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Krugman Wonks Out: The China Shock and the Climate Shock

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Change is inevitable, but can we cushion the impact on communities?

This article is a wonky edition of Paul Krugman’s free newsletter. You can sign up here to receive it.

Today’s column was focused on the remarkable announcement by the United Mine Workers that the union is ready to support the Biden infrastructure plan — if that plan helps miners and mining communities transition out of coal. This looks like a vindication of the “Green New Deal” approach to climate policy, even if Biden isn’t calling it that. That is, it suggests that an approach that emphasizes spending and offers tangible benefits to workers may be more politically salable than an Econ 101 approach that emphasizes carbon pricing, even if it’s less efficient.

But there’s a bit more to this than political packaging. There are valid economic and social reasons to devise policy in a way that, while inducing change, nonetheless alleviates the impact of that change on vulnerable workers.

One arguably valid response is “Well, duh.” Still, economists, myself included, have tended to underplay the disruptive effects of rapid change, especially when that disruption falls heavily on particular communities. A case in point: the “China shock” that took place roughly from 2000 to 2008. While there is still considerable debate about how important that shock really was, many of us feel that we missed something important about the downsides of rapid globalization. And this has implications for climate policy now.

How to worry about globalization

Many critics of globalization make really bad arguments. No, whatever Former Guy may say, the fact that we’re running a trade deficit doesn’t mean that we’re being taken advantage of.

And no level of tariffs could restore manufacturing to the economic role it used to play; even countries like Germany, which run huge trade surpluses, have seen a steady relative decline in manufacturing employment, thanks to rising productivity:

Deindustrializing Deutschland.
Bureau of Labor Statistics

On the other hand, anyone who says something like “Economics tells us that free trade is good for everyone” doesn’t actually know much about international economics. We’ve known since a classic 1941 paper by Paul Samuelson and Wolfgang Stolper that tariffs will typically raise the real income of some people within a country even if they make the nation as a whole poorer, and conversely that trade liberalization will hurt some people even if it makes the nation richer.

So serious economists never denied that rapid growth in world trade, and especially in manufactured exports from China and other developing countries, was probably hurting some Americans. The question was one of magnitudes. Like a number of economists, I tried to do the math, applying a Stolper-Samuelson-type framework to estimate the income distribution effects of rising trade, especially the downward pressure on wages of less-educated workers.

What just about everyone concluded was that these effects were real but modest, not more than a few percent wage reduction. Globalization wasn’t harmless, but the downsides seemed to be limited.

And that’s still a point you can argue, but it’s now clear that we missed a trick, because we didn’t take into account the effects of speed, and how they interact with geography.

Consider U.S. imports from China, which rose rapidly in the early years of the new millennium. Here’s that rise, measured as a percentage of G.D.P.:

Bureau of Labor Statistics

That’s a very fast rise, and it clearly displaced U.S. workers in industries facing a surge in import competition. On the other hand, the rise amounted to only a bit more than one percent of G.D.P., so that the number of workers displaced was almost surely less than 2 million — which is actually a pretty small number in a country as big as the U.S. One way to put it in perspective is to note that over this period an average of around 2 million U.S. workers were laid off for whatever reason every month:

Bureau of Labor Statistics

So even if Chinese competition caused 2 million workers to lose their jobs over the course of a number of years, it should barely have registered, right?

Well, maybe not. In 2013 the economists David Autor, David Dorn and Gordon Hanson published a revelatory paper on what came to be known as the China shock. What they pointed out was that job displacement by imports wasn’t evenly spread across the United States. Instead, the affected industries were by and large very concentrated geographically, which meant that job losses, rather than being sort of background noise in an ever-churning economy, fell heavily on particular communities.

One example I like to use to illustrate the point is furniture production. Employment in the industry fell by about 200,000 between 2000 and 2008, largely as a result of surging imports; but since total U.S. employment was 132 million at the start of the period, this was a drop in the bucket for the nation as a whole.

Furniture production, however, was largely concentrated in the Piedmont area of the Carolinas, for example in the small metropolitan area of Hickory-Lenoir-Morganton. Look at job losses in furniture as a percent of 2000 employment:

Bureau of Labor Statistics

What was a trivial shock to America as a whole was a devastating blow to greater Hickory — actually even greater than the raw number suggests, because of the multiplier effects on employment in local services.

You shouldn’t get carried away with this kind of analysis. As Adam Posen of the Peterson Institute for International Economics recently argued, there are big dangers in letting nostalgia for the way things used to be turn into an attempt to prevent change; if we try to freeze the economy in place we’ll fail, and do more harm than good. Yet we shouldn’t dismiss concerns about change that disrupts communities; the social costs may be bigger than looking at national numbers would suggest.

But what does this have to do with coal?

The coal country conundrum

The U.S. coal industry is a shadow of its former self. When Loretta Lynn was growing up there were almost half a million coal miners; now there are only around a tenth as many:

Bureau of Labor Statistics

What’s left is, however, highly concentrated geographically in part of Appalachia, mainly West Virginia, eastern Kentucky, and western Pennsylvania. And this region doesn’t have much in the way of other “export” industries, that is, industries that sell to the world at large (including the rest of America) as opposed to serving local residents. So even though coal is barely a factor in U.S. employment these days, there are still communities in which losing what’s left of the industry would do a lot of damage.

In this sense, then, coal is a lot like the industries that found themselves in the path of China’s export boom. From a national point of view their losses didn’t loom large, but for the communities hit hardest it’s a serious blow.

And these communities are troubled in any case. They’re part of a belt of depressed local economies that suffer not just from low levels of employment but from serious social problems, including widespread opioid addiction and widespread deaths of despair.

Yet coal shouldn’t and can’t be brought back, no matter what Former Guy may have promised back in 2016. Climate change must be addressed, and that means phasing out what’s left of coal; even without a policy to that effect, market forces have made coal largely unviable.

To its credit, the United Mine Workers has accepted that reality. But the union is now calling for an effort to help coal communities survive even if coal mining doesn’t. Its new report is titled “Preserving coal country,” emphasizing the place rather than the industry. That, not Trumpian fantasies, is the right way to make the case.

Sad to say, however, that preserving coal country will be hard. The historical record of place-based policies is, let’s face it, pretty dismal. And sustaining Appalachia will be especially difficult given the realities of the 21st-century economy, which seems to want to concentrate wealth generation in big metropolitan areas with highly educated work forces.

So preserving coal country may not, in the end, be possible. But we should try. The United Mine Workers aren’t wrong in saying that letting the region decline without a good-faith effort to sustain it will have real costs to American society.

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