posted on 13 January 2017
from Dirk Ehnts, Econoblog101
Going through my inbox, I found a November 2016 quote from President Obama. I think it reflects a lot on the misunderstanding that led to the defeat of the Democrats in the election.
Looking back at the elections of 2016, I think this quote shows a lot of what went wrong for the Democrats.
According to standard international trade theory, the Heckscher-Ohlin model, there are winners and losers from trade. The model suggests that the gains from trade are higher than the losses, so that the winners can compensate the losers so that everybody wins. That, obviously, is the world we want to live in. Economists help politicians to make the world a better place - for everybody!
However, even the textbook “International Economics" by Krugman/Melitz/Obstfeld contains some insights in why things did not work out that well. They have a graph showing that the computer industry declined in terms of jobs badly between 2000 and 2009, even worse than the industrial sector as a whole. The graph looked something like this (but only for 2000-2009), which I got from the World Bank:
Employment in industry (% of total employment)
There has been a fall in industry jobs, and that means that there have been losers from trade. It has been very obvious that the jobs went elsewhere as the US started to import manufactured products from abroad, with much of the increase coming from Asia, where China was used as a platform to export Asian products to the rest of the world.
According to the Heckscher-Ohlin model, the winners from trade are the owners of capital. Capital is abundant in the US, and scarce in China. Obviously, the model does not allow US firms to move their machines to China, even though this is what happened to some extent. The losers are the workers, which see their jobs leave to never return. The sensible policy that an economist using the Heckscher-Ohlin model should give to the US government is to increase taxes on capital and cut taxes on labor. In reality, the opposite happened. George W Bush cut taxes for the rich, and the relatively poor and the middle class was left to itself.
Incoming President Trump does not seem to keen to rely on economic advisors, as a recent Bloomberg article makes clear:
With the record of advice of the recent past, it will be difficult for economists to resume their role at the table of the powerful. Of course, US policy was not completely driven by economists, but then I can’t recall any dissatisfaction of economists from the early 2000s with the tax and trade policies of George W Bush. Yes, it was pointed out that the rich stood to benefit, but where was the connection to international trade?
Here is what I found on Greg Mankiw’s blog, written by Bob Frank who debates him (link):
That to me seems like the typical economist of the early 2000s.
UPDATE JAN 11, 2017: Since Obama mentioned his job record in his farewell speech, I’d like to add another statistic which includes the latest data and comes from the BLS. Here is the number of employees in US manufacturing (in thousands):
As you can see, there was an upward movement from 2010-2015, but that has fizzled out and the sector is on decline again. Again, this is not a good record for the average American. If the new jobs were not created in manufacturing, they must come from the service sector. But these jobs normally don’t pay so well. This is one of the crucial issues that the new administration might address - or paper over, using economists to confuse and mislead the public over what determines the size of the manufacturing sector and the rate of unemployment. We’ll have to wait and see.
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