IF NOT TARIFFS, WHAT? EASE MOBILITY, ACCEPT IMMOBILITY

Since the main problem with trade is that it creates many more losers than the Stopler-Samuelson theory suggests, it seems any solution should involve either limiting the number of losers by helping them move or change jobs, or finding a way to compensate them better.

One side benefit of the negative effect of trade being so concentrated is that we actually know where to look for the victims. Why not target some help directly to the workers in industries that lost out to the China shock? Indeed, this was the idea behind the Trade Adjustment Assistance program. The TAA pays for training (up to $10,000 a year) and the trained workers get up to three years in unemployment benefits, precisely to give them some time to land on their feet. The only problem, as we saw, is that the program remained tiny.

Sadly, this was not because TAA was ineffective as a concept; it was just severely underfunded. To qualify for the program, a worker must petition the Department of Labor. A caseworker is then allocated the worker’s file and tasked with determining whether in this case the job in the worker’s former firm disappeared because of competition from imports, the offshoring of jobs, or ripple effects from the trade-induced distress of other companies that either bought from or sold to that firm.

A complex judgment goes into this decision, and some caseworkers are much more willing than others to rule in favor of the worker and allocate them aid. One study makes the case that the assignment of a petition to a particular caseworker, and therefore the eventual judgment, is more or less random.⁷⁸ Using a database of 300,000 petitions, it compares workers assigned to more or less lenient caseworkers. Workers assigned to more lenient caseworkers are more likely to receive the TAA and therefore more likely to be trained, move sectors, and earn more money.

So why was an effective program like the TAA underfunded and underused? Partly because neither policy makers nor the public knew it worked until that study came out, quite recently. This probably reflects the lack of interest in these kinds of policies among trade economists. Economists also don’t like programs that rely so much on a judgment call; they worry about potential abuse. At a political level, spending large sums of money on trade adjustment would have made it more explicit that trade adjustment costs are in fact large, and this may not have been palatable.

One obvious path is therefore to expand a program like the TAA, making it both more generous to individuals and more easily awarded. For example, the revamped TAA could be modeled on the GI bill, paying enough for someone who is a “veteran” of a trade shock to get a new start with their education. The GI Bill provides up to thirty-six months of education benefits, pays for full tuition at public schools, and up to $1,994 toward tuition for a full-time student (and a prorated rate for part-time programs), as well as a stipend for housing.⁷⁹ The new TAA could be something like that, combined with extended unemployment insurance for the duration a person is in school. And since we know there are strong local market effects from trade disruptions, the TAA could be more generous in regions known to have been particularly affected by trade shocks, to avoid sending the affected labor markets into a downward spiral.

More generally, much of the hardship caused by trade is related to the immobility of both people and resources. The free movement of goods across borders is not matched by movement within countries. All the solutions we discussed at the end of chapter 2 to encourage internal migration, and the seamless integration of movers (subsidies, housing, insurance, help with childcare, etc.) would help in adjusting to trade shocks.

But it is also clear that mobility, TAA induced or not, is not the ideal solution for all workers. Some may not want to, or not be able to, be retrained; others may not want to change their job, particularly if this involves moving. This may be especially true for older workers. For them retraining would be difficult, and they might be less likely than younger workers to find a new job afterward. Indeed, a study found that after mass layoffs, older workers find it very difficult to find another job. Two and four years after losing their job, men and women swept in a mass layoff at age fifty-five were at least twenty percentage points more likely to be unemployed than those lucky enough to escape job loss at fifty-five.⁸⁰ This kind of job loss has a permanent effect on younger workers as well, but the impact is nowhere near as large.⁸¹

Older workers who get fired also tend to be those who spent a long career working at a particular job. For them, the work they do provides a sense of pride and identity and defines the place they have in their communities. It is difficult to compensate them with an invitation to be trained to do something entirely different.

Why not then offer to subsidize firms adversely affected by trade (particularly those located in the most affected regions) as long as they keep employing older workers? Larry Summers (the head of the National Economic Council from 2009 to 2012) and Edward Glaeser have recently argued for a payroll-tax reduction in some specific areas.⁸² A tax reduction may, however, be insufficient to convince a firm to keep its employees if it has become uncompetitive.

Of course, the proposal is not without practical difficulties. Affected firms would need to be identified, and there would certainly be lobbying and attempts to circumvent the rules. The proposal may be seen as a form of trade protection and run afoul of WTO rules. But these issues could be solved. The principle of identifying firms that have been subject to trade shocks is already accepted by the TAA program, which has developed a mechanism to adjudicate claims. To avoid casting it as trade protection, the provision could be extended to jobs lost due to technological disruptions.

The overarching takeaway is that we need to address the pain that goes with the need to change, to move, to lose one’s understanding of what is a good life and a good job. Economists and policy makers were blindsided by the hostile reaction to free trade, even though they have long known that as a class workers were likely to suffer from trade in rich countries and benefit from it in poor countries. The reason is they have taken it for granted that workers would be able to move jobs or places, or both, and if they were not able to do this, it was somehow their failing. This belief has colored social policy, and set up the conflict between the “losers” and the rest that we are experiencing today.