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This week, Bloomberg's Noah Smith published a list of “ten excellent economics books and papers” that he read in 2016. Number three on his list was the now celebrated paper, “The China Shock: Learning from Labor-Market Adjustment to Large Changes in Trade,” by economists David Autor, David Dorn and Gordon Hanson. Here’s Smith’s summary of the work and its consequences:
This is the paper that shook the world of economics. Looking at local data, Autor et al. found that import competition from China was devastating for American manufacturing workers. People who lost their jobs to the China Shock didn't find new good jobs—instead, they took big permanent pay cuts or went on welfare. The authors also claim that the China Shock was so big that it reduced overall U.S. employment. This paper has thrown a huge wrench into the free-trade consensus among economists.
Smith's account of the paper's effect is absolutely right: Economists' astonishment and dismay at Autor & Company's revelations were palpable and widespread. Which raises a question many of us have been raising for years: Why have mainstream economists been the last people to understand the consequences of the policies they advocate? During the debate that swirled around the congressional legislation granting permanent normal trade relations to China in 1999 and 2000, unions, progressive think tanks (most especially the Economic Policy Institute), and other liberal groups predicted with unerring accuracy the job loss that would follow if PNTR was enacted, the concomitant failure to generate adequate replacement jobs, and in a few cases, even the political shifts likely to follow in the states of the rapidly deindustrializing Midwest—shifts that did not fully manifest themselves until this November. But to the high priests of mainstream economics, and to the Robert Rubins and Timothy Geithners who provided policy guidance to the Bill Clinton and Barack Obama administrations, these were fringe opinions, narrowly self-interested, and not worthy of serious consideration.
Well, yes—the industrial Midwest was self-interested; its residents had an understandable reluctance to seeing their economies dismantled and their middle-class decimated.
The lesson from all this is that mainstream economics has to be viewed less as an empirical, much less scientific, discipline, and more as an elegant regurgitation of the worldview of dominant financial powers.
By endorsing the efficiency of markets and the concomitant curtailment of regulation, by assuming that trade with industrializing, poverty-wage mega-nations would not have a devastating impact on American manufacturing workers, by a thousand other deaths of common sense, the American economic mainstream reduced itself to little more than a priesthood serving the gods of Wall Street. The dissents of dissident economists—from Joe Stiglitz and Dani Rodrik to Dean Baker, Jared Bernstein, and the gang at EPI and Global Trade Watch, from Thea Lee at the AFL-CIO to Mark Levinson at the clothing and textile workers unions and Clyde Prestowitz at his own institute, from the pages of The American Prospect to the pages of, well, The American Prospect—were drowned in propaganda masquerading as economics.
Now that the jobs have fled, now that the deregulation has led to an epochal collapse and a woefully selective recovery, the masquerade is over—or rather, should be over. The whole point of Trickle Downers is to hasten it to its long overdue end.
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