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January 09, 2013

A Shiny Quarter per Day: New TPP Study Uses Sweeping Assumptions to Project Tiny Benefit

A new study at the Peterson Institute for International Economics predicts that the Trans-Pacific Partnership (TPP) will bring increased income to the U.S. and the world at large.  In so doing, the Institute continues a stalwart tradition of using assumptions-laden computer models to project starry-eyed gains from nearly every NAFTA-style deal it sees.  The frequency of those rose-colored projections is matched by the frequency with which they’ve been wrong. 

The year before NAFTA was implemented, the Peterson Institute’s Gary Hufbauer and Jeffrey Schott projected that the deal would lead to a rising U.S. trade surplus with Mexico, which would create 170,000 net new jobs in the U.S.  Instead, the U.S.’s $1.6 billion trade surplus with Mexico before NAFTA quickly became a trade deficit after the deal took effect.  After nearly two decades of NAFTA, that trade deficit has ballooned to over $100 billion, spelling the loss of hundreds of thousands of U.S. jobs according to the Institute’s own logic.  

Even before the depth of the NAFTA deficit became manifest, Hufbauer recognized that his NAFTA-happy predictions were ill-fated.  Just two years into NAFTA, he told the Wall Street Journal, “The best figure for the jobs effect of NAFTA is approximately zero…the lesson for me is to stay away from job forecasting.” 

It appears that Hufbauer’s colleagues haven’t learned the lesson.  The Peterson Institute’s new study on the TPP, authored by Peter Petri, Michael Plummer, and Fan Zhai, uses similar computer models to conclude that the deal “promise[s] substantial benefits and could lead to…a more peaceful and prosperous world economy.” 

Even if we accept the study’s many sweeping, benefits-aggrandizing assumptions, the supposed TPP income gains touted by the authors are pretty meager.  They predict that the TPP would add $77.5 billion to the U.S. gross domestic product (GDP) by 2025, which amounts to a mere 0.4% increase in projected GDP after over a decade of the deal.  How much money might this idealized picture of the TPP mean for your wallet? 

Quarter

Twenty-seven cents per day. 

That’s right.  The present value of the additional income that the Institute thinks the TPP will bring to each person in the U.S. in 2025 amounts to a daily gain of: one shiny new quarter.  While the assumptions employed by the TPP-praising study are remarkably optimistic, the promised income gains are surprisingly dull.

Even so, these dull hoped-for gains are overstated.  To arrive at their conclusions, the authors make a litany of assumptions about the TPP’s membership and economic results—assumptions that surpass even what pro-TPP policymakers and business executives have been willing to project.  The authors admit as much in an earlier version of their study, stating, “We are attempting to evaluate the implications of aggressive policy changes rather than to predict probable outcomes.” 

The first improbable outcome that they assume is that Japan and Korea will both not only enter negotiations for the TPP, but sign the deal by next year and begin implementing it by 2015.  Back in reality, the political party of Japan’s newly-elected prime minister just got done campaigning against the pact in last year’s elections due to strong opposition from farmers and civil society groups.  Korea, meanwhile, has not even mentioned the possibility of joining the deal.  Brushing aside such inconvenient truths, the authors include both Japan and Korea in the TPP, multiplying the size of the deal and the authors’ projections of its benefits. 

Japan alone has a larger economy than all of the U.S.’s actual TPP negotiating partners, combined.  Together, Japan and Korea account for more than half of the worldwide income gains that the authors speculate will come from the TPP.  By removing Japan and Korea so as to limit TPP membership to actual TPP negotiating parties (even while keeping all other assumptions intact), the authors’ already-small projected TPP global income gain of 0.3% in 2025 falls to just 0.1%.  Without Japan and Korea, the projections for U.S. income would similarly fall, reducing even further the promised extra-quarter-per-day benefit of the TPP.

That coin-sized benefit declines even more when you start examining the smorgasbord of economic assumptions on which the study relies.  The authors’ prediction of increased income via the TPP rests on projections of rising exports and foreign investment, which in turn depend on a host of sweeping judgments, including (warning: brief bout of wonkiness ahead):

  • that NAFTA-style deals bring greater foreign investment despite studies finding no such correlation
  • that all displaced workers can quickly find new jobs by switching industries
  • that TPP countries would use tariff reductions at considerably high rates based on an unsubstantiated assumption that utilization rises with the size of an agreement, and
  • that a trade agreement’s “depth” on a given issue can be discerned by “counting the number of characters used in the text.”

It was dependence on layers of such economic theories and approximating assumptions that caused Gary Hufbauer to produce his ill-fated projection of rising net U.S. exports under NAFTA.   Unfortunately, it appears Huffbauer’s lesson has yet to sink in at the Institute. 

While inflating projected benefits of the TPP, the study ignores many of the costs.  First, the study makes no attempt to determine the impact of the deal on income inequality.  Rather than addressing who will see projected benefits and who will bear the costs of the NAFTA-style deal, the study treats everyone in each country as “a single representative household.”  In other words, the authors ask us to imagine (a la Lennon) that there is no rich, no poor, and no growing gap between the two. 

But as economists have said for over seven decades, liberalized trade is expected to widen the gap between rich and poor in countries like the U.S., and as we’ve said several times, such yawning inequality is exactly what we have seen under NAFTA.  There’s little reason to suspect that TPP, modeled on NAFTA, would not continue this trend, with income gains for the wealthy eclipsed by income losses for many workers. 

Indeed, the study does acknowledge that hundreds of thousands of workers will likely lose their jobs under the TPP, many of whom will “be forced to undertake a lengthy job search, learn a new skill, or move to a new location…and some older workers may even leave the labor force.”  What the study does not address is the wages that the displaced workers are likely to find after enduring the arduous job search. 

The authors predict that the brunt of the TPP job loss will occur in manufacturing, with the pact eroding business for textiles, apparel, chemicals, metals, electrical equipment, machinery, transportation equipment, and other manufacturing sectors.  According to the study, these displaced workers will eventually find service-sector jobs.  This is a familiar story.  Under NAFTA, hundreds of thousands of U.S. manufacturing workers lost their jobs, many of them eventually settling for service-sector jobs that paid significantly less.  The Brookings Institution estimated that the average displaced manufacturing worker lost 20 percent of her wages, replacing a salary of over $40,000 with one around $32,000. 

Alongside the loss of good-paying manufacturing jobs, the TPP, according to the study’s own assumptions, would roll back vast swaths of public interest regulations.  Much of the study’s touted TPP income gains result from a projected elimination of “non-tariff barriers” to trade.  What exactly is a non-tariff barrier?  NAFTA-style trade deals have affixed this Orwellian label to a host of public interest policies targeted for dilution or elimination.  These include patent standards that prioritize access to medicines, bans on toxic chemicals, programs like Buy America to invest tax revenues in domestic jobs, laws to safeguard workers’ rights, labels identifying products as safe for the environment, and other popular policies. 

The authors of the study assume that the TPP would slash up to two out of every three such “barriers.”  Doing so, they assume, would increase the flow of goods, services, and investment so as to generate the hypothetical gain of an extra quarter per person per day.  My guess is that the average person in the U.S. would be willing to forego the quarter in exchange for safe food, dignified work, affordable medicines, and a healthy environment. 

Having speculated the TPP’s benefits and ignored its costs, the authors generate an equally fanciful timeline for completion and implementation of the deal.  Calling their projections “aggressively timed,” the authors assume that the TPP’s current negotiating countries will sign the deal this year, that the U.S. Congress will soon thereafter approve it, and that the pact will enter into force by next year. 

Even TPP-gung-ho members of the business community doubt that the deal can be inked this year.  Bill Reinsch, President of the TPP-supporting National Foreign Trade Council, predicted last month that negotiators would fail to close the deal in 2013, due to a host of divisive issues yet to be touched.  These include the chasms between U.S. demands and the positions of most other TPP members on intellectual property, investment, labor, environment, state-owned enterprises, dairy, footwear, textiles, sugar, and other contentious areas.  Significantly fewer areas of disagreement, along with massive popular opposition, effectively killed the Free Trade Area of the Americas, the TPP-like deal envisioned for the entire Western Hemisphere that fell apart in 2005. 

Even if the TPP were negotiated and signed, the idea that Congress would immediately thereafter endorse the NAFTA-style pact is politically silly.  Last November’s elections featured more than 125 campaign ads across 30 states criticizing the trade status quo as candidates engaged in a bipartisan race to appeal to the U.S. public’s majority opposition to NAFTA-style deals.  The results shifted the balance of the Senate decidedly away from support of more NAFTA-esque pacts.  To presume that the U.S. public, or their representatives, will now simply swallow the TPP—the largest NAFTA expansion to date—is perhaps one of the authors’ most bewildering assumptions. 

A study that uses a computerized model and palette of assumptions to paint a pretty TPP picture will not cause people to forget NAFTA’s nearly two decades of declining wages, rising inequality, and eroding health and environmental standards.  Even if the Institute’s picture were more realist than romantic, such costs simply aren’t worth an extra quarter a day.  

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