This Bonus Session expands on our in-class GMI discussion on NAFTA and explores the long-term decline in U.S. manufacturing jobs, drawing from research by Acemoglu and Restrepo's 2022 paper, Tasks, Automation, and the Rise in U.S. Wage Inequality. While trade and globalization played a role, the research shows that automation is the primary force behind both the drop in manufacturing employment and the rise in wage inequality since 1980. Its effects have been broad, sustained, and nationwide, particularly displacing routine-intensive blue-collar jobs, even as total manufacturing output continued to grow.

1. Manufacturing Employment Decline

• In 1950, ~1 in 3 U.S. workers had a manufacturing job.
• By 1980: ~20%; by 2016: under 10%; today: closer to 8%.
• The decline occurred despite steady or rising output—indicating productivity gains through automation, not offshoring, were the main factor.

2. Automation’s Impact on Jobs and Wages

• Automation accounts for an estimated 50–70% of changes in the U.S. wage structure from 1980–2016.
• Workers without a high school diploma saw wages fall ~8.8%, with industrial robots alone displacing between 400,000–700,000 jobs from 1990–2015.
• Job loss was concentrated among those performing routine, repetitive tasks, traditionally the foundation of middle-class, blue-collar employment.

3. Trade vs. Automation

• NAFTA and China’s WTO accession caused localized disruptions, but the national employment impact was smaller.
• NAFTA job losses estimated at 200k–800k.
• Increased import competition from China linked to ~2 million lost jobs, but regionally concentrated.
• Automation alone accounts for 3.3–5 million lost jobs, across the entire country.

4. Echoes in the Age of AI
The same task-displacing patterns seen in manufacturing may now emerge in white-collar sectors:

• Generative AI poses risks to routine cognitive tasks (e.g., summarizing reports, drafting standard communications).
• Like factory automation, GenAI may reshape job roles rather than eliminate whole professions.
• The potential outcome: wage polarization, where high-skill workers benefit while middle-tier roles are eroded.

5. Key Differences with GenAI
Despite parallels, AI adoption is moving faster and may be more flexible:

• Potential for task complementarity rather than substitution.
• White-collar workers may adapt more quickly due to higher education levels and geographic mobility.
• Still, the risk of “technological hollowing”—a shrinking middle class—remains.

6. Institutions Matter
Following the arguments in Acemoglu and Robinson's book, Why Nations Fail (which we will discuss in Module 5), a shrinking middle class has repercussions for the long-term economic growth rate in the US, as innovation requires wide-scale participation in economic activities. If "inclusive" institutions do not exist that both allow (via access to education, capital markets, etc.) and encourage (via ensuring new businesses can compete, supporting both small- and large- scale innovation, etc.) widespread economic innovation, long-term growth will decline.

While technological hollowing is possible in white collar sectors with the growth of genAI, it is not inevitable. Recognizing that there are always tradeoffs, there are historical policy precedents in the US that could guide this technological change towards more broad-based growth than what was experienced as automation transformed the US manufacturing sector:

• Workforce investment (e.g., GI Bill)
• Wage subsidies and expanded Earned Income Tax Credit
• Public R&D support (e.g., DARPA)
• Place-based development (e.g., Empowerment Zones)
• Balanced labor standards (e.g., Fair Labor Standards Act)

This Bonus Session summarizes Dr. J's live discussion on tariffs and the US economy held on March 15, 2025.

Main Points - Tariffs

• Theoretical Irrelevance Post-Great Depression: Economists widely agree tariffs generally harm economies based on insights gained since the Great Depression.

• Presidential Power and Constitutional Authority: Presidents have limited short-term influence on economic strength but can negatively impact it, especially through tariffs. While Congress constitutionally controls tariffs, it has delegated substantial authority to the executive branch.

• Political Statements vs. Economic Principles: Economic claims by politicians should be viewed skeptically regardless of affiliation.

False Claims About Tariffs

1. Tariffs Pay National Bills: Tariffs do not cover significant government expenses; they're paid by domestic consumers, not foreign countries.

2. Tariffs Improve Trade Deficits: Increasing tariffs does not sustainably reduce trade deficits. Initially, imports may decline, but currency appreciation makes exports pricier and imports cheaper, nullifying effects. Reagan-era tariffs did not meaningfully reduce deficits. True deficit reduction requires fiscal responsibility—higher domestic savings, lower investments, or reduced government spending.

3. Tariffs Boost the Economy: They do the opposite. Tariffs, as taxes, create inflation and decrease economic output, potentially causing stagflation.

Valid Reasons for Tariffs

1. Protect Domestic Industries: Common rationale; US sugar tariffs benefit domestic producers at consumers' expense.

2. Political Influence/Lobbying: Industries lobby for tariffs to shield their interests.

3. Support New Industries: Temporary tariffs can help emerging sectors develop efficiencies & compete globally, for instance in fields like clean energy and semiconductors.

4. National Security: Protecting vital domestic production (weapons, semiconductors) is a legitimate security concern.

5. Counter Unfair Practices: Tariffs counteract foreign policies (subsidies, weak regulations) granting unfair advantages.

6. Game-Theoretic Responses: Retaliatory tariffs can incentivize negotiation but risk damaging trade wars.

7. Weaponization of Policy: Tariffs might serve broader political strategies, effectively a weapon to obtain unrelated concessions.

8. Smooth Economic Transitions: More gradual adjustments to economic shifts (e.g., post-NAFTA manufacturing decline) reduce instability.

Current State of the US Economy

• Government Spending Cuts: Sharp cuts negatively impact economic growth, particularly affecting regions dependent on government-funded sectors.

• Increased Uncertainty: Economic uncertainty is dampening consumer spending &business investments.

• Stagflation Risk: Persistent tariffs amidst economic slowdown elevate stagflation risks, complicating Fed policy.

• Lagging Indicators: Effects may not be immediately apparent in economic data due to reporting delays.

• Financial System Stability (Currently): Positively, no widespread financial system distress or bank failures exist presently, critical to avoiding depressions. Banks have sufficient reserves, though concerns linger about potential deregulation and reduced capital requirements.

Advice for Individuals/Companies During Uncertainty

• Transparency: Leaders should clearly communicate risks without causing panic.

• Scenario Planning: Inform employees about potential outcomes to prepare effectively.

• Company-Level Focus: Prioritize organizational well-being and strategic positioning over broader economic interventions.

• Leverage Crises: Economic downturns offer opportunities for necessary organizational improvements.

• Cautious Approach: Given uncertainties, cautious monitoring of the situation is recommended.

Overview of Module 4, Section 8: Central Bank Operations in the New Norm, which discusses the evolution of the Fed's monetary policy operations, particularly the transition from a "corridor policy" to a "floor policy" following the 2008 financial crisis.

Main Themes

1. Shift from Corridor Policy to Floor Policy

• Corridor Policy (Pre-2008): This regime operated when reserves in the banking system were scarce. The Federal Reserve used Open Market Operations (OMO) (buying and selling government securities) to adjust the money supply and steer the Federal Funds Rate (FFR) towards its target.
• Floor Policy (Post-2008): The period of significantly accommodative monetary policy, including Quantitative Easing (QE), led to an abundance of Reserves in the banking system. In this environment, changes in the money supply no longer significantly impact the FFR, as banks already hold all the Reserves they desire. The Fed now primarily influences the FFR by adjusting the interest rate paid on overnight Reserve Balances (IORB) held at the Central Bank and the interest rate offered on Overnight Reverse Repos.

2. Key Policy Rates Used in the Floor Policy

• Interest on Reserve Balances (IORB): Only available to banks, this is the interest rate the Central Bank pays to banks on their Reserve balances (similar to the interest rate your bank pays you for your deposits). IORB determines the lowest interest rate a bank would be willing to lend their Reserves because banks have no incentive to lend Reserves at a rate lower than what they can earn by keeping them risk-free at the Central Bank.
• Central Bank Overnight Reverse Repurchase Rate (ON RRP): Available to a broader range of financial institutions such as money market funds (in the US, these institutions must be approved by the Federal Reserve Bank of New York), this is the rate the Central Bank pays for reverse repos. It is conceptually equivalent to the IORB (an entity gives the Central Bank money for a short amount of time and the Central Bank pays them interest), but for a larger group of financial institutions and set slightly lower than the IORB. Analogous to the IORB for banks, the Overnight Reverse Repo rate is the lowest rate at which these non-bank financial institutions would be willing to lend their excess cash.
• Discount Rate: As in the corridor range, the discount rate is the rate at which banks can borrow directly from the Central Bank and is intentionally set above the Federal Funds target rate so that it is only used as a last resort.

3. Mechanism in which the Federal Funds Rate is Managed

• As non-bank financial institutions (such as money market funds) market do not have access to the IORB rate, they lend to banks at rates below the IORB, because doing so still offers a better return than lending through the Fed’s Overnight Reverse Repurchase facility, which offers a slightly lower rate.
• Banks remain the primary borrowers in the federal funds market. But rather than borrowing to meet liquidity needs, they do so to profit from arbitrage. Specifically, banks borrow cash from nonbanks at rates below IORB (for example, from a money market fund at 5.30%), and then immediately redeposit those funds at the Fed to earn IORB (e.g. 5.40%), capturing the spread as risk-free profit.
• The federal funds rate is then pinned down between these two rates and reflects the price nonbank institutions are willing to accept for lending cash, and banks are willing to pay, to facilitate this arbitrage.

4. The New Norm

• The floor policy is expected to remain in place until the excess reserves created by QE are reduced. This unwinding is occurring through the Fed ceasing to reinvest maturing assets and through outright sales of Treasury securities and agency mortgage-backed securities.
• As reserve levels decline and the demand for reserves increases, the Fed could eventually transition back to a corridor policy and potentially lower the IORB back to zero. However, this is expected to be a gradual process.