00:00hi everyone welcome to the a6 & Z
00:02podcast I'm sonal today we're talking
00:04about all things trade and innovation
00:06and it's a really meaty topic so we
00:08began by talking about why beyond the
00:10obvious the topic so hard what trade is
00:12responsible for when it comes to tech
00:14change and jobs and we cover everything
00:16from some really interesting theories of
00:18the past and whether they matter for the
00:19present and the future to the debates
00:21around productivity manufacturing china
00:23protectionism and more so a hell of a
00:25lot to have this conversation we have
00:27two special guests Russ Roberts host the
00:29long-standing an excellent econ talk
00:31podcast and research fellow at Stanford
00:33University's Hoover Institution and Noah
00:35Smith who did his PhD in economics at
00:37the University of Michigan was a finance
00:39professor at Stony Brook University and
00:41is now a columnist at Bloomberg view and
00:43he's a first voice you'll hear we're
00:44really talking about the part of trade
00:46they don't teach in econ 101 we're
00:48talking about the adjustment to trade
00:50and in econ 101 there's pretty much this
00:54unstated assumption that economies
00:56adjust very frictionlessly and very
00:58easily and everything goes very smoothly
01:00to be honest it's really not easy to
01:04tell when that will and won't happen and
01:05there's no general theory that
01:07economists have about adjustment
01:09economists often think to the very end
01:11and think about equilibrium and ignore
01:13the path for how you get there but that
01:16you know that can be a little bit like
01:17saying like world war ii is great
01:19because it brought us human rights but
01:21the road to get to the UN Human Rights
01:22Convention with a little bumpy and
01:24reality is very messy not the only thing
01:26I would add to that I think a good econ
01:28101 teacher talks about the adjustment I
01:30think it's a bad teacher and a bad
01:32economist who says well trade creates
01:34net benefits so therefore it's good for
01:36the country trades good on average for
01:39the Americans and it obviously has big
01:41distributional effects depending on who
01:43you are what you do there could be
01:44long-term distributional effects that
01:46your skill is no longer valuable and
01:49there could be a short-term adjustment
01:51which is it's no longer valuable you're
01:53gonna have to find something to do and
01:55it may take you a bit of time to find it
01:56it takes a very long time or you may
01:58never do it and you may just retire
01:59going well for it and then someone
02:01younger may then find something better
02:02when they get out of school correct I
02:04don't want to go to econ 101 but I'd
02:06love us to actually have some building
02:08blocks for the conversation simply
02:10because there's a lack of economics
02:12education if you guys were to sort of
02:13and off with what we need to know about
02:15trade like what would be some of the big
02:17ideas that we should start with well
02:19trade is a political issue goes back
02:21Shockley any long I'd say it goes back
02:23probably about eight hundred years
02:25why not longer well round 800 or 900
02:28years ago I'm pretty sure people have
02:30been treating there was probably someone
02:31in Egypt saying like oh my god this
02:33Mesopotamian grain is gonna put us all
02:35out of business for sure but the issue
02:37was whether trade was good for the
02:38country or not still the issue but
02:40around 1776 Adam Smith came along and
02:42said we've made some fundamental
02:44mistakes in mercantilism Orkin till it
02:46was this idea that trade could harm you
02:49because you'd lose your gold and Smith
02:51point out Gold's not something you can
02:52eat it's not really the measure of
02:54nations well-being or people's
02:56well-being and he made the case for the
02:59benefits of trade and that if we come to
03:01the modern time I think most economists
03:03would say trade is important because it
03:06allows us to get more from less just
03:09like innovation does it's a way to
03:10increase productivity so instead of
03:12making things for yourself you trade for
03:16the things that you don't make as well
03:18as somebody else as cheaply as somebody
03:19else so it was actually really good
03:20anecdote that I saw about this on
03:22Twitter recently and I don't know if it
03:24happened recently or not but basically
03:25some guy in the last few years decided
03:27to make a sandwich from scratch and it
03:29was everything from growing the
03:30vegetables to milking the cow to flying
03:33to the ocean to make salt and by the way
03:34he didn't even include that flight in
03:36this price it would have been more but
03:37it cost some $1,500 you know that's way
03:40more expensive than like $7 which is the
03:42average price of a sandwich if you tried
03:44to make everything for yourself
03:46true self-sufficiency you'd probably
03:47starve to death in modern times though
03:49we worry about and correctly so that
03:51some of the people who benefit from
03:53trade are not necessarily going to be
03:55the same people who bear the costs of
03:57trade we make something abroad it means
03:58we're not buying it here domestically
04:00anymore and those people we're gonna
04:01have to find new ways of working trade
04:04makes things inexpensive for everybody
04:06that's great it also makes it harder for
04:09some people to use their skills the part
04:11that I always like to emphasize that
04:12people forget is that when you make
04:14things cheaper for everybody that frees
04:17up resources to make new things you
04:19wouldn't have had before and the last
04:20thing I would argue is the biggest
04:22benefits from trade take place over
04:23longest periods of time the opportunity
04:25for the next generation
04:27come along and use its skills well but
04:28it can be hard on this generation the
04:30one thing economists seem to almost
04:31universally agree on is this I mean
04:33there's never any universal as the
04:34economist but like this idea that it's
04:36actually in your best interest as a
04:37state country whatever to open up your
04:40borders to trade politics aside it seems
04:42to be one of the fundamental beliefs
04:43just because economists you know express
04:46agreement on something does not mean
04:48it's it's right but in this case I think
04:51that broadly the economists consensus is
04:54is fairly correct but then there are
04:57some important caveats that get lost
04:58when we talk about that and one of the
05:01things I think is important to emphasize
05:03is our ignorance we we understand some
05:07basic things about trade and then there
05:10are probably some things about trade we
05:11don't understand at all so for example
05:14if you look in history a lot of people
05:16wonder about how trade affected the
05:17Industrial Revolution
05:18now xerus said trade can look a lot like
05:21innovation in fact in economic models
05:23the gains from trade will look just like
05:25productivity and there's a complete
05:26equivalence between those and a lot of
05:28models so basically if you have a robot
05:31to do something cheaply you know from
05:33the consumers perspective that's exactly
05:34the same as getting a low paid worker in
05:38China to do it cheaply so trade can be
05:40like innovation but when we look at the
05:42really big epic booms innovation like
05:45the Industrial Revolution trade may have
05:47some more complex effects on that yeah
05:49we actually had economists duomac here
05:50on the podcast talking about the
05:52Industrial Revolution but it was more
05:53about the open trade between ideas and
05:55how that led to what he called an
05:57unprecedented quantum leap in economic
06:00and tech press and included things like
06:02the steam engine and automating fiber
06:04looms well one of the big theories about
06:06the Industrial Revolution is that a
06:08combination of expensive labor in
06:10Britain and the Netherlands and cheap
06:13resources from the Western Hemisphere
06:16the so-called new world combined
06:18to make it suddenly worth entrepreneurs
06:21while to start using machines labor
06:24instead of humans and the Romans had all
06:27the technology for steam engines they
06:29even did some mining with steam a Roman
06:32inventor had a little steam engine on
06:34his desk called a Leo pile but they
06:37never really deployed it on mass and
06:40all the technology for for power looms
06:42and just yeah put it together these
06:45things go way back so your point is that
06:46this wealth of the right capital
06:49essentially from the new world cheap
06:51resources and capital combined with
06:53expensive labor in Britain in the
06:55Netherlands there is this theory that
06:57that's what sparked the Industrial
06:59Revolution by causing business owners to
07:01finally say all right you know what
07:02forget you humans we're just gonna use a
07:04bunch of machines and then suddenly they
07:06said wait a second these machines are
07:07really good maybe we could make slightly
07:09better machines and tinkered and
07:10tinkered and then then you got suddenly
07:12on this tract of continuous improvement
07:14and continuous searching for new
07:16industrial technologies to make people
07:19richer and obviously that is the
07:20greatest episode of human flourishing in
07:22the world by far the biggest event
07:24probably bigger than the Agricultural
07:26you can almost look at that as we
07:28flipped a switch and something just
07:30something a lot of things exploded our
07:33lives are remarkably easier safer longer
07:36higher-quality and so many dimensions
07:38not just monetary ones so it's always
07:40important to add that and yet at the
07:42time of course the political economy of
07:44that revolution made Dickens famous he
07:48gave Dickens something to write about
07:49the the costs of that in human toll and
07:52human lives misery in the short run was
07:54very strong a lot of people were put out
07:56of work by those machines a lot of
07:58people had low wages as a result of
08:00those machines and a lot of people
08:02worked with those machines and didn't
08:03make a lot of money and had a very
08:05dispiriting existence Charlie Chaplin's
08:09modern times being the best pop culture
08:11version of what that experience was like
08:12that the artisans life the craftsmanship
08:15of previous days and the meaningfulness
08:17that people got from their work suddenly
08:19changed and the point I want to
08:21emphasize is that that response the
08:24anger and fear that that engendered was
08:26very natural very real very justified at
08:29that point and I think it's important
08:31though to look ahead to future
08:32generations and say even though they
08:34were very unhappy at the time and wanted
08:35it stopped those innovations are they
08:38happy now with the way the story turned
08:39out that their grandchildren to the
08:43future actually member you're talking
08:45about this in the human side of trade
08:46we're like 40 was on the workforce in
08:48the 1900s was in farming and now it's
08:53if you go back in time that farmer would
08:55have been really crying and sad about
08:56the lack of opportunity for himself and
08:59his kids but if you brought that farmer
09:01into the present he'd actually crying
09:03happiness to see his great grandkids
09:05have so much more than he did or they
09:07did when they were going through the
09:08really hard times but it's obviously
09:10really hard to see that big picture
09:12right now it's hard to do that and I
09:14think it's important to do that because
09:16economic change is dynamic out by
09:20definition and it's lively and it's hard
09:22to know what's going to happen but often
09:25the longer-run impact is very different
09:27than the immediate impact absolutely not
09:29just long-run but I think it's important
09:31to emphasize the nonlinear impact the
09:34the fact that sometimes small things can
09:36have big consequences but now back to
09:39the theory so one theory of the
09:41Industrial Revolution is that it
09:42happened because basically uh business
09:45people started replacing overpriced
09:47British and Dutch workers with robots
09:50the robots of the day and the question
09:53is what if in a much smaller way in the
09:562000s we started replacing robots with
10:01cheap workers in China what if we were
10:05going the opposite direction
10:06and what if trade can temporarily under
10:09certain circumstances have a slowing
10:12effect on innovation it's I mean it's
10:14obviously not going to stop the
10:15Industrial Revolution from happening or
10:17something like that we're not talking
10:18about effects that big anymore but what
10:20if what if trading with the you know the
10:25new world so to speak with all its
10:27abundant resources made capital really
10:30cheap and caused a tech boom and what if
10:33the sort of productivity slowdown that
10:36we saw starting in the early to
10:37mid-2000s actually what if part of that
10:40came from relying on outsourced labor
10:45and that boom instead of instead of on
10:49better machines why is that idea
10:51importantly what's the natural
10:52implication of that the the natural
10:54implication of this is that basically
10:57the more cheap labor you get the less
11:01incentive there is for labor saving
11:03innovation for entrepreneurs and
11:04technologists to invest in labor saving
11:07and I don't necessarily endorse this
11:10theory it is an idea it's a clever idea
11:12and I think there's some truth to it I
11:14think it's an important ideas that it
11:16suggests an explanation for the
11:18productivity slowdown
11:20that isn't as alarming as the view that
11:23says we figured everything out that we
11:25can and everything's going to get worse
11:27yeah like the Robert Gordon view of
11:29things fall of growth depth of
11:30innovation maybe we took a one decade
11:33pause in automation and maybe now that
11:36wages have risen so much in China and
11:38things like that maybe now we're gonna
11:40get back to the task of innovating in
11:44it's basically machine improvements to
11:46save labor that's your definition of
11:47innovation right it's condon if it
11:48doesn't save us labor why are we doing
11:51you would think that the opportunity to
11:53use inexpensive labor outside the United
11:56States a lot of is for China but it's
11:57also lots of other places I should still
12:00lead to gains to Americans in the form
12:03of lower prices through the innovation
12:05that's taking place so in a way if you
12:08think about what's the difference
12:09between China closing its borders and we
12:13never had this opportunity to trade with
12:15China you're suggesting we probably
12:16would have invested more in capital here
12:18that would have raised workers
12:19productivity here ironically what
12:23happened instead is that workers are
12:25saying got less excess that can access
12:27to capital therefore didn't get those
12:29productivity gains but we as consumer
12:31still should have gotten the benefits of
12:33that in the form of the lower price
12:34because that shouldn't affect it exactly
12:36and so really under some pretty simple
12:38conditions you can show that as China
12:41opens itself up and we choose to
12:44outsource to China the overall aggregate
12:46short-term gains will be bigger than
12:48they would have been if we had done the
12:50hard work of trying to invest in new
12:51machines but if you think about the
12:54long-term effects so that's talking
12:55about what we call you know static
12:57efficiency or short-term effects you can
12:59show pretty easily that that's going to
13:01be bigger and that's what econ 101
13:03always talks about static efficiency
13:04when I'm talking about with static
13:06efficiency exact static efficiency just
13:08means like how much cheap stuff are we
13:10getting today how much how much
13:12productivity are we're getting today how
13:13much is the pie bigger than how much is
13:15the pie bigger then it could be if we've
13:18exactly the pie today when we think back
13:20to the Industrial Revolution and the
13:21sort of long-term consequences if you by
13:24this theory then for hundreds of years
13:27entrepreneurs were doing the easy thing
13:29of getting a whole bunch of cheap
13:31medieval laborers to run their printing
13:33presses and looms and and mines and
13:36whatnot and they were maximizing their
13:38static efficiency there their short-term
13:40productivity but because they didn't do
13:43the hard work of invention and
13:45innovation they didn't get those
13:48knock-on effects further down the road
13:50and when they finally said okay oh my
13:52god workers are so expensive we're gonna
13:54just spring for a steam engine maybe in
13:58the short term that cost them more and
14:00so they wouldn't have done it they
14:01hadn't had to but in the long term that
14:03opened up whole new veins of innovation
14:05there's actually a concrete example that
14:07just jumps into my mind about this right
14:08now playing out today which is India's
14:10decision or discussion around not having
14:13driverless cars because they don't want
14:15to displace the labor that can they
14:17don't want to take people's jobs away
14:19essentially and then my initial reaction
14:21is exactly what you're talking about
14:22which is but they're they're doing this
14:23at the cost of then investing in these
14:26labor saving the long term innovations
14:27it's a fantastic example because as
14:30benedict evans points out in an econ
14:32talk podcast one of the impacts of the
14:35autonomous car introduction is a
14:37dramatic reduction in the cost of
14:41getting from here to there so if you
14:43think about a current cab ride occurred
14:45cab ride or uber has a huge labor
14:47component and also has an insurance
14:48component but the cost of getting from
14:51here that was going to go down and that
14:52means that more people are going to go
14:53from here to there which means it's
14:54going to be more opportunity and more
14:55resources available to do new things so
14:58the worry is and this is the essential
15:00trade political question the worry is
15:04are those new things are those new
15:07things going to be useful in employing
15:09the people who used to be the drivers of
15:11the cabs of the ubers and that is the
15:14real question I think we politicized
15:16trade dramatically in the last few years
15:18is it just for the corporate benefit in
15:19corporations of the top one percent and
15:21I think that's totally wrong however
15:23there is a real issue which is will the
15:26people whose skills have been employed
15:27productively in say the cab
15:31truck driving business will they be
15:32fruitfully employed been officially
15:34employed and whatever comes along and
15:36new things will come along that I'm very
15:38confident about what I'm not so
15:39confident and concerned about us I think
15:40everyone should be is whether the skills
15:42that people who are displaced are gonna
15:44be available so we've morphed into a
15:45discussion now or debate around tech and
15:48jobs but it's the exact same discussion
15:50that people should have about trade with
15:51China displacing manufacturing jobs the
15:53United States or an innovation like the
15:55autonomous car displacing drivers is it
15:58the same as the debates that have played
16:00out at the beginning of time and or is
16:02it actually different now because
16:03technology is accelerating faster
16:04because a big part of this is a
16:06adjustment time the debates are always
16:08the same that doesn't mean that the
16:11underlying truth is the same and
16:12sometimes we confuse this so for example
16:15anti-war movements were making broadly
16:18the same arguments in during the Iraq
16:20war and during World War two but those
16:22were obviously very different Wars
16:24that's a good analogy so how does that
16:25play out in the people who are scared of
16:27trade are scared because of things that
16:30very immediately affect them when you
16:32hear economic debates almost everyone is
16:34talking about what immediately affects
16:37them what they see in their own job good
16:39or their children maybe one generation
16:41out of the most exactly yeah and so you
16:44see people wondering will I lose my job
16:46will my business I'm still not hearing
16:50what's new what's underlying truth in
16:53this case what's new is the the type of
16:55trade what will happen who were trading
16:58with what we're trading what kinds of
17:02trade were opening up what the policy
17:04changes are and what kind of other
17:06innovation technology is growing that
17:08alters this process those things can be
17:11very different so for example opening up
17:14trade this simple example opening up
17:16trade with a rich country like a country
17:19in Europe or you know Japan for example
17:21is in econ 101 or any Theory going to be
17:25very different than opening up trade
17:27with a very poor low-wage country it's
17:33the same with immigration same with
17:34immigration skilled immigration is gonna
17:36be very different both of which are good
17:37for for the country as a whole but have
17:40very different effects on particular
17:41groups people with exactly so that the
17:43politics are going to respond
17:44that in different ways yeah and so the
17:46point is that trade issues now for
17:48example people are talking about TPP and
17:50TTIP which is basically a trade treaty
17:53with you know Japan Korea trade treaty
17:56with Europe those are trade with rich
17:58countries and that's not going to look
17:59at all like opening up trade with China
18:03did in the 2000s it is not going to
18:05resemble it at all and yet people treat
18:07it as if it's the same thing one
18:10interesting thing is if you look at some
18:11of the research papers that are coming
18:13out now like audit and his co-authors
18:15daughter at all if I recall he's arguing
18:17now that some of the benefits of trade
18:20with China actually were not as great as
18:24he thought they were and that we could
18:25have in fact slowed down our process of
18:27trading with them it's kind of the gist
18:28of what right his paper was right so
18:30what's interesting is that during the
18:3280s and 90s people were very scared of
18:34trade with Japan and Germany
18:36you know Japanese car companies coming
18:38in and out competing our companies and
18:39blah blah yeah and so what I'm saying is
18:41that when economists around in the late
18:4290s and early 2000s went back and looked
18:44at those episodes what they found is
18:46that the displaced workers almost all
18:48found new jobs in doing very similar
18:50things for say more higher pay if you
18:52look just at manufacturing it affects
18:55more than manufacturing but if you look
18:56just at manufacturing manufacturing
18:58employment really held up very robustly
19:00during all of that so-called Japanese
19:02and German competition all throughout
19:04the end of the 90s you know very robust
19:07and you had this very smooth adjustment
19:08and people seeing that were like okay
19:10safe then China first we had most
19:14favored nation trading status permanent
19:15normal trade relations and then the WTO
19:17entry and what otter Dornan Hansen found
19:20is that the adjustment of the average
19:23worker in competition with Chinese
19:25workers was much much slower and worse
19:28and they found that you know the average
19:30displaced manufacturing worker in 80s
19:32and 90s who was displaced by Japanese
19:34competition tend to define just as good
19:35or better a job the average
19:37manufacturing worker displaced by
19:38Chinese competition in the 2000s got a
19:41crappy low page service job or went on
19:44welfare or disability which in some
19:47cases has acted as a shadow welfare
19:49system so people who drew the lesson
19:52from the 80s and 90s that the economy
19:54always adjust real quickly and the trade
19:57think very carefully about the
19:59difference between trading with other
20:00rich countries and trading with a labour
20:04rich capital poor country like China and
20:06India like China and maybe like India
20:09although there's some difficulties with
20:10infrastructure in India that means that
20:12in India's unit labor costs may still be
20:14high so when we talk about cheap labor
20:16one thing to mention is we don't just
20:18mean wages we actually mean unit labor
20:20cost which is basically for a given
20:22worker how much can I produce and so
20:25China's labor was cheap not just because
20:27Chinese wages were low but because
20:29Chinese wages were low relative to
20:30Chinese productivity Indian productivity
20:32is held back by the fact that
20:33electricity keeps going out and it's
20:35very hard to get the products on the
20:36roads the infrastructure sucks so when
20:39you have an Indian factory on the coast
20:41Indian unit labor costs are lower than
20:43Chinese unit labor costs the reasons
20:45China was cheap I mean cheap wages were
20:47part of it but they were subsidizing
20:49energy they were giving everybody really
20:50cheap coal without worrying about the
20:51environmental impacts they had very low
20:53labor standards and they had a bank
20:56finance system that essentially fed
20:57super cheap capital super low interest
20:59loans to all these Chinese enterprises
21:01overall lower overall lower unit labor
21:03costs and it was so low and so sudden
21:07and China's just so big I mean if we
21:09traded with a tiny little poor country
21:11we wouldn't notice anything but China is
21:12four times the size of our population
21:14and trading with that sudden monster of
21:18a labor dump being dumped on our our
21:21markets had a very deleterious impact on
21:24the lives of a lot of the workers that
21:26hit in a manner so here's the problem I
21:28have with that analysis there's
21:29obviously some truth to it I think the
21:32trade shock from China is different from
21:34the trade shock from Japan or Mexico I
21:36think they're probably right that the
21:37adjustment for workers in the 2000s was
21:39tougher than the adjustment for workers
21:41in the 80s that it was much harder I do
21:43think it's part of a very long trend
21:45though that's been goes back to 1945
21:47aftermath of World War two manufacturing
21:50employment steadily left the United
21:51States it just got a little quicker in
21:53the 80s and then quicker still in the
21:552000s as a proportion of total
21:57employment so the question is for me
22:00what do we learn from this and is it
22:02because they're different kinds of
22:03countries is it the speed of the
22:06adjustment that we're struggling with or
22:08is it a third factor which I want to put
22:09on the table and which is that the labor
22:11market I don't think works as
22:12effectively as it worked in the 80s and
22:14the 90s people are having a lot harder
22:17time moving to find new work and we
22:19don't fully understand why there's
22:21different theories is it because the
22:23jobs are in the cities and employment
22:24rents in the cities are very expensive I
22:26don't think we understand why and if we
22:28don't understand where we get a very
22:29tough time doing the right kinds of
22:31policies those as to it no matter what
22:34it's certainly true that we need a
22:36better system to help people find new
22:38opportunities right and give them the
22:40skills that they need to to find new
22:42employment but we don't really have a
22:45good understanding of what the nature is
22:46of the of the problem we're trying to
22:48fix and the reason that's important and
22:50this is again where it ties into
22:51technology and autonomous cars
22:54artificial intelligence robots etc the
22:57worry among them people and I think it's
22:58a genuine worry is that in the past when
23:02you were displaced by technology you'd
23:04find a new opportunity that the new
23:06technology helped facilitate because it
23:08made things a bit less expensive but
23:09what if what if the technology takes
23:11over everything and there's no place
23:13left for people's skills that's a really
23:16important question but let's uh let's go
23:18back to a couple points manufacturing
23:21employment shrank as a percent of the
23:23total workforce since 1945 but total
23:26manufacturing employment didn't and we
23:28had a growing population total
23:29manufacturing employment has shrunk
23:31since 2000 dramatically so at the exact
23:34same time trying to enter the WTO total
23:36manufacturing employment in United
23:37States which had been at a stable level
23:39for decades and decades starts to plunge
23:41we also at the same time had the
23:43introduction of the computer in the
23:44internet that was in the 90s and the big
23:46investment boom for computers was in the
23:4890s and that's when we got word
23:49processes and spreadsheets of of life we
23:51got broadband in the late nineties yeah
23:53also got the application of those
23:54techniques it absolutely could be what
23:56I'm saying is the common notion that
23:58manufacturing employment steadily
24:00declined is wrong what actually happened
24:02was that manufacturing declined as a
24:04percentage of our economy because most
24:06of the new things we wanted from the new
24:08economy new technologies were services
24:10basically we got a whole bunch of
24:12manufactured stuff and the amount of
24:14physical stuff that we bought stopped
24:17increasing very fast but we kept
24:20employing about the same number of
24:21people and their productivity increased
24:25percentage of manufacturing the economy
24:28went down because our demand for
24:29services increased much faster after you
24:32know the 1960's than our demand for
24:33manufactured stuff but it wasn't until
24:37the 2000s that absolute manufacturing
24:40employment started to fall and that
24:43manufacturing employment started to fall
24:46along with manufacturing productivity
24:48slowing down so you saw a productivity
24:51slowdown at the same time as a fall in
24:53employment when you see the trend in
24:55manufacturing worker productivity
24:57suddenly get flatter and yet
25:00manufacturing employment plunge off a
25:02cliff in absolute terms not just
25:05relative terms for the first time in
25:06many many decades you've got to wonder
25:09if this unprecedented decrease in the
25:11absolute level of manufacturing
25:13employment was from automation why did
25:16it coincide with the productivity
25:18why wouldn't we see a productivity
25:20speed-up if the manufacturing employment
25:23started plunging off a cliff because of
25:26technology why don't we see a
25:28productivity speed-up in that industry
25:31because instead we see a slowdown the
25:33only thing I'm confident of is it's
25:34tangled together there's a bunch of
25:36things going on at the same time I agree
25:38that it's possible that the over that
25:40the dominant effect is trade rather than
25:42technology I also would suggest it's
25:44really hard to measure productivity and
25:45those and and output in this area
25:47because we're a lot more easier in
25:49manufacturing than another industry you
25:52can count the actual things yeah but
25:54that's not enough you can't count the
25:55things because you've got to aggregate
25:56Computers airplanes bolts screws nails
26:00and other things so you've got to use a
26:02dollar value and then all of a sudden
26:04you've got issues of how do you within
26:07industry productivity you can measure
26:08like a number of planes rats then by
26:12price they're correct we're talking
26:13about the manufacturing and the
26:15productivity is slowed down but where
26:17does this idea of people being able to
26:18buy more because of the cheap products
26:20that are coming into the market fit in
26:22because while people may have had a hard
26:24time finding jobs they can buy more with
26:27less we do that by trying to adjust for
26:29inflation so if we have very slow
26:32inflation prices aren't going up that
26:34much relative to wages what we'll see is
26:39wage gains if you care for your buck man
26:44your real wage is going up it turns out
26:46that real wages in the United States
26:48have been pretty close to flat now
26:52they've risen the last couple years but
26:55in the 2000s real wage gains were very
26:58very anemic here's where it gets tricky
27:00there's many different measures you can
27:03use for inflation so how much should the
27:06price of health care weigh in that how
27:08much should the price of rent weigh in
27:10that versus the price of a TV it's very
27:13tricky and you can use some inflation
27:15adjustments that show a pretty strongly
27:18rising real wage or that show
27:20essentially no wage slowed down in the
27:222000s you can use PCE the pay station
27:25shows that one but the other problem of
27:26course is quality so we're doing
27:28something like a TV a TV today is very
27:30different from a TV 15 years ago
27:32incredibly different roman TV of 30
27:33years ago the number of things that your
27:36phone does and replaces thousands of
27:38dollars worth of technology I have a
27:40video camera I've got a still camera so
27:42when the phone gets more expensive in
27:44nominal terms being the actual dollars
27:46you pay or a little bit cheaper
27:47sometimes but it does a thousand more
27:50things or it holds a thousand right you
27:53need to adjust for that in the Bureau of
27:55Labor Statistics is it particularly good
27:56at adjusting for it so that's that's
27:58another caveat you have to put on the
28:00real wage this argument about just going
28:03back to the theme of trade in connection
28:05of this and the entry of China and what
28:07that did for our economy when I think of
28:09the reverse that you could say limit
28:10trade and this is like the protectionist
28:13argument that comes up sometimes I think
28:15about it disproportionately affecting
28:17poor people because they're the ones who
28:19go to Walmart to buy the cheap products
28:22on the shelves well if you don't have
28:24any job at all obviously the fact that
28:26prices are cheaper is not so important
28:27to you if you do have a job even a job
28:30that pays less but the prices are all
28:31lower you could still be better off wait
28:33and what I'm going to think about
28:34Walmart's it's a retail outlet for China
28:36that's exactly I think that's workable
28:39to me is that we are lucky right now to
28:42live in a time when the unemployment
28:44rates incredibly low it's four point
28:46three didn't we actually just hit a
28:48statistic that we are actually finally
28:50have risen on the jobs I just saw this
28:52employment rate the actual percentage
28:55people who are employers is not an
28:56alignment to population ratio the best
28:58labour my best prime age it's finally
29:01getting better and you you emphasize
29:04prime age because a lot of the drop that
29:06we've seen is actually the aging of the
29:08population right not a crisis right we
29:12could use a digested right I'm age not
29:14gonna disagree with the reality that for
29:16ten years we didn't do very well we had
29:17a horrible recession that was a just a
29:20disaster but now things are pretty good
29:23and yet the perception of how the
29:25economy's going is it's awful a lot of
29:27people are just thinking politically
29:29when you ask them how is the economy
29:30they think do I like the president I
29:32wanted to say something else
29:34the thing about slow adjustment about
29:36some workers sort of permanently losing
29:38their livelihood the stuff about
29:40competing with low wage versus high wage
29:42countries the thing about the possible
29:44innovation slowdown in automation from a
29:47decade of cheap labor all these these
29:49caveats they're all over this is all
29:53about the past and this is an argument
29:54about the past the China shock is over
29:57China unit labor costs are now at parity
30:00with the United States labor cost and
30:01there is nothing on the horizon that
30:03looks anything like China basically the
30:06China shock was this giant one-time
30:07thing suddenly you had a fifth of
30:10humanity with very little capital and a
30:13huge amount of labor and high
30:15productivity and all this cheap financed
30:17energy and capital and stuff be dumped
30:19on the world economy a fifth of humanity
30:21in one decade sticker shock all at once
30:24huge correct it's all at once China is
30:27no longer undervaluing its currency that
30:29was very mercantilist they were building
30:31up their US dollars they're like
30:33modern-day gold they were doing that in
30:35the 2000s they have stopped now and have
30:36actually been propping up their currency
30:39instead of making artificially cheap
30:40they're selling off that that giant pile
30:42of reserves they're going into reverse
30:44mercantilist mode so all of this is over
30:48and so this argument is an academic
30:50argument for how should economists think
30:52about trade how should economists study
30:54how should economists talk to the public
30:55about trade it is not an argument about
30:57what should our trade policy be right
30:59now trade has gotten less ambiguous a
31:03lot in this decade than it was last
31:06when comment is we focus a lot on our
31:09neighborhood which is realistic and
31:12understandable but I think it's
31:13important to remember that trade has
31:15transformed lives elsewhere we didn't
31:18talk about the argument of asymmetry in
31:20trade and what happens when you have one
31:22country that's being more protectionist
31:23and another one that's not I've heard
31:25the argument I think Paul Krugman made
31:27it or maybe Adam Smith remember but even
31:29when you're open and everyone else isn't
31:30you everyone still benefits and that's
31:32the bottom line of this free trade idea
31:34what happens when it is disproportionate
31:36so in the 1980s when the debate was over
31:38whether we should let Japanese cars come
31:40into the United States compete with
31:41American cars a lot of people say we
31:43shouldn't because they don't let other
31:44products of ours into their market and
31:46my view was if their want to harm their
31:48own citizens by keeping on American
31:50products that's their choice don't
31:52confuse that with the fact that we
31:53benefit when we let in Japanese cars
31:55there's a mistake and focus on the value
31:58of exports that somehow trades only fair
32:01if we have balanced trade that we import
32:03exactly the amount that that that that
32:06they accept of our goods it
32:07misunderstands the fact that trade and
32:09goods is not the only thing we do we
32:10trade in money and assets and capital
32:13surplus and services as well and so
32:16America on average is going to be better
32:18off when we open our borders not as much
32:21as would be if other countries joined us
32:22and open theirs to people think it but
32:24we need to use as a negotiating tool and
32:26my view is it doesn't work very well
32:27historically so if we say to China if
32:30we'll practice we trade only when you do
32:32they'll say okay fine we won't you won't
32:34and then we'll end up in not just a
32:36trade war but possibly a real war right
32:38so I think trades very important for
32:40that reason it builds bonds between
32:42countries even if other countries don't
32:45want to be as open as we are safe for
32:46political reasons this is one more
32:48example and a Japanese don't let him
32:49rice foreign rice because Japanese
32:52farmers are very small but very
32:53politically powerful yeah just like the
32:55corn farmers in the US I mean like
32:56high-fructose modified corn starch or
32:58corn syrup whatever you know what I'm
32:59talking about we pay a premium for sugar
33:01because we keep out foreign sugar people
33:03in China pay an enormous premium for
33:05rice it's just pure politics and the
33:07world would be a better place I believe
33:08if we didn't listen to that so that's
33:11generally right there are a couple
33:13caveats thank you no it's great well
33:20life love I love new ones so to inject
33:26some nuance the idea that trade builds
33:29bonds between countries I believe is an
33:31overrated idea because on the eve of
33:35World War one Great Britain and Germany
33:38were each other's largest trading
33:39partners my friend Paul post who's a
33:42political science professor has shown
33:45that trade agreements are a great way of
33:47cementing alliances but if you don't
33:49have an alliance then you know it's not
33:51as helpful the other caveat is that
33:54exporting at the company level raises
33:57productivity what do you mean by
33:58exporting at the company level so when a
34:00company enters a foreign market it
34:03experiences a jump in productivity
34:05obviously companies that were more
34:07productive to start with are going to be
34:08more competitive in foreign markets
34:09there's pretty good evidence that
34:11exporting forces companies to up their
34:14game in general trade generally does
34:16that right it is a product it's hard to
34:20export services services we do have a
34:22lot of service exports that we have
34:23foreigners who come to America to go to
34:25college things like an export and so and
34:28our universities are competing with
34:30Chinese universities the point is if we
34:33have a large trade deficit that's not
34:36necessarily bad because you know if
34:38there's unbalanced trades someone's
34:39gotta run the deficit but but if we have
34:43a large trade deficit it means we're not
34:45exporting as much as we would be if
34:48there were their balanced trade and that
34:50could be depriving some of our companies
34:52of this pressure of international
34:54competition that forces them to up their
34:56game it's kind of similar to the
34:58argument you made earlier actually about
34:59just how it improves innovation overall
35:01it's actually the same gain it could be
35:03in the same vein you know in most
35:05economic models technology falls from
35:06the sky like manna from heaven and
35:08companies just take the technology that
35:10the magic inventors somewhere invent yes
35:15it is there's an argument to be made
35:16that encouraging your your companies and
35:19not just your big company like Boeing
35:20but your small companies to get out
35:22there and sell in the foreign market
35:23instead of just sort of cozily selling
35:26to like your neighbors and try to get
35:29out there and sell the people in
35:30Bangladesh or wherever
35:32that's where the internet comes in but I
35:34worry that our companies are
35:37experiencing lower productivity from
35:39lack of exporting obviously in the 2000s
35:42the currency thing with China was part
35:44of that but even then it was a modest
35:45part I think really the cases we have
35:47got this giant domestic market and we
35:50run you know trade deficits but we've
35:52also got this giant domestic market it's
35:54just really easy for companies to kind
35:56of slack off well I disagree because I
35:57think politically that's gonna end up
35:59with politically powerful companies
36:01getting more than just the incentive to
36:03export I mean small companies I mean I
36:06just I just I just don't think that
36:08should be a policy goal to have exports
36:10or exports sake because I just think it
36:11leads to too many problems Japan does a
36:13lot of things wrong but it also does
36:14something's right and it has an export
36:17promotion agency called JETRO if you're
36:20a small Japanese company you don't know
36:21how to sell stuff to Bangladesh JETRO
36:24will hook you up with local resources
36:26and will try to hook you up with some
36:28financing and things like that to
36:30basically nudge you toward these markets
36:31yeah I think America could absolutely
36:33use something like that but we have the
36:35Exim Bank which mainly works as a
36:37subsidy to Boeing not small companies
36:39and they claim that they're good for
36:41small business and I think the political
36:43what you would design NOAA and what I
36:45might design if I were is it agree with
36:48you would be different than what we're
36:49gonna get so we ended on the note that
36:51China had this unprecedented scale this
36:53shock effect because the fact that was a
36:55one-time 10-year one-fifth of the world
36:57we're talking about the past so what
36:59happens next when it comes so we think
37:00about the evolution of technology we've
37:01we've alluded to you know automation and
37:04and what's happening with jobs but just
37:05more specifically what happens next
37:07the easy answer is we have no idea but
37:09the second answer which is I think gonna
37:12be true no matter what happens is that
37:13it's gonna be very hard to do something
37:15about it even if we don't like the
37:16outcome technology's incredibly powerful
37:19innovations incredibly powerful we're
37:21gonna get autonomous cars of the United
37:23States if the technology works out I
37:25don't think the political power of the
37:27taxi cab industry is gonna stop it just
37:28like I don't think the hotels can stop
37:30Airbnb and so I think we should be
37:32focusing on the cost of that transition
37:35and that you're a people with education
37:37and better skills to cope with it I
37:39couldn't say that any better the rest I
37:42completely agree I finally agree
37:44completely with each other
37:46on this point you can't you can't stop
37:47technology and you can't suppress it
37:49these things are coming CRISPR is coming
37:51to disaster baby someday driverless cars
37:54are coming we're gonna have to roll with
37:56it we're gonna have to be flexible
37:58we're gonna need things like continuing
38:00education throughout people's entire
38:01life and not just you know teach them
38:03stuff and then release them into the
38:04workforce we're going to need all kinds
38:06of things to become more flexible and to
38:09roll with these things yeah because
38:12trade in the 2000s was something we
38:14might have been able to manage better
38:16than we did but that's over and the
38:18challenges of the future are completely
38:20different than the challenges of the
38:21past well said thank you for joining the
38:23a 6nc podcast guys thank you thank you
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