November 9, 2012

Panacea Failure

I wanted to share this excellent bit of reporting I came across in the Washington Post a few weeks ago. The original, longer article was done by ProPublica, and I would recommend it if you have time. If not, the shorter Post version should not be missed.

The article is important because it opens up a black box of questions that economists and politicians typically wave away or plaster over with assumptions. Most importantly, many economic models of trade trade and technological change assume "full employment". When economist talk about the "gains from trade", these 'gains' ignore potential losses from unemployment. Or put differently, when someone is laid off because their employer cannot compete with cheaper imports from abroad, these models assume they can instantly find another job. This assumption is valid in some situations, for example when there is high growth in other industries. But in other situations it is absurd on its face. Economists, however, rely on it because modeling the impact of trade on economies without it becomes extremely difficult.

A second, related assumption is that workers are able to move up the "value ladder" to find better-paying jobs than the ones they lost. Or that if this does not happen, then at least the country overall will be richer and the workers benefit via Trade Adjustment Assistance or some similar redistributive program.

A final reason these results are so alarming is that education is a basically the economic policy prescription of last resort. How do we compete with China? More STEM education. How do we get out of the recession? Go back to school to be more competitive. If nothing else is working, policymakers often turn to education and "skills" as the way to appease the market and bring about that illusive world where there are enough jobs and inequality is not spiraling out of control. Education is important, no question, but it should not be the only leg we attempt to stand on.

The Janesville study is an airhorn in the ears of anyone resting peacefully in these assumptions. It is not a perfect study; in fact there plenty of reasons to question the results, many noted by the authors themselves. But its results are so perfectly antithetical to common assumptions about retraining, employment, and competitiveness as to call into question the models that led us to those assumptions. We have to ask: what is the point of economic ideas that give results like these?

1 comment:

  1. I'd just add that the gains from the specialization that results from trade not only assume easy shifting to the new specialized industry for employment, but they also assume redistribution of gains. This true of any "creative destruction" argument and while may be plausible within some countries, international re-distribution, unfortunately, strikes me as pure fantasy.