Category: From CEPR Co-Director Dean Baker

Not Everything Trump Says on Trade is Wrong: Countries Don't Always Benefit from More Trade

Dean Baker

Dean Baker Co-Director, Author, Center for Economic and Policy Research

Donald Trump's tendency to make things up as he goes along naturally prompts a strong reaction from people who try to approach issues in a serious way. But serious people can sometimes get carried away in this reaction.

Glenn Kessler, the Washington Post's fact checker, got a bit carried away in trying to set readers straight on Trump's bizarre claim we have a $100 billion trade deficit with Canada. (We do have a trade deficit, but it is closer to $20 billion.) In his Fact Check piece, Kessler asserts:

"If overall trade increases between nations, people in each country gain, no matter the size of the trade deficit."

This is not necessarily true. Let me go through two cases, one in which the countries are below full employment and one in which they are at full employment.

Suppose in the first case one country, let's say Denmark, decided to subsidize $100 billion of exported cars to the United States, displacing $100 billion of domestic production. The immediate effect of the increased imports from Denmark is a loss of output and employment in the United States.

In principle, the Danes have another $100 billion to buy goods and services from the United States, but suppose they don't like anything we sell. In the textbook story, they would dump their $100 billion on world currency markets, driving down the value of the dollar. This would make US goods and services relatively cheaper, thereby causing us to export more and import less, possibly fully offsetting the $100 billion in increased imports.

But suppose the evil Danish central bank used these dollars to buy up US government bonds, as many countries have done over the last two decades. This would keep the dollar from falling. The purchase of US bonds would have some effect in lowering US interest rates, but this would be just like the Fed's quantitative easing policy. The lower interest rates would boost demand, but not nearly enough to offset the $100 billion increase in our trade deficit.

So, in this below full employment story we end up with a situation where trade has increased by $100 billion, but the US is left with lower employment and output. It sure looks like it has been hurt by more trade.

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Senator Lankford Is Confused About the Trade Deficit

Dean Baker

Dean Baker Co-Director, Author, Center for Economic and Policy Research

Yep, the senator from Oklahoma says it is good in a Washington Post column. Most of Senator Lankford's confusions are pretty standard, but he does come up with an original one.

"For starters, a powerful economy such as ours often runs a trade deficit because of the immense buying power of its people. Mexico’s average net per capita income is roughly $13,000, while the average U.S. household brings in more than $41,000 each year. Americans have a far greater capacity to buy goods than do consumers in Mexico. It should come as no surprise that we do exactly that."

Okay, we have a trade deficit simply because we are a rich country. I suppose someone forgot to tell Germany that it is a rich country since it has a massive trade surplus of more than 8 percent of GDP (roughly $1.6 trillion in the U.S. economy.)

He then tells us that our imports frrom Mexico will help it to grow and eventually make Mexico a better market for U.S. products. While this is true, Mexico's economy has actually grown less rapidly on a per person basis than the U.S. since NAFTA went into effect in 1994. While NAFTA may not be the cause of weak growth in Mexico, it apparently has not prevented the two economies from diverging further.

Then we get some of the standard confusion pushed by denialists:

"Foreign investment also tilts the trade-balance calculation. Because we have the world’s largest economy and the strongest currency, more money comes into the United States than goes out. This surplus of investment adds to our trade deficit, even though this foreign cash stimulus is a positive for our economy.

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Mulvaney’s MAGAnomics Mix of Groundhog Day and Flat Out Lies

Dean Baker

Dean Baker Co-Director, Author, Center for Economic and Policy Research

Office of Management and Budget Director Mick Mulvaney had a Wall Street Journal column highlighting the benefits of “MAGAnomics.” The piece can best be described as a combination of Groundhog Day and outright lies.

In terms of Groundhog Day, we have actually tried MAGAnomics twice before and it didn’t work. We had huge cuts in taxes and regulation under both President Reagan and George W. Bush. In neither case, was there any huge uptick in growth and investment. In fact, the Bush years were striking for the weak growth in the economy and especially the labor market. We saw what was at the time the longest period without net job growth since the Great Depression. And of course, his policy of giving finance free rein gave us the housing bubble and the Great Recession.

The story of the 1980s was somewhat better but hardly follows the MAGAnomics script. The economy did bounce back in 1983, following a steep recession in 1981–1982. That is generally what economies do following steep recessions that were not caused by collapsed asset bubbles. Furthermore, the bounceback was based on increased consumption, not investment as the MAGAnomics folks claim. In fact, investment in the late 1980s fell to extraordinarily low levels. It is also worth pointing out that following both tax cuts, the deficit exploded, just as conventional economics predicts.

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Painful Nonsense on Trade

Dean Baker

Dean Baker Co-Director, Author, Center for Economic and Policy Research

It really is amazing how much effort elite types expend denying that trade has cost us manufacturing jobs. The latest entry is from Robert Samuelson who tells us that it isn't true that manufacturing jobs have been lost to trade. Samuelson's main source on this is Brad DeLong, who is actually a very good economist and surely knows better.

Samuelson tells readers:

"Contrary to popular opinion, trade is not a major cause of job loss. It’s true that U.S. manufacturing has suffered a dramatic long-term employment erosion, sliding from roughly one-third of nonfarm jobs in 1950 to a quarter of jobs in the early 1970s to a little less than 9 percent now, according to economist J. Bradford DeLong of the University of California at Berkeley in an essay posted on Vox. But the main cause is automation."

The cheap trick here is going back to 1950. Yes, we have lost lots of manufacturing jobs to automation and over a 70 year period that does swamp the impact of the jobs lost due to trade, but this is really a dishonest way to present the issue. Manufacturing was declining as a share of total employment even in the 1950s and 1960s, but the pace was modest enough and we were creating enough jobs in other sectors that the job loss still allowed for real wage growth in both manufacturing and the economy as a whole.

 

What is at issue is the rate of decline, not the fact that manufacturing employment is dropping. The graph below shows the number of manufacturing jobs in the economy since 1970.

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The Washington Post-President Obama TPP-Challenge

Dean Baker

Dean Baker Co-Director, Author, Center for Economic and Policy Research

It's hard to resist a good challenge and the Washington Post gave us one this morning in an editorial pushing the Trans-Pacific Partnership (TPP). The editorial criticized TPP opponents and praised President Obama for continuing to push the deal. It tells readers:

"Mr. Obama refused to back down on the merits of the issues, noting that other countries, not the United States, would do most of the market-opening under the TPP and challenging opponents to explain how 'existing trading rules are better for issues like labor rights and environmental rights than they would be if we got TPP passed.'"

Okay, here's how we are better off with existing trade rules than the largely unenforceable provisions on labor and environmental standards in the TPP.

1) The TPP creates an extra-judicial process (investor-state dispute settlement [ISDS] tribunals) whereby foreign investors can sue governments for imposing environmental, health and safety, and even labor regulations. Under the TPP, these tribunals are supposed to follow the far-right wing doctrine of compensating for regulating takings. This means, for example, that if a state or county restricts fracking for environmental reasons, they would have to compensate a foreign company for profits that it lost as a result of not being allowed to frack or the additional expense resulting from the standards imposed. The ISDS tribunals are not bound by precedent, nor are their decisions subject to appeal.

2) The TPP imposes stronger and longer patent and copyright protection. These protectionist measures are likely to do far more to raise barriers to trade (patent and copyright monopolies are interventions in the free market, even if the Washington Post likes them) than the other measures in the TPP do to reduce them. In addition to the enormous economic distortions associated with barriers that are often equivalent to tariffs of 1000 percent or even 10,000 percent (e.g. raising the price of a patented drug to 100 times the generic price), TPP rules may make it more difficult for millions of people to get essential medicines.

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Is Donald Trump Serious About Trade, Or Anything?

Dean Baker

Dean Baker Co-Director, Author, Center for Economic and Policy Research

One of the main themes of Donald Trump’s presidential campaign has been the idea of getting tough with our trading partners. He has attacked President Obama and his predecessors for negotiating bad deals. Trump promises to get tough with the Chinese, Mexicans, and other trading partners and thereby bring jobs back to the United States.

While many working people would agree that recent trade deals have not benefited them, they have good cause to be skeptical about Trump’s get tough promises. Most immediately his vice-presidential pick, Governor Mike Pence, has been a strong supporter of NAFTA and other trade deals. But choosing vice-presidents with differing views certainly has precedents.

More importantly, it is not clear what Trump thinks he is going to do when he gets tough with the Chinese and the other bad guys in his story. It’s true that China and Mexico and many other countries are running trade surpluses with the United States. And it’s also true that these surpluses have cost the jobs of millions of workers. In some cases these workers have been able to find new jobs, generally at much lower pay. However in many cases these workers remain unemployed and end up dropping out of the labor force altogether.

The trade deficit poses an especially severe problem in the context of secular stagnation: a situation in which the economy faces a sustained shortfall in demand. In the years prior to the collapse of the housing bubble most economists did not take the idea of a secular stagnation seriously. Their view was that if we saw a loss of demand due to a trade deficit, we could simply make it up with increased demand from consumption or investment spending.

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Contrary to What You Read in the WaPo, Financial Transactions Taxes Will Save Most Investors Money

Dean Baker

Dean Baker Co-Director, Author, Center for Economic and Policy Research

In an article that reports on plans by a new coalition to challenge the financial industry, the Washington Post implied that the financial transaction tax (FTT) supported by the coalition would hurt ordinary investors. The piece told readers:

"The proposed so-called transaction tax has already raised concerns among some on Wall Street. Such a tax would also effect pension funds or other large investors who sometimes trade thousands of stocks a day, they say.

"'While some politicians claim this tax is directed at high frequency trading, the truth is that it would directly hit the pension funds of hard-working teachers, nurses and teamsters,' said Bill Harts, chief executive of Modern Markets Initiative, which represents high frequency trading firms.

"'We don’t understand why unions would support something that would so clearly hurt their membership’s pension funds.'"

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The Washington Post Says Doctors Without Borders Is Silly to Worry About the Impact of the TPP on Drug Prices

Dean Baker

Dean Baker Co-Director, Author, Center for Economic and Policy Research

The humanitarian group, Doctors Without Borders, along with many other NGOs involved in providing health care to people in the developing world, have come out in opposition to the Trans-Pacific Partnership (TPP) over concerns that the deal will make it more difficult to provide drugs to people in the developing world. Their argument is that it will raise drug prices by making patent protection stronger and longer and by making it more difficult for countries to scale back protections that they may come to view as excessive and wasteful.

But the Washington Post editorial board tells us not to fear, that the TPP is actually "a healthy agreement." The gist of its argument is an analysis by Council on Foreign Relations Fellow Thomas Bollyky, which finds that there were few incidents of large increases in drug prices for countries following the signing of previous trade deals. 

As I noted in a previous post, this analysis almost seemed designed not to find substantial rises in prices. Bollyky looked at changes in drugs prices immediately after a trade deal took effect. The problem with this approach is:

"In most cases, the rules in these agreements will only apply to new drugs, and even then to a subset of new drugs, for example patent protection for a drug that is a combination of already approved drugs. They may also allow for the extension of patent terms beyond the date where they would have expired under pre-trade deal rules, but here again the impact will only be felt gradually over time.

"Furthermore, the date of a trade deal with the United States may not be the key factor in pushing up drug prices. The United States signed a deal with South Korea in 2012 that required stronger patent and related protections, but most of these conditions were already law as of 2009 due to a trade agreement Korea signed with the European Union."

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Fools or Liars On the Trans-Pacific Partnership?

Dean Baker

Dean Baker Co-Director, Author, Center for Economic and Policy Research

Given the recent flood of opeds and editorials on the wonders of the Trans-Pacific Partnership (TPP), the Obama administration must be about to present the deal to Congress for approval. Otherwise, it’s hard to see why so many pieces would spontaneously appear on the TPP. Since there is real money at stake, we can expect the debate to get pretty low and nasty, with the pro-TPP forces liberally substituting ad hominems and claims to expertise for serious arguments.

My favorite on the lack of argument side is the exciting news that if the TPP is approved it will eliminate 18,000 tariffs on U.S. exports to the countries in the deal. That sounds like a huge boon to trade, right? Public Citizen looked up the 18,000 tariffs that would be eliminated. If found that the United States is not currently exporting in more than half of the categories in which these tariffs apply. Included in the list of tariffs to be removed are Malaysia’s shark fin tariffs, Vietnam’s whale meat tariffs, and Japan’s ivory tariffs.

The overwhelming majority of these tariffs are of little consequence in very narrow product categories, like Brunei’s tariff on ski boots. So when the proponents of the TPP tout the 18,000 tariffs is this because they have no clue what they are talking about, or are they deliberately trying to deceive the public?

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Bernie Sanders, Hillary Clinton, and Wall Street

Dean Baker

Dean Baker Co-Director, Author, Center for Economic and Policy Research

Bernie Sanders, Hillary Clinton, and Wall Street

As the Democratic presidential primary heats up, one of the major issues has been which candidate has the better approach towards regulating Wall Street. While financial regulation can get into many complex areas, there are some basic points that people should know.

First, financial regulation always leaves enormous room for discretion. Some regulatory agencies, like the Office of the Comptroller of the Currency, are notoriously lax, not because they lack the authority to control the banks and other financial institutions, but because their leadership is content to let the banks do what they want.

Sometimes an agency's character changes with its leader. The Commodity Futures Trading Commission became a serious regulatory agency under Gary Gensler, who headed it in the first six years of the Obama administration. (Gensler is now the chief financial officer of Secretary Clinton's campaign.)

This is a crucial point, since the effectiveness of any regulation will always depend on the political will to enforce it. Even with the deregulatory steps of the 1990s, the Federal Reserve Board still had all the power it needed to rein in the housing bubble. The Fed had authority to regulate mortgage issuance. It chose to ignore this authority during the run-up of the bubble.

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Union Matters

America’s Wealthy: Ever Eager to Pay Their Taxes!

Sam Pizzigati

Sam Pizzigati Editor, Too Much online magazine

Why do many of the wealthiest people in America oppose a “wealth tax,” an annual levy on grand fortune? Could their distaste reflect a simple reluctance to pay their fair tax share? Oh no, JPMorganChase CEO Jamie Dimon recently told the Business Roundtable: “I know a lot of wealthy people who would be happy to pay more in taxes; they just think it’ll be wasted and be given to interest groups and stuff like that.” Could Dimon have in mind the interest group he knows best, Wall Street? In the 2008 financial crisis, federal bailouts kept the banking industry from imploding. JPMorgan alone, notes the ProPublica Bailout Tracker, collected $25 billion worth of federal largesse, an act of generosity that’s helped Dimon lock down a $1.5-billion personal fortune. Under the Elizabeth Warren wealth tax plan, Dimon would pay an annual 3 percent tax on that much net worth. Fortunes between $1 billion and $2.5 billion would face a 5 percent annual tax under the Bernie Sanders plan.

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No Such Thing as Good Greed

No Such Thing as Good Greed