Even as U.S. policy makers continue to debate the relative advantages and drawbacks of globalization, it’s abundantly clear that international trade is not the benevolent force it was once thought.
For all its promise of boosting incomes and strengthening growth, trade has had a disproportionately damaging impact on regions of the U.S. that have long depended on manufacturing. Recent data shows that these communities have suffered a great deal of economic distress, including high rates of underemployment and joblessness.
These communities have also become much more indebted compared with the rest of the nation, according to my latest research. During the years 2000 to 2007 — also known as the run-up to the Great Recession — overall American household debt doubled. That debt peaked in 2008, at almost $13 trillion. This leverage, however, was not shared equitably. Household debt in regions of the country where manufacturing jobs had shifted overseas grew an additional 20-30% over that period. In other words, nearly a third of American household debt during that time frame can be attributed to import competition with China and other low-wage countries.
Why does this matter? For starters, the research — which I undertook with my colleagues Jean-Noel Barrot of MIT, Matthew Plosser of the New York Federal Reserve, and Julien Sauvagnat of Bocconi University — shifts the narrative on what fueled the credit bubble that preceded the Great Recession. To date, most of the economic literature has focused on the supply side and the private sector’s drive for short-term profit. Greedy banks sold unsuspecting customer risky loan products. Money-hungry private lenders made mortgages too easy to get. And fund managers sought new investments through high-yield mortgage-backed securities.
But our study shows that the demand for debt was also a big contributing factor. Perhaps more importantly, our study suggests that a great deal of this household debt can be tied directly to globalization.
It’s not difficult to piece together what happened. As factories shut down and manufacturing jobs were shipped overseas, many Americans — especially blue-collar laborers without a college degree — found themselves without a paycheck. So they borrowed to make ends meet. This borrowing often came in the form of home-equity loans or mortgage refinancing. (In fact, we found that the rise in household debt was strongest in areas where house prices had appreciated the most.)
In theory, this is how financial markets ought to work. People should be able to borrow money when they need it — and it makes sense to use a home as collateral, particularly when the value of that home has increased.
Read the full post at MarketWatch.
Erik Loualiche is an Assistant Professor of Finance at the MIT Sloan School of Management.