A Better Way to Think About Trade

Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

Representative Sander Levin of Michigan, the senior Democrat on the Ways and Means Committee, which has jurisdiction over many trade issues, proposed this week that the United States make a significant change in its approach to international trade. The United States is in the middle of trade negotiations that, while still somewhat under the political radar and seldom on the front pages, have the potential to affect the economy - and many people’s jobs - in ways that could be quite negative or somewhat positive.

Mr. Levin, in remarks earlier at the Peterson Institute for International Economics, laid out a set of issues that are entirely reasonable and could well draw bipartisan support, even in the House of Representatives. (I’m a senior fellow at the institute, but I was not involved in organizing this event.) The Obama administration should pay attention, particularly as any trade deal ultimately needs Congressional support.

Mr. Levin made three main proposals that are directly relevant for the negotiations between the United States and countries on the Pacific Rim, aiming to sign a Trans-Pacific Partnership Agreement. (For a primer on that agreement, I recommend the book “Understanding the Trans-Pacific Partnership” by my colleagues Jeffrey J. Schott, Barbara Kotschwar and Julia Muir - the introduction and two other chapters are free.) The same principles are relevant for other potential trade deals.

The first point is that enforceable labor and environmental standards need to be given more emphasis in American trade agreements with other nations. Recent horrendous events in Bangladesh have driven home the unfortunate truth that if matters are left purely “to the market,” there will be very unsafe factories and dangerous working conditions. People will die, tragically and unnecessarily, producing cheap goods for American consumers.

Under consumer and legal pressure, companies in the United States and Europe are changing how they interact with suppliers - and insisting on higher standards. Richard Locke, director of the Watson Institute for International Studies at Brown University (and my former colleague at M.I.T.), has worked long and hard on these issues, and his conclusion is that while voluntary standards can help, more formal commitments by governments also play a constructive role.

(I recommend his book, “The Promise and Limits of Private Power: Promoting Labor Standards in a Global Economy,” as well as “The High Price of Cheap Clothing,” in which public radio’s Warren Olney discussed the issues with Professor Locke and other experts earlier this year.)

When I discuss these matters with global business executives, almost without exception they are of the opinion that health and safety should be subject to minimum acceptable - and legally enforceable - standards everywhere. Mr. Levin is pushing on an open door.

Mr. Levin’s second point is just as compelling. Japan has just joined the Pacific Rim negotiations, in part no doubt hoping that American tariffs on Japanese cars and trucks will be lowered. But it should not escape American negotiators that despite many years of promises, the Japanese automotive market - for both completed vehicles and components - remains very much closed to foreigners.

In large part, this is because of what economists like to call nontariff barriers - but it is exactly such barriers that the agreement under negotiation is supposed to address. Mr. Levin’s proposal is simple: tie the tariff reduction on Japanese cars and trucks to actual progress with automotive imports into Japan.

Those would not, by the way, have to be imports from the United States; the Japanese might consider letting in some South Korean cars and components (a repeated and reasonable South Korean request). The point is to get beyond promising that markets will be more open to actually removing the de facto barriers to trade.

Many countries claim to engage in free trade. But some governments, and the companies that work closely with them, have become adept at gaming the system - essentially finding various forms of official actions that tilt the playing field. Or if you prefer to be more blunt, engaging in unfair trade practices.

Mr. Levin is talking about removing government distortions, and this is why I expect he may receive a great deal of Republican support.

And this is also where Mr. Levin’s third proposal will really hit a nerve. There are countries that manipulate their exchange rate - lowering (or depreciating, in technical jargon) its value in order to gain a competitive advantage, increasing exports and reducing imports relative to what they would otherwise be.

The nuances of currency manipulation are fascinating and, as Mr. Levin said, the International Monetary Fund has invested a great deal of time and effort in detecting and measuring such actions. (This is part of what I worked on when I was at the I.M.F. in 2004-5 and 2007-8.)

Unfortunately, constraining or preventing currency manipulation through the I.M.F. and other multilateral forums has not been successful, and this potentially matters a great deal for the United States economy (see, for example, a recent report by C. Fred Bergsten and Joseph Gagnon of the Peterson Institute, or a May lecture by Mr. Bergsten).

Again, the issue is cheating within the system, with governments’ getting away with actions that distort markets on a grand scale. Here, too, I don’t know many Republicans who would feel good about this.

Mr. Levin proposes to establish a panel, as part of the Trans-Pacific Partnership Agreement, that would determine if currency manipulation has taken place. (Trade agreements typically include similar mediation mechanisms, but it would be innovative to do this for currency manipulation.) Relying on the I.M.F. or the United States Treasury to make a currency manipulation determination in the past has not worked, primarily for political reasons.

If a country manipulates its currency to gain an unfair advantage, the tariff on its goods and services sold to the United States would rise back to the level that would have existed without the free trade agreement, Mr. Levin proposes. In other words, it is just the additional perceived benefit of the proposed reduction that is on the table in the Trans-Pacific Partnership Agreement or any other free trade proposal.

This is a targeted and responsible proposal. It should get support from both sides of the aisle on Capitol Hill. The Obama administration needs Democratic and Republican votes to get the Trans-Pacific Partnership Agreement and other trade deals adopted.

Top officials should listen carefully to Mr. Levin’s suggestions.

The Multinational Equation on Jobs

In his speech on Wednesday, President Obama said:

This year, we are off to our strongest private-sector job growth since 1999. And because we bet on this country, foreign companies are, too. Right now, more of Honda’s cars are made in America than anywhere else. Airbus will build new planes in Alabama. Companies like Ford are replacing outsourcing with insourcing and bringing more jobs home.

Is it true that foreign companies are “betting” on the United States, and that American multinationals are returning jobs here in large numbers?

The most recent Bureau of Economic Analysis data available on multinational companies’ employment in the United States is for 2011, unfortunately. But those data do show that the total number of people working for American affiliates of foreign companies rose 3.3 percent that year, up to 5.6 million workers from 5.4 million in 2010. That rate of increase was higher than that for total American private industry employment that year, which was 1.8 percent.

Even so, total employment at these American affiliates of foreign companies had fallen sharply during the recession, and so its 2011 level was about the same as it was in 2002 through 2008, when the population was smaller.

Source: Bureau of Economic Analysis.

As for American multinational companies (like Ford, which Mr. Obama cited), their employment in the United States actually stayed flat from 2009 to 2011 while they hired in large numbers abroad. From 2009 to 2011, domestic employment at these American companies was 22.9 million, while the number of employees abroad rose to 11.7 million from 10.8 million.

As a result, the share of employment at these American companies that is based at home has been shrinking, to 66.3 percent in 2011 from 79 percent in 1989:

Source: Bureau of Economic Analysis.

None of those employment numbers will capture work contracted out to other companies, of course (e.g., Taiwan-headquartered Foxconn does a lot of manufacturing for American companies like Apple).

Strongest Since 1999?

“Add it all up, and over the past 40 months, our businesses have created 7.2 million new jobs. This year, we are off to our strongest private-sector job growth since 1999.”

So said President Obama in a speech in Illinois on Wednesday. And by one measure he has the facts to back him up, at least for now. But those facts could easily be revised away next week, when the July jobs report comes out. And no one reading that statement should overlook that he said “private sector.” If you talk about all jobs, the record is not nearly so impressive.

First, the 7.2 million number is accurate. Private-sector employment hit bottom for the recent cycle in February 2010, at 106,850,000. In June, it was 114,051,000, or 7,201,000 higher.

Over the same stretch, governments have reduced employment by 619,000, leaving the total gain at 6.6 million.

As for the strongest start since 1999, that is also accurate, at least if you use the number of jobs, rather than the percentage change.

This year, private-sector employment rose by 1,234,000 jobs during the first six months. That is more than in any comparable period since 1999.

But comparing gross numbers can be misleading. This year’s gain of 1.0938 percent is not as good as the 2011 gain over the same period, which was 1.12 percent, or 1,209,000 jobs. And on a percentage basis it was also a smidgen below the 2005 first half, when 1,211,000 jobs, or 1.0942 percent, were added.

Even by Mr. Obama’s preferred way of counting, those two years could be better if the July report revises the June figure down by 26,000 jobs. That would not be an unusually large revision.

On a percentage basis, by the way, every first half from 1993 through 1999 was better than the 2013 first half.

Obama’s View of the Economic Challenge

Stephen Crowley/The New York Times President Obama speaking Wednesday in Galesburg, Ill.

President Obama’s speech in Galesburg, Ill., is more a description of how things are than a plan to get them to where they should be. It lays out Mr. Obama’s vision of how the economy has changed to the detriment of American workers, if not American businesses and executives, over the last 30 years or so, since long before the recession hit:

In the period after World War II, a growing middle class was the engine of our prosperity. Whether you owned a company, swept its floors, or worked anywhere in between, this country offered you a basic bargain - a sense that your hard work would be rewarded with fair wages and benefits, the chance to buy a home, to save for retirement, and, above all, to hand down a better life for your kids.

But over time, that engine began to stall. That bargain began to fray. Technology made some jobs obsolete. Global competition sent others overseas. It became harder for unions to fight for the middle class. Washington doled out bigger tax cuts to the rich and smaller minimum wage increases for the working poor. The link between higher productivity and people’s wages and salaries was severed - the income of the top 1 percent nearly quadrupled from 1979 to 2007, while the typical family’s barely budged.

Towards the end of those three decades, a housing bubble, credit cards, and a churning financial sector kept the economy artificially juiced up. But by the time I took office in 2009, the bubble had burst, costing millions of Americans their jobs, their homes and their savings. The decades-long erosion of middle-class security was laid bare for all to see and feel.

In other words, the returns to labor just are not as high as they used to be. Robots and computers and globalization have in many cases made your average American worker less valuable - particularly if he or she is less educated. For a while, the housing bubble and cheap credit papered over those problems. But once the bubble burst and the recession hit, the problems afflicting millions of households became obvious.

Still, Mr. Obama notes that things are getting better: The cyclical recovery from the recession has truly taken hold, even if structural problems remain. Here are some of the statistics he cites:

• Over the past 40 months, our businesses have created 7.2 million new jobs. This year, we are off to our strongest private-sector job growth since 1999.
• We sell more products made in America to the rest of the world than ever before.
• As a country, we’ve recovered faster and gone further than most other advanced nations in the world.

He also blames Congress - as the Federal Reserve, the International Monetary Fund and many others have done - for instituting cuts that have made the cyclical recovery slower.

Rather than reduce our deficits with a scalpel - by cutting programs we don’t need, fixing ones we do, and making government more efficient - this same group has insisted on leaving in place a meat cleaver called the sequester that has cost jobs, harmed growth, hurt our military, and gutted investments in American education and scientific and medical research that we need to make this country a magnet for good jobs.

Economists generally believe that the $85 billion in sudden budget cuts instituted this year have been less harmful than they originally thought they would be. Still, they have slowed down the recovery by taking money out of workers’ and business’ pockets. Mr. Obama also notes that Congress’ refusal to raise the debt ceiling, the government’s statutory borrowing limit, this fall would put undue stress on the economy.

But Mr. Obama does not really propose any policy specifics to tackle the structural problems he says he believes remain the greatest challenge to the American middle class - the rising inequality and stagnant wages.

Granted, he’s tried to tackle them before. The Affordable Care Act at its heart taxes the wealthy to provide insurance coverage to lower-income households. His tax bill also raises levies on the rich, while cementing tax cuts for the middle class and working poor. But he has no such specific proposals in this speech, at least, only running through the same broad policy goals he and his team have outlined for some time, for infrastructure spending, education, housing finance and manufacturing.

Obama’s View of the Economic Challenge

Stephen Crowley/The New York Times President Obama speaking Wednesday in Galesburg, Ill.

President Obama’s speech in Galesburg, Ill., is more a description of how things are than a plan to get them to where they should be. It lays out Mr. Obama’s vision of how the economy has changed to the detriment of American workers, if not American businesses and executives, over the last 30 years or so, since long before the recession hit:

In the period after World War II, a growing middle class was the engine of our prosperity. Whether you owned a company, swept its floors, or worked anywhere in between, this country offered you a basic bargain - a sense that your hard work would be rewarded with fair wages and benefits, the chance to buy a home, to save for retirement, and, above all, to hand down a better life for your kids.

But over time, that engine began to stall. That bargain began to fray. Technology made some jobs obsolete. Global competition sent others overseas. It became harder for unions to fight for the middle class. Washington doled out bigger tax cuts to the rich and smaller minimum wage increases for the working poor. The link between higher productivity and people’s wages and salaries was severed - the income of the top 1 percent nearly quadrupled from 1979 to 2007, while the typical family’s barely budged.

Towards the end of those three decades, a housing bubble, credit cards, and a churning financial sector kept the economy artificially juiced up. But by the time I took office in 2009, the bubble had burst, costing millions of Americans their jobs, their homes and their savings. The decades-long erosion of middle-class security was laid bare for all to see and feel.

In other words, the returns to labor just are not as high as they used to be. Robots and computers and globalization have in many cases made your average American worker less valuable - particularly if he or she is less educated. For a while, the housing bubble and cheap credit papered over those problems. But once the bubble burst and the recession hit, the problems afflicting millions of households became obvious.

Still, Mr. Obama notes that things are getting better: The cyclical recovery from the recession has truly taken hold, even if structural problems remain. Here are some of the statistics he cites:

• Over the past 40 months, our businesses have created 7.2 million new jobs. This year, we are off to our strongest private-sector job growth since 1999.
• We sell more products made in America to the rest of the world than ever before.
• As a country, we’ve recovered faster and gone further than most other advanced nations in the world.

He also blames Congress - as the Federal Reserve, the International Monetary Fund and many others have done - for instituting cuts that have made the cyclical recovery slower.

Rather than reduce our deficits with a scalpel - by cutting programs we don’t need, fixing ones we do, and making government more efficient - this same group has insisted on leaving in place a meat cleaver called the sequester that has cost jobs, harmed growth, hurt our military, and gutted investments in American education and scientific and medical research that we need to make this country a magnet for good jobs.

Economists generally believe that the $85 billion in sudden budget cuts instituted this year have been less harmful than they originally thought they would be. Still, they have slowed down the recovery by taking money out of workers’ and business’ pockets. Mr. Obama also notes that Congress’ refusal to raise the debt ceiling, the government’s statutory borrowing limit, this fall would put undue stress on the economy.

But Mr. Obama does not really propose any policy specifics to tackle the structural problems he says he believes remain the greatest challenge to the American middle class - the rising inequality and stagnant wages.

Granted, he’s tried to tackle them before. The Affordable Care Act at its heart taxes the wealthy to provide insurance coverage to lower-income households. His tax bill also raises levies on the rich, while cementing tax cuts for the middle class and working poor. But he has no such specific proposals in this speech, at least, only running through the same broad policy goals he and his team have outlined for some time, for infrastructure spending, education, housing finance and manufacturing.

A Mobility Prophet

Only 26 years ago, one of the country’s most respected economists argued that social mobility was a problem largely solved. Birth rarely dictated a child’s destiny, suggested Gary Becker, in a 1987 speech to fellow economists. Children born rich often ended up poor, and children born poor often ended up rich. “Low earnings as well as high earnings,” said Mr. Becker, a University of Chicago professor who won a Nobel five years later, “are not strongly transmitted from fathers to sons.”

He had empirical evidence for his claim. Academic research at the time showed that the relationship between the earnings of different generations in a family was not especially strong. In technical terms, the correlation was so low: regardless of parents’ income, children’s income often reverted to the mean.

I first came across those findings, and Mr. Becker’s description of them, almost a decade ago, when reporting a series of articles for The Times on social class. At the time, Gary Solon, an economist of the University of Michigan, was one of the researchers considered to be on the cutting edge of mobility research. And Mr. Solon argued that Mr. Becker’s conclusions were mostly wrong.

Mr. Solon and other economists pointed out that tracking people over many years was quite difficult. The early studies of mobility, many of them done in the 1980s, suffered from these difficulties. As Janny Scott and I wrote in 2005:

Some studies relied on children’s fuzzy recollections of their parents’ income. Others compared single years of income, which fluctuate considerably. Still others misread the normal progress people make as they advance in their careers, like from young lawyer to senior partner, as social mobility.

When Mr. Solon and others looked at the new data that was emerging in the 1990s, they found that previous studies had confused statistical noise with evidence of a highly fluid society. When researchers were able to use accurate measures of people’s earnings, the relationship between the fortunes of parents and their children was quite strong. Most surprisingly, economists came to believe that a child’s chances of overcoming poverty in the United States were lower than in many other rich countries, despite our more egalitarian history.

“We all know stories of poor families in which the next generation did much better,” Mr. Solon, now a professor at Michigan State, told me almost a decade ago. “It isn’t that poor families have no chance.” But in the past, he added, “People would say, ‘Don’t worry about inequality. The offspring of the poor have chances as good as the chances of the offspring of the rich.’ Well, that’s not true. It’s not respectable in scholarly circles anymore to make that argument.”

At the time, even the new data was imperfect. Mr. Solon and other economists had to rely on surveys of several thousand families, some of whom dropped out of the panel, never to be surveyed again. (Mobility research, unlike research on inequality at a moment in time, depends on following the same people or families over many years.) In the last 10 years, however, the data on mobility has become better â€" much better. In a recent study, four economists were able to analyze millions of earnings records over more than three decades, as I reported on Monday.

One of the most striking aspects of this study, which economists say offers the most comprehensive picture of mobility yet, is how closely its findings match Mr. Solon’s. The numerical comparison of parents’ and children’s earnings â€" the statistical correlation between the two â€" is nearly identical, notes Jonathan Parker, a finance professor at M.I.T. (who did not work on the recent study).

Raj Chetty, a Harvard economist and one of the four co-authors, said the findings helped make clear Mr. Solon’s importance as a researcher. “What I find especially impressive is that many of his insights â€" most importantly that the U.S. has substantially lower mobility than previously thought â€" are basically borne out by our new data that is thousands of times larger,” Mr. Chetty said.

Sometimes, a huge batch of new information overturns old assumptions. But sometimes it confirms them.

The New Economics of Part-Time Employment, Continued

Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

A revised definition of part-time employment may have some popular appeal, but it will not repair the Affordable Care Act’s disincentives for full-time employment or its extra costs for taxpayers.

Part-time employment rarely includes health benefits. The lack of health benefits and the lower pay for part-time work have traditionally discouraged people from taking part-time jobs rather than full-time jobs, but both of those attributes of part-time jobs are about to change.

I explained in an earlier post how, in many cases, the Affordable Care Act would almost entirely eliminate these two shortcomings of part-time employment by offering access to generously subsidized health insurance to part-time employees while denying it to most people who work full time. As a result, more people will work part time (under the law, less than 30 hours a week) rather than full time, and this will occur at significant taxpayer expense.

Two senators, Joe Donnelly, Democrat of Indiana, and Susan Collins, Republican of Maine, are proposing to tweak the Affordable Care Act by changing the definition of part-time work to include any work schedule of 39 hours a week or less. They say the change conforms with traditional definitions of full-time work and will prevent workers from having their work schedules cut.

Their proposal is likely to have the opposite effect. Although it may be true that their proposal would prevent cuts in hours for those now working, say, 35 hours a week, it would be likely to cause cuts for employees working 40 to 45 hours a week, because staying short of the 40-hour threshold would be closer to their current work schedule than staying short of the law’s 30-hour threshold.

More important from an economic point of view, the 40-hour threshold would further magnify the already strong disincentives for working full time. The table below illustrates what may happen.

The left column of the table shows the economics of a full-time position (40 hours a week). Between employer health insurance premiums and the employee paycheck, this position costs the employer $56,000 a year, or about $28 an hour. The full-time employee’s pay after his portion of health insurance premiums are withheld is $42,000.

Although covered by health insurance, the employee and his family incur $3,000 in additional health costs from health insurance deductibles, co-payments and so on ($3,000 is typical for a family of four with a comprehensive health plan). The employee also has work expenses for commuting, child care and so on, which I assume to be $100 a week when working full time.

The part-time columns of the table show two situations for a part-time position with the same employer cost an hour of $28. The middle column is the situation I discussed earlier, in which the full-time threshold is the 30 hours contained in the law. The right column is the situation that would apply if Senator Donnelly and Senator Collins have their way and workers become part-time by cutting their weekly hours to 39.

Because the part-time position is 39 hours a week, the annual employer cost is $54,600. All of the $54,600 consists of cash compensation for the employee, because the part-time position does not include health insurance.

The part-time employee has to pay for his own health insurance, but the new law limits his premiums to $3,947 (the law pays the other $8,463 from the Treasury) and limits his out-of-pocket health costs to $4,590 (the law pays the other $510; by design the law increases deductibles and co-payments but uses subsidies to offset those increases for low- and middle-income families).

Net of work expenses ($100 a week for both 40- and 39-hour positions) and health expenses, the 39-hour position pays $41,063, significantly more than the full-time position’s $34,000.

By taking a 39-hour position, the employee can have comprehensive health insurance coverage and actually make more money than he would in a full-time position. In effect, the new subsidies totaling almost $8,973 more than fully offset, from the point of view of employers and their employees, the loss of production that occurs from working 39 hours a week rather than 40.

It’s one thing for public policies to present workers with a small reward for working full time. But the proposal from the two senators would put millions of people in the position of having to pay - in the form of less disposable income - for the privilege of working full time. When millions of workers choose part-time rather than full-time work under the Donnelly-Collins proposal, it will be taxpayers who pick up the tab.

The Affordable Care Act is full of disincentives. But tweaking the law without carefully considering incentives is likely to increase the law’s damage to the labor market and its depletion of taxpayer funds.