How American leaders failed to help workers survive the 'China Shock'

Most blockbusters have sequels. Apparently, that's also true in economics. A new study by David Autor, David Dorn and Gordon Hanson offers another installment in their epic China Shock saga. You might call it China Shock: The Final Chapter. It may be the best one yet, with solid exposition and cutting-edge statistical effects. It kind of ties the whole thing together, offering important lessons for the political world on how to avoid another catastrophe for working-class Americans.

For those not caught up on the China Shock saga: About a decade ago, economists Autor, Dorn and Hanson began a groundbreaking research project to see what happened to the U.S. after China cannonballed into the global marketplace at the turn of the millennium. For competitors, it was like an earthquake followed by a tsunami followed by a flood. Between 1991 and 2013, China's manufacturing exports went from only 2.3% of the world's total to a whopping 19% of it.

Up until Autor, Dorn and Hanson began publishing about the China Shock, mainstream economists didn't really consider trade to be a crucial part of the story of rising inequality in America. They focused more on the effects of technological change and domestic policies. And to be fair to them, Hanson says, trade wasn't really an important part of the story before China came on the scene. "We had never seen a country that was this big and this specialized in manufacturing open itself that quickly."

It was not a surprise to economists that China, with its endless supply of cheap labor, killed American manufacturing jobs. But most economists, like most American leaders, had believed that workers would adapt somewhat smoothly to economic change and that they would find solid places to work in other sectors. "We had this notion that the American economy is this incredibly dynamic place," says Hanson, an economist at Harvard Kennedy School. "We create millions of jobs every year, and we destroy millions of jobs every year. We thought we could handle moving a couple of million manufacturing workers from one sector to another."

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Autor, Dorn and Hanson's first peer-reviewed papers from their China Shock saga were published in 2013. The economists found that between 1990 and 2007, trade with China killed about 1.5 million American manufacturing jobs, or about a quarter of all manufacturing jobs lost during that period. But what was even more startling: These losses were heavily concentrated in small- and medium-size communities dotting America's heartland — and workers who lost their jobs in those areas struggled to find other work. The China Shock created what looked like miniature Great Depressions in these places.

Standard economic theory said that the non-college-educated workers who lost their jobs would move or retrain and find work in other places or sectors. But they didn't. Most stayed put and were never fully employed again. "It ended up creating these pockets of distress," Hanson says. "That was the surprising part. That's what we economists didn't know was going to happen."

The initial China Shock research was pretty much as influential and eye-opening as any group of egghead academics could hope for. It has been talked about regularly in mainstream media outlets. It has been cited on Capitol Hill and in the halls of the White House. After Donald Trump got elected president with a populist China-bashing message, it helped explain an important part of the mystery of why so many working-class Americans in the Rust Belt supported him.

Spoiler alert: The sequel is depressing

In China Shock: The Final Chapter (OK, it's actually called "On the Persistence of the China Shock"), the economists tell the story of what has happened since the previous chapter. Their study period now goes from 2000 to 2019. There's quite a bit to chew on.

The first important thing to note is that the China Shock was basically over after 2010. "China had achieved enormous market shares in furniture and footwear and consumer electronics and held onto those market shares — but kind of stopped picking up market presence," Hanson says. Part of Hanson's explanation for the slowdown is that China reached the limits of its model of economic growth, which was powered by transforming an inefficient, agrarian, state-run economy into a modern industrial one. Around 2010, Hanson says, Chinese leaders also began turning away from their embrace of private enterprise and back to inefficient statism.

But even if China stopped its frenzied growth in exports, the scorched earth left by that growth still mars America's landscape. Chinese imports may have given the average American more purchasing power, allowing them to buy cheap stuff from Walmart and Amazon, but the American communities that had drawn their lifeblood from manufacturing never recovered from the evisceration of their industries. These communities just got poorer and poorer. Government programs did help a little bit, but, Hanson says, they find that government transfers offset only about 15% of the total income lost.

Surprisingly (to economists, anyway), even though these communities remain decimated, many people have still refused to leave them. Autor, Dorn and Hanson find that it was only foreign-born workers and native workers ages 25 to 39 who were likely to leave. Everyone else basically stayed, even if the economic rug was pulled out from under them. It contradicts the standard economic model, which says people will rationally move to where better opportunities present themselves.

Why did so many people who lost their jobs stay? It speaks to the power of friends and family and people's identities being intertwined with their communities and former occupations. In short, sociological and psychological complexities that economists traditionally haven't studied. But, Hanson says, there may also be some economic factors at work as well. For example, the housing markets in these places tanked after manufacturing dried up, and that likely left many people underwater on their mortgages. This may have made them reluctant to move and lose what equity they had.

The China Shock saga, Hanson says, seems to be a general story about what happens when a bomb explodes on a community's main industry. The community doesn't just bounce back. Workers don't just shift to new sectors or move to new places. The social fabric of the community gets ripped apart. Destitution, squalor and depression set in.

Autor, Dorn and Hanson draw a direct analogy to what happened to coal-mining towns in the 1980s, after the sinking price of oil and gas led to a catastrophe for the coal industry. "Those coal-mining towns had experiences that were remarkably similar to what happened in former manufacturing towns in the U.S.," Hanson says. "Job loss in one sector translated into lower overall employment rates and social breakdown: families being less likely to form, more kids living with single moms and poverty, and then more drug and alcohol abuse and substance-abuse-related mortality."

It's easy to paint China as the antagonist in the China Shock story, especially in the United States. And, Hanson says, China did do some nefarious things along the way. At the same time, trade helped hundreds of millions of Chinese people get lifted out of extreme poverty. The real failure, Dorn says, was U.S. policymaking, and he blames leaders in both parties. Leaders failed to create effective policies to help workers cope with the pain brought about by trade. Hanson says America's policies have been and remain pathetic when it comes to helping those who lose their jobs. He argues we should increase the generosity of unemployment insurance and trade-adjustment assistance and retool our programs aimed at retraining workers. Other advanced countries, he says, do a much better job on this front.

Hanson argues this is a really important lesson that American policymakers need to learn. We're going to see more shocks to communities in the future. He predicts the next one will come from the ongoing transition from oil and gas to alternative forms of energy.

So the sequel is super-depressing. In a desperate attempt for any levity, we asked what Hanson's favorite movie sequel is. He said Star Wars: Episode V — The Empire Strikes Back. We joked it's time for the Autor, Dorn and Hanson trio to release a Star Wars-style prequel to the China Shock saga.

"Funny you should ask," Hanson says. "Some of the stuff that we're working on now is understanding whether job loss that is concentrated in these manufacturing towns is different today than it was in the 1960s and 1970s."

We econ nerds at Planet Money will be lining up for the China Shock prequel.

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