Better safety nets needed

RIGHT on the heels of my post on the gains from trade, Mike Konczal draws our attention to a new paper that sets out the balance between the gains and losses from openness in fine detail. David Autor, David Dorn, and Gordon Hanson compare local labour markets with varying levels of exposure to Chinese manufacturing imports and draw some interesting conclusions about the impact of growth in trade with China on wages and unemployment. Here's what they find:Growing import exposure spurs a substantial increase in transfer payments to individuals and households in the form of unemployment insurance benefits, disability benefits, income support payments, and in-kind medical benefits. These transfer payments are two orders of magnitude larger than the corresponding rise in Trade Adjustment Assistance benefits. Nevertheless, transfers fall far short of offsetting the large decline in average household incomes found in local labor markets that are most heavily exposed to China trade. Our estimates imply that the losses in economic efficiency from trade-induced increases in the usage of public benefits are, in the medium run, of the same order of magnitude as U.S. consumer gains from trade with China.Mr Konczal summarises the analysis:The gains from trade with China are between $32 and $61 per person.  (Don’t spend it all in one place.)  The deadweight losses are estimated at $52 from the transfer mechanisms in place.  This is a very provocative framing and numerical analysis. One conclusion is that since the consequences of trade are very real, and the frictions involved in adjusting in the short and medium term are serious, the government needs to back a free trade regime with serious employment subsidies and mechanisms for coping with the consequences of trade. Another avenue of research that is very important is the argument that the reduced employment situation being temporary and the gains from trade being permanent. Are those, particularly the first, reasonable assumptions? Under what conditions might they break?I suspect many people will be tempted to conclude from this paper that America isn't gaining anything, on net, from trade with China. But that's not what the paper is arguing. Rather, it's pointing out that there are costs from trade liberalisation, that these costs are often concentrated on relatively small groups of people, and that the transfer mechanisms used to compensate the losers are themselves quite costly.Once upon a time, America had a relatively good system for dealing with displaced workers. But the shallowness of its recessions and the rapidity with which employment tended to spring back led to complacency and neglect of these institutions. In Europe, by contrast, governments responded to persistent high unemployment with a wave of labour market reforms and investments in retraining and other measures to return workers to the labour force. Recent jobless recoveries have therefore left the American economy with a declining participation rate, while Europe has done better. The authors of the paper cited above provide a glimpse at some of the mechanisms slowing American labour market adjustments:[F]ederally funded transfer programs, such as Social Security Disability Insurance (SSDI), implicitly insure U.S. workers against trade-related employment shocks. Import exposure also predicts a large but imprecisely measured increase in benefits from Trade Adjustment Assistance (TAA), which is the primary federal program that provides financial support to workers who lose their jobs as a result of foreign trade. However, TAA grants are temporary, whereas most workers who take-up disability receive SSDI benefits until retirement or death (Autor and Duggan, 2006). For regions affected by Chinese imports, the estimated dollar increase in per capita SSDI payments is more than forty times as large as the estimated dollar increase in TAA payments.When a worker goes on SSDI, he or she is almost certain to be lost forever to the workforce. And SSDI plays a strikingly large role in cushioning workers from the impacts of trade. This is terribly wasteful. A better designed programme would help more displaced workers find jobs. That would lead to less of a loss in the country's economic productive capacity, and it would also reduce the loss from the need to tax working people to pay benefits to jobless workers in perpetuity. In other words, the reason trade with China looks like a wash is because America's labour market policies are absolutely dismal. This will come as no shock to the 15 million currently unemployed American workers. But it may surprise those who haven't faced a long period of joblessness in a while. And I'll interject here that both Democrats and Republicans are responding to the long-term budget crisis associated with rising Medicare costs by proposing to cut job retraining programmes.There's more to adjustment failures than just SSDI. As the authors note, low-skill workers are less geographically mobile than high-skilled workers. So imagine a small, textile-manufacturing town somewhere in the southern Piedmont. Growth in trade with China contributes to the closure of the local textile mills, which significantly damages the local economy. The most skilled workers then leave; they can do better in growing towns nearby, and they probably have the financial resources to relocate. The low-skill workers left behind do not move. Why? Well, they may not be able to afford to do so, but other factors make staying in place more attractive. As Ed Glaeser has pointed out, housing is durable and so housing supply is fixed. Combine fixed housing supply with a shrinking population and you get falling home prices. For low-skilled workers, the increased affordability of housing in a declining city is quite attractive. Combine that with poorly designed transfer payments, which go much farther in the falling cost environment of the declining town, and you have a recipe for immobility.But that immobility is costly to the economy. America needs to find ways to help those workers develop new skills and to encourage them to move to places where they can maximise the return to those skills. It's failing to do so, and that failure winds up wiping out many of the gains from trade.And because so much of the gains from trade with China are being offset, the popular support for trade openness with China is low and falling. That sentiment may lead to a more hostile American approach to China, and the potential costs of that development go way beyond the net benefits from trade.It really is remarkable how far off the radar these issues seem to be given the present state of the American labour market. I'm at a loss to explain it.