Unusually candid Fed chief recognizes trade's dark side
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This Tuesday, Federal Reserve Chief Janet Yellen commented at the British Academy in London that, while freer trade and rapid technological change have brought much that is positive to the U.S. economy, the resulting offshoring of jobs had been devastating for many American communities. In unusually direct remarks, she acknowledged that it has been difficult to design measures to help.

These points have been made by others. In fact, the Council of Economic Advisers released an extensive study on the issue last summer. What is unusual here is the fact that the head of the Fed, which is charged with controlling U.S. monetary policy to keep inflation and unemployment low, would enter this debate.

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It would be natural that the Fed would be front and center on a discussion about unemployment. But this discussion is much less about how many people in total are unemployed than about the effects of unemployment on specific communities and specific groups in the economy.

 

The aspect of Yellen’s comments that is a bit novel here is her willingness to openly acknowledge that the trade policies advocated by mainstream economists have had major negative effects. Many advocates of freer trade point to the benefits for the whole U.S. economy, arguing that the effects on those hurt are somehow smaller and could, at least in theory, be mitigated by appropriate government policies.

Yellen’s comments might be seen in light of the general reevaluation of economic policy occasioned by Donald TrumpDonald John TrumpTrump rallies in Nevada amid Supreme Court flurry: 'We're gonna get Brett' Trump: 'Good news' that Obama is campaigning again Trump boosts Heller, hammers 'Wacky Jacky' opponent in Nevada MORE’s election victory, as well as the significant support garnered by Bernie SandersBernard (Bernie) SandersTrump's trade war — firing all cannons or closing the portholes? The Hill's 12:30 Report — Trump rips 'ridiculous' spending bill | FBI dragged into new fight | Latest on Maryland shooting Poll: Most Massachusetts voters don't think Warren should run for president in 2020 MORE’ economic populism. At least one part of that narrative was a strong wave of rejection of the bipartisan consensus on free trade, mainly underpinned by disgust about the loss of stable, well-paying manufacturing jobs in many Midwestern states.

This reevaluation is certainly overdue. Congress and a whole list of presidential administrations have diligently liberalized trade, creating first the General Agreement on Tariffs and Trade, then the World Trade Organization (WTO), while also entering into regional pacts like the North American Free Trade Agreement (NAFTA).

But they have shown no such consistency in creating policies to help those displaced by trade. Those voices expressing concern over lost manufacturing jobs have been regularly drowned out.

It would not be unfair to point out that it is easier to remove restrictions than to actually design and implement programs to help specific groups. However, this is only the beginning of the discussion. The U.S. currently spends a far smaller proportion of its GDP on “active labor market policies”— policies designed to actively improve the ability of unemployed workers to get jobs — than any of its peers among the rich Organization of Economic Cooperation and Development (OECD). Going back as far as the 1980s, Congress has limited these programs.

One of the striking symptoms of the problems Chair Yellen refers to is the large, long-term decline in labor-force participation of men without a college degree. In 1964, almost 98 percent of both college-educated and high school-educated men were either employed or looking for work. In 2015, 94 percent of college-educated men were in the workforce, but only 83 percent of high school-educated men were.

The Council of Economic Advisers’ study pointed out that the evidence suggests that the decline in labor demand — firms’ willingness to offer jobs that only require a high school degree — is the main culprit here. This is partly due to improvements in technology that have raised the educational requirements of manufacturing jobs. But it is also partly due to the closing of manufacturing plants and firms in the face of foreign competition.

There are also deep social processes involved as well. The decline in participation of African-American males has been tied to rising rates of incarceration. Former prisoners are much less likely to be employed than those never suffering imprisonment.

Additionally, increased problems with health and drugs, including opioids, has played a role in decreasing the willingness and ability of many men to participate in the labor force. Recent research by Anne Case and Angus Deaton on “deaths of despair” documents how decreasing job opportunities combined with these social and health issues have had a devastating impact on many communities.

Even this brief overview of the problem suggests that solutions will have to be multidimensional and are unlikely to be effective overnight. Improving our system of job training and retraining, bolstering vocational and technical education and working harder to help ex-convicts into the world of work all require long-term solutions. Money, certainly starting with federal money, is needed, but so is a great deal of local creativity and persistence.

Trade policy can be reformed, but imposing drastic tariff barriers or moving to an overall protectionist stance will cause more damage than benefit. Literally millions of U.S. jobs depend on our ability to export goods and services to other countries.

Ideas worth exploring include improving labor standards in trade agreements, strengthening enforcement of existing agreements’ provisions on unfair competition and aggressive use of the rights we and other nations have to take action through the WTO and NAFTA when violations occur. This last point may require some redefinition and possibly renegotiation to make it easier to identify violations.

This is a long way from monetary policy, which may be why Chair Yellen did not go into detail on these subjects. However, a thorough and thoughtful conversation on trade is needed. The prevailing free-trade consensus needs a strong dose of concern for suffering communities and groups. Protectionism, however, is not the answer. Yellen’s comments could be helpful in framing a constructive dialogue.

Evan Kraft specializes in the economics of transition, monetary policy and banking issues as a professor at American University. He served as director of the research department and adviser to the governor of the Croatian National Bank.


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