Fed Chair Janet Yellen made some minor trade-related headlines (in the greater scheme of things) when she reportedly told the Senate Banking Committee that she opposed including enforceable disciplines on currency manipulation in trade agreements.
Actually, Yellen said no such thing. In response to a question from Tennessee Republican Senator Bob Corker following her latest semi-annual testimony to Congress on monetary policy, Yellen stated that she would “really be concerned” about such a move, but she by no means told the lawmakers anything like “Don’t do it!”
But what I found at least as interesting as those remarks were others in which she indicated – and not for the first time – that her views on trade and its effects on American labor markets have undergone some real changes since the 1990s – including the period when she served on President Clinton’s Council of Economic Advisors.
Before this government service, Yellen joined many other leading academics in endorsing Congress’ passage of the North American Free Trade Agreement (NAFTA). Their joint 1993 letter predicted, “The agreement will be a net positive for the United States, both in terms of employment creation and overall economic growth. Specifically, the assertions that NAFTA will spur an exodus of U.S. jobs to Mexico are without basis. Mexican trade has resulted in net job creation in the U.S. in the past, and there is no evidence that this trend will not continue when NAFTA is enacted.”
In 1998, as a White House economist, Yellen wrote a journal article displaying similar confidence. Appropriate titled “The continuing importance of trade liberalization,” Yellen’s piece concluded a staunch defense of standard trade theory and its relevance to practice by declaring, “Trade liberalization might adversely affect a small fraction of American workers in their role as producers, but it benefits all workers in their role as consumers. The bottom line is that the benefits of increased openness and increased international trade are wide ranging: more efficient utilization of resources, faster productivity growth, higher quality goods, and lower prices, all of which raise living standards.”
After a decade-and-a-half’s worth of experience with NAFTA-inspired trade deals and related policies, Yellen’s tune sounds different. Last August, speaking to the annual central bankers’ conference in Jackson Hole, Wyoming, the Fed chair attributed sluggish wage growth during the current economic recovery to “changing patterns of production and international trade.” Indeed, she cited a paper commissioned for the conference that emphasized the toll taken on workers by “the offshoring of the labor-intensive component of the U.S. supply chain.”
In yesterday’s appearance before the Senate Banking Committee, Yellen made that latter point herself. (These remarks start a little after the 46-minute mark.) Again explaining the current recovery’s anemic wage inflation, she mentioned as one of the “longer-term structural factors” likely playing a role “the fact that many labor-intensive activities in the global production chain are being increasingly outsourced….” (If only some alert legislator would point out that many higher value links in these supply chains have been offshored as well!) And she expressed no optimism that trade-related developments would ever bring any relief to a trend that’s been at work “over the last decade or so.”
Yellen’s recent pronouncements on prospects for future increases in the federal funds rate makes clear she’s become acutely sensitive to matters of time and how its passage is described. She might consider that describing outsourcing helping to undercut wages over the last decade or so means that this process started right about the time NAFTA ushered in the current phase of U.S. trade liberalization policy.