In the 1990s and early 2000s, free trade was considered an unalloyed good. But now, policymakers and economists agree that global trade creates winners and losers—and they acknowledge that we’ve never really tried to fairly compensate the losers. Economist Dean Baker and Seattle Port Commissioner Ryan Calkins help us try to imagine a more equitable way forward on international trade.
Dean Baker is a senior economist at the Center for Economic and Policy Research, an organization he co-founded in 1999. His areas of research include housing, consumer prices, intellectual property, trade, employment, Social Security, and Medicare. He is the author of several books, including ‘Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer,’ and his blog, ‘Beat the Press,’ provides commentary on economic reporting. He is currently a visiting professor at the University of Utah.
Ryan Calkins is a Port of Seattle Commissioner specializing in sustainable economic development, ensuring that our region’s prosperity is shared among all of our communities. Commissioner Calkins also works as a nonprofit professional at Ventures, a charitable organization that supports low income entrepreneurs who are starting and growing businesses in the Puget Sound Area.
Speaker 1: Hey gang. Well believe it or not, Pitchfork Economics got a million downloads, one million, which is really amazing. And I wanted to first thank all of the incredible guests we’ve had on the show, and all of the support and feedback from our listeners. The whole thing has been super enjoyable and again, thank you so much everybody for participating.
Trade is a big issue these days in terms of the trade war that President Trump has sparked with China.
President Trump: We won’t back down until China stops cheating our workers and stealing our jobs and that’s what’s going to happen.
Speaker 3: We went from a trade war that was focused on a issue that actually did matter to workers to an issue that workers in U.S. really have no stake in.
Speaker 4: We have to acknowledge that anything we do will have pluses and minuses, and that we have to robustly account for the minuses.
Speaker 5: From the offices of Civic Ventures in downtown Seattle, this is Pitchfork Economics, with Nick Hanauer. A pointed conversation about who gets what and why, with one of America’s most provocative capitalists.
Nick Hanauer: I’m Nick Hanauer, founder of Civic Ventures.
David Goldstein: I’m David Goldstein, senior fellow at Civic Ventures.
In our office, we spend a lot of time putting together policy proposals, deep thinking on a number of issues, we haven’t really done all that much on trade.
Nick Hanauer: That’s right, we have ducked trade.
David Goldstein: Coward.
Nick Hanauer: Cowards that we are.
David Goldstein: Because?
Nick Hanauer: Trade is super complicated and there is so many dimensions to it and so many pluses and minuses and so many winners and losers.
David Goldstein: It’s at the heart of market economies, at the very heart of it is trade and the marketplace whether its international or domestic.
Nick Hanauer: There are non economic dimensions to trade, like the interdependence between states which may be economically disadvantageous, but may prevent a war for instance. As you know I did a lot of work in trade when I worked full time for my family business because it was a very international business. All our suppliers were over seas, I spent a ton of time in Asia, China, these other places. Structuring relationships, importing, exporting, all that stuff.
There was this joke that was told when I was in DC working with people in the trade business and in the Commerce Department that they all reported up to the State Department. That in fact, if the State Department felt like a relationship was important they didn’t give a rip about what happened to the companies. National Security trumped economic policy at all times.
David Goldstein: And be clear when they said they didn’t give a rip about what happened to the companies, that also meant they didn’t give a rip about what happened to the workers, or the communities the workers lived in.
Nick Hanauer: Exactly and because at the den of the day, national security felt more important than economic vitality of a neighborhood or whatever it is.
Again, I just want to make clear, as far as I know that was not an explicit plank of the governments policy platform.
David Goldstein: It was actually with China. That was always openly stated that it was-
Nick Hanauer: Here’s the thing: that makes perfect sense. There are considerations, unfortunately, that go beyond economic convenience or even vitality that may trump those things. Trade is complicated and we have avoided taking positions on trade policy and getting deeply into the intricacies.
David Goldstein: But not because we’re cowards, it’s because we’re not really sure what to do.
Nick Hanauer: Yes and I think our goal in this episode is to get people to understand a little bit more about both the theoretical and practical dynamics of trade, what the good parts of it are, how it benefits societies and economies and what the risks and the trade offs are.
I think with trade, when you start to unpack it, it’s all about trade offs. On the one hand, you’ll get something good, on the other hand there will be a harm to someone or something. And it is hard to sort it all out.
We get to talk to a super awesome guy, one of the good economists.
David Goldstein: One of the good economists.
Nick Hanauer: Dean Baker, who is the senior Economist at the Center for Economic Policy and Research, he’;s actually co founder, and has worked in so many domains for so long. He’s the author of several books including his latest, Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.
It should be a really interesting conversation, mostly focused on trade.
David Goldstein: And Dean was one of the first economist to warn about the housing bubble prior the Great Recession.
Nick Hanauer: Yeah, he was on that before anyone was. Should have listened to him, I guess.
David Goldstein: Well, now you can listen to him now.
Nick Hanauer: Exactly.
Dean Baker: I’m Dean Baker I’m senior economist and co founder at the Center for Economic Policy and Research and I have a book, Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.
David Goldstein: We wanted to talk to you a bit about trade, you’ve written on the topic obviously. Trade is a big issue these days in terms of the trade war that President Trump has started with China. If you could just give us a little background on what’s going on and your take on our trade policy these days.
Dean Baker: It’s a little hard to be too clear about what’s going on, just because a lot of this is secretive and frankly, I think as we know, we can’t count on President Trump to act in a consistent manner.
But where to some extent this originated, I think were quite legitimate complaints. That we have a very large trade deficit, a big part of that is China. A big part of that story is China’s management of its currency. This is something that at least now most economists now concede was a big issue in the last decade.
The basic story was China deliberately kept down the value of its currency against the dollar and other major currencies. What that does is it makes their goods more competitive in international trade and our goods less competitive. People dispute whether their still managing their currency, but that was the historical story.
We lost millions of manufacturing jobs in the last decade because of our trade deficit and against China being the biggest culprit here. Trump actually during his campaign had run on this, making this a major point running around the country yelling about China being a world class currency manipulator and he was going to go after them on that.
Ostensibly, that was the start of the trade war. He was going to address currency with China. What’s happened since then is currency has largely fallen from the picture and we hear complaints about China’s treatment of company’s intellectual property. It’s common for China it’s alleged, and I don’t doubt it to be largely true, that when Boeing, when General Electric, other major companies outsourced jobs to China, that often will be the case China requires them to get a domestic partner. What that means is Boeing, General Electric, whoever it might be, is going to end up having to transfer their technology to this Chinese company who then in two, three, four years will be a competitor with them.
That issue has taken center stage in Trump’s trade war and the currency issue has fallen largely by the wayside. My reason for emphasizing that is workers arguably have a strong case that if China raises the value of their currency, U.S. goods become more competitive, likely means more manufacturing jobs in the U.S. On the other hand, workers have non interest in making it easy for Boeing and GE to outsource jobs to China and not have to worry about whatever intellectual property claims they have.
So we went, at least ostensibly, from a trade war that was focused on an issue that did matter to workers in terms of jobs here, to an issue that workers in the U.S. really have no stake in. Workers have no reason to care whether or not China is respecting Boeing’s intellectual property and actually since it will make it easier for them to outsource, they might be happier if China did not respect Boeing’s intellectual property.
David Goldstein: Let’s back up a tiny bit and dig deeper into the intellectual framework that made all of this globalization and trade possible. The notion that trade is always good and that in aggregate, everyone is better off the more that we trade. And certainly the lessons of globalization overt the last 20 years, 30 years in the United States and in Europe is that their have been profound winners and losers and that the economic orthodoxy was largely wrong.
Dean Baker: I’m not one to generally defend the economic orthodoxy, but I would actually say what we’ve seen has largely been a misrepresentation of the economic orthodoxy. What the economic orthodoxy actually says is that there will be winners and losers from trade. The story goes if you look at the textbooks it’s that the winners win more than the losers lose. So we could in principle the winners could compensate the losers and everyone ends up better off.
Whether that statement is true or not, the fact is we’ve never in any serious way compensated the losers. You can look at trade adjustment programs and we spend one or two hundred million, and I don’t even know the latest number, but somewhere around there, one or two hundred million a year on those programs where if you say okay we really want to compensate all the steel workers who lost their jobs in Pennsylvania and Ohio, and the autoworkers in Michigan, you would be talking about hundreds of billions. You’d be talking about a thousand times as much.
And no one has ever seriously proposed that type of compensation package. It would obviously politically be a huge lift and quite frankly as a matter how would you implement a program like that? Not to say it’s impossible, but this is a really really big program. Think of a program like TANF, multiply it by 10 or 15, that’s what you would be talking about. And that’s just not on the political agenda.
David Goldstein: You could of course do it by imposing some sort of 3% surtax in all trade.
Dean Baker: You could do that. Again, the discussion on this has been very very sloppy even front he standpoint of orthodox economics. Again, the orthodox economics never says that there aren’t losers, it does say there are losers. There’s this very famous piece from the early forties by Paul Samuelson and Wolfgang Stolper, I think it’s like 41, that basically shows there are losers, and I don’t know anyone that’s ever said that’s wrong.
Usually what economists that have supported the trade deals over the last few decades have done is they have poo-pooed them. They go “Oh yeah, some people will lose a little bit.” And you go no. We have now very good research that was done by some very mainstream economists, David Author being the most prominent at MIT, that shows millions of people lost their jobs. When they got jobs back, if they got jobs back they almost invariably paid far far less than the jobs they lost.
We aren’t talking about a few hundred thousand workers getting a minor cut in pay, we are talking about millions of workers getting really big cuts in pay. Again, that was predictable. I and other economists were warning about that and we were of course poo-pooed but that was a predictable outcome and unfortunately no one took that seriously at the time.
David Goldstein: In a way, aren’t trade and automation very similar in terms of their impact on the economy? Their both about increasing productivity and lowering costs. They both have allegedly winners in the aggregate but losers at the micro level?
Dean Baker: Well, there’s similarities. What’s interesting with automation, now this has become less true in recent years, but historically workers gain from automation. So historically the classic story this is often referred to as the Treaty of Detroit that if General Motors productivity went up 3% a year, then workers in the auto industry so their pay go up 3% a year. So they very directly shared in the gains of productivity growth. That’s become certainly less true over the last four decades.
But if you have that sort of story, where you basically have a built in mechanism, obviously unions played a really big role here so they said “Okay, we’re happy you’re going to have 2%, 3% productivity growth that’s wonderful, you’re going to pay us 2% more, 3% more, that way you can ensure that workers are sharing in the gains.
But as union membership has fallen sharply, the unions are still there in many cases much weaker, they are much less able to ensure that workers get their share of productivity growth.
Nick Hanauer: There’s a really interesting feedback loop, too, which is that the less upper pressure there is on wages, the less inventive corporations have for investing in productivity saving technologies.
Dean Baker: Exactly, so when workers are highly paid, companies have an incentive, how can we figure out more efficient ways to operate the workplace. When they can get workers very cheaply, they don’t have much interest in that.
Nick Hanauer: For my own part, I’m very conflicted over what are approach to China should be. In the interest of full disclosure, I spent a huge proportion of my younger years in the family business working in and around China. I spent a ton of time in Hong Kong and doing business in the old fashioned home textiles industry.
And it was super clear, even then, how predatory the Chinese were in approach to markets. And they entrepreneur way beyond manipulating currency, They manipulated the price of the raw materials that went into the inputs. They gave massive tax subsidies for manufactured items versus shipping out raw materials, blah blah blah blah.
I mean it went on forever. So I’m super sympathetic to taking a harder line with those folks on trade. But we are where we are and we can’t go backwards to the old times. So it doesn’t seem like the current approach probably is the optimal approach. What are your thoughts on how to make this all work better?
Dean Baker: I raised the currency issues, I still think that’s important. I do think that would also be a very winnable goal in the sense it’s very concrete. We set a target with China we want you to raise your currency by say 20% over the next three or four years, it’s very concrete and they’ve done this in the past.
I’ve had people tell me “Oh they’ll never raise their currency.” I go, well they’ve actually done that a lot, so you better tell them that they’ll never… That seems very concrete.
But we’ve gotten to this big issue over intellectual property and I think this is an incredible mirrass from an overall economic perspective and certainly from the standpoint of most people in the United States. We are trying to enshrine U.S. type intellectual property rules, patents and copyrights to be as concrete as possible, into the world economy and have these longer and stronger and the idea being oh we have to make sure our intellectual property is protected.
I just look at the basic story here. China’s economy, measured in purchasing power parity, which I think most economists will say that’s how you want to measure it, it’s already 25% larger than our economy. In a decade it’s likely to be twice the size. They commit the same share of their GDP to research and development as we do, may even a little bit more, their increasing it rapidly.
They are going to have many many great innovations in artificial intelligence, computer technology, pharmaceuticals, all sorts of areas. They are going to have many great innovations. I would like to see our trade policy rather than focusing on locking down our technology, focused on trying to get access to their technology. And be very concrete, they are the world leaders in world technology, wouldn’t it be great if we had open access to all of their technology there.
So rather than locking our knowledge, our technology down, why don’t we focus our trade negotiations in trying to ensure that all this technology, ours is available to them, theirs is available to ours. That would allow for the greatest progress, the greatest benefits to humanity.
David Goldstein: I would love to ask the benevolent dictator question. If you were setting our trade policy, what would you do?
Dean Baker: Certainly I would put a priority on intellectual property going to some process of making it open. I think that would just have incredible impact. Just in the case of prescription drugs, we’re going to spend over $460 billion dollars this year on prescription drugs. If you snapped your fingers and said everything is available, its generics, you’d probably be talking about spending $80 billion, savings would be 380 billion dollars.
It’s a huge amount of money, but more importantly, all these people are facing this situation oh there’s this drug it costs $100 thousand, $150 thousand dollars, we can’t afford it, we can’t get our insurance company to pay for it, that would disappear. These drugs would cost a few hundred, maybe a thousand dollars. And I understand for a low income person, even that’s a burden. But the point is for the vast majority of people, that’s affordable. And even for low income people we can find easy enough ways to cover that tab.
So I would make that front and center. I would also point out that people often say when they talk about the hit that manufacture workers have taken “Well the problem is that we have all these people in the developing world, China and other countries, they can do the same work for much less money.”
And what I like to point out, that’s true, but guess what? They have a lot of really smart ambitious people who would be happy to work as doctors, as lawyers, as other professionals in the U.S. and they would also be willing to do it for much less money. How about we open up those professions, make it easier for people from other countries to train to our standards and then compete with our most highly paid professionals.
Few people like that idea, but if we want to be free traders, lets do that. I originally used to say that as a joke, I don’t take that as a joke anymore. In think that would actually be very good policy. We basically structured our trade policy to pout downward pressure on the wages of less educated workers.
And when I say less educated I always use that advisedly because that’s about 65% of the workforce that doesn’t have a college degree.
Nick Hanauer: What do you think about tariffs and this shit show that is unfolding today?
Dean Baker: You can use tariffs in a way that makes sense. So if you had very well defined goals, other presidents have done this, President Obama did it, and President Bush had done it and I believe it Clinton did as well, I mean it’s not unusual for a president to have a particular complaint against a country and say “Look, we don’t like your practices in this sector, we want you to change them.”
They are very specific and we’re going to impose a 10% tariff or 20% tariff whatever it might be, until you change that practice. And usually you end up negotiating, the tariffs are not imposed for long, sometimes they are never even imposed at all, because they sit down and talk and they work it out and they get a deal on it.
The problem with what Trump’s doing, at least from my vantage point, is he’s being incredibly haphazard. I joke about it and I think its apt, he’s running it as a reality TV game show. And that’s not a way ton run the economy. So what specifically are his demands, what does he expect China to do, that seems to change day to day.
What that means is we get these tariffs that they’re imposed, then he says he’s putting them off, then he imposes them, that’s a very bad way to run an economy because be very concrete. If you’re thinking of setting up a manufacturing operation in Iowa or Michigan, wherever it might be, you want to know that you are going to have markets. If they might retaliate against you, you don’t known that. You want to know what your input prices are going to be.
You’re getting some things from the U.S., you are getting some things from China, you don’t know what those prices will be. As a result of that, you are getting a lot of companies putting off investment, and that’s very very clear in the data. The obvious reason for it is this is a non good environment for firms to be able to plan long term investment.
David Goldstein: In some ways its even worse for farmers. Washington State, big on agricultural exports, apples and cherries, those trees have ton be planted years in advance on the expectation there’s a growing market in China and then suddenly China cuts off imports in retaliation.
Dean Baker: China has been very clever about this in the sense that they’ve been selecting targets where they think it will impose maximum damage. Obviously those who are suffering don’t like the maximum damage, but they are saying “Okay, you are going to hit us with these tariffs, what can we do that will hurt you?”
So they’ll say “Okay, we are going to cut back our imports of cherries from Washington State or the United States in general.” And they know, they are sitting there, figuring out what will impose the maximum damage. And they’ve done a good job at that, given that that’s their goal.
David Goldstein: Our final question we like to ask our guests: Why do you do the work you do?
Dean Baker: That’s a great question. I wanted to be an economist because I thought I could have a positive impact on the world. I saw a lot of bad things happening and I felt that learning economics and having an impact on economic policy was a way to make those things better. I don’t think that was a mistake.
You always look back, not that I’m at the end of my career but I’m 61 now, you go could I have done things differently, could I have done things better? Sure, but I can point to a lot of areas, one area I’ve done a lot of work is preserving Social Security and I think I played a very big role in ensuring that Social Security was not cut back and privatized under President Clinton or President Bush.
It’s my way about trying to make the world a better place. Again, maybe I could have done things differently, could have done them better, but I think I have had a positive impact.
David Goldstein: Well Dean thank you so much for spending time with us, it’s been really, really great.
Dean Baker: Sure, thanks for having me on. I enjoyed the discussion. Good finally meeting you guys. We probably have a thousands of people in common, but I don’t think we’ve ever talked to you before.
David Goldstein: Talk soon, thank you, bye.
One of the things that Dean drove home was in his words, how incredibly haphazard Trump’s trade policy has been. First he imposes a tariff, then he says he’s putting it off, then suddenly it’s on again.
Just last Friday, there was big news from trump that they struck a trade deal with China and then today we find out that no actually it’s not really a trade deal, they are just delaying some tariff hikes against.
Nick Hanauer: Haphazard is the kindest and gentlest word you could have chosen to describe Trump’s approach to trade.
David Goldstein: Crazy, sociopathic-
Nick Hanauer: Stupid.
David Goldstein: Stupid, right. And of course, as Dean pointed out, this is just a terrible way to run an economy. Because you know as a business man, you need to plan and if you don’t know what your tariffs are going to be, how can you have done that with your family business?
Nick Hanauer: That’s right. Of course again, the shame of it is that being mad at China for how mercenary their trade approach to us has been, is completely valid. I’m completely with people who feel like we should hold China to a higher standard, pish back against their currency manipulation and their straightforward attempt to steal all of our jobs and take them there.
But there are so many intelligent ways that you could approach this problem that would generate more good than harm. Unfortunately we definitely have the wrong man in charge.
David Goldstein: And of course a lot of the impacts of Trump’s trade war here in Seattle, a very trade dependent city and state. And so to learn a little more, we sent one of our producers over to talk with Seattle Port Commissioner Ryan Calkins.
Nick Hanauer: On the front lines of what’s actually happening in trade.
Ryan Calkins: My name is Ryan Calkins and I’m a commissioner at the Port of Seattle. So the Port of Seattle, it’s technically a special purpose government, which was established in 1911 when the waterfront of Seattle was effectively privatized. Railroads and some big agricultural interests owned almost every foot of the waterfront.
So a coalition got together of progressives and farmers who couldn’t get their good to market and established something in the state that allowed for jurisdictions to create port authorities. In the case of the Port of Seattle, we grew from a seaport to also include the airport, Sea-Tac International Airport.
Our balance sheet includes a huge airport, the eight busiest in the country. We are apart of the fourth largest container cargo gateway, the Northwest Seaport Alliance, which is the Port of Seattle and Tacoma. We also have an economic development division, where we through real estate and other mechanisms help also to increase the overall size of the regional economy.
At root what we are trying to do is create livelihoods for people who live in our area.
We move about four million, what we call TEU’s which is roughly to say 20 equivalent unit containers. Those boxes you see on the back of semi trucks. We move about four million of those a year, imports and exports. Its really important that we have the balance of the two because if we don’t have a box coming in, we don’t have a box to put our goods in and export.
We are lucky that we are fairly balanced. We bring a lot of goods in from Asia that are for consumers here in the Pacific Northwest, but also for inland areas like Chicago and the Twin Cities and Kansas City. So we are effectively the port of a lot of Midwest cities as well.
For Washington State, which is a big agricultural state, we do a lot of exporting of grains and fruits and other things as well, through both the seaport and the airport.
Of the three areas we really focus on maritime, aviation, and more broadly economic development, maritime itself accounts for 60,000 direct jobs around the Seattle waterfront. And these are on average, high five figure incomes, often times union represented jobs. They range from long shore workers, who are the workers who pull the goods off the ships and put them onto trains to send into the Midwest from Naval architects who are designing the next generation of fleets to of course the fishers who go up to Alaska each season and thankfully very sustainably harvest the fish stock. So there are a whole range of jobs associated with the waterfront. We estimate around 60,000.
Then of course the airport represents 20,000 direct jobs, but for the most part they are employees of the 350 businesses that are represented at the Sea-Tac airport. We really focus on in our relationships with the businesses at the airport and around the waterfront, we focus on ensuring that they are quality jobs, that one job is enough for the people who come to the airport or the seaport to work.
I’m a big booster of trade because I do believe that when we look at the history of trade around the world, it is arguably the single greatest mechanism for poverty alleviation that human history has ever known. I think that’s simply because when you connect larger networks of people who can trade, we can specialize better and we can more efficient in how we produce good and how we transfer them.
This is not to say there aren’t downsides to trade as well. In fact my first job out of college was working for an organization in Latin America that was advocating for fair trade at a time when there was a big push through NAFTA and other trade arrangements in Latin America, there was a big push for free trade.
Essentially, the negative externalities of trade come down to labor disruptions and environmental problems. I would say that trade, while by and large a good, is something that needs to be well regulated to ensure that we minimize environmental consequences and also take care of the workers who are displaced by trade.
There are definitely winners and losers in trade. As new markets open, it means firms that have not been very efficient in the production of goods or services will be out competed by firms in the new markets that can provide those goods and services more cheaply.
I’m less concerned about what happens to companies that fall victim to trade. What I’m much more concerned about are the employees of those companies. In particular in industries in which the options for new work are limited or which require significant new training. I think that has to be the focus of policy makers like myself. What are we doing to ensure that the benefits of trade also come with solutions for helping those who have been displaced by trade.
Trump’s tariffs have been an unqualified negative for the Port of Seattle, for the state of Washington, I think for people in the United States generally. First off you need to understand that tariffs are taxes, they are just a tax that’s levied on the consumer of the goods that the tariffs are on. The reason that’s the case is because the producers aren’t absorbing the tariff, they aren’t paying the tariff. Tariff is collected at the waters edge essentially.
I spend a lot of time looking into what happens with those tariff dollars. They go into the general treasury, meaning it’s not as if they immediately then go into assistance programs for the people who are negatively impacted by tariffs. As a result, it means that the goods and services that people rely on that are being imported are now more expensive than before.
It’s also creating all sorts of distortionary effects in the real economy. I read just the other day about how there are a number of opportunistic companies being set up on the Canadian border where they break down Chinese goods into smaller increments that fly below the radar and then shipping them over the land border with the United States because the tariff rates have gotten so high when you direct import from China to the United States.
It’s that kind of distortionary impact that is endangering jobs at the Port of Seattle and other ports in the United States. But its also just adding friction to an economic system that would otherwise be much more productive and result in cheaper goods for consumers.
We are also seeing on the export side, I think in many ways through Washington State, a much more profound impact. We export a huge amount of soy and other grains through Port of Seattle terminals. The counter tariffs that China levied on our products bound for China were such that the soybean export dropped by 60% in 2018. And those are farmers in the Midwest and workers at the Port of Seattle that are now out of work because of those counter tariffs that resulted from Trump’s trade war.
I like to introduce that concept of the elephant graph where if you look at the history of trade and what it has meant from various sectors of the population, you can sort of imagine the back of an elephant in profile, all the way up as you move to the right, over its head and then a big drop off down to where the trunk rises back up so there’s kind of a dip where the forehead of the elephant is. That graph describes what has happened to various segments from the poor on the left all the way over to the very rich, which represent the high end of the trunk on the right hand side. That dip where the head meets the trunk represents the developed world lower and middle classes.
These are people who relative to the global economy, have been doing well for quite a while. But as ar result od the broad opening of global trade, that particular group was really impacted negatively while virtually everyone else saw their incomes rise significantly. It’s a very important segment of our economy here in the developed world, it’s our lower and middle classes. It was my family, and lots of people who I grew up with, we certainly experienced that. They are the folks who are displaced by the global economy. If we don’t think about how to ensure that those people also benefit from growing GDP per capita all around the world, they will be an incredibly disruptive group within the overall economy.
When Nick talks about the pitchforks are coming, they will be the one carrying the pitchfork. They know what its like to have a middle class lifestyle where you don’t have to worry about the paycheck or you don’t have to worry about where your healthcare will come from. And that’s being taken away from them. That’s deeply problematic and if we don’t address that, then In think we really will see revolution.
David Goldstein: So you and I know that Seattle is a very trade dependent city. It’s interesting hearing from Ryan what this really means for workers here. 80,000 people are employed directly, just in the maritime industry at the Port of Seattle. And those are mostly, as he said, high five figure job. These are decent, dignified middle class wages for people who don’t necessarily have a college degree.
Then you get to the airport where there’s another 20,000 direct hires, and this is just direct hires, and those are predominantly people of color, women of color, those are low wage work, but they are making a lot higher wages today than they did five or six years ago because of what Nick?
Nick Hanauer: The $15 minimum wage, where we started in Sea-Tac.
David Goldstein: That’s right. We like to talk about Seattle being first, but actually Sea-Tac-
Nick Hanauer: Was the test case.
David Goldstein: The one thing we haven’t mentioned is the textbook phrase-
Nick Hanauer: Comparative advantage.
David Goldstein: Comparative advantage, right. So if you’re learning Econ 101 you go all the way back to the 18th century and David Ricardo and his concept in classical economics comparative advantage, which is that nations should focus on the industries that they have this relative advantage in, not an absolute advantage. His example was Portugal and England. That Portugal had an absolute advantage in making both wine and cloth. But England had a relative advantage internally in making cloth over wine, so if the Portuguese focused on creating wine and the British focused on making cloth, they would both be better off.
Better off as nations. Because comparative advantage, as it’s taught in school where you hear that everybody wins from trade, they are talking about trade between nations. But as we’ve learned throughout this podcast, that totally ignores the individual winners and losers within each nation.
Nick Hanauer: The prosperity of a society really is linked not so much to how and what you trade but what you have the capacity to make.
David Goldstein: You can’t trade if you don’t have something to trade.
Nick Hanauer: What’s important about that thought is that your capacity to make things in inextricably intertwined with your capacity to make adjacent things. That you can’t make rope unless you can make string. And you can’t make string unless you have access to fiber and so on and so forth.
David Goldstein: And when you actually look at real modern market economies, the measure of a healthy economy and the best predictor of economic growth of any measure is the complexity and diversity of the economy. If you specialized only in the things you are best at, as comparative advantage tells you you should, and by the way as economists have told developing countries to do, then you end up with an economy that’s relatively simple and not complex and diverse.
And that diversity is important for a number of reasons. One, just like in the biological world, economic diversity makes you more robust. If things change, if one industry goes a little down, well you still have other industries to back you up. The other is that notion you talked about of adjacent product space. That you don’t create whole new industries over night, you tend to move into adjacent opportunities so if you grow peanuts, maybe you’re going to now going to go a little higher value and your country will export peanut butter and you’ll process it there.
If you’re doing peanut butter, well now you’re going to process it a little further and you’re going to specialize in higher value peanut oil. And if you are doing peanut oil, you can do other oils and maybe you’ll get into refining petroleum and start exporting that. Bit by bit, piece by piece, you start to expand your technologies, the available knowledge and know how, the breadth of your industries and invent whole new product categories.
Nick Hanauer: And that’s where prosperity really comes from in the long term. So some countries, governments, have worked assiduously to increase the diversity of their economies and to defend relatively weaker parts that may not, on a stand alone basis, make any sense-
David Goldstein: Well the U.S. did that under, that was part of Hamilton’s vision for the U.S. We were essentially Britain’s China by the end of the 19th century. We were exporting all of our products into the British market.
Nick Hanauer: But today Germany does a great job of defending industries, not because they stand on their own necessarily, but because other industries depend on them. The textiles industry may not make any sense until we have cotton anymore, but it may make a huge amount of sense if we’ve graphite or Kevlar, or a whole bunch of other things which you can’t do if you’ve lost the ability to weave.
If Trump were to cut off our ability to trade with China, the truth is that the United States for instance could not probably make iPhones here anymore because we have essentially eviscerated all of the industries that made doing that possible and let them go to China. And was it efficient in the near term? Maybe, but it may be very harmful in the long term.
An economy that is diverse and complex, will always in the long term out compete an economy which is very narrowly focused.
David Goldstein: Because most of the value is in the complexity. There is a lot more value in exporting steel than iron ore. There’s a lot more value in exporting specialty metal products than there is in raw steel.
So the question is how do we balance those short term efficiencies that you get from unbridled free trade with the long term necessity of maintaining a diverse and complex economy?
Nick Hanauer: I have no idea. That’s the problem is that it’s complicated.
David Goldstein: That’s something that you and I have in common.
Nick Hanauer: It’s complicated. We have to acknowledge that anything ewe do will have pluses and minuses, and we have to robustly account for the minuses.
David Goldstein: The winners need to compensate the losers because the losers are not losers because of something they did wrong, but because it’s accidents of history, bad timing, bad luck, et cetera.
Nick Hanauer: Context.
David Goldstein: Right. It’s not your fault if your employer decides to export manufacturing to Mexico or China or wherever.
Nick Hanauer: And in the next episode of Pitchfork Economics, we are going to be talking to the author Naomi Klein about her new book, On Fire: The Burning Case for a Green New Deal.
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