Kimberly Clausing on Open and the Progressive Case for Free Trade

Episode Summary

Executive Summary: Russ Roberts and Kimberly Clausing discuss globalization, trade, and distributional harms. They broadly agree free trade raises overall prosperity, but debate how much recent growth has benefited typical workers and what politically feasible policies can soften dislocation. The conversation centers on trade deficits, China, job churn, redistribution, and tax reforms to make openness more inclusive.

Main Topics: Has the typical American benefited from globalization? (Priority: 5/5): Clausing argues that since 1980, GDP growth has not translated evenly into rising living standards for lower- and middle-income households, while Roberts questions the data, citing inflation measurement and household composition changes. Politics vs. optimal policy (Priority: 5/5): Clausing criticizes economists for prescribing ideal policies without considering political feasibility, and argues her book focuses on realistic reforms rather than first-best theory. Free trade and the ethics of winners and losers (Priority: 5/5): Both guests support trade, but Roberts emphasizes the moral problem of large short-run losses, while Clausing argues protectionism usually worsens outcomes and creates collateral damage. Trade deficits and macroeconomics (Priority: 5/5): Clausing explains that trade deficits reflect saving-investment gaps and budget deficits, not national competitiveness, and says tariffs do not solve the underlying issue. China shock and job churn (Priority: 4/5): They discuss the labor-market disruption from China’s rise, acknowledge concentrated losses in manufacturing, but stress that job creation and destruction are ongoing features of a dynamic economy. Policy responses for displaced workers (Priority: 5/5): Clausing proposes expanded earned income tax credits, wage insurance, community college access, zoning reform, infrastructure, and local public investment to help workers and regions adapt. Tax reform, climate, and inclusive growth (Priority: 4/5): Clausing advocates a grand bargain: more progressive taxation, uniform treatment of income, reduced sheltering, and a carbon tax with rebates to fund redistribution and decarbonization.

Key Arguments: Clausing argues the post-1980 era delivered growth, but much of the bottom 50% did not experience comparable gains in living standards or security. Roberts counters that inflation and demographic changes may make the stagnation narrative overstated, though he accepts regional and educational divides are real. Both agree trade creates winners and losers, but Clausing says the answer is redistribution and adaptation, not protectionism. Clausing argues tariffs are costly, create new shocks, raise consumer prices, and encourage rent-seeking rather than productive competition. Trade deficits are not evidence of weakness; they primarily reflect macro saving and investment behavior, especially government borrowing. China’s rise was large and disruptive, but many losses were offset by gains in cheaper goods and job creation elsewhere in the economy. The most promising help for displaced workers is targeted transfer and mobility policy: EITC expansion, wage insurance, community college, and zoning reform. Clausing’s preferred tax system would better fund redistribution by taxing all income more uniformly and using a carbon tax as an efficient revenue source.

Data Points: Period comparison: 1945-1970 vs. 1980-present - Clausing contrasts the postwar era with the more recent globalization era to argue that typical-worker gains have slowed. Bottom half living standards: Relatively stagnant - Clausing says the bottom half of the population has not kept pace with earlier expectations. Income insecurity: Survey measures of ability to cover 3 months without wages are rising - Clausing cites increasing economic insecurity as evidence of strain on workers. Tariff cost per steel job saved: About $650,000 - Clausing cites studies suggesting steel tariffs are extremely costly per job preserved. Trade deficit size: About 3% of GDP - Clausing says current U.S. trade deficits are not large enough to imply major shocks in a floating exchange-rate system. China-linked job loss estimate: About 2 million workers - Roberts and Clausing discuss estimates associated with China’s manufacturing rise. Quarterly job churn: Over 6 million jobs lost and over 6 million jobs created - Clausing and Roberts use job churn data to show labor markets are highly dynamic. Childless EITC max: About $500 - Clausing notes the earned income tax credit is much smaller for childless workers than for parents. EITC with children: Up closer to $6,000 - Clausing uses this contrast to argue for broader support of low-income workers. CO2 policy example: Carbon tax with rebates can leave the bottom 70% ahead - Clausing argues a carbon tax rebated per person could be progressive while reducing emissions. China poverty reduction: 800 million people - Roberts and Clausing note the massive global poverty reduction linked to China’s integration into the world economy.

Pivotal Quotes: "it is a quite common affliction of the economist to smugly pronounce what an optimal policy would look like... and then pass off the resulting problem as one of politics" — Kimberly Clausing: Clausing explains why her book focuses on politically feasible policy, not just first-best theory. "if we didn't have free trade, ultimately things would be even worse" — Kimberly Clausing: She defends free trade while acknowledging distributional harms and the need for compensation. "we have really powerful tools through the tax system to make sure that when GDP goes up, everyone's income goes up" — Kimberly Clausing: Clausing lays out her preferred approach to inclusive growth through redistribution.

Implications: For listeners, the core lesson is that openness is beneficial but not self-justifying: trade and globalization need credible redistribution, mobility, and climate policy to preserve public support. Future debates will likely hinge less on whether trade helps overall and more on how to share gains and absorb losses.