Adam Posen is the President of the Peterson Institute for International Economics. Previously, Adam was on the monetary policy committee of the Bank of England. He has also worked at the New York Fed and has advised many central banks and governments. Adam is also a returning guest to the podcast and re-joins Macro Musings to discuss his new article, *The Price of Nostalgia: America's Self-Defeating Economic Retreat.* Specifically, David and Adam discuss the Fed’s new framework, secular stagnation, the economic impact of demographic changes, the China shock, and how the new political consensus on trade, growth, and the American middle class is short-sighted and self-defeating.
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Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].
David Beckworth: Adam, welcome back to the show.
Adam Posen: Thanks so much for having me back. You've had a lot of great guests since I last was on.
Beckworth: Oh, it's been a blast and it's been amazing actually working from home during this pandemic that I've had all these fun conversations with interesting people like yourself and others. And we were talking before we got on air here, Adam, the last time we actually had a conversation was in person in San Diego, January 2020. And I looked back and I think of the crowd as I was walking from the hotel to the conference building, the wave of humanity and little did we know what was ahead of us that year.
Posen: Absolutely. The sun was shining, it was an ASSA conference, and there were mobs. And I think thanks to you I got to have a great interaction with a group of monetary folk ahead of me. And that was intimate and that was only like 40 people in the small room.
Beckworth: That's right. Yeah. That was a blast. And it makes me long for the days when we can do that again. And hopefully that is not too far off. So looking forward to in person meetings once again. All right. So I brought you on to discuss your article in Foreign Affairs. The title again is “The Price of Nostalgia: America's Self-Defeating Economic Retreat,” and we'll provide a link to that for our listeners in the show notes. But before we get to that, I have a few other questions, Adam, you're an interesting guy. You really cover a lot of the same topics I care about. And so I want to touch on some of them, but before we get to even those interesting topics, I understand that you are now somewhat royal in Japan. You have an Imperial Decoration. Tell us about that.
Posen: Well, I find you as fascinating, because we actually do have the same tastes and what we think are the important issues, I think David, for the most part. Thank you for mentioning that. I was flattered to be again, an Imperial Decoration from the government of Japan on behalf of the Emperor. So a lot of Americans know that the Queen of England has a semi-annual honors list and they announce who gets various awards or who gets knighted or noble. The Japanese Emperor has a similar semi-annual list. And the main order for civilians making contributions, like the Order of the British Empire in the UK is the Order of the Rising Sun. Now one can make some cracks about the fact that it's the Rising Sun or the British Empire, but it's really meant as recognition to people who've contributed to Japanese life. And so I was very honored to get this recognition.
Posen: I've been working on and off on the Japanese economy since 1997. I was pretty critical of Japanese government policy in the late '90s and early 2000s and also Bank of Japan as you and I have discussed previously. And I've been very complimentary frankly of Japanese government policy and the Bank of Japan, obviously not an unqualified, but complimentary of them over the last six or seven years particularly things like womenomics, getting women back into the workforce in large numbers. Some liberalization of agriculture leading with Australia CPTPP, the big trade deal, and now being open to a deal with China. And frankly though not succeeding on monetary things as much as you or I would have liked or frankly might even have expected they've delivered improving productivity growth and improving per capita growth in the last several years compared to a lot of other countries, including the U.S.
Posen: So there's been a lot to think about on Japan that I think is relevant for the U.S. and other economies. It's interesting intellectually and I'm going on too long, but I just wanted to say I'm very grateful that frankly, a lot of people in Japanese public life and academic life were willing to have a foreigner come in and talk policy with them. And that's a great privilege and a lot of countries do that, but usually it's somebody strong arming them or it's somebody who's directly in the pay of the government or something. And that wasn't the case here. And so it's very gratifying to be recognized for that contribution.
Beckworth: Well, congratulations again, that's amazing. And you're the first person that I've met, who has this designation. So is there an official title you receive now going forward? Do I call you Sir Adam Posen or something like that?
Posen: No. All I hope is that if there's ever a visa issue, I'll be able to drop this out, get myself to Japan when needed.
Beckworth: Nice. You're a friend of the Emperor, so they should let you in whenever you want.
Posen: I'm a friend of somebody somewhere in the cabinet office.
Beckworth: Okay. Well, that's still great. That's awesome.
Beckworth: So something else we have in common, we cover a lot of the same issues in macro and we care about them, but we also both work in think tank environments, and you're the president. So you're in a different world than I am altogether, but I'm curious because I mentioned earlier, I've been working from home outside of DC for a year and it's worked. I think it would have been better to have some in-person, but it's worked better than I expected. And I'm wondering, as you reflect over the past year, what do you see happening, changes? What is your sense of this past year?
Posen: A lot of things going on, and in some ways we had a typical experience at the Peterson Institute in that we're primarily a white collar work staff. We have a few people who were very brave and dutiful throughout the pandemic of keeping the building functioning and dealing with things in person, but basically it went entirely remote since mid-March last year. And we've been amazingly productive, I think. The team has been incredible. We've done a lot of work on the pandemic, a lot of work on trade, a lot of work on fiscal policy, good work for more variety for our team. And there was a worry that people would get exhausted and worried that you lose some of the informal conversations, whether it's by the proverbial water cooler, or the actual coffee machines or whatever.
Posen: And certainly that was lost, but we found, and I don't think we're alone in this. We found that a lot of the younger people felt more engaged, frankly, and more able to participate. And a lot of like your think tank, we have a combination of people who are full-time and local and people who are affiliated, who are part-time or not local. And we found that a lot of our non-residents and your fellows were actually more engaged as well. And so we're trying to sort of bottle that and figure out how to continue that as we get back to normal.
Posen: The other thing is, and again, it's sounding grateful because I genuinely am. Our board stood by us. We're a small nonprofit and we have an endowment we're more fortunate than some, but we still have to raise 70% of our money every year. And our board stood by us a year ago and said, "Okay, keep doing what you're doing. And if something happens, we'll cover you." And that meant we didn't have to lay anybody off or cut any hours. So it's been a good community effort. I guess the other thing going with what you just said is David, that we are shifted essentially to virtual meetings and there, again, we thought we'd lose something and we probably have lost a little bit, but our audience is up. Our census are down, our frequency of events is up-
Posen: Think tanks, bizarrely were the opposite of restaurants or travel agencies, they just happened to have been very fortunate in this supply shock.
Beckworth: Yeah. And I've watched some of your events. You've had some great interviews with central bankers, for example, that I've been able to enjoy. And you've had lots of events there. I want to go back though to that loss of the informal sharing knowledge or water cooler conversation. And that's always been one of the big critiques of working from home even before the pandemic, there's the agglomeration economies, even in the office, you share ideas and increasing returns to scale all that good stuff. But I guess, my question and my thought is what I've done is found a substitute for that. And maybe it's not perfect, but that's Twitter and other social media places. I feel like it's part of my job every day to get on Twitter and interact with people doing similar work to myself. And I'm just wondering what is your sense as a president of an organization like Peterson?
Posen: Well, as a president, and I will say this for a long time, my view is I'm not inputs oriented and outputs oriented, and we try to stick with that, meaning people can figure out however they want to work. Again, for the fortunate ones who are on the research side. And I try with the pumps, comms, meetings, people as well, as long as we get the results. So on Twitter for me personally, as an individual and to some degree for promoting the work of the Peterson Institute, I'm like you, I feel I have to be out there every day. I have to retweet, like stuff. I have to read stuff, I have to interact. But on the other hand, I do find myself, frankly, getting into a warped state of mind, if it's not on Twitter, I'm sort of unaware of it. Or I don't think it's that important, which I know is wrong.
Posen: There's a lot of good stuff on Twitter, you are part of the booming macro Twitter community, and a lot of good macro tweeters are now in the Biden administration. There's a great trade community. Colleagues at Cato, colleagues in this group called the Trade Experettes, which is a global group of female, trade economist. Colleagues from some of the WTO and government agencies. So there's a lot of great stuff, but yeah, it warps your brain. You get convinced. And I just spend too much time on Twitter, so I try not to force others to do so.
Beckworth: I think that's a good point. It's a bubble. You can get stuck in a bubble there. But it's also been good on one hand. Yes. Promoting what we do, but on other hand to actually engage, I want that conversation. I want that feedback. I want the criticism of, if I put a piece out and people think it's got holes, let me know. Or if it's a casual conversation, I find Twitter useful, but you're right. You have to be careful. I have to monitor my time on there. And you get lots of replies that you just have to ignore sometimes, but it's interesting, anyhow, to think what that means going forward for remote work and stuff.
Beckworth: But let's move on for the sake of time here. I want to get to your article, “The Price of Nostalgia.” But before I do that, though, since you work in these areas that I find fascinating, two more areas I'd like to stop along the way. The first one is the Fed's new framework. And as I mentioned, you had some Fed officials on, you've talked with them. What is your sense of the Fed's new framework so far?
The Fed’s New Framework
Posen: My sense, David and again, I think it so happens, we're not that far apart, although we did for a bit on average inflation targeting or nominal GDP targeting. My sense is this is a very successful and well justified move that the Fed has done and frankly… Well, I’ll explain. So essentially they've moved from a preemptive strategy to a reactive strategy on inflation, not putting as much faith into forecast. They've moved from focusing on things that are not directly observable, like U-star and R-star towards things that are directly observable as targets, as intermediate targets. And Chair Powell started us down that road two and a half years ago at his first Jackson Hole speech. And there's a very clear through line from that speech through various things Vice Chair Clarida said to other comments that Powell made through the Fed Listens right up to the announcement of the new framework last August.
Posen: Thirdly, and extremely importantly, they've broadened the definition of what constitutes labor market slack. So they're not focusing on U-3 or other narrow measures in the labor market. They're paying more attention to wage growth, they're paying more attention importantly to labor force participation. So I think all of these are important changes, but just to make us all remain as humble as we should be, even when you do everything right. The one thing their system is not well set up for is if you have an incredibly and arguably overly expansionary fiscal policy. It's set up for a world where, God almighty, if we're lucky, we'll get inflation and we don't want to cut it off too soon.
Essentially they've moved from a preemptive strategy to a reactive strategy on inflation, not putting as much faith into forecast. They've moved from focusing on things that are not directly observable, like U-star and R-star towards things that are directly observable as targets, as intermediate targets...they've broadened the definition of what constitutes labor market slack. So they're not focusing on U-3 or other narrow measures in the labor market. They're paying more attention to wage growth, they're paying more attention importantly to labor force participation. So I think all of these are important changes.
Posen: Now again, to be fair to chair Powell and the other people in the FOMC, they made this decision not knowing who was going to win the election. They very quickly made this decision last summer when who knew. And they were not liking a contingent on any fiscal political outcome, but it turns out that the one thing that may not be well accounted for in the system is if you get a fiscal blowout. I think in the end, it'll be fine, but it is a bit of a challenge.
Beckworth: Yeah. Well, let me throw my interpretation of that to you and see what you think since you are actually a central banker yourself, you have experience sitting at the helm, guiding the ship. And that is this, I think there was this whole conversation over heating going on, but I also think there's another angle. And this is the one I like to take is that, we are in the midst of an historic change. This is the first time a modern central bank is moving to something like a price level target. It's a watered down version. It's not quite a price level target, but it has elements of it, makeup policy.
Beckworth: This is something that hasn't been tried as I understand since the 1930s, when the Riksbank in Sweden, tried to price level target. So this is something in a modern sense, it's very new. And it's just strange, it's hard for people to accept. Well, you mentioned earlier they're going outcome-based as opposed to preemptively tied and all of these elements are just new. They're strange, it's a little bit scary. We're navigating, bond markets are figuring it out. The FOMC is figuring out, we're figuring it out and maybe going forward, we'll be more comfortable with the Fed doing what it's doing. It sets a new experience and yes, it's complicated by the huge fiscal package, but do you see any merit in looking at it in that kind of benign way?
Posen: Broadly, yeah. I think it is benign. I think a place of difference between you and me is how much the makeup strategy, the announcement of it, or trying to set up a framework of it matters versus actual in the fact holding fire. And I think that the next year may show one of the reasons why I have been less enamored of nominal GDP targeting say than you have, because it actually does matter, what's the composition of that NGDP. If we end up next year, not only exceeding whatever NGDP target would have been, but with an inflation number that's in the mid threes, even if we're filling in the past gap, I'm not sure people are going to be happy with that. And so broadly I agree, but I do think there are some issues here.
Beckworth: Do you mean issues in terms of politically making it happen, meeting resistance or issues in terms of the actual outcome? Will it actually deliver what it's meant to do?
Posen: I think those two are not really separate. I think that there's a forward looking expectations channel that with a lag, maybe goes along and reinforces the effects, if not accelerates the effects you want. I think the inability to sustain it or to make it credible until you've actually done it shuts that channel down. And I think in reality, it's going to be politically very difficult as well as economically to get the kind of catch-up you and I both, and watch more importantly, the majority of the FOMC wants, because we're going to have, I think too much of it in too short a time.
Beckworth: So you would like to see spread out over a more gradual pace, more control that way?
Posen: Well, writing down equations on a piece of paper or if I was allowed to more likely, not more likely, but more typically for me, if I was allowed to try to set policy, I'd be just as happy with this outcome. But I think in practice, in terms of market volatility, in terms of political pressures on the Fed, in terms of potential risks of things getting out of control, I think it is less good that you make up your NGDP gap beyond catching up from what we had.
Beckworth: Right. So in an ideal world, you would have implemented the new framework in a slightly less volatile situation, a little more controlled …
Posen: Well, again, I don't think there's anything wrong with the new framework. I think in an ideal world we would not be facing an existential political threat in U.S. democracy, such that the Biden administration feels they have to go be enormously big right now. I think it's been hard for me to come to this point of view because my sympathies are frankly with the individual programs that the Biden administration is, and the Congress are putting in place or proposing to put in place as you and I talked about before we started recording. And I think as I recall, you've talked about in previous episodes of the podcast, the childcare credit is a good thing, extending Pre-K and community college is a good thing. Making healthcare and various benefits more portable for more people and less jobs specific, which I mentioned in my Foreign Affairs piece is a good thing.
Posen: I just wish either they had been paid for more than they look like they're going to be paid for, or that they had been spread out over more years or something such that the fiscal impulse was not so overwhelmingly concentrated. And I would like to be with people like Krugman and many other perfectly good folks who are saying, "Don't worry about it. We're going to catch up on inflation. Well, it's not a bad thing." I would like to be there, but the more I look at the numbers and the more I look at things like what happened in Japan, for example, the more I get convinced that Summers and Blanchard have a point that... So anyway, so this is about fiscal policy, this isn't about monetary policy.
Beckworth: So, Adam, this is fascinating discussion and I have one other pushback I want to give you, I want to see your responses. And that is the idea of hysteresis. So I recently had Antonio Fatas on this show and man, he had the survey paper and he's done original work earlier than this, but I just hadn't seen all these connections that he had in this paper. For example, he tied together endogenous growth theory from Paul Romer's of the world, and tied that to reverse hysteresis, or it could be regular hysteresis just depending if it's downward. But for me, he made a lot of links that I hadn't seen before. And that could be one way out of these concerns that you have. That it's not that we'll go above potential, but that will actually generate a higher potential. But you want to see evidence before you reach that, or what are your thoughts on using reverse hysteresis says as an escape hatch for your concerns?
Posen: I heard your episode with Antonio Fatas and he has done some great work on this, but my view is that he is pushing the argument beyond what I think the data fully support. And I don't mean that in a snide way, like he's doing anything dishonest, nothing of the kind, he's very transparent, he's very good. But I think the evidence for both negative and positive hysteresis just isn't there as strongly. So he, and Summers and Blanchard, again, those guys they tried a few years ago to write a paper on this and you didn't find much evidence in the advanced economies of hysteresis. When you look at just at the top level, if you look at the U.S. experience in the great recession you find that there was a very little hysteresis, at least in labor market terms. In terms of people who were shut out of labor force and who couldn't get back in. What do you mean they got shut out? They got right back in.
Posen: And this goes back to an argument that Danny Blanchflower, and I were making back in 2014, trying to tell the Fed, Janet Yellen's Fed, then not to raise rates because we said, "Look, all these people, your labor market models say that they were first participation is down to last." And we're saying, "No, it's not. It can come back." And this isn't about the framework, but that to me is one of the tensions or errors in the Powell approach in the last couple of years is he invokes and Yellen invokes and others invoke hysteresis this as a justification for going big and fast. Now, I think there's human reasons and healthcare reasons and just plain, why bother to delay reasons for why we should have had a strong response to the pandemic, but the hysteresis argument just doesn't seem to be there. And if we're talking about, if our target for monetary policy is complete catch up. If our target for labor force participation as the president of the Richmond Fence said the other day is pretty close to what labor force participation was pre-pandemic, then we're assuming no hysteresis and that's fine.
Beckworth: Okay. Well, let's touch on one other area before we get to your article. And that is secular stagnation, which you've worked on with, you mentioned Japan. I've looked at it from a slightly different angle, but the same issue and that's the safe asset shortage, the excess demand for safe assets. And in one of the implications of this is that it helps us understand why we've had low interest rates in advanced economies for the past few decades. Why we have also had low inflation. And even if we have say a temporary bout of high inflation over the next year or two, do you think these forces will be back two, three years from now keeping yields on treasuries low and keeping inflation lower in the advanced economies?
Posen: Yeah. Again, I think you and I largely agree, but just speaking my own point of view. I view secular stagnation as primarily a real side phenomenon that we've had a simultaneous slowdown in the rate of innovation at the frontier, the diffusion of innovation and in the capacity or desire for risk. And so one can attribute a lot of this to the experience of the financial crisis, but as you and your listeners know, there's very strong evidence that this happened starting in roughly 2004 across the advanced economies, John Fernald, the Fed San Francisco among others has done a lot of good work documenting it; interpreting the data more than the documenting.
Posen: And additionally, as you know the slowdown in productivity growth and in risk appetite is pretty much across the OECD. OECD economists under Catherine Mann, she was chief economist now under Laurence Boone, a whole team there have done a great job of showing how the diffusion of innovation and technology has slowed down. And again, it's across multiple metrics. So this is a real side phenomenon. And this is arguably an exogenous phenomenon. That's more open to debate, but it really looks like in the spirit of Robert Gordon, Robert Solow, then we've just had an exogenous technology shock, which then compounds other problems, including politics, including the reaction to the depression.
OECD economists under Catherine Mann, she was chief economist now under Laurence Boone, a whole team there have done a great job of showing how the diffusion of innovation and technology has slowed down. And again, it's across multiple metrics. So this is a real side phenomenon. And this is arguably an exogenous phenomenon.
Posen: And this goes back to something which you've heard me say before, which is the reason the central banks are keeping interest rates low and balance sheets big isn't causing low rates, it's because the real rate of return is down so much. They're keeping their instrument rates low and the balance sheet big. The causality runs the other way. The central banks are just reacting. And so that's a long-winded way of saying if somehow we got enough stimulus and enough luck on the innovation front, we could get out of this. So maybe productivity would jump just as a jump down. But here I am a little bit more extreme in doing this is supply side, the demand side, I'm not sure that there's that much crowding it. I'm not sure that if we do some huge amount of public investment, it directly reverses secular stagnation.
Posen: What I am sure of is if you buy a lot of lottery tickets and you improve the odds of the lottery tickets for the next big thing in technology, by investing in R&D, by improving rules against patent trolling, by improving education, by breaking down a monopoly and oligopoly power, then that's good investment because the odds of getting out of secular stagnation rise.
Beckworth: Okay. One more question. My last question, I thought I would ask on this, but what about demographics? I know Charles Goodhart has a book where he argues demographics is actually going to lead to higher inflation, but the argument has been for most people that demographics is also key reason we've had this phenomenon. You've been telling more of a productivity story, but do you think demographics will still be an important part of the story moving forward?
Economic Impact of Demographic Changes
Posen: Yes and no. To be honest. So we had, at Peterson Charles Goodhart and his coauthor present their book. And they do argue that demographic's going to lead to a shortage of workers and that's going to lead to wage increases and inflation, and I think it's wrong. We should have seen that happening in Japan and elsewhere by now, if it was going to happen. I am very skeptical of that argument, but I do think there is something to the demographics argument. So I've told the story before, but I actually sent a note of apology to my friend Kiyohiko Nishimura, who was deputy governor of the Bank of Japan several years ago. And he and the then governor Maasaki Shirakawa did some statements and some speeches and even a paper to try and argue that Japan's low inflation was at least in part due to the aging of the society.
Posen: And at the time I and a lot of more distinguished people said, "Oh, that's nonsense. That's excuse making, it's policy that matters." And I've come to think, given that the BOJ has done a lot of the things that most mainstream Keynesian economist would ask them to do. And it hasn't resulted in inflation, myself included, they may have something there. So bringing it to productivity, I think there is some interesting research that's come out and some interesting ideas to pursue about whether when you have aging societies, investment behavior, and capacity to refuse innovation do change. But that's different from the idea that we're suddenly going to have a worker shortage.
Beckworth: Well, it’s been a great conversation, Adam, on these other issues, but we do need to move on to your article. That is a centerpiece of the show, and that is the “Price of Nostalgia: America's Self-Defeating Economic Retreat” just recently published in Foreign Affairs. And I was doing some research and you've done a lot of interviews on this piece. It's really been popular and it seems many people have been following up on it. And so I'm glad to be the next one to do this. And maybe you could start off just by giving us your summary, bird's eye view of the argument you're making in this article.
The Price of Economic Nostalgia
Posen: Well, I appreciate your giving me time to bring it to your listeners and your readers. So thank you. Dan Kurtz-Phelan is the new editor in chief or the titles editor of Foreign Affairs decided in his first issue under his leadership to have a discussion of trade. And he's got articles from some very good people: Harold James, Gordon Hanson, Matt Slaughter. Anyway, but I used the opportunity to challenge some things that have been bothering me for a while. And I guess there's, let's call it four points. The first point is there is this ongoing narrative now that lots of senior people in the Biden administration, not just in the commentariat, that believe that we, the Washington blobs hold out American workers to liberalization for trade, including especially letting China trade. And this is why we end up with inequality and anger at Trump.
Posen: And this is part of the narrative about why it's good we don't have too many economists and certainly too many so-called neoliberal economists in the Biden administration. And of course on the right, we've got some extremists who give this as a stab-in-the-back myth, basically that Washington elites sold out the hardworking men of real America. And so the first point is just gathering some facts with Simeon Djankov and some others at Peterson. We showed that this is just not true. That the U.S. has been essentially withdrawing from globalization for 20 plus years. We have a lower share of trade now in the economy than we did for much of the last period. And more importantly, while the rest of the world has continued expanding their share of trade in the economy, the rich democracies have gone into reverse.
Posen: We have a much lower rate of immigration than we did 20 years ago, 30 years ago. We have basically flattened nominal terms declining in real terms amounts of FDI coming into the U.S. and declining amounts of green-field FDI, so it's not foreigners taking us over. In terms of trade deals labor and other successfully blocked TPP, they blocked most other deals that the Obama administration or the Bush administration pursued and meanwhile, Europe added 13 new countries to the European Union. Japan joined and Australia and Singapore joined CPTPP and in fact, interacted more with Korea and China and the ARSA.
The U.S. has been essentially withdrawing from globalization for 20 plus years. We have a lower share of trade now in the economy than we did for much of the last period...We have a much lower rate of immigration than we did 20 years ago, 30 years ago. We have basically flattened nominal terms declining in real terms amounts of FDI coming into the U.S. and declining amounts of green-field FDI.
Posen: So to me, there's two clear implications with this, first, the story that our problems are due to us having sold out the working person through trade, it's just false. And second that even if you try to be protectionist, which is what we've effectively done, which Trump made much worse on immigration especially been on trade and other things, but it's a long standing thing. It didn't make matters any better on the inequality front. On the political front, we gave the angry white men what they want and they're still angry. The second point is the Biden ministration seems to share with the Trump administration, a lot of people, this extreme nostalgia, to use that word for macho men moving heavy stuff to get well in the middle of America, outside the cities. And this same image which is on a thousand car commercials is always out there.
Posen: And the fact is that manufacturing employment has always been exaggerated and it has always been disproportionately white males and is in decline around the world. So even economies like Japan and Germany, which run up manufacturing trade surpluses for years and years, decades, and decades, their share of employment in manufacturing has been declining steadily yet. Pretty much the same rate as the U.S. for the last 30, 40 years. Our colleague Robert Lawrence of Peterson has pointed this out and we updated the data and it's very clear. And so yeah, Germany has a higher share of employment in manufacturing, but it's still not that high. I think it's 17%. In the U.S. it's fluctuated between eight and 12%. And so even if you are supposedly successful and not sold out on trade, you still don't have huge manufacturing employment. You still losing. And that's basically a technology story that you can produce the same health stuff with less people.
Posen: And also, again, Robert Lawrence points this out, you have the value of manufactured goods is going down. It's becoming cheaper. People want less of it as they get richer and these things are cheaper. And so to me, this notion that we're going to rebuild the middle class with this idea of manufacturing employment is doubly distortionary. First, realistically, even if you reversed everything on trade, which you're not capable of doing, but even if you were more protectionist and more subsidizing, more by American than even the Biden people were saying, you're going to raise manufacturing employment by maybe 2% of the total and you're still going to have 80 to 85% of non-college educated American working people in services. And so it's not going to solve your problem. And the second point which comes out of that is it's totally unfair.
If you reversed everything on trade, which you're not capable of doing, but even if you were more protectionist and more subsidizing...you're going to raise manufacturing employment by maybe 2% of the total and you're still going to have 80 to 85% of non-college educated American working people in services. And so it's not going to solve your problem.
Posen: The people of services, which is disproportionately female and disproportionately of color, as opposed to manufacturing, which is disproportionately white male are coping with turmoil and labor market churn and issues with inequality. And they're not traded services for the most part, at least lower income people. Things you and I do might be traded services, but people doing in-person healthcare, hospitality, personal services, retail, those aren't trade. And these people have gotten disrupted repeatedly and nobody seems to care about that the same way they get all wound up about some town in West Virginia. And I'm not making light of the pain of the town in West Virginia. All I'm saying is the pain of people in the services industries is just as real and just as acute, so don't go chasing this manufacturing shibboleth to solve your problems.
Posen: And similarly, I make an argument about localization. That I was watching TV last night HGTV hometown series, and they've got these special set of episodes about they've gone to another small town and they're going to revive it by renovating the various buildings. It's very sincere and it's very effective and it's nuts. Economically, it just doesn't work. And so you can look at the U.S. for Robert Byrd, Senator from West Virginia, the majority leader brought billions literally of aid and handouts to West Virginia and they still never caught up really closing the gap on per capita income for the rest of the country on inequality. You look at again, the international perspective is important. Germany has spent now near 30 plus years since unification transferring huge amounts of money to Eastern Germany and the young people in the town, the saleable skills people who have advantages have moved and all this money hasn't led to convergence.
Posen: The same is true between North and South Italy. And the same is true between rural and urban Japan. The same is even true in China, where you get the growth is in income, the convergence income is people moving from the Northwest to the Southeast, to the coast to find employment and opportunity. And the people in the Northwest are left behind, there's no convergence. And China has the largest industrial subsidies in the world, the largest protections, the greatest ability to direct funds and say, "No. You have to work here." And you still got enormous income diversions. And then in parallel to the manufacturing agreements, are also moral argument we focus on the earlier, "Oh, these poor white folks in good, old fashioned America and rural, and ex-urban America have to move that's so unfair."
Posen: But of course, African Americans moved in huge numbers from the South to the North and South to the West, the warmth of the other suns, during the 20th century for opportunity, and then some of them moved back South, as the opportunity changed. Hispanic Americans have had migrated into the country and across the country. And in fact, the grandparents and great-grandparents in many of these white, rural Americans migrated both to the U.S. and in the U.S. to find opportunity, but yet we're supposed to focus on, in some Bruce Springsteen Jeep ad, the idea that this one church in this one place really has to be preserved. So it's not to say there isn't real pain there, and we shouldn't help people but just to say that parallel with things, sadly in criminal justice and culture and other things we're focused so much on what happens to the rural white male American that we ignore the fact that there's a lot of other stuff going on constantly.
Posen: And so the approaches have to be more universal. And you're letting me go on too long and I appreciate it. But so I just want to say, it's not all complaint. There's a positive agenda.
Beckworth: Yeah. We'll come back to your policy recommendation in a minute, but there's a lot of interesting observations you've made there. I want to unpack some of them and go back through them. But I just want to speak to the one you made just now about sending large fiscal transfers from a wealthy part of the country to the poor where you had these great examples, you just mentioned West Germany to East Germany. You mentioned Japan from the urban to the non-urban areas. And what you just said really resonated with me, was China. If China can't do it, who can? They are the ultimate form of this. And that was a great, I think, very powerful point. So we should be very humble and thinking what we can achieve with such a policy it's not likely we're going to have any more success than they did. And they've been trying a lot longer and dealt with these issues before us.
Beckworth: I want to go back though to your first observation, which is probably for me, was the most striking one. But your point was contrary to popular belief, the U.S. has actually been disengaging from globalization over the past few decades, as opposed to being a part of it. Because that definitely goes against what most people would argue. That's what most people think. And you mentioned a lot of interesting illustrations of this, like the European Union has added 13 new member States since 2000. So they're becoming more deeply integrated or we're not signing treaties, we're pulling back. You also mentioned, as you did a few minutes ago, that net immigration has been falling since 2000, which that's something to me is also really troubling because our fertility rate in the U.S. is also falling and long-term, we got to have bodies in America. We need more people and that's something that's really... That's a tough nut to crack. I think to get people on my side to be more embracing of that, getting more people in this country.
Beckworth: So I completely agree with you on this, but I want to go to an objection on that first point about the U.S. has been pulling back, less engaged and I agree with you, but I want to just flush this out for our listeners. And probably the biggest counterpoint to that first argument, that first claim you make is the China shock. And you discuss it. So walk us through, what was the China shock and why do people invoke it a lot? And what do we now know about it?
The China Shock
Posen: So there's sort of this visceral sense of a China shock. But the reason is that economic argument in this paper and subsequent work by three economists: Autor, Dorn and Hanson. And they go through and they look at some very micro geographic data and are able to show that on their numbers, they're roughly two million jobs lost in American manufacturing and in particular extensively due to Chinese competition. And this is competition that comes after China, which joins the WTO, gets that trade status and access to the U.S. until roughly say 2012, 2015, when they declared the China shock.
Posen: Now there's been a lot of serious pushback, not against their basic work, but against some of their numbers and the context of their numbers. One point [of pushback against the China shock narrative] is that if you redo the numbers a different way, you end up with number close to one million instead of two. Another point, which I think is more profound is that, of course this ignores what jobs were created by trade with China, which is a lot, as well as what values were given to working people from trade with China. A third point, which my colleagues, Joe Gagnon and Fred Bergsten among others have long raised is the period they're talking about is also a period of extreme Chinese currency manipulation from roughly 2003 to 2010. And so what's called the China shock might have actually been the currency manipulation. And if the Bush or Obama administrations have been more forceful about that, we might have not had as big a challenge.
One point [of pushback against the China shock narrative] is that if you redo the numbers a different way, you end up with number close to one million instead of two. Another point, which I think is more profound is that, of course this ignores what jobs were created by trade with China, which is a lot, as well as what values were given to working people from trade with China. A third point, which my colleagues, Joe Gagnon and Fred Bergsten among others have long raised is the period they're talking about is also a period of extreme Chinese currency manipulation from roughly 2003 to 2010.
Posen: But anyway, those are all things, but to me, the important point, which Autor, Dorn and Hanson made which Paul Krugman picked up on in one of his more wonky, recent blogs is that some of these effects were extremely localized. So the plant in Hickory, Kentucky, or wherever it is in North Carolina the furniture plant in this one town just gets completely wiped. And basically there's no working with that. And so for those places, this is very major. The context and reason I pushed back at the political use of the China shock and the exaggerated role of the China shock in people's minds is first scale. That even if we accept two million as the upper bound of manufacturing jobs that were lost because of China, that's two million over 15 years in an economy with 150 million plus working people where there is churn turnover of jobs of 60 million in an average year.
Posen: Now some of that 60 million is voluntary and some of that 60 million is individuality and idiosyncratic. So call it a third is in voluntary job offer, even if it's a third... So excuse me, it's 20 million a year versus effectively 130,000 a year. So you're talking less than 1% of the total churn are these people who, again, their suffering is real -
Beckworth: But it's a drop in the bucket.
Posen: It's a drop in the bucket. And again, I worry about perspective. If you're an African-American and you had a city from which there was white flight and you didn't get out, you had just easily as devastating, a localized shock as the people in the furniture making town in North Carolina. If you were a secretarial worker and therefore likely female and likely single, because that was disproportionately with secretarial workers and word processing comes in and you get your skillset is wiped out. You may not have quite the same geographic shock, but you have pretty much the same kind of approach shock. And so again, I think the perspective on this, like this was somehow special and unfair and different is I think quite warped.
Posen: And again, I'm not attributing that talk to Autor, Dorn and Hanson, they're responsible for their views, but just taking their research at face value, not attributed to that. But the sense that goes with the broader foreign policy narrative that we the Washington blob for foreign policy reasons and idealistic views of what was going to happen in China threw away something special and precious, I think is just wrong. And so when you look at the data again, the human toll is real, but there's other human tools that have nothing to do with China going on all the time. And this just doesn't make a leap in the long-term trends of the economy, in the long-term share of imports in the economy, in the long-term share of manufacturing employment.
Beckworth: Yeah. I guess a nice segue to an observation I was going to make. And that is, if you look at manufacturing, which is the one of the other points you make in this paper, it's been on a secular decline as a percent of the labor force, or it's been going down, down, down, down, down. And if you look at this window of time where we had the China shock, you really don't see much change, it stays on that same trend. So if the China shock was really all that important, we would have expected to see an acceleration of that train or something different, but it's not there.
Posen: Exactly right. And I just want to plug that for your listenership, I think this is particularly important, Foreign Affairs doesn't publish charts or tables, but we have a bunch of associated data and charts to go with these claims in the article on the PIE website. And it's right there for anyone to look at it. It's mostly straightforward charts and publicly available data if anybody wants to see it. So the picture you're painting David is exactly right. You've got these parallel lines running down in manufacturing employment as a share of total employment and all the G-7 economies and the China shock should also frankly, have shown up in the other G-7 economies too. You could argue it should have been smaller because they were more protectionist or they didn't have the currency manipulation working against them. They should have been something. And you just look at the data and it's effectively a straight line. There's no jog at 1999 or 2000 or 2001.
Posen: And even wage growth, we're talking mostly about employment numbers, but even wage growth it's not as though again, in the aggregate data in any of these countries, you see a sudden decline from 2000, what you do see is an accelerating capital share of GDP, particularly in the U.S. And that certainly seems to have a lot more to do with deregulation and tax cuts and non-enforcement of labor costs and various other things. And people in the labor movement disagree with me. And we'll say, "You're just totally underestimating how much the threat of moving employment abroad, particularly the China was a club to keep down wages." And to me, I'm sure that was invoked a lot, and I'm sure there were specific instances, but in the end, again, we're not seeing this vast change in employment. This vast moving broad. And so it's hard to take that argument as very big.
Beckworth: Yeah. And you raised some other interesting observations in your paper about this, I think are important. And one is we can view this China shock to the extent that it did matter as just another part of the transformation of the U.S. economy. You point back to the agricultural transformation, late 1800s, there was the agrarian revolt. The farmers were losing their terms of trade, they were going down. Their sector was getting smaller and smaller as a part of the economy. And it was hard for them to accept that. So they revolted as best they could through the politics. Even this past century, a lot of manufacturing moved from the north down to the south in U.S. and there was a lot of turmoil over that as well. So there's always churn going on. This may be just be one of another manifestations of that.
Beckworth: And I think it's useful to keep that kind of historical perspective. And I want to segue now into your proposals. I want to make one last observation about China at the shock that I think is a nice segue into it. And that is, if anything, what I take away from the China shock is not the jobs themselves or the number, but the fact that the people stayed in those towns, they didn't move to where the jobs were. The labor mobility seemed to be going down. They were stuck. We've had some other guests on the show talking about populous stuck in place. They're not as mobile as you'd want them to be. And I think that's a nice segue into some of your proposed policy solutions. So why don't you walk us through those.
Posen: Yeah. Thank you, David I agree this is an issue. So one of the other things to know that it's in the data is that labor mobility in the U.S. has been going down. And it's been going down at the same time, the labor force participation rates with both men and women has been going down. Again, this is trend pre-pandemic. And it's kind of difficult to fully understand why this has happened. But there's no question that this makes life difficult. Now the usual reaction is, A, that people like being in their community, so they're in small towns. They don't want to move. And B, that in part because we have the more paltry welfare state than the rest, people have social networks, they have relatives, they have local friends or they have local communities where they can call on for childcare or emergency support since we don't offer that in the same way a European or any European country would.
Posen: And then C, and this is the part I have least sympathy for, you've got a bunch of policy entrepreneurs who come out and say, "Oh, I've got this plan for how to revitalize the small cities or small towns." Now, as we already discussed, I think C just ain't happening. You can find individuals. It's people, they built Faneuil Hall in downtown Boston and that was great. And yet somehow when they try and repeat it in Harvard, it didn't work. Pittsburgh made it. Pittsburgh made it back. Pittsburgh made it back by completely transforming what it did and turning over profits to its population. So I don't really have any sympathy for the certain political pandering on the face of that, that we've got ways to fix this.
Posen: Point two is you can make it so that it's less scary and less dangerous for people to move. And that is, things which are bankrupt… to their credit, the Biden administration is doing, such as providing more access to childcare, more monies to people who aren't parents, more portability of health insurance by expanding and strengthening Obamacare. Potentially, and I advocate for this in my article potentially making it so that people in the gig economy, Uber drivers, whatever have access to the ability to accumulate seniority in things like pension benefits in the same way other people do and not lose health insurance. You can do things, and you've colleagues who have written about this David, but you can do things to improve transportation. And here I sound like a libertarian, and you can do things to change zonings or housings more affordable in big cities and attractive places where the jobs are so that people do not have to either commute ridiculous, long distances or not be able to move to where the jobs are.
Posen: So there's a whole agenda about making people's wellbeing, not so dependent on a specific job in a specific location. And it doesn't do anything about point one that people who were emotional just want to stay quiet and there has to be freedom for that, but there also has to be the reality that you cannot insist that you have to be provided with the job you want in the place you want. That's not possible. It's not possible in a communist country like China, and sure isn’t possible in a free market economy. But it is possible to make it so that people are not so stuck. And again, to echo something I was saying about manufacturing in locals earlier, we have to remember that for all the people, for whom being in the small place or around the home place, was very helpful to them, there are people who don't have those kinds of support networks or who are exploited by being in a small place or being trapped. And we have to make it possible for people to get out and to have support if they're not fortunate enough to have a family that some people have, or if they're not fortunate enough to fit in, in the particular place where they want.
There also has to be the reality that you cannot insist that you have to be provided with the job you want in the place you want. That's not possible. It's not possible in a communist country like China, and sure isn’t possible in a free market economy. But it is possible to make it so that people are not so stuck...we have to make it possible for people to get out and to have support if they're not fortunate enough to have a family that some people have, or if they're not fortunate enough to fit in, in the particular place where they want.
Posen: And again, this is where I think some libertarian types and some moderate left types can come together, like on antitrust, they worry about local abuses. And as much as big companies and big cities have their abuses, that there is a lot to prove evidence that we have a very dominant local employer or two, they can explore the worlds and they can keep down wages for workers and they can... Think of what's it called, Bedford Falls in the Jimmy Stewart movie.
Beckworth: Oh, It's a Wonderful Life.
Posen: It's a Wonderful Life. I can't believe I forgot that title. The local banker really dominates things. One big employer and the people are taking advantage. So I think there's a lot of agenda, positive agenda with making people more mobile, facilitating their mobility, facilitating them that they don't give up a lot if they happen.
Beckworth: Okay, well that our time is up. Our guest today has been Adam Posen. The title of his article is “The Price of Nostalgia: America's Self-Defeating Economic Retreat.” Adam, thank you for coming on the show.
Posen: Thank you so much for having me back, David. And I'm a regular listener and I appreciate the opportunity.
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