade agreement which concerned trade barriers and investment restrictions while allowing flexibility on domestic policy, if that's possible, or even unilateral American free trade, but I don't think NAFTA was worth it. Free trade? Great. NAFTA? Not all bad, certainly, and not the cause of most of Ohio's problems, but not worth it in my view.

[kaleidescope]

It would still be a good idea to renegotiate NAFTA to give the same strong protections to labor rights and the environment as are given to intellectual property.

[theCoach]

"For years, they have been promised that globalization was making the United States a richer country. They're still waiting for their share of the bounty."

All sorts of signaling problems here in that to an Ohio voter NAFTA = Globalization, loss of jobs, and trade deals in general (and our trade policy with China, etc.). This is a shorthand association that the as politicians Obama and Clinton do not have the time or media backing to straighten out.

But in that sense, that NAFTA represents the deal being made with Capital on globalization, NAFTA does represent the bargaining away of one side with almost no attempt to provide the following:

the solution should involve more government investment in infrastructure, the medical sciences, alternative energy and other areas that could produce good new jobs. A more strategic approach to investment, one less based on the whims of individual members of Congress, would also help....

What the NAFTA defenders seem to miss is that the time to negotiate for this is during the Free Trade deal.

It is like bargaining for a new employment agreement and coming to a conclusion on how much you will work, vacation hours, etc. Then when the worker has stagnant wages claiming that the problem is not the hours worked, vacation hours, etc., but that they did not negotiate for a good salary.

The time to negotiate for these things is during the trad deal!

(I realize that trade agreements are formally between governments, but the decision to agree to Trade Deals is an internal one that should be negotiated between workers and capital, and their representatives).

[piotr]

So, the short history of economy after NAFTA seems to be:

First, there was a technology boom, and both employment and wages were increasing, although not in Ohio. Trade deficit was growing though.

Second, the technology boom ended, the employment and wages dropped, for something like two year.

Third, real estate and construction boom raised the employment, and wages a bit, although not in Ohio. The trade deficit stabilized at something like 5% of the national product.

Now, the real estate boom ended, and, dollar crashed (good), oil jumped a lot (ouch), we got some improvement in manufacturing trade (good) erased by doubled expenditures on oil (ouch).

What else happened? Small-medium scale manufacturing that gave good income in Rust Belt largely evaporated, and Sun Belt industries to a degree follow the suit. High tech employment and low tech like call centers is subject of outsourcing. It seems that in the era of very efficient transportation, communication and banking services the difference between personal incomes in different areas is unsustainable disequilibrium.

For a while, this was only a long term potential disequilibrium, because the difference between the infrastructure, accumulated investment, experience and education levels was making up for lower costs of labor and land. However, the new investments in infrastructure and manufacturing capacity altered that, and education levels are also convergent. Anyway, one of the marvels of modern organization and automation is that you can decrease the number of educated and experienced people involved in the production process.

The way I see it, we can either march toward world-wide equilibrium, contributing to it through decay, or make that march somewhat slower, so our losses will be relative rather than absolute.

[Kelly]

theCoach: "This is a shorthand association that the as politicians Obama and Clinton do not have the time or media backing to straighten out."

And Prof DeLong and Leonhardt and Krugman all know this. What you're looking for here is ...WTO.
In the article Leonhardt notes that; "Two years later, it had 1.03 million. The number remained above one million for the rest of the 1990s, before plummeting in this decade to just 775,000 today.". And then just ignores that thereafter.

What the candidates are doing is using NAFTA as a shorthand for all the disasterous trade agreements and all these people know that. They are just using a technicality to argue what is plainly at the grassroots a disaster for American workers.

[Kelly]

theCoach: "This is a shorthand association that the as politicians Obama and Clinton do not have the time or media backing to straighten out."

And Prof DeLong and Leonhardt and Krugman all know this. What you're looking for here is ...WTO.
In the article Leonhardt notes that; "Two years later, it had 1.03 million. The number remained above one million for the rest of the 1990s, before plummeting in this decade to just 775,000 today.". And then just ignores that thereafter.

What the candidates are doing is using NAFTA as a shorthand for all the disasterous trade agreements and all these people know that. They are just using a technicality to argue what is plainly at the grassroots a disaster for American workers.

[Kelly]

theCoach: "This is a shorthand association that the as politicians Obama and Clinton do not have the time or media backing to straighten out."

And Prof DeLong and Leonhardt and Krugman all know this. What you're looking for here is ...WTO.
In the article Leonhardt notes that; "Two years later, it had 1.03 million. The number remained above one million for the rest of the 1990s, before plummeting in this decade to just 775,000 today.". And then just ignores that thereafter.

What the candidates are doing is using NAFTA as a shorthand for all the disasterous trade agreements and all these people know that. They are just using a technicality to argue what is plainly at the grassroots a disaster for American workers.

[bigTom]

Demonizing NAFTA and Nuclear power, is a required rite of passage for Democratic pols. In a similar manner "all taxes/regulations are bad" is required of Republican pols. Omit this and the applicant loses his chance to play in the big leagues. I'm in full agreement with most of the comments here, the European model of wealth distribution, and strategic investment has allowed them to avoid the demonization of globalization. We have only done half the program, and like California's halfway deregulation of the utility sector several years ago, a bad result is not unexpected.

[R. Vangala]

For a different view on the Leonhardt piece:

http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=02&year=2008&base_name=why_is_the_nyt_so_opposed_to_f

[bigTom]

Heres what the Canadians think about the wisdom of opening up renegotiations for NAFTA:
http://canadianpress.google.com/article/ALeqM5iAnllHOZKWHSuOSWtGnSfK2lgSGg

OTTAWA - Trade Minister David Emerson suggested the United States has a sweet deal over access to Canada's oil under the North American Free Trade Agreement, saying the two Democratic presidential candidates calling for renegotiations may not know just how good the U.S. has it under the deal.

Emerson said Wednesday that reopening the three-country trade deal would not be a one way street and that Canada also has its list of concessions it would seek if the continental pact was renegotiated.
"Knowledgeable observers would have to take note of the fact that we are the largest supplier of energy to the U.S. and NAFTA has been the foundation for integrating the North American energy market. When people get below the rhetoric and pick away at the details, they are going to find it's not such a slam dunk proposition."

I'm assuming that these sorts of issues will give cover for a future Clinton or Obama administration to avoid doing this.

[Ken Muldrew]

bigTom wrote, "I'm assuming that these sorts of issues will give cover for a future Clinton or Obama administration to avoid doing this."

Of course there's also that bit about worker protection (in which both Clinton and Obama specifically mentioned Canada in addition to Mexico). This is a bit rich since almost every American challenge to FTA and NAFTA has been about forcing Canada to *reduce* worker protections. Hopefully your "Democratic right of passage" is accurate.

[Paul A. London]

The key fact in Leonhardt's column is this: "cars, furniture, clothing, computers and televisions -- which are all subject to global competition --have become more affordable, relative to everything else." Cars and steel are cheaper and better too, compared to the good old days when the Big Three and Big Steel had their way.

Today in the U.S. the biggest problems are still in areas where competition is weak. Healthcare costs rise 7 percent a year because there is no transparency and therefore no real competition. Autos in Ohio are another aspect of the same problem. Honda has expanded in the state for three decades because it is not burdened by the legacy of the post-war oligopolistic U.S. auto industry. The Big Three in the state continue to fade because for 50 years they and their unions have been too slow to give up the habits of post-war oligopoly and government has not helped enough.

We need to think of U.S. economic problems in terms of 5 or 6 sick industries (healthcare, education, energy, electric utilities, coastal shipping) that are not world class in large measure because competition in them is weak. In Adam Smith's words, these are industries that "have obtained monopolies against us...and upon many occasions intimidate the legislature." The politics of taking on these interests is the central issue represented by the NAFTA "debate" and that politics is never easy.

[walkingdaline]

>> This is a bit rich since almost every American challenge to FTA and NAFTA has been about forcing Canada to *reduce* worker protections.

Not true Ken! About half the time it's blocking imports of things like softwood lumber despite repeated international rulings that such behavior actually contravenes the agreement.

[mary]

Well, so maybe we should stop making it difficult for foreign doctors (and journalists) to enter the US workforce. I'm with Dean Baker on this -- why leave some workers vulnerable to foreign competition but not others? And why do we keep calling NAFTA and other agreements "free trade" agreements? (Actually, I think I know the answer to these questions . . . )

[jerry]

Dean Baker's post is 100% correct. The corollary is that Free Trade economics professors need to explain why they retain tenure.

[piotr]

Ok, certain things are better and cheaper, but our trade deficit is not sustainable, so how is it supposed to stabilize?

By the way, one reason a big class of imported goods is cheap is that central banks of several large exporters suppress the market signal that our currency is worth less due to trade imbalance. In the presence of such a signal the trade imbalance would be somewhat self-correcting. I think something went out of whack, and the regulators of American economy bear a lot of blame.

I think protectionism in the style of 1930-ies is probably wrong or very wrong, but we, like many other countries, need some measure of protectionism. For example, we could make making alternative sources of energy somewhat protected, to stimulate the domestic production, with very simple device, namely we can make subsidies and tax advantages for energy savings and non-carbon electricity generation conditional on some domestic content requirements. That way we would substitute the oil import with domestic production and jobs. It could be good for ecology and for Rust Belt economy. Actually, there would be no harm that I can see in making it NAFTA content requirement.

We could also break WTO, or modify it, to allow preferences for good behavior on matters of ecology and workers rights. I guess we could get EU and Japan to cooperate.

[Altoid]

"A more important cause of Ohio's jobs exodus is the rise of China, India and the old Soviet bloc," writes Leonhardt.

It is the besetting and maddening habit of free-trade supporters to speak as if this rise were an exogenous event. Of course it has not been. And of course it would be both wrong and dangerous to try to deny these countries their economic development.

The most successful of the new economies have, so far as I know, followed fairly closely the model we followed in the 19th century, namely attracting foreign capital and investing much of it, as well as much government money, in infrastructure development while protecting the domestic market through several different means. For lack of a better term (not being an economist) I'll call it a kind of mercantilism. The alternative seems to have been mere colonization, with foreign direct investment controlling a country's productive resources and preventing any political control over its economy.

While this industrial-mercantilist approach is probably theoretically inconsistent, it has at least two major proven virtues. First, it works. Second, it's politically sustainable. A possible third is that it seems to work better than economic colonization at actually improving standards of living in the countries concerned.

IMHO, it would be better for us in the US to acknowledge the pattern that most other countries and trading blocs are actually following, and to plan out and discuss our own policy options silmilarly. When we instead bow at the idol of free trade alone, we say, in effect, that we're ready to sacrifice the livelihoods of our own people for a theoretical model. (Remind me again, what is it we deride the failed gods of German idealism and Communism for?)

If we're actually doing what other countries do, let's say so and develop domestic political support for the appropriate degree and range of free trade we think is most effective. If instead we're actually trying to be purist free traders in a mercantilist world, we'll be as successful as Canute was. He got pretty wet, didn't he?

Once upon a time, the discipline was called "political economy."

[gordon]

I posted this earlier at Economist's View. I haven't bothered copying the links.

I was lost in admiration of the subtlety with which David Leonhardt recommended an improved industrial policy for the US without actually using the words "industrial policy": "The solution should involve more government investment in infrastructure, the medical sciences, alternative energy and other areas that could produce good new jobs. A more strategic approach to investment, one less based on the whims of individual members of Congress, would also help....".

At that point I hoped that Prof. Thoma would pick up the disguised industrial policy theme, point to where it was going, and run with it. Unfortunately, we got shunted to the "take care of the workers not the jobs" theme, which looks the same as the safety net theme which has been discussed here more than once.

Why is industrial policy so hard to talk about? Is it a Communist Conspiracy? Is it a proprietary product of the Pro-Abortion lobby? Is there a danger of being tarred and feathered?

I am aware of the EPI's project called "Agenda for Shared Prosperity", which contains some very moderate industry policy proposals for the US. Maybe there are other US proposals around which I don't know about. I would be interested. In Australia, the biggest metalworking union commissioned a paper called "The State of Australian Manufacturing" on industrial policy from a Melbourne think-tank in 2006 (go here and click on "reports"). It might be useful reading.

Of course, the US has already got a de facto industrial policy, but it exists in the shadowlands of earmarks, subsidies, tax breaks and of course a huge military expenditure. It would be nice if US economists could haul its various and sometimes obscure components out into the daylight and maybe estimate its overall effects. Frankly, I doubt if they would be found beneficial to Ohio or to the US in general.

[zinc]

"All this global competition has brought some big benefits, too. Consider that cars, furniture, clothing, computers and televisions -- which are all subject to global competition -- have become more affordable, relative to everything else."

And that's it ? That's the trade protectionist justification ?

The lopsided trade policy problems would have reached a breaking point in 2003 without the chimera made possible by the debt bubble.

[bigTom]

Whenever I mention "industrial policy" in conversation, I get the "it's a horrible idea, remember when the government tried to push HDTV way back when" thrown at me. I haven't developed a good response.

[gordon]

BigTom:
Maybe you should respond by talking about the de facto industrial policy and suggest that a reasoned policy might be better.