Bernanke and the Case for Trade


Federal Reserve Chairman Ben Bernanke just gave a speech that might have gotten him fired if he was still an economist over at the White House. The topic was trade, perhaps the new "third rail" of American politics. Speaking at the Montana Economic Development Summit in Butte, Bernanke played both academic and politician. He methodically delineated the overwhelming economic case that trade, including the outsourcing of jobs, is a good thing. The numbers came fast and furious as he cited study after study in support of his case. (The speech and links to the studies are here.)

Among Bernanke's points:

–Removing all remaining barriers to trade would raise U.S. incomes anywhere from $4,000 to $12,000 per household.

–Among U.S. manufacturers, exporters pay higher wages and add jobs more rapidly than nonexporters, with multinational firms paying higher wages than purely domestic firms.

–During the past 10 years, annual job losses of 16 million have been more than offset by the creation of about 17 million jobs per year.

–Between 1965 and 2006, the share of imports in the U.S. economy nearly quadrupled, from 4.4 percent of gross domestic product to 16.8 percent. Yet, reflecting growth in the labor force, employment more than doubled during that time, and the unemployment rate was at about 4 ½ percent at both the beginning and end of the period. Furthermore, average real compensation per hour in the United States has nearly doubled since 1965.

–Trade deficits and unemployment rates show little correlation. Among America's six Group of Seven partners (the world's leading industrial countries), three have trade surpluses (Canada, Germany, and Japan). However, based on the figures for February of this year, the unemployment rates in Canada (5.3 percent) and in Germany (9 percent) are significantly higher than the 4.5 percent rate in the United States; and Japan's unemployment rate, at 4 percent, is only a bit lower.

Bernanke's conclusion: "If trade both destroys and creates jobs, what is its overall effect on employment? The answer is, essentially none. ... And of course, global trade allows many types of goods, especially consumer goods, to be purchased at lower prices. ... By creating a global market, trade enhances competition, which weeds out the most inefficient firms and induces others to improve their products and to produce more efficiently. ... In the long run, economic isolationism and retreat from international competition would inexorably lead to lower productivity for U.S. firms and lower living standards for U.S. consumers."

It was just this sort of talk that got former White House economist N. Gregory Mankiw in hot water back in 2004 when he said that "outsourcing is just a new way of doing international trade. More things are tradable than were tradable in the past, and that's a good thing." Now I doubt there is much Mankiw or Bernanke would disagree about concerning trade, given their backgrounds and the fact that such views are the overwhelming consensus of the economic profession. Yet Bernanke is certainly aware of the Mankiw affair and spent a good chunk of the speech talking about various approaches to help workers who do lose their jobs because of trade, whether it be wage insurance, portable health insurance, or greater education.

Bernanke, Ben