Inequality and the China Trade

Paul Krugman writes about trade, China, and inequality. He says that in the late 1990s he, like most economists, thought the impact of trade on inequality was small. He says that the same models that showed a small impact then, point in the direction of a much larger impact in more recent years (and in the years soon to come), essentially because (to oversimplify a bit) China is so giant. Brad DeLong has his doubts:

But if those goods were to be produced here in the United States, they would be produced with higher-skil labor and with lots of capital. The key question is how has the shift in economic activity created by expanding trade affected the demand for different kinds of labor and capital here in the United States. We have had:

• A shrinkage in export and import-competing manufacturing.
• A tremendous expansion in construction.
• An expansion in consumer services.

I don't see how those shifts significantly reduce the demand for factor of production "labor" and enhance the demand for factor of production "capital." Construction employs lots of capital--but so does tradeable manufacturing. I want to see Leontief input-output matrices for the U.S. before I upweight trade and downweight education, collapsing unions, migration, changing norms, monetary policy, and other factors as more likely to be responsible for the lion's share of the increase in U.S. inequality over the past generation and a half.

I'm no economist, but DeLong and Krugman are partly talking past each other here. DeLong says the lion's share of growth in inequality "over the past generation and a half" are due to non-trading factors. Krugman, however, is talking about very recent events and events that are likely to occur in the near future.

To argue with guys with PhDs, if I were answering a question on the AP Macro test about opening up large-scale trade with a country featuring a huge labor force, I would say it should permit a faster rate of non-inflationary growth than previously existed. 21st century America has seen steady GDP growth but not anything remarkably faster than what took place previously. At the same time, we've seen little-if-any wage growth for most people. This is all related and the economy "should" (in some sense) be growing much faster.