Friday, January 27, 2017

Making the Rust Belt Rustier


Photo
Ambridge, Pa., a former steel town west of Pittsburgh, was once a Democratic stronghold but supported Donald Trump in November. CreditHilary Swift for The New York Times
Donald Trump will break most of his campaign promises. Which promises will he keep?
The answer, I suspect, has more to do with psychology than it does with strategy. Mr. Trump is much more enthusiastic about punishing people than he is about helping them. He may have promised not to cut Social Security and Medicare, or take health insurance away from the tens of millions who gained coverage under Obamacare, but in practice he seems perfectly willing to satisfy his party by destroying the safety net.
On the other hand, he appears serious about his eagerness to reverse America’s 80-year-long commitment to expanding world trade. On Thursday the White House said it was considering a 20 percent tariff on all imports from Mexico; doing so wouldn’t just pull the U.S. out of NAFTA, it would violate all our trading agreements.
Why does he want this? Because he sees international trade the way he sees everything else: as a struggle for dominance, in which you only win at somebody else’s expense.
His Inaugural Address made that perfectly clear: “For many decades we’ve enriched foreign industry at the expense of American industry.” And he sees punitive tariffs as a way to stop foreigners from selling us stuff, and thereby revive the “rusted-out factories scattered like tombstones across the landscape.”
Unfortunately, as just about any economist could tell him — but probably not within his three-minute attention span — it doesn’t work that way. Even if tariffs lead to a partial reversal of the long decline in manufacturing employment, they won’t add jobs on net, just shift employment around. And they probably won’t even do that: Taken together, the new regime’s policies will probably lead to a faster, not slower, decline in American manufacturing.
How do we know this? We can look at the underlying economic logic, and we can also look at what happened during the Reagan years, which in some ways represent a dress rehearsal for what’s coming.
Now, I’m talking about the reality of Reagan, not the Republicans’ legend, which assigns all blame for the early-1980s recession to Jimmy Carter and all credit for the subsequent recovery to the sainted Ronald. In fact, that whole cycle had almost nothing to do with Reagan policies.
What Reagan did do, however, was blow up the budget deficit with military spending and tax cuts. This drove up interest rates, which drew in foreign capital. The inflow of capital, in turn, led to a stronger dollar, which made U.S. manufacturing uncompetitive. The trade deficit soared — and the long-term decline in the share of manufacturing in overall employment accelerated sharply.
Notably, it was under Reagan that talk of “deindustrialization” and the use of the term “Rust Belt” first became widespread.
It’s also worth pointing out that the Reagan-era manufacturing decline took place despite a significant amount of protectionism, especially a quota on Japanese car exports to America that ended up costing consumers more than $30 billion in today’s prices.
Will we repeat this story? The Trump regime will clearly blow up the deficit, mainly through tax cuts for the rich. (Funny, isn’t it, how all the deficit scolds have gone quiet?) True, this may not boost spending very much, since the rich will save much of their windfall while the poor and the middle class will face harsh benefits cuts. Still, interest rates have already risen in anticipation of the borrowing surge, and so has the dollar. So we do seem to be following the Reagan playbook for shrinking manufacturing.
It’s true that Mr. Trump appears ready to practice a much more extreme form of protectionism than Reagan, who avoided outright violations of existing trade deals. This could help some manufacturing industries. But it will also drive the dollar higher, hurting others.
And there’s a further factor to consider: The world economy has gotten a lot more complex over the past three decades. These days, hardly anything is simply “made in America,” or for that matter “made in China”: Manufacturing is a global enterprise, in which cars, planes and so on are assembled from components produced in multiple countries.
What will happen to this enterprise if the United States takes a meat ax to the agreements that govern international trade? There will, inevitably, be huge dislocation: Some U.S. factories and communities will benefit, but others will be hurt, bigly, by the loss of markets, crucial components or both.
Economists talk about the “China shock,” the disruption of some communities by surging Chinese exports in the 2000s. Well, the coming Trump shock will be at least as disruptive.
And the biggest losers, as with health care, will be white working-class voters who were foolish enough to believe that Donald Trump was on their side.

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