New Study Shows that Establishment Economists are Wasting Our Time

January 27, 2016


Establishment economists will defend to the death the idea that trade does not destroy jobs. Yes, I'm serious. They believe that. Really.

Instead, they say, job losers move into other jobs so there is no net job loss.  They also assume that trade deals cause no change in the balance of trade.

This matters because when economists study the TPP and other trade deals, their models find no job losses and no future trade imbalances because those bad things are simply assumed away. Those net negatives cannot happen and are not even worth inquiring about. If you think you observed trade deficits and job losses in the real world, you are simply mistaken.

That is why we cannot trust the trade deal cheerleaders at the Peterson Institute or the World Bank.

Happily, an important economic study was just released showing - GASP! - that there are net job losses, reduction in lifetime incomes for workers, and trade imbalances that result.

The authors are economists from the Massachusetts Institute of Technology (MIT), the National Bureau of Economic Research among other places. The paper is titled: "The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade."  A summary is below.

Adjustment in local labor markets [after trade liberalization] is remarkably slow, with wages and labor-force participation rates remaining depressed and unemployment rates remaining elevated for at least a full decade after the China trade shock commences. Exposed worker experience greater job churning and reduced lifetime income. At the national level, employment has fallen in U.S. industries more exposed to import competition, as expected, but o􏰀setting employment gains in other industries have yet to materialize.

As wonky as this summary sounds, it basically destroys every opinion ever uttered on trade by Lawrence Summers, the Peterson Institute, Stephen Rattner, Paul Krugman, the Cato Institute, the American Enterprise Institute, the US International Trade Commission and other when projecting future impacts from trade deals.

Yes, I know you did not believe those guys before, but this paper does actually help within the profession. Future economists can increasingly write scholarly works challenging the past dumb assumptions and not lose their university jobs.

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  • The civil engineering department builds a bridge and the bridge falls down;
    1. It is because somebody really screwed up.
    2. There will be lawsuits and somebody might even go to jail.

    The economics department builds a bridge and the bridge falls down;
    1. It is because gravity did it.
    2. It is guaranteed that nobody gets sued and nobody goes to jail.
  • As pointed out in many recent discussions many assumptions are being made incorrectly with the use of widely known flawed thinking in some economic formulas, policy and ideals-value to the point to where it is no longer about economics but more about politics…So much so that It all depends on who’s mail you want to or are carrying. With todays big data analysis capabilities I would think that using timely and more accurate data to get to the real truth of analytics and more accurate projections should not be a problem. The problem comes from those who want and purposefully distort the truth for personal gain or ideology beliefs… The president may attempt to ram through congress and senate the TPP in its current flawed format at a very low price to corporations to buy the required voted needed. This would reflect a huge return on the corporations paltry investment of about $200M to get their way with more of the same unfair trade for all Americans. More job losses, greater wage inequality, more indentured servitude workers trapped in minimum wage jobs.
  • As Thomas Sowell has pointed out in his book “Intellectuals and Society,” public intellectuals pay no penalty for being wrong.
  • According to economists, airplanes never crash and burn, they just tend toward perfect ideal stable equilibrium, time constant undetermined.
  • An old joke in economics, "… an economist is someone who, when shown something works in practice, says, “Ah… but does it work in theory?” Observed outcomes only matter if they agree with theory.

    By the way, these particular assumptions are crucial to derive mutual gain from trade. Balanced trade and full employment support “opportunity costs.” ~ Portugal’s economy works at full capacity [assumption] cannot make both wine and woolens [assumption], and will therefore specialize where it has comparative advantage and trade for the other.

    Unless they don’t.
  • Thanks Mr. Stumo once again you are spot on. I do not have any problem believing the MIT study is probably most true and accurate. The problem is that the oligarchs who control the Wall St big world money Banks has a hidden agenda so they will most likely use other sources of economic data to make their points about “Free Trade” and the reality of job losses. The regulation Glass-Steagall is desperately needed for the big banks not so much for smaller regional banks. The government does not do its job properly regulating Wall St. or trade so the oligarchs get their way since there is no real push back from the congress, senate or president. We really need “Balanced Trade” with currency and intellectual property and environmental controls.