[CTC] Peterson Institute Finds Boost From TPP Outweighs Adjustment Costs

Wed Mar 16 10:47:51 PDT 2016

The latest pro-TPP Peterson report, which estimates between 238,000 and 1,690,000 jobs lost in the first ten years, can be found at: http://www.piie.com/publications/interstitial.cfm?ResearchID=2931 <http://www.piie.com/publications/interstitial.cfm?ResearchID=2931>
Peterson Institute Finds Boost From TPP Outweighs Adjustment Costs

Inside US Trade, March 15, 2016 
A new report by the Peterson Institute for International Economics argues that the economic benefits of the Trans-Pacific Partnership (TPP) vastly outweigh adjustment costs associated with the deal over a 13-year period and that economic gains will be spread evenly throughout the economy, and actually reduces income inequality.

The study, produced by Peterson Institute nonresident senior fellow Robert Z. Lawrence and Peterson Institute research analyst Tyler Moran, maps three scenarios to determine the impact on job displacement using a different set of assumptions in each instance. The authors compare these scenarios against the 2016 weekly average unemployment additions of 277,000, and generally the report finds that “displacement from the full adjustment to the TPP over more than a decade is less than the weekly additions to unemployment claims in 2016.”

The first scenario, deemed the least realistic by the authors, assumes that businesses lay off workers who produce the finished goods and services imported as a result of TPP, as well as their inputs. This results in 1.69 million people -- or 169,000 people a year over ten years -- losing their jobs in a wide variety of sectors, including those not commonly associated with trade such as social services and utilities.

The authors arrived at the total of 1.69 million lost jobs by employing an “input-output matrix” previously used in a January 2016 study <http://insidetrade.com/node/152302> by the Peterson Institute to determine the economic effects of TPP, Lawrence said in a March 15 interview with Inside U.S. Trade. The matrix allows for the tracing of final output costs to the industrial origins of that output and uses worker productivity measurements in each industry to determine the jobs displaced by increased imports, according to Lawrence.

The second scenario takes into account “employment growth repression,” which is the idea that companies will grapple with increased imports by hiring fewer new employees than they would in a world without TPP and reassigning workers away from sectors that are no longer producing goods and services due to increased imports. The study claims that if this were the case, 278,000 jobs would be lost over the first ten years of TPP's entry into force, the majority of which would be in the manufacturing sector.

The third scenario builds on the second and adds “voluntary attrition” variables, such as voluntarily quitting a job to find more attractive work elsewhere and labor force exits through retirement or death. Citing data from the U.S. Bureau of Labor Statistics, the authors argue that 14.3 percent of employees are likely to voluntarily exit the manufacturing sector on an annual basis which lowers job loss as a result of TPP to 238,000 workers over the first ten years of the trade agreement's entry into force.

In order to calculate the economic costs of these job losses relative to the economic gains associated with TPP, the authors assume that the value of income loss would be 1.4 times that of annual income accrued from that lost job, while maintaining that the benefits of TPP by 2030 will be equal to 0.5 percent of the U.S. GDP or $131 billion. In order to calculate the economic benefits of TPP, the authors relied on the model used in the January 2016 Peterson study.

Under the first scenario which does not include mitigation from employment growth repression or voluntary attrition, the benefits are 12.3 times greater than the costs of the trade agreement. The second scenario would produce benefits 98.1 times greater than the costs, while the third scenario finds that the benefits of TPP are 114.5 times greater than that of costs associated with the deal.

The report also makes the case that the economic gains from TPP are spread mostly evenly across households regardless of income, with the smallest gains in percentage terms for the top 20 percent of the income distribution in the U.S., relative to factor income without TPP from 2015-2030. Factor income is a measure of income from the three factors of production: land, labor and capital.

Households with incomes in the lowest 20 percent -- or the fifth quintile -- will see a 0.528 percent gain in factor income or about $2 billion total by 2030. The fourth quintile would see a 0.53 percent gain in factor income amounting to a $6 billion increase. The third quintile is predicted to have a 0.529 percent increase in factor income which translates to an additional $13 billion while the second quintile is projected to gain 0.531 percent in terms of factor income which produces a $21 billion windfall.

The first quintile, households making up the highest 20 percent of incomes, sees the smallest percent gain in terms of factor income as a result of TPP with a 0.521 percent boost but the largest gain in terms of actual dollars brought in from the agreement with a $48 billion gain.

Additional factor income in the fifth through second quintile stems mostly from increased wages for non-college educated labor and an increase in net capital which boosts real profits and purchasing power, according to Lawrence. On the other hand, the first quintile sees the largest increase in factor income stemming from increased wages for college-educated labor.

The report finds that, “in sum, the TPP will improve the consumption possibilities of poorer relative to wealthier households. Claims that the TPP would worsen income inequality in the United States are thus not borne out.”

The Lawrence and Moran study aims to defend and build on the January Peterson Institute study produced by Peter Petri and Michael Plummer which has been criticized by some academics <http://insidetrade.com/node/152398> and lawmakers -- including House Ways & Means Committee Ranking Member Sandy Levin (R-MI) -- for not taking into account the economic downsides of TPP associated with employment dislocation, according the Lawrence.

The Petri and Plummer study uses the computable general equilibrium (CGE) model, which assumes that economies are always operating at full employment.

Lawrence and Moran offer a defense of Petri and Plummer's report first by arguing that the CGE model's assumption of full employment is necessary and appropriate to track the long-run impacts of the trade agreement. Holding static employment over a long period of time allows for a more accurate determination of changes in wages and the impact the agreement may have on inequality which in turn allows for a more accurate estimation of dislocation costs, Lawrence said.

 Lawrence also took issue with a number of other studies on TPP's economic impact, including reports published by Tufts University <http://insidetrade.com/node/152025> and theEconomic Policy Institute <http://insidetrade.com/sites/insidetrade.com/files/documents/mar2016/wto2016_0637.pdf>, for using a model that overstates the significance of TPP's impact on U.S. employment relative to other macroeconomic “shocks” or variable which have a larger effect on employment rates, wages, and other economic inputs.

Lawrence and Moran also argue that Petri and Plummer's failure to predict adjustment and wage costs of workers displaced by TPP is remedied by their own findings and therefore their paper compliments and fills the gaps of Petri and Plummer's.

Levin in February at a U.S. International Trade Commission (ITC) hearing on the economic impact of TPP argued that its analysis must include an examination of how TPP will affect wages and income inequality; a review of whether the ITC's economic model should assume full employment; and an analysis of who will experience gains or losses as a result of TPP and other factors. Lawrence said that his and Moran's paper aimed to answer Levin's demands for a more holistic analysis of TPP.

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