Economics Has Failed America

Economics Has Failed America
When it comes to the impact of global trade, the dismal science has done a dismal job
explaining how to help workers hurt by globalization.
BY DANIEL ALTMAN | MAY 19, 2016, 5:12 PM
s a recovering economist writing on behalf of my erstwhile field, I would like to
apologize to every American who has lost a job or a livelihood because of
globalization. Economics has failed you. It has failed you because of ideology,
politics, and laziness. It has failed you because its teachings are woefully incomplete,
and its greatest exponents have done almost nothing to complete them.
There are “positive” questions in economics that have mathematical answers — things
that simply must be true — and then there are “normative” questions that amount to
value judgments on points of policy. In economics classes, we teach the former and
usually stop short when faced with the latter. This leaves a hole in any discussion of
economic policy; students acquire first principles but rarely consider real-world
applications, because to do so would presuppose a social or political point of view.
In the case of free trade and globalization, this omission has been disastrous. All firstyear students of economics learn the theory of comparative advantage and gains from
trade. They see a mathematical proof showing that when two countries trade goods or
services, the benefits to the winners outweigh the costs to the losers. They are assured,
correctly, that this result allows everyone to be made better off — or at least no worse off
— by trade.
Yet the redistribution required to generate this broad improvement in living standards
is hardly addressed, or sometimes even mentioned. To do so would be to step into the
muddy mire of normative questions. Should the government take from some people in
order to give to others? Who should give the most, and who should receive? What
exactly should they receive?
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Daniel Altman is the owner of North Yard Analytics LLC, a sports data consulting firm, and an adjunct associate professor of economics at New York
University’s Stern School of Business.
Even putting politics aside, these are not easy questions. No one has figured out a
foolproof way to make workers hurt by globalization whole again. In theory, everyone
who benefited from globalization — every consumer who bought cheap imported
products, every producer who used cheap imported inputs, every exporter — would
have to chip in. Likewise, everyone who suffered — every worker whose job moved
abroad, every shareholder whose company’s prices were undercut by foreign
competition — would be in line for compensation. Moreover, society would have to
agree on the value of all these benefits and costs, not in dollars but rather in terms of
This might be heavy going for first-year students, not to mention their professors, so we
move on to the next model. Consider the following passages from recent first-year
economics textbooks — after several pages on comparative advantage and gains from
trade, these are virtually all the words the authors chose to devote to the nettlesome
issue of winners and losers:
Tyler Cowen and Alex Tabarrok of George Mason University offer this breezy guidance:
“Job destruction is ultimately a healthy part of any growing economy, but that doesn’t
mean we have to ignore the costs of transitioning from one job to another.
Unemployment insurance, savings, and a strong education system can help workers
respond to shocks.” It may be worth noting that Cowen is a frequent critic of
unemployment insurance on his blog.
Nobel laureate Paul Krugman and his wife, the economist Robin Wells, are even less
specific: “The great majority of economists would argue that the gains from reducing
trade protection still exceed the losses. However, it has become more important than
before to make sure that the gains from international trade are widely spread.” Perhaps
the book’s brevity owes something to Krugman’s opinion that gains from trade have
pretty much been exhausted anyway.
Should the governmenttake from some people in order to give to
others? Who should give the most, and who should receive?
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More realism comes from N. Gregory Mankiw, the former chairman of George W. Bush’s
Council of Economic Advisers, who sounds resigned: “But will trade make everyone
better off? Probably not. In practice, compensation for the losers from international
trade is rare. Without such compensation, opening up to international trade is a policy
that expands the size of the economic pie, while perhaps leaving some participants in
the economy with a smaller slice.”
Finally, R. Glenn Hubbard, Mankiw’s predecessor in the White House, and Anthony
Patrick O’Brien of Lehigh University are the only ones who mention the program
designed to accomplish redistribution: “It may be difficult, though, for workers who
lose their jobs because of trade to easily find others. That is why in the United States the
federal government uses the Trade Adjustment Assistance program to provide funds for
workers who have lost their jobs due to international trade. These funds can be used for
retraining, for searching for new jobs, or for relocating to areas where new jobs are
available. This program — and similar programs in other countries — recognizes that
there are losers from international trade as well as winners.”
The Trade Adjustment Assistance (TAA) program has a budget of about $664 million, or
roughly 0.004 percent of gross domestic product. This means one dollar of every
$25,000 in income generated by the United States goes to help people here who have
been hurt by globalization. They don’t receive the cash directly; they just have to hope
that the program — which offers retooling, retraining, and relocation, among other
services — will aid their transition to new jobs.
There aren’t many beneficiaries, either. Even in the dark economic days of 2010, fewer
than 300,000 Americans received TAA. Yet to judge by the political climate, millions
more have grievances related to globalization. Across the country, Bernie Sanders and
Donald Trump have garnered applause and probably votes as well by attacking the
North American Free Trade Agreement and potential new deals with Europe and Asia.
This should not come as a surprise to economists. I’ve lost count of the times I’ve
written that globalization reduces inequality among countries and increases inequality
This means one dollar of every $25,000 in income generated by
the United States goes to help people here who have been hurt by
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within countries. The wealthiest, most highly educated, and most internationally
connected people are always the best equipped to claim the biggest gains from trade. In
poor countries, these gains from trade often come from the exports of labor-intensive
industries, and the millions of people who work in these industries may benefit as well.
That used to happen here, too, but not anymore.
In the United States, the big losers from the current wave of globalization have been
working- and middle-class people, as Branko Milanovic of the City University of New
York details in his new book, Global Inequality. Many of them have gravitated to the
insurgent campaigns of Trump and Sanders, whose proposals have left economists
shaking their heads and wringing their hands.
But we have only ourselves to blame. We never told our students the importance of
managing the transition to a more integrated global economy. We never really told them
how to do it, either. If we had done our jobs, it needn’t have been this way.
Photo credit: FRANCK ROBICHON/AFP/Getty Images
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