Uncommon Knowledge

The Historical Benefits Of Trade

via Uncommon Knowledge
Tuesday, March 28, 2017

Recorded on December 2, 2016

Professor Douglas Irwin defends the benefits of free trade and explains why protectionism, high tariffs, and currency wars could cause economic problems. Irwin explains the misconceptions around trade surpluses and deficits and the historical consequences and benefits of trade. He talks about an absolute versus comparative advantage with trade and why and how a trade deficit with China still benefits the United States. Irwin refers to Adam Smith’s view of trade in explaining the absolute advantage of trade. Smith argued for unregulated foreign trade, reasoning that if one country can produce a good, for example, steel, at lower costs than another country, and if a different country can produce another good, for example,  an iPhone, at lower costs, then it is beneficial to both parties/countries to exchange those goods. This has become known as the absolute advantage argument for both international and domestic trade.

Irwin notes that trade still benefits the United States enormously and that striking back at other countries by imposing new barriers to trade and/or ripping up existing agreements would be self-destructive. Finally, Irwin talks about problems within the American economy, how too many people are not working, which cannot be blamed entirely on the trade deficits. Some reasons people cannot find jobs are mechanization, efficiency, productivity, technology, and skills. Irwin discusses a few options for helping people with limited education and few skills survive, including paying a basic wage, improving our educational system, and reducing regulations so the costs of hiring an employee are not as steep.


Peter Robinson: Free trade. Donald Trump has attacked it, but economists celebrate it. Now that he's become our 45th chief executive, Donald Trump can speak for himself. Here today to speak for economists, one of the nation's leading trade economists, Douglas Irwin. Uncommon Knowledge, now.


-Peter Robinson: Welcome to Uncommon Knowledge. I'm Peter Robinson. Douglas Irwin did his undergraduate work at the University of New Hampshire, then received both his MA and PhD from Columbia. He served on President Reagan's council of economic advisor’s staff, has taught at institutions including Yale and the University of Chicago, and has been the visiting scholar at the Hoover Institution here at Stanford. For almost two decades now, Dr. Irwin has been a professor of economics at Dartmouth College. Among his many publications, Free Trade Under Fire, the most recent edition of which was published in 2015. Doug Irwin, welcome.

-Douglas Irwin: Thank you.

-Two quotations. Donald Trump: "I am in favor of free trade. "But I want great deals for our country." Close quote. Second quotation, you, Doug Irwin, writing this past summer in Foreign Affairs, quote: "Trump portrays trade as a zero-sum game. "That's an understandable perspective for a casino owner." Close quote. Zero-sum game, understandable for a casino owner. Explain yourself.

-Well, he owns the casinos in Atlantic City and elsewhere, and if the house wins, that's because the patrons are losing, so he's counting on his benefit being extracted from the customers that come in.

- Both parties do not win at the same time.

- Exactly.

-Got it.

- People lose, the house wins.

- Okay, and what's wrong with that view?

- Well, it's the wrong view of international trade. It's sort of right from a businessperson's perspective in terms of the particular deals they're involved with. If he buys some land, someone else doesn't buy that land. So, he gets to build the building. The other person loses. But international trade is a little bit different. It's an exchange between countries, producers and consumers in different regions, and both sides benefit in the aggregate from those agreements.

- All right, Free Trade Under Fire. The traditional case for free trade. Very briefly, I wanna take you through the case that you make in your book. "The traditional case for free trade "is based on the gains from specialization and exchange." Explain those terms.

- No one can explain it better than Adam Smith, and I'm wearing the Adam Smith tie for you, because he in The Wealth of Nations in 1776 made one of those eloquent, powerful cases for trade that we've ever seen, and basically said countries can only become rich by specializing. The division of labor allows people and producers to specialize in certain activities, become more productive, more efficient, and international trade is just a way of extending that division of labor, not only within a country but between countries. So, if we have a lot of agricultural land and a lot of sophisticated capital, we can leverage that and use that to produce goods that other countries would want, and other countries can specialize in labor-intensive goods, if they have a lot of labor. So, we can benefit by exporting things that we're good at, and we benefit also from importing things that other countries are better at than we.

- And now explain...This, in my understanding, my reading of it, in any event, is one of the most subtle concepts. There's really no bottom to the concept I'm about to name, but you have to understand it at least superficially to grasp free trade, and that's comparative advantage. Specialization and exchange, Adam Smith gets that. We come about a century later, or 50, five or six decades later to David Ricardo and comparative advantage.

- Yep, that was actually not too long after that. So, in 1815, a little bit before then, actually, David Ricardo was on vacation in Bath in England. He happened to pick up, at the place he was staying, he had a copy of The Wealth of Nations. And he read it. He wasn't an economist. There was no profession of economics back then. He read it, became engrossed, and he quit his day job, which was trading stocks in London, became an economist, wrote The Principles of Political Economy in 1817, and in that, he has a chapter on foreign trade. And he said, Adam Smith got some things right and some things wrong on trade. He's generally right about the division of labor and specialization, but what happens if one country is better than others in doing everything? Shouldn't it do everything for itself and import nothing? Or what if you're a country that can't do anything as well as another country in terms of your productivity advantage? Shouldn't you just import from countries that do things best and not export anything yourself? So, in other words, he was raising a problem that Adam Smith hadn't quit addressed.

- Right.

- You don't really need to understand comparative advantage to understand the gains from trade, but it is a subtle, important concept.

- It's counterintuitive.

- Very counterintuitive.

- Okay.

- 'Cause what is says, the bottom line is, or the counterintuitive bit, is that we should import things that we could actually produce ourselves more efficiently than other countries. So, if you look at our textile industry, our apparel industry, in terms of sheer productivity, we're much more efficient than other countries. Other countries may do things less productively than we do, less efficiently, but we can still gain by specializing where our comparative advantage, our relative advantage, is greatest, and then using that to buy goods from other countries where their relative advantage is the greatest, even if we could produce those goods better ourselves. So, I guess the household division of labor is sort of one way to explain this. So every household has certain tasks that they want to accomplish. House has to be cleaned, food has to be made, and what have you, and I always tell my class that my wife is superior in all those things to myself. She is a better... She cleans the house better, she's a better cook.

- That, I can testify to, yes.

- Yes. So, does that mean that I should do nothing, come home, sit home, and turn on the TV while she cooks and bakes and does all these other things? That would be one way of doing it.

- By the way, that's the argument I attempt to use in my home, but go ahead.

- It doesn't necessarily work.

- No.

- Because I may be a really poor cleaner, but I'm actually just marginally worse than her at cooking. So, if we have a certain number of hours that we have to devote to our household activities, it makes sense, it's better for both of us, if we specialize in the good where our relative advantage is the greatest. Now, once again, she has an absolute advantage over me, but I have a comparative advantage, or I sometimes put it, my disadvantage is least in cooking.

- Ah.

- And so therefore, my margin of inferiority is least there. That's what I should be doing, and then she can do things where she far exceeds me in terms of her ability.

- Okay. So, we've got the case for free trade. Now, very briefly, the post-World War II regime of global free trade in which the United States is a leader in hammering out the new free trade, much freer trade after the Second World War than through the 30s and so forth. And give us the practical effects on this nation in particular of free trade over these last seven decades. Freer and freer trade. There are negotiations that expand free trade. But what has been the practical experience?

- Can I back up just for a moment...

- Of course.

- Because there are really two parts to the case for free trade. One is the one we've just been making about specialization, gains from trade, that's how...That's an important part of it. But you know, one of the most important concepts of economics is, what's the alternative? And so, the case for trade is also, the case for protection is not very good, and protectionism does not serve economies well.

- Protectionism is, you better just explain the basic concept here.

- Sure. Raising trade barriers to interfere with trade, to limit trade, in the hopes of helping the domestic economy. In other words, sort of withdrawing from world trade to some extent.


- And the US has a history of actually having tried that for some period of time, and the reason I want to mention this before we got into the post-war period is because right before that, we, in 1930, passed the Smoot-Hawley Tariff, which Ronald Reagan would occasionally talk about in his speeches, 'cause he was alive and remembered that period. And that was a period where we raised tariff barriers, trade barriers, to new, high levels, right on the cusp of going into the Great Depression. And you might think that would actually help the economy. We're gonna import less so we can produce more of those goods that we would have imported at home. Create jobs and what have you. It doesn't work out that way, because what happened is, not only did you raise prices to consumers, but other countries retaliated against our exports. In other words, they saw, if we were going to become protectionists and raise our trade barriers, we're gonna do the same thing against the United States. And we exported a lot of foodstuffs and raw materials, manufactured goods. Other countries raised their trade barriers against our exports, and so we lost as many jobs in our export industries as we gained in stopping imports.  So, that is sort of a disintegration of the world economy, and to get to your question, the reason why, after World War II, the United States embraced this idea of freer trade around the world is because the 1930s was a disaster in terms of the world economy. It wasn't just the Great Depression in the United States. Trade relations among countries deteriorated. Every country became much more autarchic, meaning trying to be self-sufficient.


- Not trading with one another, and it was an attempt to unwind that, because the theory of the time was, the idea at the time was, we can't build a prosperous post-war system, prosperous post-war world, unless we have a strong economic foundation for it. The way we can enhance the economic foundation is by having freer trade among countries. So, the idea was not just that protectionism had bad economics effects, but it had deleterious political effects as well, in terms of exacerbating friction and diplomatic problems across countries. So, France and Germany have always been fighting with one another.

- Right.

- If we get those two economics together and bring down the trade barriers between them, we can get goods flowing between countries, not armies flowing flowing across borders.

- And it worked.

- Absolutely. So, we established something called the General Agreement on Tariffs and Trade, which was basically a conference bringing major countries together after World War II. We all agreed on sort of a code of conduct of world trade. We began to reduce trade barriers in stages throughout the 1950s, 60s, 70s, and so on. We reduced those trade barriers. We've seen an explosion of world trade, an explosion of world GDP, and western Europe, Japan, United States, the key core countries at this time became much more prosperous as a result of that.

- Fine. Now, here's why you're wrong. I'm giving you the case against free trade.

- Sure.

- Every year since 1976, the trade deficit. Every year since '76, the values of goods and services that we've imported into the United States, in incoming goods and services, has exceeded the value of goods and services that we've exported. Donald Trump, quote: "Our trade deficit is like having a business "that continues to lose

money every single year. "Who would do business like that?" Close quote. Professor?

- Well, to judge whether a trade deficit or a surplus is a good thing, we have to sort of understand what's driving it. So, I brought a friend with me, Alexander Hamilton, to help explain this. So, here's my Alexander Hamilton, the $10 bill.

- Got it.

- And so, let's say we're, country's engaged in trade.So I say, you have some good products, I'd like to buy $10 worth of products. I'm the United States.

- I'll sell you this book for 10 bucks.

- Okay, there you go.

- Which, by the way, is a heavy discount. I paid full retail for that, by the way.

- Right. Now, you have $10. Now, you're another country. You can't pay your workers with those dollars. You have a different currency.

- No.

- The euro or the yen or what have you. And I have some goods to offer, this cup here, and you say, I wanna buy that for $10. Well, we have balanced trade. We've traded. I gained from buying the book, you gained from getting the cup. But actually, what's gonna happen is, you say, well, of this $10, I only wanna spend seven dollars on goods from you. Now you're left with three dollars. Well, what do you do with that? You can't use dollars in your own country. It's a different country. You're gonna invest those three dollars in the United States, in treasury bills, in stock, stocks, in land, buying a firm, starting up a firm here or something like that. In other words, the whole balance of payments will balance. We'll get the $10 back, but it may not all be in terms of exports. It's gonna be in terms of a capital inflow to the United States.

- So...

- And that's basically what's going on. So, I imported $10 from you, I only exported seven dollars from you, but that three dollars still came back to the United States in the form of foreign investment.

- And for much of the 19th century, the United States ran a trade deficit, the flip side of which was that on net, foreigners were investing more, putting more capital into the United States, than we were putting in capital in those countries, and that built out the interior of the United States. It was British capital that build American railroads, for example, to a large extent, right? 

- Right, exactly.

- Okay. So, the flip side...A trade deficit, nobody likes the sound of the word deficit. That's one way of describing it, but an investment surplus is different words for exactly the same phenomenon. Is that correct?

- Exactly. So, the balance payments are sort of divided to what's called the current account and the capital account. The current account is basically the trade deficit. So we'd have a capital account surplus, a financial account surplus.

- Got it, all right.

- And just an important point here, the other country, then, is making foreign investment. You're running a trade surplus, but you have a capital account deficit, because you're making a foreign investment. Japan's been doing that for some time. Japan's had a big trade surplus for many, many decades. Its economy is floundering. So, running a trade surplus...

- A trade surplus is no indication of a strong economy.

- Exactly.

- No necessary indicator.

- Not necessary, yes, that's right.

- All right. Argument against free trade number two, jobs. Critics argue that free trade has hollowed out American manufacturing, sending tens of thousands of jobs overseas. Donald Trump, quote: "I'm going to bring jobs back from China, Mexico, Vietnam. They are taking our jobs." Close quote. Professor Irwin.

- We have lost jobs in manufacturing. The share of the labor force in manufacturing has been declining secularly since 1950 or so.

- Secularly means long-term trend.

- Long-term, it's almost a straight line down, and we're not uncommon in that. A lot of developed countries have seen a greater share of their labor force shifting to services rather than manufacturing. In some sense, it's what happened with agriculture as well in the 19th century.  We shifted from an agricultural economy to a manufacturing economy, now to a service economy. Foreign trade has played a very small role in that transition. If you look at... So, the most important reason for that is because of technology.  Productivity advances are so great in manufacturing. We can make more and more stuff with fewer and fewer workers. So, the steel industry's a great example. In the 1980s, it took 10 workers to make a ton of steel. Today, it takes two workers to make a ton of steel. Now, the import market share has not grown in steel. We're not being besieged by steel.

- We're still making the same proportion of the steel that we use in this country.

- Exactly, exactly.

- That's the point, okay.

- So, it's about 25% now. It was about 25% in the 1980s. So, we're not being besieged by imports of steel, but we need fewer and fewer workers to make that steel.

- But that's a good thing, because that's how an economy grows. We can make more with fewer people.

- Exactly.

- Right?

- That's how we fed America with one percent of the labor force. That one percent of the labor force...

- Agriculture became persistently a secular trend, long-term trend, more and more productive.

- Exactly. We can feed not just ourselves, but the world, and now with manufactured goods, at least in terms of steel, autos, we have many fewer auto workers, but we're still making lots of trucks and cars.

- Wages. If you've...

- Oh, can I just back up, 'cause once again, there's always a qualification.

- Oh, all right.

- I'm trying to leave you exposing yourself, but you're covering every... Sorry, go ahead.

- Apparel. We have lost a lot of jobs in apparel. Also apparel output is down. So, we are importing a lot more apparel than we did before. We have lost those jobs, partly because of technological change, but also because of imports. So, when you say imports cause...

- You write...Let's get right to this case. You write in this book that China is a special case, that as imports from China surged, particularly during the 1990s, as I recall, it's through about the early 2000s, isn’t that right?

- Particularly the period from 2000 to 2007 or 2008.

- Oh, I see, so the early 2000s. As imports from China surge, they're concentrated in certain industries, and in this country, those industries were concentrated in certain regions, largely the South, and people, the harm... Well, you describe it. How do you put it accurately? People got hurt. They really did.

- Yes, absolutely.

- And it was free trade that hurt them. 

- It was trade that hurt them. We didn't change our policy regarding China at that time. We did extend them permanent normalized trade relations, so we had been giving them pretty good access to our markets before. We made that more permanent around the year 2000. But also, what happened is that China joined the WTO. A lot of their tariffs in inputs went down, making their businesses more efficient. They were able to reduce prices and export a lot more than they had before. So, a lot of the imports were in apparel, furniture, and those industries got hammered.

- And so, Donald Trump has a point. We shouldn't have let that happen.

- Well, we did lose, you know, a couple hundred thousand jobs in apparel, but millions of American households got much cheaper clothing, a greater variety of clothing. They were able to save a lot of money, and the way that I put it once is that we have about 44 million people under the poverty line here in the United States. 44 million, and if they can save $100, $200 on their clothing budget every year...

- That's a big deal.

- That's a lot of money, and yes, 100,000 workers, 200,000 workers in apparel may have been laid off as the result of imports, but you trade that off against the savings for all these people at the poverty line, let alone everyone else, and you have to think about, well, should we have stopped all those imports and raised those apparel prices and imperiled those households that were impoverished? There's some difficult trade-offs that just simple sound bites don't quite get it.

- Okay, I'll come back to that. Free trade in American history. Donald Trump isn't the only one who's skeptical of free trade. The founders sought to protect American industry from international competition. Alexander Hamilton, quote, he's writing of, quote, "the expediency of encouraging "manufacturing in the United States." From the Civil War to roughly World War I, the nation imposes a system of tariffs, a policy of protectionism. Here's Abraham Lincoln, the sainted Abraham Lincoln, quote: "The abandonment of the protective policy by the American "government must produce want and ruin among our people." Close quote. That could have been Donald Trump, it could have been Pat Buchanan, who writes often against international trade. The abandonment of protectionism must produce want and ruin among our people, close quote. And during this protectionist period, the country grows and grows and grows and becomes the greatest industrial power on earth. Would you like to retreat?

- Absolutely not. So, I have a forthcoming book next year called Clashing about Commerce: A History of US Trade Policy. And I go into all these debates and talk about the real economic history behind them. So, yeah, it's true that around 1860 we raised tariffs fairly significantly. They were high for a very long time after that, and the economy did very well. But we're also a large continental country with internal free trade, a lot of competition. We're still able to import the best technology in the world, so we were always at the technological frontier. It's true we probably didn't trade as much as we would have if we had had open trade, but a lot of our manufacturing industries were already well established. A lot of that growth took place in the service sector. That was the high productivity sector of the period, and so tariff had very little to do with us becoming a great power in the late 19th century. It wasn't so much a manufacturing phenomenon, per se.

- So, suppose...So what you're saying is, all right, there was a protectionist policy in place, but if you actually look at the details, the items that were protected, the tariffs, it didn't real matter that much. The economy was a small part of the entire economic picture. And I now put it to you, Professor Irwin, that it would be just fine for Donald Trump if he pursues a by and large pro-growth economic agenda rolling back regulation, rationalizing taxes, cutting the corporate tax rate, all the things he's talking about doing, and if the political price of that is pursuing a protectionist policy, which is big words, but actually very little effect on the economy, that's okay. We ought to be able to live with that. Yes?

- Well, once again, domestic economic performance is determined by a whole range of factors. So, you can fiddle with trade a little bit, but I think a lot of the things you point to, corporate tax reform, burden of regulation, those can have a much bigger impact than, you know, a lot of other policies regarding trade. Starting a trade war would not be productive, however. It wouldn't enhance, I think, that agenda, because we tend to export technologically sophisticated goods. A lot of machinery, Boeing aircraft and things of that sort. And we put those jobs and those sectors in jeopardy because other countries would retaliate if we tried to protect our apparel industry or what have you.

- Even before he became president, he said he'd yank us out of the TPP, Trans-Pacific...Trans-Pacific Partnership.

- Right.

- Which doesn't actually involve China. It involves a number of countries on the Pacific rim and us, and because he campaigned against it and won the election, that's already dead. He didn't have to withdraw us. The Obama administration has chosen not to pursue it, knowing that it would face defeat in the Senate. Okay. Good thing or bad thing.

- It's a bad thing, but it's not a done deal, a dead deal. Already, members of Congress, Chairman Brady of the House Ways and Means committee.

- Kevin Brady, eighth district of Texas, go ahead.

- Yes, and the Speaker of the House have said TPP is on hold. We think there are important benefits there for the American economy, and even though the president-elect has said we're not gonna pursue it, we're gonna keep it alive and maybe wait for more opportunity in a moment, or perhaps renegotiate parts of it. So it's very interesting. This will be a very interesting period for trade, because usually, presidents are the responsible ones, and they're trying to reign in the irresponsible Congress that wants to throw out barriers or do this or that. That was certainly the case during the Reagan administration. He always said, you know, I will veto any protectionist bill that comes from Congress. Congress is the irresponsible party now, here. Today, we have a president who may be willing to rip up trade agreements or start trade wars, and now it's the leading members of Congress who are saying, wait a second. Congress is now being more responsible. Let's not be too abrupt here.

- A couple of final questions, Doug. Here's Pat Buchanan, quote. This is longish, but it says something. Quote: "In 1985, China's trade surplus "with us was a paltry six million." Not billion, six million. Tiny. "Last year, China ran up the largest trade surplus "in history at our expense, $365 billion. "To understand why Detroit looks as it does, "while the desolate Shanghai that Richard Nixon visited "in '72 is now the great and gleaming metropolis of 2016, "look to our trade deficits." Now, you've already argued that trade deficits can't be responsible for that kind of change. But it's unnerving. Detroit has been laid waste, and Shanghai is a great and gleaming metropolis. What happened?

- Well, a lot of things going on there to impact, but what, first of all, that's that sort of zero-sum thinking that I think is wrong, that they've gained at our expense. Remember, we're still making a lot of cars and trucks. We're not making them in Michigan. They've gone down south. Not to Mexico, but to Tennessee, Alabama, and what have you, so one thing you have to ask about the state of Michigan is, what is it about some of these Rust Belt states where they've allowed manufacturing to flee, to stay within the United States and go to other states that are, have different laws regarding unions...

- It's the union, unions.

- This climate, in terms of taxes and things of that sort.  So, manufacturing jobs have left the north, but they're elsewhere in the United States. That's certainly true with the steel industry, where the steel industry is sort of spread around due to these mini-mills. It's not so much due to foreign competition.

- And the rise of China? They had to have been taking advantage of us in some way.

- Well, let's go back and think about that trade deficit, because here's why bilateral trade deficits can sometimes be very misleading. So, what kind of phone do you have?

It's not on me now, but I have an Apple. Apple, iPhone.

-So, what does it say on the back of the iPhone?

- Designed in California.

- And?

- And manufactured in China, I think.

- It says assembled in China.

- Assembled in China.

- Assembled in China. So, the unit cost of an iPhone is about $150. That's not the retail price. That's the unit cost that Apple declares when they import this from China. It's not made in China. It's not manufactured in China. The camera came from Germany. Microprocessors came from Korea. Other component software came from the United States. It all goes to China where it's assembled, which is why they say, assembled in China. It then comes to the United States, and it becomes a $150 import from China. Do you know what the Chinese content of that iPhone is? About three dollars. But we don't say, we just bought three dollars' worth of stuff from China. We attribute all the value of what the US had exported, coming from Japan, Germany, to China, because that's the last place it came from. So, we say it's a $150 import from China that's only three dollars' worth of Chinese content.

- It's only three dollars' worth of Chinese physical content, or the physical content plus the labor...

- Plus, the labor, plus the labor.

- Plus, the labor. The total Chinese contribution is only three dollars.

- Five dollars, three dollars, something like that, depending on how it's portioned. So, the whole point there is that, when we say that we have this enormous trade deficit with China, you know, we're attributing a lot of stuff to China that's not really coming from China. That means our trade deficit with Germany is a little bit higher, because we got that camera actually indirectly from Germany via China.

- Got it. All right, Doug, last question. This is you writing, once again, in Foreign Affairs this past summer: "The real problem is not trade "but diminished domestic opportunity and social mobility." You wrote this this past summer, but think about states that Donald Trump won that nobody expected him to win. Pennsylvania, Michigan, Wisconsin. "The real problem is not trade but diminished domestic "opportunity and social mobility. "Technology has shrunk manufacturing "as a source of employment. Construction work has not recovered from the housing bubble. "And the military turns away "80 percent of applicants as unqualified. There are no sectors of the economy that can employ "large numbers of high-school-educated workers." The real problem is we're so productive in manufacturing per person now that we can't employ as many people as we used to. Last question. You are now advising president-elect Donald Trump. What should he do?

- Well, what's behind that quote of course is work by Charles Murray and Robert Putnam and others talking about, if you drop out of high school or are just a high school graduate these days, once again, there used to be opportunities for you in the economy.

- Right.

- And those have been shrinking. Somehow, we have to either give those people the skills that make them employable in the 21st century...

- So, one implication is education... Oh, go ahead.

- Education reform, some sort of vocational training, a whole bunch of things can be tried there to at least give them the skills that, firms wanna hire them and what have you. Otherwise, it's very difficult. Once again, many people have sort of thought about what can we do for these workers, what can we do for these people? Whether you create make work schemes, like on the New Deal, WPA. If you can't join the military, there's no manufacturing jobs for you, and housing construction's not at a high level, what are the opportunities for you? It's a difficult social problem, I think, that we're facing this generation for some time, and I don't have easy...

- But the fault is not trade. The blame... Ascribing the blame to trade is a mistake.

- Once again, we're still producing a lot of manufactured goods here, it's just we need fewer works to produce them.

- Okay, so I said that was the last question. I just told a lie. Here's the last question. Productivity... As the country became more and more productive in agriculture, what was it, 1900, 90% or close to 90% of workers were engaged in agriculture, and now it's one percent? We're all richer. Everybody understands that. Manufacturing doesn't seem to be following the same path. Robots come in, artificial intelligence makes machines more and more and more productive. People can't find work. The adjustment is going to be very hard. It doesn't seem to be that there's going to be a smooth adjustment. What do you do? A basic income? Give people money, not two years of unemployment or six months of unemployment, but $15,000 a year, $20,000 a year so people can afford to live and just simply admit that certain sectors of the American population are going to be unemployed for long portions of their productive life? Is that what we have to do? Is that what we're facing?

- That's a big problem that we face as a society.

- So, do you buy this argument that actually productivity is happening... Increases in productivity are coming so fast that it really is going to throw people, on net, throw people out of work.

- Once again, we'll create jobs elsewhere to employ those people. I mean, we're speaking late December, mid-December, and the unemployment rate was just announced at 4.6% percent. So, the headline unemployment rate is fairly low, pretty good. But a lot of people have dropped out of the labor force, and the question is how to get them back in, and so here's where ideas such as the Earned Income Tax Credit, where basically, for a firm to hire a worker, they have to take in a lot. They have to pay taxes on that worker. They have to pay healthcare expenses. It's a very expensive proposition. We have to make it cheaper for firms to hire workers. So that means business taxes and things of that sort, but the Earned Income Tax Credit is another way that once again, in a bipartisan way, Republicans and Democrats have both endorsed that. President Obama did, as did Paul Ryan, Speaker of the House. They both think it's a good idea. It's effectively an inducement for people to get work where the government will help them if it's below some standard. It's almost like Milton Friedman's negative income tax.

- Right, right.

- And that's a way you can get people at least work experience, which is so important, and get them on the ladder where they can potentially see doing better in the future. But if you're not on that ladder, if you dropped out of the labor force, you have very few prospects ahead, and we can't have that. We have to get people back in the labor force at least doing something just so they can support themselves in the future.

- All right, here's the last last question. The Trump transition team now is talking about four percent, maybe even a little more than four percent growth, within a couple of years. They really seem to believe, or at least they're saying that they believe that, with the economic program that they intend to move in the first 100 days, taxes lowered, corporate tax drops considerably, making it easier for corporations to repatriate money, the economy will roll back regulations. The economy can recover quickly, and there will be growth of the kind that we haven't seen in almost a decade now. Do you buy it? I guess what I'm asking is, are you fundamentally optimistic, or will more and more of America start to look like Detroit?

- Oh, I'm generally optimistic about America, because once again I think there's still huge opportunities. We're a large, open market with a lot of capable people. Long run, always bullish on America. Whether you can achieve four percent growth, I mean, think about the Reagan boom in the 1980s. That was after coming off a big recession, and so we had a lot of slack in the economy, pulling people back into the labor force, and we could grow quite rapidly. But right now, as we just mentioned, you know, there are people on the sidelines, but the unemployment rate is fairly low. We've had an expansion for some time, albeit from a very difficult financial crisis. If the growth doesn't come from a lot of people moving into the labor force, it comes from capital accumulation. Well, that means we have to increase our savings rate or really provide some big inducement for investment, or it has to come from new technology and productivity. It's hard to see where that magically can appear. So, I'd be skeptical about a four percent sustainable growth rate, but certainly, we always have to be thinking about what policies can we do to improve the performance of the economy and increase economic growth?

- All right. Short-term skeptic and long-term optimist, Professor Douglas Irwin, author of Free Trade Under Fire, thank you.

- Thank you.

- For Uncommon Knowledge and the Hoover Institution, I'm Peter Robinson.




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