Assuming Away Unemployment and Trade Deficits from the TPP

Yves here. It will probably come to the surprise of many readers to learn that some economists are trying to claim that the TransPacific Partnership will deliver gains in employment. Most economists instead try to sell the TPP with a much weaker claim; “Well, the gains [finessing the rather important point of “whose gains?” will be small, but it’s still Free Trade and More Free Trade is always better!” Mind you, this premise was debunked in 1956 with the Lipsey-Lancaster Theorem.

By Timothy A. Wise, Policy Research Director at Tufts University’s Global Development and Environment Institute and Jomo Kwame Sundaram, a former United Nations Assistant Secretary-General for Economic Development and co-author of “Trading Down: Unemployment, Inequality, and Other Risks of the Trans-Pacific Partnership.” Originally published at Triple Crisis. See earlier posts on the TPP and the debate over how to model its effects here and here<

In an old joke, a shipwrecked economist is asked for his counsel on how the stranded group can be rescued. “Assume we have a boat,” he begins.

Robert Lawrence and Tyler Moran, writing for the Peterson Institute for International Economics, seem to have missed the joke in their recent repeat of the same flawed assumptions of their colleagues’ hugely optimistic assessment of the Trans-Pacific Partnership (TPP) Agreement which prompted our own paper, “Trading Down: Unemployment, Inequality, and Other Risks of the Trans-Pacific Partnership.”

Claiming to address contrarian findings that the TPP may well cause job losses and increase income inequality, Lawrence and Moran assume away the causes – downward pressure on wages and employment due to the consequent “race to the bottom” – which have made free trade agreements so controversial.

Assume We Create Jobs

To recap, in January, the Peterson Institute published new TPP estimates, updates by Peter Petri and Michael Plummer of an earlier 2012 paper. The update reiterated their claim of significant income gains from the agreement, 0.5% for the United States after fifteen years, with minimal job displacement, and with new jobs in growing industries absorbing displaced workers in declining activities.

In “Trading Down”, we pointed out that the study was flawed because it assumed full employment and unchanged national trade and fiscal balances, among other things. We applied the United Nations macroeconomic Global Policy Model to their estimated trade impacts from the TPP dropping the full employment assumption.

Even without adjusting for the assumption of fixed trade balances, we found that if one does not assume away job losses, there will be some permanent job loss, there will be downward pressure on wages, and economic growth will be slowed by the consequent decline in aggregate demand.[1]

Congressman Sander Levin (D-MI) highlighted the problems with the kind of modeling the Peterson Institute offered, calling on the International Trade Commission, in its TPP assessment for the U.S. government due in May, to stop using models that assumed away the problems. As Inside U.S. Trade reported, the new paper is the Institute’s attempt to respond to that criticism:

“Levin in February at a U.S. International Trade Commission (ITC) hearing on the economic impact of TPP argued that its analysis must include an examination of how TPP will affect wages and income inequality; a review of whether the ITC’s economic model should assume full employment; and an analysis of who will experience gains or losses as a result of TPP and other factors. Lawrence said that his and Moran’s paper aimed to answer Levin’s demands for a more holistic analysis of TPP.”

Holistic Analysis? Or Filled with Holes?

It does nothing of the sort, offering a misleading analysis instead. Consider:

  • The new study is based on the earlier Petri-Plummer model, claiming to take those results to estimate the “adjustment costs” for workers displaced by the agreement. But the same assumption, that the TPP causes no long-term job loss, underlies the analysis. So permanent job loss is excluded by assumption, with all displacement assumed to be temporary.
  • Nor do the new findings allow for trade deficits. The authors assume that TPP does not cause long-term trade surpluses or deficits, in fact, that trade itself is not a major determinant of current account balances. This, of course, flies in the face of large and persistent U.S. trade deficits, including with partners such as Korea, with whom the U.S. has seen its bilateral trade deficit nearly double since the Korea-U.S. Trade Agreement took effect four years ago. Again, the Peterson modeling assumes away the possibility of trade deficits and associated job losses.[2]
  • With no trade-deficit-related job losses, Lawrence and Moran only estimate “adjustment costs” for the remaining few displaced workers awaiting new jobs assumed for them, offering three scenarios, each smaller than the previous.
  • The first mischaracterizes our paper, suggesting that we assume that no displaced workers get new jobs. We simply do not assume that they are fully absorbed into growing industries. They estimate 1.69 million U.S. workers could be displaced over ten years.
  • The second drastically reduces that total to 278,000, by invoking the full-employment assumption that rising demand will generate new jobs and limit job loss. They acknowledge, however, that the displaced workers are nearly all in manufacturing.
  • The third reduces this to 238,000 workers who voluntarily leave manufacturing jobs, so the TPP can’t be blamed for that.
  • They then apply a formula to estimate the temporary adjustment costs (essentially lost wages) from those “displaced”. They compare these to Petri and Plummer’s reported TPP gains for the United States of $131 billion. The resulting cost-benefit calculation does not report the costs, just the ratios, for the three scenarios. The authors report that for their “most realistic” scenario (#3), with the least displaced jobs, the benefits are 18 times the costs over the 10-year “adjustment period” (2017-26).
  • Then, remarkably, when they add in the “post-adjustment years” 2027-2030, the ratio skyrockets to 115:1. Why? Presumably because with the full-employment assumption all displaced workers are, by then, happily employed in their new post-TPP jobs.
  • Finally, Lawrence and Moran claim that the TPP will be mildly progressive for U.S. income distribution. Basically, they argue that the assumed income gains will be very much the same for each quintile of U.S. income distribution, with the bottom quintile seeing a percentage increase 0.007 of a percentage point higher than the top quintile. Technically, that is mildly progressive.
  • But it certainly does not look that way when one looks as the absolute gains. The bottom 40% sees just $8 billion in income gains, while the top quintile would get $48 billion. That is more in absolute terms than the bottom 80% combined.
  • The authors also make the unfounded assumption that U.S. wages will increase at the same rate as productivity, though that has not happened for decades. This misleadingly raises most workers’ incomes in their analysis.

Full-Employment Models? Abandon Ship!

It is not surprising that Lawrence and Moran find that the benefits of the TPP far exceed the adjustment costs. They employed the same study with the same flawed assumptions of full employment and fixed trade balances. With such assumptions, wage and employment losses are written off as temporary adjustment costs on the path back to full employment. These are significantly understated if the TPP results in large and persistent trade deficits, an outcome they assume away.

The resulting cost-benefit calculations are misleading. First, the costs are minimized as outlined above. Second, the benefits are overstated, taking Petri and Plummer’s estimates at face value, with all their flawed growth-boosting assumptions (surge in foreign investment, most growth gains from non-trade measures).

Finally, the gains are simply asserted to be large, when even the recent Petri-Plummer estimates of gains are incredibly small, just 0.5% of GDP for the United States in 2030, i.e. a paltry 0.029% per year on average over 15 years. How small is that? For the bottom 40% of the U.S. income distribution, the gains amount to just $62 per person, in 15 years.

Those concerned that TPP modeling needs to take better account of the real implications of such agreements should not be satisfied with the Peterson Institute’s latest offering. It does little more than reiterate flawed assumptions, which understate costs and overstate benefits, besides misrepresenting them as serious cost-benefit analysis.

Before the U.S. Congress approves the TPP, the public deserves the kind of robust economic analysis that Rep. Levin has called for, that does not assume away employment losses or trade deficits and offers realistic estimates of the TPP’s impacts on wages, employment, and inequality.

Notes

[1]  For the United States, we estimated that in 2025 the TPP would generate a 0.5% slowing in economic growth, 448,000 job losses, and rising inequality, as measured by a 1.31% decline in labor’s share of national income.

[2] It is worth quoting the paper’s own acknowledgment of these assumptions (from p. 3): “For analyzing the long-run impact of the TPP, it is reasonable for Petri and Plummer to assume that the agreement is unlikely to permanently affect the level of employment or the trade balance[…] Assuming normal employment levels is justified not because changes in imports and exports have no impact on employment in the short run-obviously import growth can cause job loss and exports can generate job growth-but rather because the size of the annual impact of the TPP will be smaller than the many other shocks that will occur every year[…] Moreover, over a longer period macroeconomic policies and wage and price adjustments are likely to restore the economy to the same employment level as the baseline.”

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20 comments

  1. Ranger Rick

    And it’s not just in the US. Can you imagine what will happen to farmers across the Pacific when they get buried under government-subsidized wheat, corn and rice?

    1. Massinissa

      Theres no need to ‘imagine’ anything: read about what NAFTA did to Mexican farmers in the ’90s. It will be that all over again but on a larger scale.

      1. sgt_doom

        Great point (Greenspan’s Fraud by Ravi Batra)!

        And the mere mention of the Peterson Institute, which has been soley focused on the offshoring of American jobs, the destruction of Social Security, Medicare and Medicaid, and adherence to the WTO’s Financial Services Agreement!

      1. RBHoughton

        Exactly. In return for promoting US-style capitalism in Far East, Japan got a free ride for its own domestic economy. Richard Werner’s “Princes of the Yen” tells the story in a very readable, exciting and convincing way.

  2. allan

    Finally, the gains are simply asserted to be large, when even the recent Petri-Plummer estimates of gains are incredibly small, just 0.5% of GDP for the United States in 2030, i.e. a paltry 0.029% per year on average over 15 years. How small is that? For the bottom 40% of the U.S. income distribution, the gains amount to just $62 per person, in 15 years.

    But of course it’s likely to be far worse than that. Even the claimed 0.029% per year is for the entire economy.
    The `gains’ for the bottom 40% are likely to be negative.

    1. tegnost

      especially when you add in the compound interest on student loans and other predatory lending, sounds like apoxia to me

  3. Ulysses

    Thanks for sharing this important post! I agree that the TPP boosters deliberately downplay the job losses, and other likely negative consequences, of the agreement. Yet what bothers me most about the persistent promoters of the new TPP/TTIP/TISA world order is that they have managed to distract us from the fact that these agreements aren’t primarily about “trade”. They get us into the weeds of competing economic forecasts, and out of the intense alarm– that all citizens of nominally sovereign nations should be feeling as their “political leadership” sells out our rights to self-determination, to our new kleptocratic overlords.

    Article 25.9 (3-4) of the TPP:

    “3. In subsequent notifications, each Party shall describe the steps, including those set out in paragraph 2, that it has taken since the previous notification, and those that it plans to take to implement this Chapter, and to improve its adherence to it.
    4. In its consideration of issues associated with the implementation and operation of this Chapter, the Committee may review notifications made by a Party pursuant to paragraph 1. During that review, Parties may ask questions or discuss specific aspects of that Party’s notification. The Committee may use its review and discussion of a notification as a basis for identifying opportunities for assistance and cooperative activities to provide assistance in accordance with Article 25.7 (Cooperation).”

    What this language shows is that the Regulatory Coherence Committee, a completely unaccountable body answering only to the same multinationals and corporate lawyers who wrote the TTP, are asserting veto power over anything nominally sovereign nations might do to protect the environment, or the health and safety of its people.

    They stand ready to “assist” anyone who might have mistakenly believed it was still possible to do something that threatened the wealth extraction program of the transnational kleptocracy. The chapter is ominously silent on what might happen to those who, in the eyes of this omnipotent Committee, aren’t trying hard enough to “improve their adherence” to its dictates.

    1. sgt_doom

      Overall the TPP is structured to destroy all workers’ rights — when you read through those 30 chapters several times!

      1. Ulysses

        Yep. Also the rights of environmentalists, and advocates for consumer and healthcare rights!

  4. TedWa

    Job creation these days appears to wholly dependent on taxpayer subsidies to workers at companies like Walmart, McDonalds, banks and who knows who else, in the form of food stamps and other subsidies that would only be needed and used to the extent they are today in a great depression. This welfare give-away to Americas largest corporations is all to insure corporate profits remain high, because markets. TPP and their ilk promises more of the same. And they dare to tout employment as a bright spot?

  5. Minnie Mouse

    What is the end game that needs to be adjusted to, and on what basis is that end game justified? It makes no sense to even talk about adjustment cost if the end game does not make sense in the first place. Is the end game to geographically concentrate manufacturing or whatever as much as possible (China) since that appears to be the empirical outcome of the nondeterministic process of free trade? How is that particular result acceptable and on what basis? If the moon shot is to put a man on the moon the result had better not be Mars.

  6. KYrocky

    It is a lie.

    The author is being far too deferential, too collegial, toward the paid hacks at Peterson. These authors, and others like them, are paid to lie. Period. They are credentialed professionals who reach the answer they are paid to reach, and are no different from those that worked to support the lies of tobacco companies, whose products killed millions, or those that work to support the petroleum industry, who are killing the planet.

    Robert Lawrence and Tyler Moran are paid to create validation for their client’s desired lie.

    permanent job loss is excluded by assumption: Hint, they are planning to lie.

    The authors assume that TPP does not cause long-term trade surpluses or deficits, in fact, that trade itself is not a major determinant of current account balances. This, of course, flies in the face of large and persistent U.S. trade deficits: Hint: they are lying.

    For those who haven’t noticed, lies are routinely used to advance the conservative agenda, and there are entire industries that have been cultivated to create, justify and disseminate these lies. WMD? Voter Fraud? Tax cuts pay for themselves? Social Security will be broke? Climate change denial?

    The motives are the authors, Robert Lawrence and Tyler Moran, are dishonest. They are paid to support the lie and then weather to controversy. They will concede nothing. They will create, at worst, a he-said, he-said situation where others are forced to chose and all of those invested in having legitimacy bestowed to the lie win. There is no at best scenario.

    Decent economic professionals conduct themselves professionally and interact with courtesy to those whose work they disagree with. Paid liars like Lawrence and Moran, and those paying them, rely of this professionalism of their critics to mask their true motives from the public. They are lying. You know it, and they know it. The liars will characterize it as legitimate differences of opinion, but when accountants cook the books it’s called fraud, and what Robert Lawrence and Tyler Moran are doing with their model is no different.

    Thank you, Mr. Wise, for your excellent dissection of this Peterson propaganda. In your closing you state that the public deserves better. I agree, the public deserves not to be lied to and deliberately misled by the Peterson Institute and their well paid professional hacks. This is not a difference over parameters, it is a difference of motive. Lawrence and Moran are paid to lie, you are working to inform the public. These are not equal. In matters of this magnitude it is this point that should be made at the top of your article, not left for readers to reach on their own.

    1. sgt_doom

      Absolutely agree! I recall when I was corresponding with hack, Catherine Mann, for her sources to support her contention that two jobs are magically created with each job offshored — turned out to be an ASSUMPTION!

      1. tegnost

        I keep remembering a charlie rose from last week, the one with al hunt talking about the trump phenomenon in the second segment, and in the third segment of the show a technophile with a green watch and lots of confidence about the future was talking about his daughters and charlie mentioned that the jobs for todays children have not been invented yet, and there was an effusion of enthusiasm for this when all I could think of was that this guy was assuming that through some unknown force that there would be jobs invented because his kids would of course need them, kind of magical thinking. The same guy was going on about how it takes ten years for the work of tech genius to trickle down (and yes I do believe he did the dancing fingers thing to emphasize the percolation) and start to impact us poor plebes (the ungrateful beneficiaries of the tech revolution) so we needn’t complain because it hasn’t gotten to us yet. I assume he was full of it…not related exactly to tpp but the same thinking generally.

  7. Synoia

    It appears economists should be forced to wear Patches on theirclothing advertising the source of their income.

    They appear as paid shills.

  8. cnchal

    What happens when the useless eaters assume too much?

    Ass u me.

    Such fatuous precision to the figures.

    . . .For the bottom 40% of the U.S. income distribution, the gains amount to just $62 per person, in 15 years.

    or roughly a penny per day.

  9. Knute Rife

    It makes it so much easier for your research to reach desired results when you can assume away all facts.

  10. DakotabornKansan

    Race to the bottom …

    The Peterson Institute predicts great economic growth from the TPP.

    [TPP = fewer jobs and lower pay]

    The Peterson Institute, the same billionaire who supported Obama’s Catfood Commission.

    [tax cuts = caviar for the rich; Social Security and Medicare cuts = catfood for the rest]

    House 2017 budget plan would slash SNAP by more than $150 billion over ten years: http://www.cbpp.org/research/food-assistance/house-2017-budget-plan-would-slash-snap-by-more-than-150-billion-over-ten

    [benefit cuts = increased hunger and poverty]

    Marked contrast: Peterson, the son of Greek immigrants; Sanders, the son of a Polish immigrant.

    [Peterson targets = “entitlement” programs; wants to cut Social Security, Medicare and Medicaid, the middle class; Sanders targets = just the opposite; wants to expand Social Security, Medicare and Medicaid and the middle class] 

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