Wednesday, March 15, 2017

Interview: J. Bradford DeLong says "NAFTA is just not a big deal for the U.S.", explains why

Story by Joseph Ford Cotto

"A strong majority of Americans say the U.S. economy is running strong, and most believe the upward trend will continue under President Trump, according to a Harvard-Harris poll," The Hill's Jonathan Easley wrote last month.

He went on to mention that this "survey found that 61 percent view the economy as strong, against 39 percent who say it is weak.

"A plurality, 42 percent, said they believe the economy is on the right track, versus 39 percent who said it is on the wrong track."
The economy was viewed largely along partisan lines; with Trump voters optimistic about it and Clinton supporters feeling quite different. Regardless of whichever side one should fall on, or perhaps neither, it is difficult to deny that great discord over our nation's economic future led to our present political quagmire.

Support for Bernie Sanders and the Donald did not rise out of nowhere, after all.
In such turbulent waters as these, it is important to seek the guidance of a wise, seasoned captain. Insofar as the sea of dollars and cents is concerned, J. Bradford DeLong is just that fellow.
He is "a professor of economics at UC Berkeley, a weblogger for the Washington Center for Equitable Growth http://equitablegrowth.org/blog, a research associate of the National Bureau of Economic Research, and former deputy assistant secretary of the U.S. Treasury in the Clinton administration .... He also writes the weblog "Grasping Reality": http://bradford-delong.com," as DeLong's U.C.B. biography explains.
Dr. DeLong recently spoke with me about many topics relative to our nation's economy. Some of our conversation is included below.
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Joseph Ford Cotto: Prominent economists and politicians often say that free trade will benefit America in the long run. Many Americans disagree strongly. What is your take on this situation?

Dr. J. Bradford DeLong: Well, typically and roughly, the average import we buy from other countries we get for 30% off--we use foreign currency that costs us $1.40 to purchase goods and services made abroad that would cost us $2.00 worth of time, energy, resources and cash to make at home. But there's more. Typically and roughly, we sell the typical export to foreigners for about 40% more than we would get if we had to find a market for it at home: it costs us $1.00 worth of time, energy, resources and cash to make stuff that we can sell to foreigners for $1.40 worth of foreign currency. Thus for the country as a whole our foreign trade sector--exports and imports--is a way to get $2.00 worth of value for $1.00 worth of work. That's a very good deal. Our foreign trade sector takes advantage of this good deal on a mammoth scale: in the fourth quarter of 2016 we were trading goods and services at a rate of $2.8 trillion a year--17.5% of national income. That means that in a typical year we sell exports that we could get $2 trillion for if we had to sell them here at home and get imports that would cost us $4 trillion. That makes us $2 trillion per year--$25,000 per family each year--richer and more prosperous.

That is a big deal.

Now you can complain that the benefits from international trade are inequitably distributed. And they are. But they are less inequitably distributed than what we produce here at home: serous worriers about economic equity do not start with foreign trade, only non-serious worriers do. 

If you ask me why many Americans "disagree strongly" that trade benefits America, my answer is that they have been successfully grifted by some of the many, many grifters we have at all levels of our society. Think of it: If international trade is bad--if we should be self-reliant at the national level--then the same argument applies at the state level. If interstate trade is bad----if we should be self-reliant at the state level--then the same argument applies at the municipality level. If inter-municipality trade is bad--if we should be self-reliant at the municipality level--then the same argument applies at the neighborhood level. And so we get all the way down to the basic bedrock of human society: the hamlet or band community of less than 100, say 75. How much could any 75 of us produce as a group if we couldn't trade with outsiders? About $1,000 a year per worker. A United States that tried to be self-sufficient at the hamlet or band level would be lucky to have a national income of $160 billion, one hundredth of the $16 trillion we have. 

Now we certainly can manage our international trade account badly--the Reagan administration, in particular, was especially disastrous. But Americans who "disagree strongly" that trade has benefits  have been misled. Perhaps "free" in your question is supposed to serve as a weasel-word escape hatch?

Cotto: Libertarian economic theorists tend to believe that trade deficits are of minimal importance. Do these deficits really have a great impact on America's economy?

DeLong: If the president and congress are not doing their job through fiscal policy--regulating government spending and taxing--and the Federal Reserve is not doing its job through monetary policy--regulating the supply and price of liquid purchasing power--in order to maintain full employment, then, yes, a trade deficit can make matters much worse. Given that President Obama was much too cautious in 2009-10 when he had congressional majorities, that congressional majorities over 2011-2016 were focused mostly not on keeping America great but on making Obama look like a failure, that Fed Chair Bernanke was much too cautious over 2008-2014, and that Fed Chair Yellen has been somewhat too cautious since, yes, the trade deficits have made our problems significantly worse. But before 2009 and going forward into the future in which the unemployment rate is--we hope--6% or below, the trade deficit was not and will not be among the five biggest errors of economic management the U.S. government was and will be making.

Cotto: Since it went into effect during late 1995, the North American Free Trade Agreement has formed a trilateral commerce bloc between Canada, the United States, and Mexico. From your research, has this proven to be of benefit to our country? 

DeLong: NAFTA is just not a big deal for the U.S. We import $100 billion of goods and services a year from Mexico--that's $1,250 per family per year. If NAFTA had never been negotiated, we would, roughly and approximately, be importing about $75 billion of goods and services from Mexico--$940 per family per year. Since we get a good deal on the stuff we buy from Mexico, shrinking that down would make use poorer, but only by about $100 per family per year. If we did not have NAFTA, we would have about 400,000 fewer people working in--for the most part good, high-paying--manufacturing at jobs that sell goods to Mexico, and we would have about 600,000 more people working in--for the most part bad, low-paying--manufacturing at jobs making things that we buy from Mexico because of NAFTA.


If you want to say that NAFTA is not a benefit to America, you have to believe that (a) getting an extra 600,000 mostly bad, low-paying manufacturing jobs is worth (b) losing 400,000 mostly good, high-paying manufacturing jobs plus (c) lowering the annual income of the typical family by $100 per year--that's total income losses of $80 billion a year. For the country as a whole to pay more than $400,000 a year to increase the number of bad, low-paying manufacturing jobs... that looks like a very bad deal to me.

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