(What’s Left of) Our Economy: New Peterson Pro-Globalization Study Only Deserves a “Nice Try”

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China, Financial Crisis, Gary C. Hufbauer, Global Imbalances, globalization, Great Recession, Larry Summers, manufacturing, Peterson Institute for International Economics, productivity, secular stagnation, technology, Trade, trade agreements, trade liberalization, trade policy, World Trade Organization, {What's Left of) Our Economy

The Peterson Institute’s new study of the benefits to Americans of globalization apparently leaves no doubt that the nation should promptly forget about any retreat from conventional trade liberalization policies and resume its aggressive pursuit of new trade agreements like the Trans-Pacific Partnership (TPP). Or does it? A close reading of the report reveals gaping holes in these claims.

According to authors Gary C. Hufbauer and Zhiyao Lu, between 1950 and 2016, “trade expansion” has enriched the overall U.S. economy by $2.1 trillion, and boosted America’s output per head and per household by just over $7,000 and $18,000, respectively. Even better, lower-income households probably gained the most (since the greatest trade liberalization progress has been made in the goods that comprise so much of their consumption).

Yet the phrase quoted in that previous paragraph points to the first big hole in the Peterson findings. “Trade expansion’s” benefits, the authors specify, entails much more than either signing new trade deals or otherwise reducing trade barriers. It also includes “technological advances in transportation and communications [that] have drastically slashed the economic distance between countries.”

Of course, there’s been a lot of the latter over the last 66 years. What share of expanded trade’s benefits has come from trade liberalization policy decisions and what share from that technological progress? Darned if the authors know.

The long time frame, in turn, reveals a second major problem with the central argument. Obviously over that last two-thirds of a century, the world economy, and America’s position in it, have changed in numerous and fundamental ways. One prominent example: For the first roughly three post-World War II decades, the United States was the only fully intact developed country. How could trade liberalization not have been a major net benefit? America produced countless products that the rest of the world desperately needed. And none of its important industries faced significant import competition until the 1970s. That doesn’t sound much like current circumstances.

And in fact, Hufbauer and Lu acknowledge this problem, noting, for example, that “compared to previous decades, increased trade since 2003 has not delivered substantial gains.” At this point, however, their analysis gets dicey. For example, they speculate that that low recent payoff resulted partly from “the lack of fresh policy liberalization on a large scale (the failure of the Doha Round)….” But that period actually saw a hugely important liberalization initiative completed – China’s accession to the World Trade Organization. And don’t forget the numerous free trade deals signed by the George W. Bush and Obama administrations, including with South Korea’s very large economy.

Moreover, although Hufbauer and Lu rightly note that the financial crisis and Great Recession also have marked the post-2003 period, they claim that “The decade that experienced the greatest gains from increased trade was 1970 to 1980.” That decade witnessed no less than two recessions (three if you count the 1980 downturn).

Undaunted, the authors contend that returning to the trade liberalization policy course will result in even more American wealth creation. But here’s where their discussion of the post-2003 period fails badly – and unmistakably. They never mention that, thanks largely to that aforementioned boost to incredibly lopsided U.S.-China the first decade of this century produced the greatest U.S. trade deficits and associated global economic imbalances in world history. They ended in the financial crisis and the nation’s worst economic downturn since the Great Recession.

Since America’s main trade partners – including China – seem either just as export-dependent, and/or just as import-and consumption-phobic as ever, it’s difficult to understand why a return to conventional trade diplomacy, combined with the cumulative and often lagged impact of past deals (as noted by Hufbauer and Zu) wouldn’t end in near-catastrophe again.

Another big problem: Former Treasury Secretary and chief Obama economic adviser Larry Summers, along with many others, worry that the United States has fallen into an economic trap they call “secular stagnation.” They speculate that the nation has become so incapable of generating healthy growth that it’s grown dependent on blowing up credit and consumption bubbles to at least produce (misleading) signs of economic life – and that these bubble’s inevitable bursting keeps creating financial crises and serious slumps. Do Hufbauer and Zu believe that the sandbagging of domestic manufacturing (which hasn’t grown in real terms since 2006) due to import competition and offshoring isn’t partly to blame? 

Finally, and similarly, American leaders have finally recognized that the economy is experiencing a major productivity growth slowdown. Can trade liberalization’s real economic impact be measured without considering the effect on productivity of allowing all that trade damage to manufacturing, which historically has led the nation in productivity growth?  

It’s definitely encouraging that a major think tank like the Peterson Institute is looking in detail at globalization’s impact on America’s economy.  Let’s hope that its next effort reflects some actual thinking.  

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Im-Politic: No Media Accountability for Cockeyed “Experts” on Fast Track, Trade

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Arthur Laffer, Barry Ritholtz, budget defict, China, Condoleezza Rice, fast track, Federal Reserve, Gary C. Hufbauer, growth, Im-Politic, inflation, Jobs, journalists, Laffer Curve, Mainstream Media, NAFTA, Peterson Institute, think tanks, TPA, TPP, Trade, Trade Deficits, Trade Promotion Authority, Trans-Pacific Partnership, Washington Post, WTO

As the House of Representatives prepares to vote tomorrow on granting President Obama fast track trade negotiating authority, investment guru Barry Ritholtz has just reminded us of a huge problem with the way America and its leaders debate such major public issues – and the way the Mainstream Media help frame this debate.

Ritholtz today wrote about how much of that Big Media keeps taking seriously pundits and other so-called experts whose analyses and predictions have been proven flat wrong over the long haul. His example is economist Arthur Laffer, whose famous “curve” served as a prime basis for Reagan-era tax cuts (and is still cited to justify such policies). Ritholz writes that most of Laffer’s recent warnings about the inflationary and budget deficit-busting consequences for America of the Federal Reserve’s super-easy money policies have been wildly off base.

In fairness, that’s not entirely clear for two reasons. First, there’s a heated debate in the economics world over how well the U.S. government statistics measure inflation. Second, the Fed’s monetary stance has been so radical for so long that no one can reasonably be certain yet about even the medium-term effects. But it’s also fair to say that there’s now a heavy burden of proof on Laffer and others in his camp to show why his forecasts will yet be confirmed – and on reporters who keep citing them.

When it comes to the trade debate, the wholesale lack of accountability in the is incontrovertible. Just to review quickly, since the signing of NAFTA launched the current phase of U.S. trade policy, the U.S. trade balance heavily influenced by trade deals and related policies has dramatically worsened in inflation-adjusted terms. I’ve pointed this out for the years spanning the current recovery, but it’s also true going back further. (See the non-petroleum goods balance column in this Census Bureau table.) The inevitable consequence – if you take economics fundamentals seriously – is a drag on economic growth. And anything that drags on growth will surely drag on hiring, and almost certainly depress wages.

These employment and wage effects were predicted by virtually every politician or analyst who was around for the NAFTA debate and criticized the agreement, and is still weighing in on the fast track debate and broader fight over the president’s proposed Trans-Pacific Partnership (TPP) trade deal. (Less attention, unfortunately, has been focused on the more fundamental growth destruction.) These trade critics rightly keep pointing out their record, but how often do you read about this? The closest the Mainstream Media seem to come is treating their foresight as “claims,” which are ipso facto subjects for legitimate debate. They’re not. They’re facts and realities.

To be sure, Big Media has an “out,” at least in principle – President Obama’s insistence that he’s learned the lessons of past trade policy mistakes, and that his TPP corrects them. But only a few news organizations have reported that Mr. Obama has had ample opportunities to demonstrate his progress on the high-profile issue of improving labor standards, and that he’s flunked this test. Even fewer media organizations have reported that the president’s recent trade agreement with Korea is his model for the TPP – and that it’s produced surging trade deficits, which by definition are themselves killing growth and job-creation. So White House claims of a trade learning curve clearly don’t deserve to be taken at face value.

And just as recent and current trade policy critics have been proven right, supporters have been proven dead wrong. And many, unlike Mr. Obama, won’t even admit it, yet are rewarded with prominent media platforms. Take the Washington Post’s recent decision to publish a pro-fast track and TPP tract by former Secretary of State Condoleezza Rice. Rice cited as one prominent reason for her position “the impact of a rising China, creating risks of …in the Asia-Pacific region and beyond. A growing Chinese economy built on openness and fairness would most assuredly strengthen the world economy and, by extension, the U.S. economy. That was the hope that animated the decision to admit China to the World Trade Organization in 2001, embedding it in the rule-based global economy and pushing it toward greater economic openness. Yet, that hope is clouded today by China’s assertiveness in Asia.”

At that point, Post editors could easily have decided “Full stop. Into the reject pile.” The writer after all, has just admitted being completely – and potentially dangerously – mistaken on a major trade policy issue. Worse, although her Post article didn’t mention this, she was President George W. Bush’s national security advisor when this decision was made. Indeed, she endorsed the move the year before. At the very least, the Post should have asked Rice to explain to the paper and to readers why, given the blunder for which she was partly responsible ten years ago, why her judgment has improved since then.

And let’s not forget the long string of media appearances of Gary C. Hufbauer of the Peterson Institute for International Economics. Hufbauer’s rosy projections of NAFTA’s likely results were central to the lobbying campaign for the deal waged by the Clinton administration and its offshoring-happy business allies. These predictions were so wide of the mark that Hufbauer was soon forced to admit, “The lesson for me is to stay away from job forecasting.” Nowadays, this same analyst is being portrayed as an expert on TPP’s prospective impact on U.S. financial regulations. Based on what? Why would anyone assume he knows anything more about this subject than he knew about U.S.-Mexico trade?

The Mainstream Media keep dredging up these so-called experts for several reasons – none of them reflecting well on the press. First, reporters and editors worship credentials. So if Condoleezza Rice used to be both White House national security adviser and Secretary of State, then she must know lots about everything international, right? Even, apparently, if she admits she deserves blame for an epic mistake. Second, many of these alleged experts work for well-funded institutions like think tanks that spend bundles enabling their staff reach the media, and courting and flattering journalists.

And something like credentials-mania is at work here, too. In other words, outfits like the Peterson Institute are large organizations that have obviously attracted considerable financial support. (Never mind that most of it comes from self-seeking special interests.) They’re therefore very good at projecting what an old friend of mine once called “the image of success.” As a result, surely their experts…really are.

More understandably – but of course not defensibly – is how seductive the media finds the pseudo-precision peddled by economists and other social scientists. E.g.: “TPP will raise GDP by 0.23 Percent Over Next 9.4 Years”! What could be more convincing than that? And would intellectual fraudsters or simple hucksters really risk their reputations with projections this detailed?

It’s also important to remember that few members of the American work force are lazier on the whole – both physically and intellectually – than journalists. Nothing is easier than continuing to rely on the same sources that have always been used. So much the better if their views are entirely predictable. Then it’s not even necessary to take new notes. And better yet, many of these experts are publicity hungry and therefore highly media-friendly. They’re both happy to talk to reporters 24/7 and the best have honed impressive quotability skills.

Also likely in play: a powerful herd instinct. That is, if my competitor is quoting Distinguished Special Fellow X, maybe I should, too. In fact, since my boss reads the competition, he or she is definitely going to ask me why I’m not consulting the same oracle. And conversely, it’s correspondingly difficult to seek out new sources – in large measure because this endeavor forces one to do some research and, even worse, to think. And no occupational or social pressures foster such behavior.

It’s tempting to blame the rise of social media and digital journalism for this pundit idolatry. But it was established practice long before the much-bemoaned ’round-the-clock news cycle and powerful, unending pressures to churn out copy almost continually

Finally, as suggested by that previous paragraph, inertia is one of the most powerful forces in the universe. As long as the Mainstream Media aren’t held accountable for its mindless pundit practices, don’t expect them to hold the rest of American politics, society, and business very accountable, either.