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.

US economist and Nobel-prize of Economy winner Paul Krugman speaks with journalists after his meeting with Japanese Prime Minister Shinzo Abe at Abe's official residence in Tokyo on March 22, 2016. 
Krugman participated in a meeting on international financial economy with top Japanese governmental officials. / AFP / POOL / FRANCK ROBICHON        (Photo credit should read )
US economist and Nobel-prize of Economy winner Paul Krugman speaks with journalists after his meeting with Japanese Prime Minister Shinzo Abe at Abe's official residence in Tokyo on March 22, 2016. Krugman participated in a meeting on international financial economy with top Japanese governmental officials. / AFP / POOL / FRANCK ROBICHON (Photo credit should read )

As 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 first-year 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?

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 well-being.

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.

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 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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