(What’s Left of) Our Economy: The Establishment’s Dead-End Thinking on Trade

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2016 election, Ben Bernanke, China, Donald Trump, Financial Crisis, Global Imbalances, imports, Iowa Caucus, Jobs, Josh Barro, Michael Pettis, NAFTA, North American Free Trade Agreement, Steven Rattner, tariffs, taxes, The New York Times, TPP, Trade, Trans-Pacific Partnership, transfer payments, wages, {What's Left of) Our Economy

The new year has brought a positively weird confluence of events in the trade policy world. On the one hand, a spate of Trans-Pacific Partnership (TPP) endorsements by the Offshoring Lobby and a big study on its effects from a major Washington, D.C. think tank suggests that a strong campaign to push the Pacific Rim trade deal through Congress is in the works. On the other, recent weeks have also seen a flurry of acknowledgments from national policy mainstays that the U.S. trade strategy on which the TPP is based has backfired powerfully.

Stranger still (or not?), these expressions of buyers’ remorse make clearer than ever that the country’s economics and business establishment has no realistic ideas for solving the serious problems they admit their favored trade measures have created.

The most glaring example comes from Ben Bernanke. As I’ve written, the former Fed Chair is one of the economics profession superstars who has linked the last financial crisis to the buildup of historic trade-centered imbalances in the global economy. Given the rebound during the current economic recovery in both the Chinese trade surplus and the American deficit at the heart of the previous meltdown, you’d think that Bernanke would be thinking seriously about how to prevent a rerun. But you’d be wrong.

New York Times economics writer Josh Barro has just reminded us that Bernanke rejects out of hand widespread calls to punish China and other countries that have long manipulated their currencies to steal growth and jobs from countries like the United States – and which, in the case of China, are still realizing the trade benefits of long years of manipulation that have distorted price structures to its advantage. But the only response he suggests is rightly dismissed by Barro as “asking nicely.” In Bernanke’s words:

“countries do respond I think to diplomatic overtures and to pressure from their trading partners when what they’re doing is perceived as, you know, counterproductive to the global economy.”

Barro’s article also shows that many of the second thoughts voiced lately on trade policy have been sparked by another new study – this one on the impact of greatly expanded U.S.-China trade– and by Republican presidential front runner Donald Trump’s (so far short-lived) call for a 45 percent U.S. tariff on imports from China. Such measures of course are still taboo throughout the policy community. But are we hearing about any good alternatives? Not judging from the debate so far.

Michael Pettis is one of the world’s genuinely knowledgeable observers of China and the founder of a must-read blog on its economy. But his solution to China’s dangerous mercantilism mirrors Bernanke’s almost to the word. After telling Fortune magazine that his “really big concern [about the weak world economy nowadays] is that we’re going to see a soaring trade deficit in the U.S. which could derail the U.S. economy, which is the only bright spot right now,” Pettis was asked if American leaders should “enact protectionist policies to prevent a soaring trade deficit.” His answer:

“The best thing would be for the world to get together and say we can’t allow [1930s-style trade wars] to happen, it would be incredibly stupid.” He then added, “But I’m not confident that this will happen.”

Other thinkers have proposed counter-measures that don’t literally depend on the kindness (or enlightenment) of strangers. But they hold no more potential to put either the U.S. economy or its beleaguered workers on a sounder financial footing. An especially noteworthy example was former Obama administration official Steven Rattner’s New York Times column last week asking “What’s Our Duty to the People Globalization Leaves Behind?”

Rattner, a former Times reporter, Wall Street-er, and an architect of the Obama administration’s auto industry rescue plan, not only rejected the notion that automation and other efficiencies are the main causes of job destruction and wage lag in the trade-centric manufacturing sector. He actually blamed specific trade deals like the North American Free Trade Agreement (NAFTA).

Also to his credit, Rattner didn’t dredge up failed recommendations for better training and re-education programs as the cure for what ails America’s workers. But his apparent first choice – “huge tax redistribution, both as a moral matter and as a mechanism for ensuring political support for free trade” – is entirely conventional. It’s just a variation of the classic “compensate the losers” option that enjoys widespread support in the economics profession, but that dangerously pretends government transfer payments can adequately substitute for earned income. As one former colleague of mine cracked years ago, “It’s work-to-welfare.”

The upcoming Iowa Caucus results – and other early primary season contests – will reveal much about whether Americans favor candidates who stand for incremental changes in the policy frameworks long established by the two major parties, or politicians who favor breaking the mold. If the latter prevail, surely one reason will be a trade policy consensus that keeps offering the working public either more of the same debilitating results, dispairing shrugs, or bigger handouts.