Choosing the Right Words when Giving Economic Policy Advice

This article appeared in the March edition of the ZEWnews.

Anyone familiar with how easily experts can put their foot in their mouth when giving economic policy advice to lawmakers may have some sympathy with the recent story involving Gregory Mankiw, chief economist to the President of the United States. According to press reports, Mankiw had pointed out that the loss of jobs on US soil to low-wage countries would benefit US consumers. This led to a wave of uproar in the run-up to the US election and Mankiw had to apologise.

On its own, Mankiw’s assertion is not at all controversial in economic terms, but the unlucky economist neglected to put his words directly into the context of employment policy. Mankiw must have surely been aware of how enthusiastically the media likes to quote what they think is catchy sound-bite by ripping it from the context of a much larger text, a practice which can often lead to readers drawing the wrong conclusion. How should he have formulated his comments then?

To answer this question, there are certain factors to consider from the outset. Firstly, international trade on the whole offers considerable advantages to those countries involved, regardless of the fact that in this context certain groups will lose out. If individual countries choose to specialise on producing goods at an absolute or comparative cost advantage over other countries and then conduct trade with these countries, this leads to lower prices and a greater supply of goods than if there was no international trade between these countries. As a result, as international trade has expanded, new jobs are created in the branches of the economy favoured by the country’s international specialisation, while in the same country jobs are lost in the sectors that do not complement this specialisation. The challenge faced by national economies is to overcome these structural changes in various sectors of the economy. What is more, in Germany these changes primarily, though not exclusively, affect low-qualified workers. The goods they might produce can be manufactured elsewhere for a fraction of what it would cost in Germany (in wages, taxes, etc.). Germany is not the only country facing these challenges; low-qualified workers can be found all over the world. Some countries have however managed to successfully deal with this problem. Finally, these considerations ostensibly only apply for tradeable goods and services, but manufacturers should not get complacent if their products cannot be exported. Workers can simply leave, as sectors like the construction industry can bear witness to, and so can customers, as frequently recounted by hairdressers in Frankfurt an der Oder on the border with Poland.

With this in mind, Mankiw’s statement should have ran something like this: “It is a matter of maximising the great advantages of international trade for consumers while at the same time taking care to ensure as much as possible that workers who lose their jobs have other employment opportunities.” This, of course, raises the next questions, namely what this kind of strategy would look like. Protectionism would certainly be the wrong answer to this question. At best, countries can buy themselves some time with the help of adjustment periods – such as in the case of freedom of movement regulation for workers coming from the more recent EU Member States – to support the necessary adjustment measures with regard to professional and regional mobility as an employment-friendly income (structure) policy. However, having a broad professional qualification is still the best way to guard against unemployment. As bleak as it may sound, not everyone who loses their job will find another one. This is where social policy has to step in.