Friday, July 4, 2008

Rise of the machines, or how I learned to stop worrying and love trade

It's been a tough election cycle for proponents of trade. In particular, Hilary Clinton and Barack Obama turned the Democratic nomination race into a contest to see who hates trade the most. While campaigning in Ohio a few months ago, Obama declared:

"One million jobs have been lost because of NAFTA, including nearly 50,000 jobs here in Ohio. And yet, 10 years after NAFTA passed, Sen. Clinton said it was good for America. Well, I don't think NAFTA has been good for America -- and I never have"

Now Obama, the Democrat's presumptive nominee, has proposed a tax credit that is aimed at keeping jobs from moving overseas.

Why all the focus on trade? The concerns center on the decline of manufacturing employment and stagnant wages for blue collar workers.

Are these concerns warranted? Economic theory indicates that trade with developing countries could put downward pressure on wages for poorer Americans. However, empirical investigation of this issue has suggested that this effect is not that large. A recent book by Harvard economist Robert Lawrence shows that the gap between white- and blue-collar workers has not risen that much since the late 1990s when China's global integration accelerated and that the wages of the least skilled have improved relative to those in the middle. (see here for a larger discussion of these issues).

A large part of the problem here is disentangling the separate effects of trade and technology. Wages are closely tied to productivity. The main reason that American workers earn more money than their Chinese counterparts is that they produce more stuff in the same amount of time. Of course, one of the main factors that increase productivity is technology.

However, technology is a double edged sword. While technology raises productivity (and thus wages) it also eliminates many jobs. Consider this: despite losing 4 million manufacturing jobs between 1998 and 2007, US manufacturing output increased by 22%. Thanks to machines, we can make more stuff with less people.

What's interesting is despite the fact that technology has much more effect on manufacturing jobs than trade, politicians are not warning us against the impending robot threat. None except Arnold Schwarzenegger that is. And yet trade and technology have essentially the same impact: greater economic efficiency, which leads to lower prices and higher standards of living.

Politicians railing against technology would be laughed at as kooks. Certainly John McCain, who is already dealing with concerns about his age, wouldn't want to seem anti-progress. No one would support a tax credit for business that avoid using computers or other machinery.

However, unlike technology, foreigners represent salient fear for the public. Bryan Caplan has written extensively on the issue. There is a tendency to talk about trade with other countries in terms of it being a "race" or a "war", when in reality trade is mutually beneficial. Further, trade is a policy that politicians can change; technology is something they have less control over. So even if they have the same impact, it is more effective for politicians to rail against cheap labor in southeast Asia than to hate those adorable robots.

The good news is that we really don't need to fear either. Trade creates new economic opportunities and lower prices, which raise living standards. And recent research has shown that trade actually increases the purchasing power of the poor more than the rich, helping to stem inequality. Technology has largely the same effect. Despite the loss of 4 million manufacturing jobs over the last 10 years, unemployment has remained fairly constant. Technology may eliminate some jobs, but it creates many others.

So don't hate trade. And don't hate the machines either. Both improve your life in countless ways you don't even see.

No comments: