November 2012, Week 3


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Sun, 18 Nov 2012 21:57:25 -0500
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WashPost Ignores Historic Inequality Under NAFTA, 
Cites Hypothetical Twinkie-Sized Gain
Posted by Ben Beachy
Public Citizen
November 13, 2012

Yesterday the Washington Post's WonkBlog engaged in some
undeserved albeit tepid NAFTA cheerleading by profiling
a new NBER study estimating that the deal has brought a
tiny increase in real wages.  And I mean tiny-the
authors use a mathematical model to project that the
deal led to a 0.17% increase in real U.S. wages over a
twelve-year period (1993 to 2005).  That means that the
average U.S. worker, who was earning $22,000 in 1993,
can thank NAFTA's first twelve years for a real wage
increase amounting to a whopping $37.  That's right-
according to the NAFTA-friendly study's own theorized
calculations, each worker should consider the annual
worth of NAFTA to be close to that of a box of Twinkies:
about three dollars.

Does such a conclusion merit a blog post entitled
"Study: NAFTA Raised Pay Here and Abroad?"  Probably
not.  But that's not the most concerning element of the
WonkBlog piece.  The bigger elephant in the post is that
"raised pay" from NAFTA is simply not the reality for
the majority.  Neither the study nor the blog post
address the real story of NAFTA and wages: that the deal
has fueled a regressive redistribution of income from
average workers to the wealthy.

Trade economists widely acknowledge that any U.S. income
increases resulting from NAFTA-style trade deals will
tend to disproportionately favor the wealthy while real
wage reductions are likely to be the result for the rest
of us.  In standard trade theory, the Stolper-Samuelson
effect predicts that open trade will create increased
demand for U.S. capital-intensive goods and reduced
demand for U.S. labor-intensive goods, thereby
increasing income for capital owners (i.e. the wealthy)
while reducing wages for workers.  Under NAFTA, this
regressive impact has moved from theory to reality.  One
study by the Economic Policy Institute estimated that
even after taking into account consumer savings from
cheaper imports, a U.S. household with two median wage
earners was losing $1,000 of earnings each year to
NAFTA-style trade by 1995, increasing to a $2,000 annual
loss by 2006.  The median U.S. worker probably finds
little comfort in a new study that averages out gains at
the top to transform her real $1,000 trade-related loss
into a hypothetical $3 gain.

The regressive influence of NAFTA-style trade on income
distribution may help explain why income inequality in
the NAFTA era has reached historical heights, now
apparently surpassing even the inequality levels of
1774.  Median real incomes in the U.S. have been falling
for the last decade, while the income of the richest 1%
has been continually climbing.  Workers' productivity
has been steadily rising while labor's share of income
has been steadily falling.  Why are workers getting paid
less while doing more?  Economists from institutions
ranging from the Economic Policy Institute to the
Federal Reserve have named NAFTA-style trade as a key
answer ("increased globalization and trade openness," in
the words of Federal Reserve economists).  So the
income-related takeaway from NAFTA is not the deal's
miniscule impact on aggregate wages (whether negative or
positive), but its large impact on income inequality.

But even if we were principally concerned with the
miniscule aggregate impact, the study featured in the
WonkBlog omits several key factors, calling into
question the small positive impact it cites.  First, the
study only aims to estimate the impacts of NAFTA's
tariff reductions, which were a focus of only 6 of the
deal's 22 chapters.  The authors make explicit the
limitations of disregarding the brunt of the agreement's
content, stating, "Unquestionably, NAFTA had more
provisions than only reducing tariff between members and
by no means our results should be interpreted as the
trade and welfare effects of the entire agreement" (pg.
27).  Non-tariff NAFTA provisions that could impact real
wages include those found in the deal's intellectual
property chapter, as Dean Baker notes over at the Center
for Economic and Policy Research.  The chapter grants
pharmaceutical firms and other corporations anti-
competitive patent extensions, which tend to inflate the
cost of medicines and other patented products, thereby
eroding consumers' real wages.

In addition, the wage increase cited by the WonkBlog
ignores another side of the tariff reduction coin: loss
of tariff revenue for all three NAFTA governments.  The
study itself notes that this loss in fiscal revenue
actually outweighed the purported real wage gains for
Mexico and Canada.  Taking into account reduced tariff
income, the authors conclude that the net income effect
of NAFTA's first twelve years is a 0.1% loss for both
Canada and Mexico (pg. 25).  In the United States, the
lost tariff revenue reduces the Lilliputian wage impact
even further, yielding a purported 0.1% net increase to
aggregate income.  At that rate, the hypothetical
average U.S. worker did not see a gain of $37 under a
dozen years of NAFTA, but just $22-less than an average
tank of gas.  Meanwhile the actual median worker
continues to lose at least $1,000 each year under NAFTA-
style trade.  One of these facts seems worthy of a blog
post.  One does not.


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