Import Competition and the Great U.S. Employment Sag of the 2000s

by on August 26, 2014 at 2:04 pm in Data Source, Economics | Permalink

In the new NBER paper on this topic by Daron Acemoglu, David Autor, David Dorn, Gordon H. Hanson, and Brendan Price, we see the evidence for this proposition piling up:

Even before the Great Recession, U.S. employment growth was unimpressive. Between 2000 and 2007, the economy gave back the considerable gains in employment rates it had achieved during the 1990s, with major contractions in manufacturing employment being a prime contributor to the slump. The U.S. employment “sag” of the 2000s is widely recognized but poorly understood. In this paper, we explore the contribution of the swift rise of import competition from China to sluggish U.S. employment growth. We find that the increase in U.S. imports from China, which accelerated after 2000, was a major force behind recent reductions in U.S. manufacturing employment and that, through input-output linkages and other general equilibrium effects, it appears to have significantly suppressed overall U.S. job growth. We apply industry-level and local labor market-level approaches to estimate the size of (a) employment losses in directly exposed manufacturing industries, (b) employment effects in indirectly exposed upstream and downstream industries inside and outside manufacturing, and (c) the net effects of conventional labor reallocation, which should raise employment in non-exposed sectors, and Keynesian multipliers, which should reduce employment in non-exposed sectors. Our central estimates suggest net job losses of 2.0 to 2.4 million stemming from the rise in import competition from China over the period 1999 to 2011. The estimated employment effects are larger in magnitude at the local labor market level, consistent with local general equilibrium effects that amplify the impact of import competition.

There are more details in this version of the paper than in an earlier version cited on this blog.  Here is my related column on economic contraction, from a few days back.

Kevin Erdmann August 26, 2014 at 2:16 pm

The US economy must have been more than capable of handling the dislocations from this source of growth, because by 2007, labor force participation was very strong. At the bottom of the post I’m linking to from calculatedrisk, you can see male labor force participation, by age. There are slight downward trends across age groups, dating back to the time of Mao, which are quite linear over decades. In the late 2000′s, before the recession, LFP was growing strongly, against the long term trend.

http://www.calculatedriskblog.com/2014/06/41-year-olds-and-labor-force.html

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Cooper August 26, 2014 at 2:56 pm

There was definitely an acceleration of prime age men leaving the workforce during the recession and we haven’t seen a bounce back to the trend line.

The bigger question is, why are so many men dropping out of the labor force? They can’t all be stay at home dads…

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Cooper August 26, 2014 at 2:58 pm

Or maybe a better question is, why was there a bump above the trend line during the 2000s?

Lots of middle aged male construction workers who were temporarily employable thanks to a real estate bubble?

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mulp August 26, 2014 at 8:32 pm

They were working the boiler rooms pushing refis into bad mortgages earning money only if the got a refi no matter how bad the outcome would be.

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Steve Sailer August 26, 2014 at 10:48 pm

“Things We Lost in the Fire” was a timely 2007 movie about a heroin junkie who gets a job as a mortgage broker:

http://www.imdb.com/title/tt0469623/

It wasn’t a hit, but I enjoyed Benicio del Toro’s performance, which was keyed off Lou Reed singing “Sweet Jane.”

mulp August 26, 2014 at 9:23 pm

According to http://felonvoting.procon.org/view.resource.php?resourceID=000287#III statistics:

reading from a graph in 1976 the number of persons disenfranchised from voting was 1.2 million, and from there it steadily increased to 3.3 million in about 1998, and then it turned up from there to 4.7 million circa 2004, and is around 5.9 million today.

The percentage is about 2.5%.

Disenfranchisement means a felony conviction and living in a State that denies felons rights of citizenship.

Increasingly, businesses and other employers have been encouraged to deny jobs to felons. Even the US military which gave the screwups who got into trouble a chance refuse to allow felons to serve and kill people, because killing requires people with high moral standing. Being convicted of selling pot is a sign you are not qualified to kill. Being a gang banger disqualifies you from killing.

And if a pot dealer is not moral enough to kill for the military, they certainly aren’t moral enough to work in an auto factory, or be an assistant manager overnight at a fast food. The only option is to drop out of the labor force.

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Steve Sailer August 26, 2014 at 10:50 pm

Getting into the military has been pretty hard since Dick Cheney downsized the Army in 1992. Lately, the Air Force, Navy, and Coast Guard have been requiring 3 digit IQs, while the Army and Marines want IQs at least in the 90s (translating heavily g-loaded AFQT scores into IQ scores).

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Ed August 27, 2014 at 10:03 am

I think this is a good point, but its probably the other way around.

There simply isn’t a big deman for labor compared to past decades, for various reasons. I actually suspect there is some social and political pressure on employers to maintain a larger labor force than is really profitable, or else the labor force participation rate would be much lower.

So you get a situation where employers can be really picky about who they employ, and they need some metrics to sort through the unmanageable pile of applications anyway, and despite the recession alot of their jobs are still fluff jobs so competence isn’t a big issue. But if they too openly reject applicants for being the wrong race, sex, or to some extent religion they get into legal trouble. If they hire someone with a conviction, who then commits another crime, they get into trouble. So as the labor force shrinks and people are excluded, people with convictions become one of the first groups to be excluded.

I don’t think this is going to end well (its an excellent way to create a large permanent criminal class), but with reduced demand for labor I can’t think of anything effective to do about it.

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JonFraz August 27, 2014 at 7:19 pm

I think it may also be true that employers didn’t realize that they could produce the same output with fewer people since the productivity enhancements of the 90s were often very incremental and passed unnoticed, leaving small amounts of slack time (measured in minutes) here and there in workers’ work days, and not obviously noticeable gaps. When the recession hit lots of people were laid off in almost panicked over-reaction that things really were going down to doomsday, and employers suddenly discovered than the remaining people could produce more than they had estimated, so less need to hire as the economy picked up again.
This observation also eliminates the need for Tyler’s ZMP workers: the people let go were not inherently unproductive or unprofitable– they just were not needed.

Nathan W August 27, 2014 at 12:21 pm

How likely do you think ex-cons are to vote Republican?

As an alternative to voter suppression, we should have a mandatory vote with a “none of the above” option.

When “none of the above” wins the election, perhaps some constructive alternatives will start to appear.

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tyler August 27, 2014 at 12:49 pm

Mulp,

We absolutely need high moral standards for the military. There are strict rules of engagement and chains of command which must be followed. We don’t want to hand machine guns to people who don’t obey orders. That’s a recipe for chaos.

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Ed August 27, 2014 at 12:57 pm

Historically, militaries, including the American military, prided themselves on taking literally anyone off the streets and training/ brainwashing them to obey orders. You had “recruits” coming straight from jail cells (maybe not in the US but certainly in other countries). That changed somehow.

Peter Schaeffer August 26, 2014 at 3:06 pm

KE, Cooper,

Check out http://equitablegrowth.org/2014/08/18/evening-comment-male-female-prime-age-employment-rates-since-2000/

Male and female employment in the 25-54 cohort never reached the 2000 level at the peak of the 2007 bubble. Not even close.

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Cooper August 26, 2014 at 3:20 pm

You’re mixing in 25-30 year olds. Many of those people are leaving the labor force to get more education. That’s generally a good use of their time.

The early 50 somethings are likely too old to benefit from getting a new degree. They just don’t have enough working years left to justify the opportunity cost and tuition costs associated with pursuing higher education.

Breaking out people into smaller age cohorts (as KE did) provides more insightful data, IMO.

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Peter Schaeffer August 26, 2014 at 3:44 pm

Cooper,

Two problems. First, the EMPR for men, ages 40-44 reached 90.6 in 2000. The 2007, the peak was 89.0. The EMPR for women, ages 40-44 reached 77.2 in 2000. In 2007, the peak was 75.3.

The more serious problem is that focusing on the groups most attached to the labor force misses serious weakness elsewhere. For example, the EMPR for both sexes ages 30-34 peaked at 83.0 in 2000. The peak for 2007 was 80.6. By 30-34 education is no longer much of an excuse.

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Cooper August 26, 2014 at 4:51 pm

So even if we strip out demographic impacts, education decisions, child bearing, etc, we’re still seeing a strong downward trend in employment rates across all age groups except for the blue hairs who need to work to make up for inadequate retirement savings.

That definitely points in the direction of the original thesis of this thread. Increased competition in the tradable sector is depressing demand for labor in the US and pushing people out of the labor force who would otherwise be working.

Kevin Erdmann August 26, 2014 at 5:50 pm

So, age groups with either a rising LFP or a falling LFP rate are both signs of economic malaise? And, shockingly, you conclude that we have economic malaise.
I don’t blame you. I think most people agree with you.

Peter Schaeffer August 26, 2014 at 5:56 pm

Cooper,

“That definitely points in the direction of the original thesis of this thread. Increased competition in the tradable sector is depressing demand for labor in the US and pushing people out of the labor force who would otherwise be working.”

That’s my interpretation as well, in part. Add the 17 million immigrants and you have an employment disaster for ordinary Americans. Here are the basic numbers. From 2000 to 2014, the number of working age Americans rose by 16.8 million. The number of working age immigrants rose by 8.8 million. The number of employed immigrants rose by 5.7 million. The number of employed Americans went down by 0.1 million. See http://cis.org/all-employment-growth-since-2000-went-to-immigrants

Kevin Erdmann August 26, 2014 at 6:17 pm

Peter, if that is the case, wouldn’t places like Arizona and Texas be showing high unemployment and a population decline of native workers?

Peter Schaeffer August 26, 2014 at 6:27 pm

Cooper,

The EMPR for both sexes ages 25-29 fell from a peak of 81.7% in 2000 to a peak of 79.5% in 2007. That’s a fall of 2.2%. By contrast the 30-34 group fell by 2.4%. This comparison tends to show that staying in school has not been a major factor for the 25-54 group.

Peter Schaeffer August 27, 2014 at 12:52 am

KE,

“Peter, if that is the case, wouldn’t places like Arizona and Texas be showing high unemployment and a population decline of native workers?”

Regional economies vary. Texas has a stronger economy than California.

California’s unemployment rate is 7.4% (well above the national average). Central valley unemployment rates range from 9.0% to 12.7%. The unemployment in Imperial county is 22%. Imperial county is on the border with Mexico.

Of course, it goes both ways. North Dakota is a long way from Mexico (compared to Texas) and has a much lower unemployment rate.

Kevin Erdmann August 27, 2014 at 2:48 am

Peter, that’s my point. Your link treated the immigrant/native employment question as if it was a simple correlation. But, as your rundown of states demonstrates, there are many factors that overwhelm the immigration factor. If there has been no change in native job holders over a decade, it is not a function of immigrants. If the immigrants all left, it’s not like native workers would suddenly be in a workers paradise in California. In Texas, it is easy to imagine the complementarity of jobs, such that if immigrants were not there, natives might actually have fewer jobs.

Your link was using aggregate statistics to imply connections that don’t exist in the way they were implying that they do.

HL August 27, 2014 at 11:24 am

Are you saying that without immigrants the 5.7 million jobs they have, simply wouldn’t exist and Americans would have lost even more jobs than 100,000 or something?

Kevin Erdmann August 27, 2014 at 1:33 pm

Possibly. Peters link is basically just using a mental anchoring bias to make the aggregate number look meaningful. I bet if you broke it out by state, you’d get the opposite answer – more immigrant jobs = more native jobs. I would just say there isn’t that much of a relationship, but that the state level statistical relationship would be closer to the truth than the national relationship.

Peter Schaeffer August 27, 2014 at 3:25 pm

KE,

“Peter, that’s my point. Your link treated the immigrant/native employment question as if it was a simple correlation.”

Yes… Because it is for the United States as a whole.

“But, as your rundown of states demonstrates, there are many factors that overwhelm the immigration factor.”

States vary. Things average out for the United States. The average is dismal (in part) because of Open Borders.

“If there has been no change in native job holders over a decade, it is not a function of immigrants”

So immigrants forcing natives out of the labor force on a gigantic scale has no effect. Remarkable. I remember hearing the same thing about imports from China… Reality bites.

Fact in the real world, see “The Impact of New Immigrants on Young Native-Born Workers, 2000-2005″ by Paul Harrington, Ishwar Khatiwada, and Andrew Sum September 2006. Quote

“Over the 2000-2005 period, immigration levels remained very high and roughly half of new immigrant workers were illegal. This report finds that the arrival of new immigrants (legal and illegal) in a state results in a decline in employment among young native-born workers in that state. Our findings indicate that young native-born workers are being displaced in the labor market by the arrival of new immigrants.”

Note that many other similar studies exist.

” If the immigrants all left, it’s not like native workers would suddenly be in a workers paradise in California”

Before Open Borders, natives went to California (by the millions) for a better life. Now even illegals flee California looking for a better life. Open Borders does that.

“In Texas, it is easy to imagine the complementarity of jobs, such that if immigrants were not there, natives might actually have fewer jobs.”

The idea of complementary immigration died some time ago (in the literature). America is far too successful in producing native unskilled labor for low-skill immigrants to be anything but a staggering burden.

“Your link was using aggregate statistics to imply connections that don’t exist in the way they were implying that they do”

Supply and demand are a myth? Who knew?

HL August 27, 2014 at 3:30 pm

Hmm. Well if I wanted natives to get more jobs than immigrants, what would you suggest.

Peter Schaeffer August 27, 2014 at 3:31 pm

KE,

“I bet if you broke it out by state, you’d get the opposite answer – more immigrant jobs = more native jobs. I would just say there isn’t that much of a relationship, but that the state level statistical relationship would be closer to the truth than the national relationship.”

Wow. Immigrants and natives are attracted to places with stronger economies. Remarkable. Why didn’t I think of that?

Rich people live in more expensive houses than poor people. If I buy a mansion will that make me rich?

The real question is whether more jobs (in areas with stronger economies) would go to natives if American wasn’t flooded with desperate foreigners. The answer is obvious. Of course, Americans would get more jobs.

Check some history. Before Open Borders, California imported natives. Now it exports them. In the 70s oil booms Texas imported vast numbers of northern construction workers. Now the jobs go to illegals. Without the illegals would Americans do construction? Of course, they would.

Peter Schaeffer August 27, 2014 at 3:32 pm

HL,

“Well if I wanted natives to get more jobs than immigrants, what would you suggest.”

Fewer immigrants.

Kevin Erdmann August 27, 2014 at 5:42 pm

It seems plausible that unskilled young males, specifically, might see some negative labor market effects from an influx of unskilled immigrants. Other subpopulations might see positive effects.

And, it seems as though you’re saying California is doing poorly because of the immigrants but Texas is doing well, in spite of the immigrants. So, what it seems to me like your saying is that there are many other policy choices that we have which overwhelm the effect of immigrants on the labor market. I presume that if California had Texas policies, they wouldn’t have so many labor market problems, regardless of immigrants.

Of course, any addition or subtraction of a product or worker into an economy is going to cause changes – some of them disruptions. Computers put cash register and typewriter companies out of business, but just because I can isolate some negative effects doesn’t really tell me a lot about the broader picture. In the broader picture you can have either California or Texas with immigrants, and you can have either North Dakota or Michigan with fewer immigrants.

Because most of this is unseen, it’s probably not something that will be settled empirically.

Going back to the original post, the fact is that in 2007, we had no problem populating a very strong labor market. So, even if some dislocations can be isolated in association with Chinese manufacturing, the dislocations must have been manageable, and our subsequent problems come from something else. You can’t have growth without dislocations, so the identification of dislocations is not that helpful.

HL August 27, 2014 at 6:25 pm

I think the point is that natives are doing worse and that we should focus on helping our fellow citizens before importing new ones.

HL August 27, 2014 at 6:32 pm

If I’m the one, along with my fellow native citizens, are the ones being dislocated for growth… Well I guess I’m not sure what this growth thing is doing for me. It’s almost as if growth is working against my interests… yet I’m supposed to support it.

Peter Schaeffer August 28, 2014 at 12:56 am

KE,

“It seems plausible that unskilled young males, specifically, might see some negative labor market effects from an influx of unskilled immigrants. Other subpopulations might see positive effects.”

Overall LFP and the EMPR have plunged over the last 14 years as 17 million immigrants have entered the United States. The issue isn’t one group of Americans gaining and others losing. Americans have net been huge losers. The gains for the influential few are trivial compared to the losses for the less influential many.

Note that the U.S. graduation rate is roughly 75% (Heckman). At least one third of the “graduates” have “below-basic” skills (from the NAEP) in math, science, and reading. They are graduates in name only. Effectively at least 50% of each cohort is unskilled.

“And, it seems as though you’re saying California is doing poorly because of the immigrants but Texas is doing well, in spite of the immigrants.”

California is a disaster and Texas is less of a disaster. If real wages were rising in Texas and American workers were flocking to Texas to get good jobs, you might have a point. They are not. The vast majority of new jobs in Texas aren’t going to Americans (same as everywhere else).

Only the Rick Perry types really think Texas is doing well.

“In the broader picture you can have either California or Texas with immigrants, and you can have either North Dakota or Michigan with fewer immigrants.”

America had remarkably few immigrants from around 1914 to 1970. Real wages rose rapidly and the middle class prospered. Mass immigration resumed around 1970, and America has declined in many ways. Wages for workers are back to the 1950s (in real terms) in many cases. That is not progress (save for the Rick Perry types).

“Going back to the original post, the fact is that in 2007, we had no problem populating a very strong labor market.”

Even in 2007, the fall in LFP and EMPR from the last cyclical peak was large. However, the real point is that the system (Bush, Congress, the Fed, etc.) responded to import driven economic weakness by conjuring up the housing / debt bubble. The consequences were staggering.

“So, even if some dislocations can be isolated in association with Chinese manufacturing, the dislocations must have been manageable, and our subsequent problems come from something else.”

To simplify for your understanding

Chinese import -> Economic Weakness -> Bubble Conjuring -> Catastrophe

John Cummings August 26, 2014 at 3:36 pm

why would it reach the 2000 top when that cohort was declining as well in total size? again, are you ever going to get it? Now that cohort is heading to complete “Boomerless” in a few years.

I think the “recovery” in that cohort has been impressive since 2009, considering.

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Peter Schaeffer August 26, 2014 at 5:57 pm

JC,

“why would it reach the 2000 top when that cohort was declining as well in total size?”

EMPR stands for EMployment / Population Ratio.

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Tom August 26, 2014 at 2:56 pm

I could have told you this a decade ago, but I guess ten years isn’t an unusually long lag for the economics profession.

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Peter Schaeffer August 26, 2014 at 3:08 pm

Free trade and Open Borders are very, very sacred cows.

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Andrew' August 27, 2014 at 7:01 am

First, no one says that free trade preserves jobs on one side of the trade.

We don’t really have free trade, nor open borders. Setting aside the open borders for now just look at the trade. Even if it is ostensibly free (e.g. favored nation status for China) our government was freely accepting their dollars in Treasury purchases. Right or wrong, this policy facilitated the trade imbalance.

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Big Sugar August 28, 2014 at 7:57 am

Hey now!

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John Cummings August 26, 2014 at 3:31 pm

True, but the “employment” gains of the 1990′s were “over the top” so to speak. Of course there was going to be some “give back”. Overall job growth was better in the 2001-07 than people want to admit. Until people adjust for demo, they aren’t getting anwhere.

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mulp August 26, 2014 at 9:29 pm

In the 60s we weren’t tough on crime and didn’t lock up large numbers of people and forever mark them for exclusion, and we were even into reform and actively made those who went astray productive citizens.

Then we got tough on crime and started excluding ever larger numbers of people from society so they would never be productive workers.

Tough on crime has really delivered – thank you Nixon and Reagan for forcing so many millions out of the labor market.

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Andrew' August 27, 2014 at 7:25 am

“actively made those who went astray productive citizens ”

Seems unlikely. Crime rates for one. Legalize marijuana, obviously, but also considering I think elite higher education is nearly all signaling I find it hard to believe in reforming the type of criminals we should be tough on. OTOH, a criminal record is also signaling, particulary for marijuana and similar crimes.

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Peter Schaeffer August 28, 2014 at 1:07 am

mulp,

Incarceration rates when Nixon left office were at or near 20th century lows. Of course, crime soared in the 1960s which might have had something to do with the subsequent rise in prison populations. Actually, the violent crime rate rose by a factor of 5 from 1960 to 1993.

That might have had something to do with higher incarceration rates.

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JonFraz August 27, 2014 at 7:21 pm

Some give back, sure. But we haven’t just given back the 90s; we’ve given back the 80s and are working on the 70s too.

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Peter Schaeffer August 26, 2014 at 3:53 pm

JC,

The cyclic peaks for male EMPR, ages 25-54 are 1948 (94.4%), 1953 (96.0%), 1957 (95.1%), 1967 (94.9%), 1989 (90.0%), 2000 (89.5%), 2007 (88.0%).

The employment gains of 1990s were not “over the top”. The 1990s were just the last period of relative prosperity in the U.S. It was downhill under Bush. It has been downhill under Obama.

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Brian Donohue August 26, 2014 at 4:44 pm

So, in the 22 years between 1967 and 1989, 25-54 EMPR declined by 4.9%.

In the 18 years between 1989 and 2007, 25-54 EMPR declined by 2%.

How does this fit into your story?

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Peter Schaeffer August 26, 2014 at 6:16 pm

BD,

Check the chart for LNS12300061. The 50s peak(s) and the 60s peak are a pretty good match. From the 1960s to the 1980s, the peaks fall. The 80s peak matches the 2000 peak. Then the curve falls away.

Using only peak to peak comparisons, the largest and fastest fall (before 2007) is from 1967 (95.0%) to 1979 (91.4%). What changed from 1967 to 1979? We did have two major energy shocks. However, there were cultural changes in American society as well.

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Brian Donohue August 28, 2014 at 8:04 am

You have a thoughtful perspective and write long blog comments, but I think your narrative is overly simplistic and focuses way too much attention on a small part of the story that is a real negative for some (seen) people but a mixed blessing or positive for most.

You don’t want immigration and, from above, you don’t want free trade either. Your vision is clear to me.

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Peter Schaeffer August 26, 2014 at 3:54 pm

Take a look at the charts over at http://equitablegrowth.org/2014/08/18/evening-comment-male-female-prime-age-employment-rates-since-2000/

Labor market weakness up to 2000 just doesn’t show up in the data. Since 2000, it’s obvious and it doesn’t just start in 2007/8. In my opinion, the U.S. economy started going off the rails with Clinton, but the Tech Bubble masked the decline (the trade deficit soared under Clinton). Under Bush, substantive decline accelerated (the trade deficit hit 6% of GDP), so Bush (and friends) conjured up the housing bubble (construction, MEW, etc.) to partially offset the weakness inherent in his “import everything including replacements for American workers, export only jobs” philosophy.

Of course, it didn’t really work. The housing bubble wasn’t large enough to offset a 6% of GDP trade deficit. The bubble was large enough to crater the economy when it burst.

The source for the employment data is the BLS via FRED via Brad DeLong.

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JonFraz August 27, 2014 at 7:28 pm

The tech bubble was a bubble in stocks. It was not a bubble in employment, except in very small and transient ways, e.g., the Y2K hysteria that had retired COBOL mainframe programmers coming out of retirement for 100K gigs fixing old code.
But employment was pretty solid across the board during the late 90s, not just in tech. I recall my sister and her blue collar friends in Michigan complaining about too much overtime, not layoffs.
Yes, there had to be a correction for the tech bubble, hence the early 00s recession. But the 64,000$ question is why we did not have a normal recover after that recession. Why did money go into real estate (normal when interest rates are lowered) but then just stay there fueling the bubble instead of diversifying into many other areas (with salutary employment effects) when the economy started humming a bit again? I don’t have an answer myself to that. If anyone finds the answer they will have found the Philosophers Stone by which this leaden economy can be turned to gold.

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Benny Lava August 26, 2014 at 3:55 pm

So free trade has downsides and absolute advantage doesn’t mean better for everyone? It is like economists are wrong about really basic stuff or something.

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Cooper August 26, 2014 at 7:47 pm

Not necessarily. Economists weren’t saying free trade was good for every individual. They said it as good for The Economy as a whole.

If 10% of Americans lose their middle class manufacturing jobs while 90% get cheaper products and stronger stock market returns, we can still call the policy a success. Every policy has winner and losers.

The problem is that we don’t have an honest discussion about it. We pretend that a rising tides lifts all boats and no one suffers.

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Peter Schaeffer August 26, 2014 at 11:58 pm

Cooper,

“They said it as good for The Economy as a whole”

The usual definition of “good for The Economy as a whole” is higher GDP (irrespective of how it is divided). However, the import / deindustrialization shock has clearly reduced GDP below trend / potential.

That makes it “bad for The Economy as a whole”.

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Millian August 27, 2014 at 5:27 am

“The usual definition of “good for The Economy as a whole” is higher GDP ”

Broken windows fallacy is fine as long as it lets the MR race theorists bash foreigners.

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Peter Schaeffer August 27, 2014 at 3:42 pm

M,

I don’t buy the usual definition of “good for the economy”. However, even if I did, trade policy fails the test of late.

Where exactly is the “broken windows fallacy” to be found here?

Benny Lava August 27, 2014 at 8:01 am

Over on Scott Sumner’s blog they said I was a fool because I voiced this opinion, and that absolute advantage makes things better for Everyone. I think opening trade with China was similar to opening borders; it expanded the labor market. There were more winners than losers, but that does not mean there weren’t economic losers.

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Peter Schaeffer August 27, 2014 at 3:43 pm

BL,

“They said it as good for The Economy as a whole”

The usual definition of “good for The Economy as a whole” is higher GDP (irrespective of how it is divided). However, the import / deindustrialization shock has clearly reduced GDP below trend / potential.

That makes it “bad for The Economy as a whole”

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mulp August 27, 2014 at 5:03 pm

You left out the part about the 90% getting cheaper products they can buy only by spending money borrowed from the other nations exporting to the US and not buying anything from the US to put the workers buying the products to work.

We have trillion in debt held by those who sold goods to the formerly well paid US workers that the imports put out of work, with the government borrowing and paying the unemployed to buy imports. They were loaning money to the working poor and unemployed to buy houses, but when they defaults, now they are snapping up property in the US to rent to Americans. Maybe Mitt Romney will be right in saying “you built that”, but he will be leaving out the part “but the Chinese and Saudis own it and charge you rent”.

The past three decades of conservative shift in economic policy has shifted the US toward African economics – the assets of the US are being taken over by foreigners who extract from the American people who buy imports because no “capitalist” in the US wants to pay American workers to buy American products because they have partnered with the outsiders to get a slice of the extraction of assets in exchange for cheap trinkets and beads.

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simeon August 27, 2014 at 5:14 pm

“The problem is that we don’t have an honest discussion about it. We pretend that a rising tides lifts all boats and no one suffers.”

Yeah, people may have decided they wanted their ne’er-do-well nephews to be able to get okay jobs rather than pay 25cents less for cheaper products.

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DCBillS August 26, 2014 at 4:17 pm

Getting paid to point out the obvious – great deal if you can get it. Another reason economics is sinking in public opinion as a profession.

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dead serious August 26, 2014 at 5:31 pm

It’s horrible if you can put up with the blog posting, travel, and constant eating out.

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Andrew' August 27, 2014 at 8:12 am

One must realize that the purpose of academics is to take what is already known and formalize it. In general, they don’t illuminate.

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Andrew' August 26, 2014 at 5:41 pm

Whip High Fixed Cost of Labor Now!

I realize the catchiness needs some work.

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BH August 26, 2014 at 6:26 pm

Professor Cowen —

I hadn’t seen this paper discussed at all in the econoblogosphere, and thought you might find it intriguing. “Stock Returns over the FOMC Cycle” by Cieslak, Morse, and Vissing-Jorgensen: http://www.lse.ac.uk/fmg/events/capitalMarket/pdf/CMW-ST-2014-Vissing-jorgensencycle_paper_24Jun2014.pdf.

The punch line is that “The equity premium is earned entirely in weeks 0, 2, 4 and 6 in FOMC cycle time (with week 0 starting the day before a scheduled FOMC announcement day)”. Absolutely bizarre. I have no idea what could be behind this myself.

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prior_approval August 27, 2014 at 1:33 am

Semi-literate spelling as a way to avoid spam filters – seems to work, actually.

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mulp August 26, 2014 at 8:45 pm

How many businesses hire the homeless?

If you have a criminal record, what is you chance of getting a job that pays enough to buy a car and rent a place to live in a neighborhood where your car won’t be stolen?

With Nixon, the policy was to create as many people with criminal records while advocating businesses do background checks and never hire people with criminal records.

It is especially true that drunk drivers who escape felony convictions should be accommodated, and arrest for drug use should deny that person any job and definitely deny education.

Further, businesses were urged to locate their places of employment where no public transit exists in places where the only access is by Interstate highways to prohibit walkers and bicyclists from being able to get to the job. And definitely ensure no housing is nearby.

By making many people criminals and denying them work, placing places of employment beyond the reach of people without the family wealth to buy a car, the economy can create a growing underclass who will never be able to work or get to work.

These people denied work by policy can be used to blame liberals for creating poor people by providing food stamps and homeless shelters.

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chuck martel August 26, 2014 at 10:44 pm

Never seem to see a number of what percentage of the American population of working age is incapable, for one reason or another, of actually performing useful work as an employee. There has to be such a figure. Why is it assumed that everyone should have employment when substantial numbers can’t get up in the morning, read and write, converse in understandable English or maintain a presentable appearance? In fact, there are probably many employees that are actually a negative for their employer, especially in the public sector. The “Great Recession” was an opportunity for companies to get rid of at least some of the dead wood that was dragging down profits.

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Peter Schaeffer August 27, 2014 at 12:13 am

cm,

The male EMPR, ages 25-54 was 96% in 1953.

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chuck martel August 27, 2014 at 11:49 am

And your point would be?

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Peter Schaeffer August 27, 2014 at 3:34 pm

cm,

Almost everyone is capable of working and getting a job (presuming the economy is reasonably robust)

JonFraz August 27, 2014 at 7:36 pm

How would you even determine a means to get at that number? It seems to require assuming the lump of labor fallacy. Just because a person cannot do one job does not mean they are unemployable at any and every job.

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JonFraz August 27, 2014 at 7:33 pm

It’s fun to blame things on Tricky Dick. But this is something even Reagan can’t be blamed for. Until the last dozen years or so it was very difficult and rather expensive to do a thorough background check on someone. And easier for people to assume new identities if they really wanted to start over without a past (hence the old 60s radicals who lived for years under assumed names). Certain high level or sensitive jobs would go to the expense and trouble, but most run-of-the-mill jobs wouldn’t.

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Dismalist August 26, 2014 at 10:08 pm

International trade will surely affect wages. For employment changes, look at home.

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Steve Sailer August 26, 2014 at 10:53 pm

You mean economists have now discovered that outsourcing manufacturing to China hurt American workers?

Maybe in ten years Acemoglu will publish an equally astonishing paper revealing that insourcing immigrants from Latin America hurt American workers …

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Ray Lopez August 27, 2014 at 12:30 am

@SS- R U dumb or just pretend to be for your target audience? Of course competition, including immigration, hurts American workers, but it raises the standard of living of everybody in the USA and of course including the immigrants. J Bentham, utilitarianism. The same thing would happen in either blue or white collar class jobs. Textbook Econ 101, which you know nothing about. Do you propose autarky? Naturally as the naivest nativist you do.

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Andrew' August 27, 2014 at 7:57 am

Ray,

Sailer understands all that, he just de-emphasizes it. Also, it is not clear that we did this right. Consider the borders. Open borders would be better than what we have. What we have is punishment for the most productive immigrants and pandering to those who have nothing much to lose.

Similarly, we have done the outsourcing all wrong. It is not clear that consumers were helped more than workers were harmed because our policies were poorly thought out. Just for example, we are shuttering coal plants in order to burn natural gas. What is the likely scenario? If natural gas stays cheap, we waste natural gas. If natural gas doesn’t stay cheap we just burn China’s (et.al. Asia) coal to pay for shipping more of our capital over there so we can create more trade imbalances.

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Peter Schaeffer August 27, 2014 at 3:50 pm

A,

Milton Friedman once said

“It’s just obvious you can’t have free immigration and a welfare state”

The welfare state is only expanding. Adding another billion customers won’t make America a better place.

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Peter Schaeffer August 27, 2014 at 3:39 pm

RL,

For immigration to raise living standards for Americans at least three tests have to be satisfied.

1. Immigrants can not be a significant tax burden. In real life they are a huge tax burden (because poor people cost money in a welfare state).

2. Immigrants must not displace natives from the workforce to any measurable degree. In real life, immigrants massively displace natives.

3. Immigrants must not impose other (non-tax) externalities. In real life, the negative impact of immigrants on housing affordability alone makes immigration a large net negative. Add in the impact on schools, and immigration is a huge loser.

Sorry, but you don’t have your facts right.

You may have missed the memo, but Econ 101 assumes zero taxes, zero externalities, zero displacement, etc. Take some more advanced classes.

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Peter Schaeffer August 27, 2014 at 3:53 pm

RL,

“They said it as good for The Economy as a whole”

The usual definition of “good for The Economy as a whole” is higher GDP (irrespective of how it is divided). However, the import / deindustrialization shock has clearly reduced GDP below trend / potential.

That makes it “bad for The Economy as a whole”

In other words, gains to the winners from trade are more than offset by losses to the losers.

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S August 27, 2014 at 8:27 pm

You agreed, and then changed the subject.

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Axa August 27, 2014 at 6:04 am

Please read Cooper’s comment. The policy may be a success as long as the winners number is much greater than losers. Conditions have changed. The changes helped most of the people, thus policy may be considered a success even if there a losers. There are 2.4 millions losers in a nation of 300 million. Near retirement dudes can blame China imports and Latin America immigrants and still enjoy their retirement. 20 somethings, can blame all they want the changes but anyway they’ll have to adapt to new conditions. The longer they long for the past, the harder the change will be.

PD. Is there policy that causes only winners and zero losers? Or all policies have winners and losers and the goal is to maximize winners and minimize losers?

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Andrew' August 27, 2014 at 8:00 am

We are working on 2 lost decades. It is not clear the consumer was the winner he thought he was.

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Cooper August 27, 2014 at 1:39 pm

It’s not clear that consumers won?

http://seekingalpha.com/article/194764-apparel-spending-as-a-share-of-disposable-income-lowest-in-u-s-history

Apparel prices have fallen by 40% in real terms over the past two decades and the typical American now owns far more clothing than their grandparents could ever dream of buying.

In 1970 we spent 6% of our income on apparel. By 1990 that had dropped to 4.5%. Now it’s under 3%. At the same time, the volume and variety of clothing available to the average American has surged.

The number of workers who lost their jobs as a result of textile competition was modest compared to the hundreds of millions of Americans who benefit from cheap clothing.

You don’t need to care about foreigners to support free trade.

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Benny Lava August 27, 2014 at 8:40 am

Why would you assume the winners were all in America? I should think that the winners were millions of Chinese workers. I’m sure they outnumber the millions of Americans.

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Millian August 27, 2014 at 5:42 am

As journals become more important, will successful economists be increasingly concentrated at the top of the alphabetical surname distribution? Would Schumpeter have a chance? The old guys could pull rank in authorial credit, but maybe that’s less tolerated among young people these days.

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Millian August 27, 2014 at 5:48 am

The USA is really big. There’s no ceteris paribus. Higher prices would mean lower living standards. A weaker Chinese manufacturing sector would mean higher US interest rates.

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Andrew' August 27, 2014 at 7:58 am

Too soon to tell if moving capital to facilitate trade is a good deal.

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Peter Schaeffer August 27, 2014 at 3:55 pm

A,

“Too soon to tell if moving capital to facilitate trade is a good deal”

Not too soon. CA deficits financed by capital imports are strongly correlated with economic crashes. The list includes Argentina, Spain, Greece, Portugal, Ireland, and… The USA.

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Peter Schaeffer August 27, 2014 at 3:53 pm

M,

“They said it as good for The Economy as a whole”

The usual definition of “good for The Economy as a whole” is higher GDP (irrespective of how it is divided). However, the import / deindustrialization shock has clearly reduced GDP below trend / potential.

That makes it “bad for The Economy as a whole”

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Nathan W August 27, 2014 at 12:30 pm

With strong upward wage pressure in China, reinforced by official policies of major minimum wage hikes, perhaps it is possible that the US economy will be able to settle into a new competitive dynamic where competition drives many gains and acts as the stimulus to productivity and technological advance that it is supposed to offer.

The theoretical ability to ensure that everyone gains from growth was never actualized. Free trade agreements should be accompanied by explicit measures to compensate the losers, whether through job retraining, facilitated early access to public pensions for people in targeted “old” sectors where foreign competition is particularly fierce, etc.

Why should factory workers of the 1990s have paid so dearly to pad the pockets of multinationals and so middle class America (what’s left of it) could buy $3 t-shirts and $10 lawn chairs? Instead, taxes were cut for the wealthiest people who were already best poised to take advantage of the new competitive dynamic.

Economists will often point to first and second year models and say “See? Everyone can gain!”, then ignore the fact that movements towards a Pareto optimal situation are in reality very rarely accompanied by the transfers which lead them to defend the inherentness of the ethical superiority of gains by trade. It is not the case that ever freer trade is beneficial for everyone, especially once redistributional realities are considered.

Redistributional impacts of trade agreements should always be considered, imo, especially because it is most of the most vulnerable and/or poor who cannot advocate for their own situation, whether due to lack of information and knowledge or an inability to organize due to lack of money and/or time, and therefore lose out bigtime.

As Cooper mentioned above, the failure was the fact that there was no honest discussion of it. Too often, blue collar workers are manipulated by slogans and fake-ish handouts and ultimately vote against their own self interest (mostly pointing fingers at the political right here).

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Peter Schaeffer August 28, 2014 at 2:19 am

NW,

Blaming the political right may be PC and parts of the political right (McCain, Rubio, Bush, etc.) deserve all the grief they get and more. However, it’s not like blue collar workers have an appealing choice in the Democrats. Let’s start from the top. Quote

“and they cling to guns, or religion, or antipathy toward people who aren’t like them, or anti-immigrant sentiment, or anti-trade sentiment as a way to explain their frustrations.”

Obama offered these candid words in private with no expectation that they would ever be disclosed. When his absurdly elitist remarks were published (by the Huffington Post as it turns out), he simply said that ‘it’s true’ on the assumption (correct) that the media would agree with him.

“There has been a small “political flare-up because I said something that everybody knows is true, which is that there are a whole bunch of folks in small towns in Pennsylvania, in towns right here in Indiana, in my hometown in Illinois, who are bitter,””

What isn’t so well know is where these notorious words were spoken. That part of the scandal never gained any notice. It turns out that it was on Billionaires Row in San Francisco. See “Obama Visits Billionaires Row” (http://zombietime.com/obama_visits_billionaires_row/)

Obama’s remarks in San Francisco were meant to be private. Foolishly they were recorded and released. Conversely, his speech in Berlin on July 24th, 2008 was overtly public. It was also deeply cosmopolitan at many levels. See http://huff.to/2CP6nb. My favorite lines are

“That is why the greatest danger of all is to allow new walls to divide us from one another.

The walls between old allies on either side of the Atlantic cannot stand. The walls between the countries with the most and those with the least cannot stand. The walls between races and tribes; natives and immigrants; Christian and Muslim and Jew cannot stand. These now are the walls we must tear down.”

Open Borders and Free Trade from Obama aren’t exactly an appealing alternative. For a real choice, blue collar workers might consider someone along the lines of Dave Brat. Quote

“I am running against Cantor because he does not represent the citizens of the 7th District, but rather large corporations seeking insider deals, crony bailouts and a constant supply of low-wage workers.”

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Nels August 28, 2014 at 10:41 am

So was Ross Perot (“giant sucking sound”) ultimately correct?

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Peter Schaeffer August 28, 2014 at 12:32 pm

Nels,

Ross Perot was correct. More correct than he imagined as it turns out. NAFTA didn’t just trigger a hemorrhage of jobs to the south (and east) but also unleashed a flood tide of illegals into the U.S.

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JOnFraz August 28, 2014 at 2:28 pm

Except it wasn’t NAFTA that cost the US jobs. We had a jobs boom after NAFTA took effect. Mexico is not a big enough country and its economy is too integrated with the US for it to have the effect that Perot posited. The issue was China (to a lesser extent India) and the law was GATT that screwed the us labor force.
Also, the US already was experiencing lots of illegal immigration pre-NAFTA– hence the 80s immigration bill in response to it.

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Peter Schaeffer August 28, 2014 at 4:50 pm

JonFraz,

The U.S. had a tech bubble after NAFTA. Great while it lasted. See “NAFTA’s Impact on U.S. Workers” for some details on job losses from NAFTA. Note that even Brad DeLong (a key author of NAFTA) doesn’t even try to deny jobs losses from NAFTA. See http://www.epi.org/blog/naftas-impact-workers/ for some details. The author (Jeff Faux) makes the valid point that NAFTA was the template for the WTO. If NAFTA had been blocked, the later disasters might have been avoided as well.

Yes, losses from GATT (actually, the WTO) were, and are, larger than NAFTA. Note my caveat about “south (and east)”.

Yes, NAFTA greatly accelerated illegal immigration. Quote from the same article

“Third, the destructive effect of NAFTA on the Mexican agricultural and small business sectors dislocated several million Mexican workers and their families, and was a major cause in the dramatic increase in undocumented workers flowing into the U.S. labor market. This put further downward pressure on U.S. wages, especially in the already lower paying market for less skilled labor.”

See also “Wave Of Illegal Immigrants Gains Speed After NAFTA” (http://www.npr.org/2013/12/26/257255787/wave-of-illegal-immigrants-gains-speed-after-nafta). Quote

“The North American Free Trade Agreement, NAFTA, was signed with a lot of fanfare and promise. New Years Day is NAFTA’s 20th anniversary, which means that we now have a lot evidence about what the trade deal has and hasn’t done. The law, meant to be a boon for regional trade, has had some undesirable effects. NAFTA hastened a trend away from small farmers, and it sped up illegal immigration to the United States, as NPR’s Ted Robbins reports from Arizona.”

“ROBBINS: The big wave in illegal immigration from Mexico began in the 1980s. But it picked up strongly after NAFTA. That wasn’t unexpected. Philip Martin predicted it before the trade agreement passed. But Martin – a UC Davis professor who’s long been studying migration – was surprised by how soon and how big the wave came after NAFTA.”

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