Trade Might Affect Distribution in Economics, but Not in the NYT

David Leonhardt's column compares the state of the economy in 1992 and 2008. He gets much of the story right, but misses a few items.

First, he notes the slow productivity growth in 1992 and attributes it to weak business investment. He then tells readers that business investment picked up under Clinton and productivity began to grow more rapidly. Actually, the increase in business investment was very modest, especially by the time of the productivity upturn in 1995. Furthermore, much of the increase was simply accounting. There was an explosion of car leasing in the 90s. A leased car counts as investment, a purchased car counts as consumption. The productivity upturn of the 90s was far too large to be explained by the modest increase in investment that we experienced. In fact, at the point where the productivity upturn began in 1995, investment was still below its late 80s share of GDP.

The second issue is that it is not clear that productivity is still growing at a healthy pace. In the three years from the second quarter of 2004 to the second quarter of 2007, productivity growth averaged just 1.6 percent a year, almost the same rate as during the 1973-1995 slowdown. There was a huge jump in the third quarter, although this will be largely offset by weak or negative growth in the fourth quarter. The course of productivity growth through the recession remains to be seen, but we cannot take for granted that 90s upturn is continuing.

The third big oversight is that trade does not appear as a factor that can improve the situation for the middle class. The upward redistribution of the last decade has gone primarily into the pockets of highly educated professionals such as doctors, lawyers, and accountants, in addition to investment manager types. These people are largely protected from the sort of international competition to which less educated and less highly paid workers like custodians and steelworkers are subjected. If we removed the trade barriers that protect highly educated workers, it would reverse this upward redistribution of income. (Journalists are on the protected list.)

One final point, the column does not include rapidly plunging house prices on its list of items causing middle class anxiety. With nominal house prices falling at an 11 percent annual rate in the latest data, it is difficult to believe that this is not a major cause for concern.

--Dean Baker