China Shock Devastated Localized Communities, Challenging Economic Models

Key Quotes

"so for decades the mainstream thinking in economics was that free trade would be a clear win for the United States sure the reasoning went some workers might lose jobs but they'd get new ones as the economy changed and grew and everything would basically be fine everything turned out not to be fine no research project has made that more clear than one spearheaded by MIT economist David Autor and his colleagues."

David Autor, an MIT economics professor, explains that the prevailing economic theory at the time predicted free trade, including with China, would benefit the U.S. by creating new jobs for displaced workers. However, Autor highlights that subsequent research, particularly his own, has revealed this prediction to be inaccurate, demonstrating significant negative consequences.

"The story that has been told about the consequences of trade is so far from the reality of how people live that it's just you know it's all gains everyone's better off there's no real cost i mean in theory there could be but in practice there's not but that's just not the lived experience of anyone and that's not what the data ultimately shows."

Autor points out a significant disconnect between the theoretical economic models of free trade and the actual experiences of individuals. He argues that the narrative of universal gains from trade fails to account for the lived realities and the data that shows substantial costs for many.

"what the economists found was devastating well over a million manufacturing jobs destroyed these job losses were hyper concentrated in communities around America the china shock basically created miniature depressions in these communities and former manufacturing workers struggled to adapt and get new jobs."

Autor describes the findings of the "China Shock" research, emphasizing the severe impact of increased Chinese imports on U.S. manufacturing. He details how this led to widespread job destruction, disproportionately affecting specific communities and creating localized economic hardship for affected workers.

"as economists we are you know taught the kind of theory of comparative advantage and it says look you know free trade among consenting nations raises you know gdp raises you know economic output in all of them now a caveat to that point is it doesn't make every person in those countries better off in fact it will in general make some people worse off so basically it grows the pie but it really it's expected to shrink some slices in absolute terms right."

Autor explains the core economic principle of comparative advantage, which suggests that free trade increases overall economic output. He clarifies that while this theory posits a larger economic "pie," it also acknowledges that certain individuals or groups within those nations may experience a reduction in their economic share.

"The other is the absence of evidence of adverse effects and the absence was taken as evidence of absence that there were no effects but it turns out the research methods that were used to analyze that were just not really asking the right questions uh the the thing is they were asking questions about prices because trade works through prices they weren't asking questions about employment in many economic models employment is assumed to be 100 everyone who wants to work can work and so you know the only effects you'd expect to see in that case would be changes in wages but in fact what we see is a lot of it occurs through changes in employment rates not through changes in wages."

Autor discusses why economists may have underestimated the negative impacts of trade, suggesting that previous research methods focused on price changes rather than employment effects. He notes that many economic models assume full employment, leading them to overlook significant job losses as a consequence of trade shocks.

"The main result was the adjustment process was wrenching and slow and scarring it was not like the blackboard model of labor market where you lose one job and you get another almost equally good job at another firm."

Autor summarizes the findings regarding the labor market's response to trade shocks, stating that the process of workers finding new employment was difficult, prolonged, and damaging. He contrasts this reality with theoretical models that depict a smooth and rapid transition to new, comparable jobs.