(What’s Left of) Our Economy: Inflation Derangement Syndrome

Tags

economists, inflation, non-supervisory workers, Paul Krugman, private sector, production workers, pundits, Tyler Cowen, {What's Left of) Our Economy

To Paul Krugman, Americans’ recent grumpiness about the state of their economy has little to do with the state of their economy itself (which he writes is “seemingly booming”) and lots to do with a ceaseless barrage of misinfomation – generally from Republican politicians and conservative news outlets – that’s “disconnected with personal experience.”

In other words, Paul Krugman is a New York Times columnist and Nobel Prize-winning economist who hasn’t looked at the official U.S. data on Americans’ real wages. If he had – as suggested in brief yesterday by fellow noted economist Tyler Cown – he’d have known that for most of this year so far, the purchasing power of what his compatriots typically earn on the job has been shrinking, and therefore their living standards have been worsening, due to inflation.

For example, he’d know that in October (the latest available figures), average inflation-adjusted hourly pay for private sector workers fell by 0.53 percent month-on-month in October, and 1.24 year-on-year. He’d know that in April, change in these constant dollar wages tuned negative on an annual basis (by 3.66 percent) for the first time since February, 2017 (when they dipped by just 0.09 percent).

And he’d know that the current 18-month stretch of 4.68 percent cumulative decline in real wages for the entire private sector is the longest such workers have endured since the 19 months between July, 2011 and February, 2013. And then, this compensation decreased by just 0.49 percent. (As known by RealityChek regulars, government workers’ wages aren’t tracked by the Labor Department because their levels are largely set politicians’ decisions, not by market forces, and therefore say little about the funamental state of the nation’s labor markets.)

In addition, Krugman would know that in October, for production and supervisory workers, after-inflation wages tumbled by 0.72 percent on month, and by 1.13 percent on year. He’d know that annual change in price-adjusted hourly pay for these workers also turned negative in April (by 3.37 percent), and that for the first time since July, 2018, when it sank by 0.22 percent.

He’d also know that this workforce hasn’t lived through a span of falling real wages this long (4.26 percent over 18 months) since the August, 2016 through February, 2018 timespan (when it was shrank by a fractional 0.05 percent over the same 18-month period).

But clearly Krugman hasn’t looked at any of this, and the reason is pretty clear to me: For too many folks like Krugman, who work in lucrative and coddled occupations like tenured academia and punditry (seriously, when’s the last time you heard of a Mainstream Media columnist losing a job or getting a pay cut for peddling obvious falsehoods and predictions that turned out to be laughingly offbase?), current inflation is indeed something that can be blandly and abstractly described as “indeed high by recent standards.”

For too much of the rest of the country, it means the loss of hard-won economic gains – and often real pain due to soaring food and energy prices. All of which indicates that you can learn more about at least some of the economy’s biggest problems by watching, say, Fox News than by reading Paul Krugman.

Im-Politic: Times Pundit Krugman Grows Ever More Truth-Challenged

Tags

class warfare, Fox News, Im-Politic, Immigration, non-college whites, Paul Krugman, polls, Populism, pundits, tariffs, The New York Times, Trade, Trump

Oops, he (almost) did it again. That’s not only (almost) a gender-specific version of a Britney Spears song. It’s also an apt description of Paul Krugman’s latest column for The New York Times. As I wrote on RealityChek two weeks ago, Krugman’s June 3 essay on tariffs cited information on the U.S. agriculture sector fallout from 1920s duties that the source material simply didn’t contain. Yesterday, his piece on President Trump’s allegedly phony populism were partly based on a blatantly cherry-picked poll result.

According to Krugman, Mr. Trump’s talk of helping his core white working class voters economically is in fact so transparently phony that even these voters no longer believe it. His evidence? A June 16 Fox News poll finding “that only 5 percent of whites without a college degree believe that Trump’s economic policies benefit ‘people like me,’ compared with 45 percent who believe that the benefits go to ‘people with more money.’”

Regardless of whether these views reflect economic reality, the results certainly sound damning. But here’s the rub. First, Krugman didn’t get the question exactly right. Pollsters asked respondents whether the Trump programs “benefit everyone” or “mostly benefit people like you….” In other words, the benefits distribution was not presented solely as an either-or choice.

Second, and more important, the percentage of whites without college degrees believing that the Trump program “benefit everyone” (i.e., including them, and not qualified with “mostly”) was 32 percent. That’s not stratospheric, by any means, but it’s a lot higher than five percent. (See question 24.) 

(Adding another complication missed by Krugman, that five percent wasn’t five percent of the entire non-college white sample. It was five percent of the respondents who didn’t view the Trump policies as benefiting “everyone.”)

And some other notable poll results Krugman conveniently passes over:

The percentage of total Trump voters answering that his economic policies “benefit everyone” was 67 percent. That finding suggests an inclusive, rather than an us-versus-them view of how the economy should work – which in turn interestingly indicates that this part of the electorate isn’t terribly receptive to the kinds of so-called class warfare memes pushed by so many Democratic politicians.

In addition, the share of non-college whites who say they’re “strongly” or “somewhat optimistic about the U.S. economy right now” was 55 percent. That’s only a bit less than the 58 percent of the total sample that turned in such answers.  (See question 23.)  

These Fox poll results hardly demonstrate that the President is home free with his base on the economy. Moreover, they show that he’s far from having persuaded this big share of his staunchest supporters – much less the rest of the electorate – that he’s on the right track when it comes to his signature issues of immigration and trade (although as is often the case, in my opinion, the questions on these subjects – see 16-20, and 25-26 – leave much to be desired).

But Krugman’s selective report on the survey, following his off-base portrayal of an analysis of past tariffs, does demonstrate that his writings should now be accompanied by the warning, “Let the reader beware.”

(What’s Left of) Our Economy: More Evidence that Trade Wars are Absolutely Winnable for America

Tags

Apple, China, Financial Times, global supply chains, globalization, manufacturing, Paul Krugman, Rana Foroohar, tariffs, Trade, trade wars, {What's Left of) Our Economy

Throwaway lines are among my favorite aspects of opinion writing, largely because in a simple, usually brief, and almost by definition understated sentence or two they can thoroughly debunk or at least gravely weaken shibboleths that have reigned virtually unchallenged for decades. And Financial Times columnist Rana Foroohar had a doozy yesterday.

As is well known by anyone who’s been closely following the development of President Trump’s trade policies and the uproar they’ve triggered, some of the biggest fears surrounding the prospect of the “trade wars” they’re deemed all too likely to ignite concern the impact on global supply chains. As explained this morning by Nobel Prize-winning economist and New York Times columnist Paul Krugman;

“[C]orporations have invested trillions based on the assumption that an open world trading system, permitting value-added chains that sprawl across national borders, was going to be a permanent fixture of the environment. A trade war would disrupt all these investments, stranding a lot of capital.”

And since lots of capital would be stranded, lots of employment patterns worldwide would be disrupted, too – including in the numerous American manufacturing industries that have been thoroughly globalized and whose ability to assemble, further process, or produce goods in their U.S. facilities therefore depends on the smooth operations of these corporate networks.

Further, tariffs on imports from China allegedly would be especially damaging, since Chinese factories play such key roles in so many manufacturing supply chains, and since China’s prominence in globalized manufacturing in large part stems from so many special manufacturing strengths that the Chinese have developed – often by hook or by crook – in recent decades. If you need a compelling example, check out this early 2012 article on why Apple, among many others, has concentrated its industrial operations in the PRC.

At the same time, since Mr. Trump won the White House, not a few companies have either started relocated some production in the United States in response to actual or threatened tariffs, or made public remarks indicating that supplying the U.S. market from abroad would make no sense if trade barriers impeded their access. Other corporate leaders were saying even before Mr. Trump’s election that mounting protectionism and populism worldwide were bound to result in more localized manufacturing.   

So it’s become clear in recent years that however much they’ll complain about moving supply chains, business leaders scarcely view the challenge as impossible. Still skeptical? Recall how easy it’s been for them to send even the largest supply chains from inside the United States to outside American borders, or capitalize on the existence of overseas networks. And recall how quickly many of these transfers happened.

Just how fast they took place, and can still take place, is where Foroohar’s column comes in. In yesterday’s column, she echoed my point about supply chain movements that are either already underway or being contemplated:
“Over the long term, China and the US are headed towards regional supply chains for high-growth technologies of the future.” She continued – consistent with the conventional wisdom, “But in the short term, the interdependencies will be difficult to untangle.”

Then, however, came the kicker – which received no special emphasis from the author at all:

“Several executives who supply Fortune 500 companies have told me it would take months if not years for the biggest US companies to break completely free of Chinese components.”

To repeat: Months – and at the outside years – for many companies to marginalize China’s role in particular in global supply chains. And then remember the reward: Greatly diminishing China’s still-burgeoning influence over the American economy and over the broader global economy, and in the process blunting the growing threat it poses to U.S. security interests both in the Asia-Pacific region and around the world.

That sounds like an appealing – indeed, no-brainer trade-off – to me. For an American leader hoping to disrupt U.S. trade and globalization policy for long-term gain, and facing numerous raucous short-term complaints, it should be an especially effective pitch to make, and an urgent policy target to prioritize explicitly and pursue systematically. Anyone seen any politicians like that lately?

Following Up: More on the Trump Tariffs

Tags

aluminum, Australia, Canada, David J. Lynch, Defense Department, defense manufacturing base, downstream industries, European Union, Following Up, George W. Bush, Gordon Hanson, James Mattis, Kentucky, manufacturing, Mitch McConnell, multiplier, Paul Krugman, Paul Ryan, steel, steel-consuming industries, tariffs, terrorism, The New York Times, Trade, Trump, U.S. Business and Industry Council, United Kingdom, Washington Post, Wisconsin

I could spend all day today rebutting ignorant, biased, and simply inane commentary on President Trump’s Thursday announcement that stiff tariffs will be imposed on U.S. imports of steel and aluminum (along with watching the plethora of college hoops on TV today!). Instead, I’ll offer some follow-on thoughts to the tariff talking points I posted yesterday.

>The European Union in particular seems outraged by the Trump decision, and has threatened to retaliate with tariffs on its own on a wide range of products, including some from Wisconsin and Kentucky. These of course happen to be the home states of House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell. It’s an understandable, and certainly clever, impulse, and in 2003, something like it succeeded in convincing former President George W. Bush to lift steel tariffs he had imposed 18 months earlier.

Of course, Bush 43 was no Trump. He was a committed free trader and globalist, and/or agent of of America’s powerful corporate offshoring lobby. But here’s something that needs to be considered by Messrs Ryan, McConnell, and other lawmakers at whom the Europeans or other powers may take aim: What if, shortly after September 11, Osama Bin Laden had threatened to destroy major targets in their home states or districts unless the United States withdrew militarily from Afghanistan and left him alone. Would the affected legislators have run to the White House to plead for an abandonment in the war on terror? Not likely.

I know that war and economics are different (although given the importance of economic strength as a source of military strength and overall national success, the similarities and overlap are widely overlooked). But don’t doubt for a minute that American politicians’ reactions to these European threats will be watched closely in all the world’s capitals, and that signs of weakness will be factored into foreign decisions to abide by or violate current trade agreements at the U.S.’ expense, or take other measures to gain advantage in their own, American, or third-country markets that clash with free market and free trade norms.

So here’s hoping that American Members of Congress and Senators will show some backbone, and make clear to the nation’s trade partners that they won’t permit themselves and the country at large to be hanged separately.

>Speaking of hanging separately, quite naturally, U.S. steel- and aluminum-consuming industries are concerned that their global competitiveness will be harmed if they’re forced to use more domestic metal in their products. They need to keep two considerations in mind. First, if foreign governments are permitted by Washington’s inaction to dump major American industries like aluminum and steel out of existence, consuming sectors would be next in line. 

Second, there is indeed no inherent reason to make the consuming industries pay any penalty at all. When I was at the U.S. Business and Industry Council, which represented many steel-consuming companies and industry groups, we persuaded them that the best solution would be tariff protection for them as well. The tariff complaints coming from such sectors today reveals that the Trump administration hasn’t put this possibility on the table. That’s a major missed opportunity, and the President should realize that such offers not only can build support for the steel and aluminum tariffs. They can also expand the constituency for broader America First trade policies. (New Trump statements on possible auto tariffs make clear exactly the types of steps needed, although as is usually the case, they work best when applied across-the-board.)   

>Speaking of missed opportunities, here’s another (big) one – the handling of some allied countries’ indignation about being treated as threats to America’s national security because of their steel and/or aluminum shipments. In several major cases, these complaints could have been prevented had the administration recognized that Australia, Canada, and the United Kingdom are defined by American law as part of the nation’s defense “technology and industrial base.”

I’m not necessarily a supporter of this policy, but since it exists, these countries have an entirely legitimate point regarding their possible inclusion in the metals’ tariff regime. And the Trump administration should have explained to them that they were of course being exempted. Moreover, the Defense Department should have told the rest of the administration about the legal and legislative situation. Yet Pentagon chief James Mattis’ memo to his administration colleagues outlining his department’s position on the tariffs never mentioned it.

Not that these allied countries are entirely blameless for the row. They could have raised the issue when the prospect of sweeping U.S. tariffs was first raised. But all indications are that they preferred to grandstand.

>As should now be expected, the media coverage of the tariff controversy has often veered off into economics and policy La-La Land. Two of the funniest examples I’ve seen so far (and they’re nearly identical): criticizing the announced tariffs because they only boast the potential of bringing back high-value manufacturing to the United States instead of lots of industrial jobs.

Think I’m kidding? Here’s Washington Post correspondent David J. Lynch: “If tariffs prompt companies to move production back to the United States, they would likely opt for highly automated plants that require fewer workers. Trump’s tariffs ‘would bring back 21st-century factories where we lost 20th-century factories,” [economist Gordon] Hanson said this week at the National Association for Business Economics conference in Washington.”

Here’s no less than Nobel Prize-winning economist and New York Times columnist Paul M. Krugman: “[T]he tariffs now being proposed would boost capital-intensive industries that employ relatively few workers per dollar of sales; these tariffs would, if anything, further tilt the distribution of income against labor.”

What both authors are somehow missing is how manufacturing is valuable for much more than high wage employment. It’s long been the nation’s leader in productivity growth. It generates nearly 69 percent of private sector American spending on research and development. And don’t forget its high employment and output multipliers – which mean that each dollar of manufacturing output punches far above its weight in generation production and jobs elsewhere in the economy.

That last point is particularly relevant to Krugman’s claim about labor’s low share of national incomes. The manufacturing employment multiplier tells us that adding to industry in America – including capital-intensive industry – will promote employment in related sectors like logistics, plus revitalize the retail and other service sectors of the towns and cities and counties where the new factories are built. Those jobs may not pay as well as the manufacturing jobs lost. But they’re sure better than the economic death that often results when communities lose their factories.

(What’s Left of) Our Economy: The Establishment’s Case for Free Trade Keeps Weakening

Tags

Center for Global Development, currency manipulation, Dani Rodrik, free trade, Joseph E. Gagnon, Lawrence Summers, non-tariff barriers, Paul Krugman, Peterson Institute for International Economics, protectionism, sovereignty, Trade, trade agreements, trade barriers, transparency, {What's Left of) Our Economy

Although they’ve long enjoyed benefits ranging from lavish financial support to nearly uncritical mainstream media adulation, I felt a twinge of pity this morning for establishment backers of current trade and globalization policies.

As made clear from a new report from one of their leading think tanks and a recent speech from one of their leading individual lights, they’re doubling down on the claims that there’s nothing fundamentally wrong with the trade liberalization priorities long held by the U.S. government, and that the trade barriers supported by populists and other critics will only backfire on the American and global economies. And as also made clear by the report and speech, they keep fighting a losing intellectual battle.

The report comes from the Peterson Institute for International Economics, and addresses the question “Do Governments Drive Global Trade Imbalances?” As emphasized by author Joseph E. Gagnon, the stakes of finding the right answer are towering:

“At current levels, these imbalances will push the net debt of deficit countries gradually toward unprecedented and unsustainable levels….Moreover, the domestic political consequences of persistent trade deficits are already evident in both the United States and the United Kingdom, having contributed importantly to the election of Donald Trump and the outcome of the Brexit referendum….”

In other words, if global trade flows continue getting more lopsided, they could set the stage for a repeat of the kind of global financial crisis they helped foster during the previous decade. And failing to calm populist political waters in the west could tempt key trading powers even more strongly to dabble in economically disastrous protectionism.

So Gagnon makes the case for a feel-good story: These major trade powers, especially the United States,

“have the necessary tools to achieve their stated goal of narrowing current account imbalances. President Trump and some members of his administration have proposed using trade barriers to narrow the US current account (trade) deficit. The data show that trade barriers have very little effect on a country’s trade balance. Fiscal policy and net official flows are the policies that matter for trade balances.”

One problem right at the outset: There’s nothing in the study whatever that explicitly measures the impact of (conventional) trade barriers. But even accepting this unusual methodology, it’s surely significant that he does conclude that “foreign exchange intervention” – i.e., currency manipulation – has an “important” affect on trade balances. That sounds like a trade barrier to me, at least in many instances.

And although fiscal (and related spending) policies aren’t normally considered examples of trade policies, they’ve clearly been used by numerous countries, especially Germany and throughout East Asia, to keep savings rates high, and therefore consumption (and imports) low. Why does Gagnon leave these out?

It’s absolutely true that fiscal and budget policies reflect the choices made by national societies, and therefore economies, and that as such, the presumption should be that they’re entirely legitimate. But at the same time, the nature of such choices can reveal whether these priorities can produce reasonably balanced trade with an economy like America’s – whose priorities on these fronts are substantially different but presumably just as legitimate.

As a result, trade policies that emphasize expanding commerce with countries regardless of their domestic priorities ipso facto can’t help but boost the trade deficit of the freer spending and/or more economically open country. And that description fits decades worth of American trade policies to a tee.

Lawrence Summers, President Obama’s former top White House economic adviser (among many other major government jobs), last month advanced an argument that’s somewhat more sophisticated than Gagnon’s, but no more convincing or useful to policymakers. In a speech to the Center for Global Development, Summers made the standard nod to the “compelling and persuasive case for free trade” and to the follow on view that “erecting tariff or quota barriers to trade between countries is usually a bad idea.”

But then, Summers’ line of argument actually became interesting. He sought to draw a distinction between the (unassailable) idea of free trade on the one hand, and the focus of many recent trade agreements – which he claimed “may be good or they may be bad, but they are not self-evidently and clearly good in the way that free trade is clearly good.” These concerns centered around goals like “securing intellectual property protection for global companies in a wider range of countries” and “achieving access for service companies to a wider range of countries” and “harmonizing rules in areas like safety standards or financial reporting standards.”

Supporters of such measures, he contended, have too often been arrogating

“the prestige of free trade…in support of a rather different agenda of better, more harmonized commercial rules” and expressed support for the view that “the participants in the debate about what constitute better, more harmonized commercial rules are mostly the kinds of people who appear in Davos rather than the kinds of people who work in the companies that are run by the people who appear in Davos.”

It’s hardly new for trade advocates to note critically that recent trade deals have dealt largely with non-trade issues, and more disturbingly, issues that the theory’s originators couldn’t imagine. Many left-of-center opponents of the Trans-Pacific Partnership (TPP) agreement nixed (at least for the United States) by President Trump made this very point, and Summers peers such as Dani Rodrik of Harvard University and Nobelist Paul Krugman have echoed these views as well.

But Summers’ indictment of this shift in the trade agenda seems unusually strong, so it’s a great opportunity to pose three major questions that these critiques keep avoiding. First, with standard trade barriers like tariffs whittled down to near-insignificance in most cases, and such non-tariff barriers (NTBs) becoming more popular, how can genuinely free trade be sustained without somehow grappling with the latter?

Second, since the United States maintains relatively few NTBs, since these barriers are easy to identify because they’re typically line items in a completely transparent federal budget, or regulations in other, equally transparent federal documents, and since the world’s NTB champs are known for opaque governing systems that generally hide their barriers effectively, how can the United States adequately safeguard its legitimate interests without threatening to put up or actually erecting its own barriers?

So without the possibility or reality of unilaterally closing off its own market in response, how can the United States avoid being disadvantaged by legalistic systems of harmonization that (understandably but unrealistically) depend on producing evidence for winning redress?

Third, and similarly, there’s no global consensus on what kinds of health and safety regulations are genuine and valid measures to protect the commonweal, and what kinds are designed primarily as trade barriers. Therefore, how – unless again through using the threat or reality of unilateral tariffs – can countries that play it straight (like the United States) adequately safeguard their interests versus the clandestine protectionists?

The only plausible answers to these questions are, “It can’t.” And the sooner globalization’s cheerleaders acknowledge these hard truths and the commonsense measures that logically flow from them, the sooner they’ll start winning back the trust of a public that’s rightly ignoring them.

(What’s Left of) Our Economy: All the Trade Fakeonomics That’s Fit to Print

Tags

China, globalization, John Maynard Keynes, Mainstream Media, Paul Krugman, Peter S. Goodman, The New York Times, Trade, Trade Deficits, Trump, US-China summit, World Trade Organization, WTO, {What's Left of) Our Economy

Last week’s U.S.-China summit turned out to be as close to a nothing-burger as any meeting between the leaders of the world’s two most important countries could possibly be. But at least one useful purpose was served by the understandably suspenseful run-up to this eagerly anticipated first direct encounter between President Trump and the human face of the economic rival he blasted during his White House campaign: It reminded once again how relentlessly terrible Mainstream Media coverage of trade and globalization issues tends to be.

Any number of reports and columns dealing with the summit and the surrounding economic issues deserves targeting by buckets of rotten tomatoes. Worthy of special attention, however, was a “news analysis” on the economics of trade and U.S.-China trade by New York Times correspondent Peter S. Goodman. Indeed, his April 5 article, “Behind Trump’s Trade Deficit Obsession: Deficient Analysis” was so permeated with fakeonomics and outright howlers that even zeroing in on the following three will produce a pretty lengthy post. 

First, Goodman portrays as detached from “economic reality,” President Trump’s belief that “international trade is a zero-sum affair, as if every country were jockeying for a share of forever limited amounts of business.” Instead, according to Goodman, “Trade is not zero-sum. Expanded trade has historically tended to support economic growth, which generates more spoils to be divvied up for all.”

That may indeed be what the economics textbooks say. It may even be what many economists have told Goodman. But this claim misses a far more important reality. Whatever the import of trade balances in a strongly or even normally growing world, the world of recent years hasn’t fit that description. Why didn’t Goodman note that – or an equally important point that economists such as John Maynard Keynes and his own newspaper’s Paul Krugman have observed: In today’s slow growth world (to quote the latter) “mercantilism makes a fair bit of sense”? And of course the corollary is equally true: Countering that mercantilism is sensible, too.

Second, Goodman correctly reports that “Economists generally dismiss bilateral trade deficits as essentially meaningless, for reasons easily recognizable in the rest of everyday life. Most people surely run lopsided trade deficits with their dentists, handing these professionals their dollars without expecting them to purchase anything in return. One may assume that successful dentists will distribute their profits throughout the economy — on marketing, accounting, laundry and streaming music services. One way or another, these dollars generate jobs and income for other people. So it is with countries.”

But apparently, Goodman doesn’t believe that his “news analysis” mandate permits him to analyze this particular statement. If it did, he’d surely recognize that this analogy has nothing do with America’s current circumstances.

For starters, this comparison with everyday life is generally used by economists to illustrate the virtues of specialization – which unfettered trade enhances in theory and often in fact. That is, no one need worry about running a trade deficit with his or her dentist because attempting to take care of their own dental needs would be a foolish waste of their talents, resources, and time. Far better to leave that responsibility to someone with expertise and experience. And this strategy is viable because patients presumably can offer the dentist equally valuable services, or (in a more complex model), because the total amount of goods and or services that patients can offer to all of the merchants that they patronize roughly balance the amount of goods and services that the patients consume.

In other words, patients can run trade deficits with their dentists and remain financially solvent because they are earning the income to pay for these services by successfully “exporting” their own output.

Of course, this is far from the position in which the United States finds itself, since its global trade is in deep deficit, and has been so for many decades. Its economy has remained viable because it’s been able to finance those deficits by a combination of selling off assets and ever more borrowing. Its ability to borrow at affordable rates, in turn, largely reflects the reserve currency role of the dollar – which itself stems from the nation’s past record as a matchless creator of real wealth, its still world-class financial markets, and the lack of any suitable alternative. If Goodman thinks this situation is fine and dandy, he should at least say so. Then he should try remembering how similar circumstances led to the entire world economy’s near-meltdown less than ten years ago.

The financial crisis also should have taught Goodman how unrealistic it has become to expect that “one way or another,” America’s creditors will recycle their trade surplus earnings back into the U.S. economy that generate “jobs and income.” For as I’ve explained frequently, the very offshoring-happy trade policies of so little concern to Goodman (and the rest of the American establishment) greatly reduced the odds that capital inflows would be used productively (e.g., on new factories and labs) and greatly increased the odds that they would be used instead to finance consumption and crackpot finance. Responsible and productive use of recycled trade surpluses is also unlikely when they reach the mammoth scale seen during the bubble decade. For the very abundance of cheap credit greatly erodes the incentive to use it prudently. 

As for the bilateral deficits, it is indeed reasonable to downplay them – when the global deficit is fairly evenly distributed across a nation’s foreign trade partners. When nearly half of the total merchandise deficit is concentrated in U.S.-China trade, as is the case now, bilateral deficits clearly count for a great deal – unless the importance of trade deficits is discounted completely.

In fact, like Goodman, we can analogize to daily life: If an individual or family’s over-consumption is highly concentrated in a single product or service area, that’s a conspicuous target for belt-tightening.

Third, it was nothing less than jaw-dropping to see Goodman emphasize that “even if China were a paragon of fair trading practices, it would almost certainly run a surplus with the United States. Despite tremendous economic advances, China remains a relatively low-income country, home to hundreds of millions of people who cannot afford the more sophisticated fruits of the American economy.”

Just recall: This statement is being made a quarter century after the United States decided to prioritize the expansion of trade with China, and a decade-and-a-half after the landmark decision to admit China into the World Trade Organization – which was based on predictions that China would soon become a market whose growth would contribute to America’s prosperity.

If after all this time, China is still too poor to be able to support a reasonably balanced trade relationship with the United States, then its at least arguable to conclude that liberalizing trade with China so rapidly was a major mistake and was sold to the American public with completely erroneous arguments. It’s also crucial to remember that during the vigorous China trade debates that surrounded those decisions, numerous critics predicted that such imbalances would result – and in part precisely because China’s very low income levels made export bonanza forecasts so ludicrous.

But strangely, none of their views was included in Goodman’s article. Apparently being right isn’t news that’s fit to print.

(What’s Left of) Our Economy: Free Trade Claims that Deserve Some Lumps

Tags

lump of labor fallacy, Paul Krugman, protectionism, The New York Times, Trade, trade policy, {What's Left of) Our Economy

All knowledgeable students of economics know that a big reason for rejecting most critiques of U.S. trade policy is their allegedly heavy reliance (explicitly or not) on the “lump of labor fallacy.”

As explained by economics Nobel-ist and New York Times columnist Paul Krugman, the fallacy holds that “there is a fixed amount of work to be done in the world, so any increase in the amount each worker can produce reduces the number of available jobs.” And it’s especially pernicious, Krugman explained, because it “feeds protectionism. If the public no longer believes that the economy can create new jobs, it will demand that we protect old jobs from new competitors in China and elsewhere.”

So it was interesting, to say the least, to see a leading economist this week make clear that this fallacy isn’t so fallacious, and that its existence strengthens the case for U.S. policies that depart from the free trade norm. Even more interesting: His name is Paul Krugman.

As explained by Krugman, Americans are living in a barely growing world that’s “awash with excess savings and inadequate demand, where interest rates can’t fall (or at any rate not much) because they’re already near zero. That is, we’re in a liquidity trap.”

In that world, Krugman continues, “it’s true both that trade deficits do indeed cost jobs and that there are basically no benefits to capital inflows — we already have more desired savings than we are managing to invest. “

And the clincher: In such a currently stagnant world, “and maybe for a long time to come, if secular stagnation theorists are right — mercantilism makes a fair bit of sense.”

To be sure, current U.S. trade policies have created major problems even when the world was less “lump-ish.” As I’ve pointed out, the rebound in the portion of the American trade deficit most strongly affected by trade deals and similar decisions has greatly slowed growth in this already weak recovery. Moreover, evidence is abundant that the immense global imbalances fueled by decades of poorly negotiated trade agreements helped set the stage for the last financial crisis.

And even when global and/or U.S. growth is adequate, ill-considered trade liberalization can still create win-lose results for American workers by eliminating more growth (and therefore employment) opportunities than they create.

But none of this reduces the importance of Krugman’s post. As a result, unless trade enthusiasts can credibly explain why American or global growth is going to pick up significantly any time soon, they’ll deserve to take major lumps whenever they belittle lump-of-labor-related trade policy critiques.

(What’s Left of) Our Economy: Krugman’s Trade Confusion

Tags

Alfred E. Eckes, allies, China, Europe, export-led growth, foreign policy, Great Depression, Japan, Mexico, New York Times, Paul Krugman, Russia, Smoot-Hawley Tariff, South Korea, tariffs, Trade, trade surpluses, {What's Left of) Our Economy

You have to hand it to Paul Krugman. Who else but the New York Times columnist and Nobel Prize-winning economist could contribute to one of the hoariest myths surrounding American trade policy, and then turn around and debunk another vital canard? And all within a week!

Two days ago, Krugman repeated a common but wildly off-base talking point long used by trade cheerleaders when he wrote that a trade critic who won the U.S. presidency “would find it very hard to do anything much about globalization — not because it’s technically or economically impossible, but because the moment he looked into actually tearing up existing trade agreements the diplomatic, foreign-policy costs would be overwhelmingly obvious.”

Fears of significant foreign blowback have always been comical from an economic standpoint because so much of the rest of the world has depended on so much of its growth for so long on amassing trade surpluses with the United States. Endlessly voiced fears of “trade wars” endlessly ignore how self-destructive it would be for these foreign trade powers to engage in protracted economic conflict with their best customer.

The contention about diplomatic costs is no more serious. Of course, the Chinese would complain. But since the trillions of dollars of surpluses Beijing has racked up with America have so lavishly helped finance China’s military buildup, any trade overhaul could only enhance U.S. national security.

America’s allies would grouse also. But since most are in fact protectorates that would struggle – at best – to defend themselves without U.S. military support, which ones are likely to hit back at Washington? The Europeans, who worry about mounting Russian ambitions, but whose continued flirtation with recession is bound to keep restraining already inadequate spending? The Japanese and South Koreans, who face a Chinese adversary at least as powerful, and comparably dismal economic outlooks? And how much meaningful diplomatic retaliation could be expected from low-income, export-dependent Mexico, which more than two decades after the North American Free Trade Agreement went into effect still relies on the American market for 80 percent of its foreign goods sales?

Much more convincing was Krugman’s post five days earlier, which took on the Smoot-Hawley fallacy. As the author noted, a mainstay of the case for current trade policies is the belief that any interference with trade flows will start the U.S. and world economies down the slippery slope toward recessions. And as he has also noted, the American Smoot-Hawley tariff is widely blamed for triggering or deepening the Great Depression of the 1930s (and, he could have mentioned, the political and military horrors that followed).

So kudos to Krugman for pointing out that “trade fell a lot between 1929 and 1933, but that was almost entirely a consequence of the Depression, not a cause,” and for spotlighting research making clear that “Trade actually fell faster during the early stages of the 2008 Great Recession than it did after 1929.” Incidentally, much more data debunking the standard Smoot-Hawley claims can be found in this scholarly history of U.S. trade policy by Ohio University’s Alfred E. Eckes.

Neither of these Krugman posts proves (wittingly or not) that big changes in America’s longstanding trade strategies are essential. But if it’s this easy to shred arguments this central to the trade status quo for so many decades, it’s time to start wondering what’s left of the case for standing pat.

 

(What’s Left of) Our Economy: TPP Debate is Perpetuating Longstanding Trade Delusions on Both Sides

Tags

currency manipulation, David Autor, enforcement, labor standards, Lawrence Summers, level playing field, non-tariff barriers, offshoring, Paul Krugman, Sander Levin, Simon Johnson, tariffs, TPP, Trade, Trans-Pacific Partnership, {What's Left of) Our Economy

Some of the biggest names in the economics world have weighed in recently on President Obama’s proposed Pacific Rim trade deal and the negotiating authority that would help secure its approval by Congress, and their analyses once again underscore how thoroughly misunderstood American trade diplomacy, its impact, and its possibilities remain. Their main points – that agreements like the Trans-Pacific Partnership (TPP) have little economic impact, and that carefully crafted provisions can produce equitable terms of competition for America – could not be more at odds with the record, and with simple common sense.

The main rationales for slighting the economic effects of the TPP – and indeed trade agreements in general – have been made by New York Times columnist and Nobel economics winner Paul Krugman, and former Treasury Secretary and top economic adviser to President Obama Lawrence Summers. The former emphasizes that “once trade is already fairly open, the gains from opening it further are small.” The latter writes that “increases in the extent of U.S. trade are driven largely by technology and by the increased sophistication of developing economies, not by trade agreements.” (Krugman also expresses agreement with this point.)

But although trade liberalization unquestionably has made major strides in the post-World War II period, the barriers that remain shouldn’t be underestimated. For the vast bulk of the obstacles to trade that have been dismantled have been visible barriers like tariffs and quotas. By contrast, non-tariff barriers (NTBs) like subsidies – which are often excruciatingly difficult even to identify, much less document and combat through trade law actions – have become especially important to America’s trading fortunes for two main reasons.

First, most of them are found overseas, which means that their persistence and growth damages U.S. producers who face foreign competition disproportionately. Second, they are particularly popular among the developing countries whose massive surge into the global trading system starting roughly when the Cold War ended has transformed international commerce. Because trade with countries like China increasingly dominates America’s trade flows, their pervasive use of NTBs – greatly aided by the secrecy with which their governments tend to operate – imposes outsized costs on their U.S. rivals, too.

What Summers overlooks is just as important. The main reason that these developing countries’ sophistication has fueled so much trade growth is that trade agreements have enabled capital from the United States and other high income countries to access not only their markets but their productive capacities and potential. In fact, by providing important guarantees to prospective investors about their treatment in host countries, these trade agreements have boosted and indeed created most of that developing country sophistication to begin with – through the transfer of management and technological knowhow that these economies never would have developed so quickly on their own.

Ironically, Summers concedes the point when he writes that trade agreements “reduce pressure for outsourcing because when barriers fall the incentive to invest abroad in order to avoid paying tariffs is attenuated.” Unfortunately, he misses the continuing importance of NTBs in sending American production and jobs to trade deal partners, especially requirements that foreign investors transfer technology, and produce and source locally.

Krugman and Summers also ignore the crucial role played by recent U.S. trade agreements, and the global imbalances they inevitably generated, in triggering the last financial crisis and ensuing Great Recession. Chiefly, the third world focus of America’s trade diplomacy starting with NAFTA intensified U.S. economic ties with countries whose willingness and potential to produce vastly exceeded their willingness and potential to consume. So not only did soaring U.S. trade deficits become inevitable. So did a deterioration of income-earning opportunities in the United States that Washington decided to offset with recklessly easy money policies. These in were turn enabled largely by the trade profits of its partners that were recycled back into the U.S. economy to create oceans of cheap credit. If you don’t believe this, your quarrel isn’t only with me. It’s with guys named Obstfeld and Rogoff, among others.

Completely unjustified faith in the ability of trade agreements to deal effectively with trade barriers – especially NTBs – is the second fundamental misunderstanding surrounding U.S. trade policies. It’s expressed prominently on both sides of the TPP debate both by Members of Congress and leading scholars, notably Summers as well as David Autor, David Dorn, and Gordon H. Hanson in the Washington Post; and Simon Johnson (along with Rep. Sander Levin, Democrat from Michigan) in Politico.

TPP supporters (based on what is known of the agreement) claim that the deal will significantly strengthen the American economy and even improve the lot of hard-pressed U.S. workers facing foreign competition by creating significant protections for intellectual property; and by protecting “U.S. firms against predatory regulatory interventions by member governments” (as Autor, Dorn, and Hanson insist). Critics, like Johnson, Levin, and Summers believe that the deal could be made acceptable to the United States if it banned currency manipulation and included strong safeguards for the environment and worker rights.

Based on America’s experience, though, confidence in trade rule-writing is a total mystery. One big and in practical terms insuperable problem is enforcement. As I’ve noted, many of the countries currently negotiating the TPP have enormous manufacturing complexes (even relatively small economies like Vietnam). As Johnson and Levin recognize, the labor provisions of NAFTA have been a major flop in Mexico. But even if a much stronger regime had been in place, how many American officials would have been needed to be constantly inspecting how many Mexican factories to ensure consistent, widespread compliance? And now they propose to add Vietnam to Washington’s enforcement burden? And, down the road, possibly China?

The second equally big and insuperable problem stems from the structure of the dispute-resolution systems in U.S. trade agreements. Typically, they give each signatory country an equal say, even though the American economy is invariably the biggest by far in the group – and therefore the greatest prize. As a result, even if so-called strong and enforceable disciplines on currency manipulation, for example, were included in the core texts of TPP and other trade deals, what reason is there to suppose that the majority of partner countries would ever see eye-to-eye with Washington on actually using any existing standard to punish the practice?

After all, Japan has already been accused by the U.S. Treasury Department of devaluing the yen for trade advantage. Why would Tokyo agree to deprive itself of the option in the future? The same goes for follow-on countries like Korea and China. In fact, since all of current and likely TPP members have a strong interest in growing by amassing trade surpluses with the United States, why would any of them ever agree to remove this weapon from their policy arsenals in any and all future circumstances?

The real lesson taught by America’s experience with trade deals is that it’s not remotely possible to level the proverbial global playing field with provisions proscribing or limiting various ostensibly objectionable foreign practices and policies. Washington’s enforcement capacity is sorely inadequate to the task, and the necessary consensus among our trade partners on acceptable and unacceptable behavior simply doesn’t exist, and shows no likelihood of emerging no matter how many pieces of paper these countries sign and how many rules they endorse.

The United States can, however, reasonably hope to secure equitable terms of trade for its domestic producers by relying on what it can hope to control – access to its own supremely important market. In other words, to serve the interests of the U.S. domestic economy, America’s trade agreements must stipulate that other countries will receive the privilege and immense advantages of doing business in the United States only on terms acceptable to the U.S. government and subject to the Congress’ unfettered ability to amend any deal it considers. Moreover, Washington will unilaterally administer all agreements and serve as judge, jury, and court of appeals for all disputes.

Even better, since the U.S. economy remains the world economy’s biggest golden goose, such tough trade policy love will bring major worldwide benefits as well – by preventing the reemergence of unsustainable international economic imbalances and the destructive financial instability and global crises to which they can lead.

Our So-Called Foreign Policy: Krugman’s Ignorant Screed on War and Conquest

Tags

"Pottery Barn Rule", aggression, conquest, Iraq, neoconservatives, oil, Our So-Called Foreign Policy, Paul Krugman, Putin, Russia, sanctions, Ukraine, war

Congratulations to Paul Krugman! The latest offering from the Nobel Prize-winning economist and New York Times columnist is both ethically disgusting and historically ignorant.

The ethically disgusting elements of Krugman’s December 21 column, “Conquest is for Losers”? The charge that American neoconservatives who supported the U.S. invasion of Iraq in 2003 were (and remain) a group of would-be conquerors who are typically “eager to fight” and who have viewed Russian leader Vladimir Putin’s recent aggression “with admiration and envy.” According to Krugman, “What really bothered [neoconservatives]was that Mr. Putin was living the life they’d always imagined for themselves.”

I’m a long-time critic of the neoconservatives.  Even though I supported the second Iraq war and still believe it was necessary to launch. I have repeatedly upbraided the neocons for defining America’s overseas interests far too broadly, for being excessively optimistic about exporting American values to regions to which they are completely alien, and for viewing international activism as the real measure of this nation’s worth. And because of their bloated view of what’s needed to ensure American security and prosperity, the neocons do indeed tend to overestimate the utility of military force in achieving foreign policy goals.

But that’s a far cry from qualifying as warmongers. As for the claim that the neocons support (or even “admire and envy”) Putin-like efforts to take over or politically dominate foreign countries contrary to the expressed wishes of their populations – that’s nothing less than the worst kind of smear. Unless Krugman really believes that the neocons ever wanted to turn Iraq into a U.S. satellite? Or wanted to keep large numbers of U.S. boots on the ground one moment longer than necessary? Maybe he’s forgotten that the Bush administration approach to post-Saddam Hussein Iraq was widely (and accurately) lambasted for the lack of a serious follow-on plan. Remember the so-called “Pottery Barn Rule”?

Krugman’s broader point that, nowadays, for great powers, “War makes you poorer and weaker, even if you win,” is even more obvious know-nothingism. Not to mention having the most destructive implications for U.S. foreign policy. Take his example of Putin and Ukraine. It’s eminently defensible to argue (as I have) that no major American response to this instance of Russian revanchism is needed because Ukraine’s independence has never (for good reason) been seen as a significant American security or economic interest.

But if you disagree (and it’s not clear whether Krugman does), then it matters decisively that the trouble Putin and Russia have now encountered have resulted not from Russia’s aggressive actions as such but from a combination of the Western sanctions response and an oil price drop that was predicted by almost no one. For those believing in the importance of Ukraine’s independence and territorial integrity (and the security of Russia’s other threatened neighbors), simply counting on the costs of Putin’s aggression either to produce rollback or adequate containment is the height of recklessness. Unless Krugman thinks that oil prices will remain this low forever?

Krugman is also utterly mistaken in suggesting that Putin’s moves reflect a desire for “tribute” (the author’s words) or any other type of economic gain. Instead, Moscow is clearly motivated mainly by security considerations – specifically, a determination to keep western influence, and NATO forces, out of Ukraine and certain other neighbors. So far, he’s succeeded. In theory, Putin could at some point determine that whatever costs he’s paying to control Ukraine (and it’s not entirely clear what they are) have become high enough to require reversing course. But even that turn of events is likelier to stem ultimately from setbacks on fundamentally separate fronts that reflect Russia’s built-in economic weaknesses.

Like everyone, Krugman has every right to speak out on issues outside his core competence of economics. But his latest column once again makes me wish that he paid more attention to one of the central theories of that field – comparative advantage – and left the foreign policy commentary to people who actually know what they’re talking about.  In the process, he could do his bit to keep our national debate on these matters out of the gutter.