Monthly Archives: January 2018

Noah Smith Writing For Bloomberg View Concedes That Free Trade Can Harm Employment

Free trade is the most sacred tenet of Economics. So economists are desperate to defend it. In doing so, they also ironically seem to talk like “Luddites”, i.e., that automation is the cause of job losses.

Noah Smith has an article Don’t Blame Robots for President Trump for Bloomberg View. The article is a large concession from orthodoxy. It says:

As Mishel and Bivens point out, estimates by Acemoglu and Restrepo imply that the effect of Chinese competition on U.S. manufacturing-job losses has been three times the effect of robots. So even researchers who are alarmed about robots think that so far, trade has been a much bigger shock to U.S. workers.

It’s easy to see all this is using simple Keynesian economics. In open economy macroeconomics, international trade affects the expenditure multiplier. So output is dependent on exports and imports and the actual output needn’t be the full employment output. Expenditure multiplier depends on both fiscal policy and the private expenditure function and so fiscal policy can be relaxed to achieve a higher output. But this process can be unsustainable.

Except that there may be a market mechanism to resolve imbalances in international trade. By that, what is usually meant is that stock-flow ratios converge and don’t keep rising (or falling if negative) without limits. In fixed exchange rate regimes, there is none. But free trade is not a new idea but an old one and orthodox economists used to argue for mechanisms. The problem with these is that they rely on Monetarism, which is deeply flawed. In floating exchange rate regimes, one could imagine adjustments of the exchange rate in doing the miracle. But it has not been seen in practice. In stock-flow coherent models, one does see adjustment of exchange rates leading to imbalances resolving but this is under simple simple assumptions on expectations of exchange rates. One can’t show this in general.

In reality, instead of convergence of fortunes of nations, what happens is polarisation. The nations who get a head start get more and more competitive and keep winning at the expense of the ones left behind. So we need a solution through actions of all governments.

A closely related claim is that manufacturing employment has reduced because of rise in productivity and not due to international factors. The Bloomberg article concedes that this orthodoxy is not true.

Some Post-Keynesian authors such as Wynne Godley had been stressing the importance of international trade on US employment. In his 1995 essayA Critical Imbalance In U.S. Trade: The U.S. Balance Of Payments, International Indebtedness And Economic Policy, he said (page 16):

It is sometimes said that manufacturing has lost its importance and that countries in balance of payments difficulties should look to trade in services to put things right. However, while it is still true that manufacturing output has declined substantially as a share of GDP, the figures quoted above show that the share of manufacturing imports has risen substantially. The importance of manufacturing does not reside in the quantity of domestic output and employment it generates, still less in any intrinsic superiority that production of goods has over provision of services; it resides, rather, in the potential that manufactures have for expansion in international trade.