Can the Gains From Trade be redistributed?

Trade might be the only thing that pretty much all economists pretty much agree on. Like Harvard professor Greg Mankiw, who wrote the book on mainstream economics, wrote a whole article on this.

The argument for trade goes something like this: things should be made where it is the most efficient to make them, when production is artificially confined by national boarders it is prevented from being done in the most efficient manner. If things are done efficiently we will spend fewer resources and create more wealth overall. In terms of US consumers, this wealth will mostly come in the form of cheaper and more diverse, goods and services. These gains are diffuse and sometimes subtle, but pervasive enough that in total they are significant, and significantly outweigh the costs[1].

These gains are not evenly distributed. trade might boost total wealth, but that will be of little consolation to those who wake up in the morning to find that their manufacturing jobs are now being done in China.

Maybe this isn’t a big deal. If trade creates more wealth overall, some of that wealth can be transferred to the people who were most negatively impacted by increased trade. This is an extremely beguiling idea, it means that we can have the gains from trade, and no one needs to suffer from it.

In a textbook, moving these gains around is a trivial thing to do.

But of course, it isn’t.

 

Trade Adjustment Assistance

In the United States the thing that most explicitly does this is a government program called Trade Adjustment Assistance (TAA). The TAA has three different programs, one for workers, one for farmers, and one for businesses.

The one for workers is largely focused on providing training, a safety net, and flexibility to workers who have lost their jobs due to imports or exports. Ideally, these sorts of protections and benefits give workers the chance to move to a career with more protection from trade.

The primary benefits the TAA provides are paid for training or education for up to two years after a worker has joined the program. While they are pursuing this training workers receive payments, this provides payment for a much longer period than they would under traditional unemployment insurance programs.

There are other benefits as well, the government will largely pay for the costs of job hunting and relocation, and will subsidize the wages of older workers who decide not to pursue training, but take a lower paying job instead.

(For a more personal view of the benefits and issues involving TAA, I recommend this planet money story. Which partially motivated this post) 

Does it Work?

A 2012 study from the Mathematica Policy Institute did a benefit-cost analysis on the TAA. It didn’t do well.

TAA was successful at getting people into retraining and reeducation programs. 66% of those who were involved in the TAA received education or training, compared to 27% of the control group. This education resulted in improved credentials, TAA participants were more than twice as likely to have a degree or educational credentials.

It just didn’t do them much good.

“Not much good’ meant that TAA participants had less income than a matched sample[2] of similar workers who received traditional Unemployment Insurance benefits.

This was especially true in the first two years, which makes sense as this is the time typically allocated to training. However, even four years after losing their jobs, TAA participants were still faring no better than those who had simply received traditional UI benefits[3].

While the results for TAA might not be substantially different than basic unemployment insurance programs, the TAA is more expensive.  The Mathematica benefit-cost study put the net cost of the program of about $26,000 per participant. In 2011, the various programs cost about $700 million.

Retraining

Some of the issues with TAA apply to other programs that are focused on retraining. Retraining is most effective when the labor market is strong enough, but individual workers lack the correct skills to be successful. It doesn’t work well when dealing with cyclical unemployment, nor does it work well when there just aren’t any jobs to be had in a locale.

Retraining programs  can also funnel a bunch of people into the same trade at about the same time. This results in a glut of labor supply for a particular industry, which results in low wages, or no jobs.

While TAA prioritizes retraining, retraining is going to be more beneficial for certain groups of people, such as younger workers, Indeed younger workers tended to fare better than older workers under TAA. While there are provisions specifically for older workers such as the ATAA, they are not as frequently taken advantage of.

Compensation

TAA is supposed to help those who lose from increased foreign competition. It does this by providing them with retraining, at little or no personal cost, and to provide them with an income while they try to change careers.

If this retraining doesn’t work, there are alternative policy approaches.

One possibility would be to focus on the compensating part of compensating those who lose from trade. The most extreme method for this would be to simply hand them a check. This sort of transfer could be a lot cheaper to administer [4]  than the current program, and if the workers wanted to spend their money on training programs, they could certainly do that, but they wouldn’t have to.  Still, this compensation would be less than what the trade affected workers would have made had they not lost their jobs due to trade.

Another option is to expand traditional unemployment insurance programs, or other, broader programs that are focused on general redistribution. These programs are not limited to those who lost their jobs due to trade.  This may not be a bad thing, depending on your opinion of redistributive policies in  general, and if you think those who lost jobs due to trade are more deserving of redistribution than those who have lost their jobs for other reasons, such as technological change.

Or we can conclude it is too difficult to compensate the losers from trade, and that the only way to protect those who might lose from it is to have less trade. Trade is can be easily reduced by enacting tariffs or other policy measures[5]. While an improvement for the select few who benefit from protectionism, the costs of these policies is spread over everyone else.

The Awkward Truth

The awkward truth is that there are always going to be losers from trade, and no redistribution program is going to make that go away completely.

While perfectly compensating those who lose from trade might be an impossibility, a partial compensation is possible. In the real world, this compensation will likely be imperfect, messy, and expensive. Despite this, it remains a better choice than prohibiting trade.

How exactly the compensation be done, is a question free trade advocates need to take more seriously than we have in the past. If only so free trade is not lost to rising protectionist sentiments.

 

 

 

Notes, Sources, and Further Reading

 

Blogs and Opinions:

https://www.cato.org/blog/should-we-compensate-losers-free-trade

http://blogs.ft.com/gavyndavies/2016/12/11/how-should-we-compensate-the-losers-from-globalisation/

http://timharford.com/2017/02/remind_me_what_was_so_great_about_trade/

 

News:

http://www.economist.com/news/leaders/21695879-case-free-trade-overwhelming-losers-need-more-help-open-argument?fsrc=scn/tw/te/pe/ed/openargument

 

Econ

http://internationalecon.com/Trade/Tch120/T120-3.php

TAA

http://blogs.wsj.com/briefly/2015/06/15/5-questions-on-trade-adjustment-assistance/

http://www.heritage.org/research/reports/2015/04/trade-adjustment-assistance-enhancement-act-budget-gimmicks-and-expanding-an-ineffective-and-wasteful-job-training-program

https://wdr.doleta.gov/research/FullText_Documents/ETAOP_2013_09.pdf

 

 

 

[1] For the sake of this post, I’m going to just assume that this is all true. This could be an incorrect assumption, but I don’t believe it is.

[2] Propensity score matching on a number of observable variables.

[3] There are some caveats to this conclusion. Primarily the study only looked at the first four years following entry into the program, this may not be sufficiently long to show the benefits from retraining.

[4] Of course, there would be costs, namely the difficult task of figuring out who lost their jobs due to trade and who lost their jobs due to other factors.

[5]Another common method is naming Peter Navarro as the Director of the National Trade Council (whatever that is).

 

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5 thoughts on “Can the Gains From Trade be redistributed?

  1. I agree with you. These are the sort of thinking that we need to be doing. New ideas and then testing to see if they work and tweaking them until they do.

    Sent from my Verizon, Samsung Galaxy smartphone

    Like

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