In keeping with the Washington elite's practice that it is fine to say any nutty thing in the world to push a trade, Nike promised to create 10,000 jobs in the United States if the Trans-Pacific Partnership (TPP) passes. As Post reporter Lydia DePillis notes, this is a dubious promise.
Her piece notes that Nike relies almost exclusively on foreign manufacturers for its products. Furthermore, it continues to go in the direction of more outsourcing as one of its suppliers just announced that it was closing a plant in Maine and replacing it with production in Honduras. Given that new facilities are highly automated, it is unlikely that even if Nike brought some production back to the United States it would result in the creation of 10,000 new jobs.
But the Nike claim largely went unexamined, other than this piece by DePillis. This is part of a pattern in which major media outlets treat any nonsense said in favor of a trade agreement as being true. This is why they don't challenge people who claim that we get jobs by increasing exports, even if the exports are car parts to an assembly plant in Mexico that replaced a plant located in Ohio. It is also why they repeatedly describe the TPP as "massive" and "huge" based on the size of the economies included in the deal, even though most of the countries in the pact already have trade deals with the United States, meaning that the TPP will have little actual effect on their trade with the U.S. (It may affect domestic regulation in those countries.)
That is what readers of the NYT must be wondering. According to the NYT, the White House strongly objected to a bill that would be attached to fast-track authority which would require the government to impose tariffs to offset the effect of currency management by other countries. (If a country deliberately reduces the value of their currency against the dollar by 10 percent, it has the same impact as imposing a tariff of the same size and providing a 10 percent subsidy on its exports.)
The article notes that Commerce Secretary Penny Pritzker called it “a terrible idea," and then tells readers:
"Josh Earnest, the White House press secretary, said any measure to counter a foreign power’s currency policies could backfire, undermining the Federal Reserve Board, which uses the flow of currency to tighten or loosen economic growth in the United States."
This assertion is bizarre because the Fed never intervenes in the currency market to tighten or loosen economic growth in the United States. Its standard tools involve raising or lowering the overnight interest rate and more recently trying to reduce long-term interest rates directly by buying up large amounts of government bonds or mortgage backed securities. These policy tools would not be affected by rules that limited central bank interventions in currency markets.
You have to admire Niall Ferguson. There aren't many people who are willing to write lengthy diatribes on topics on which they seem to know next to nothing, but some would say that is the definition of a Harvard professor.
Anyhow, he apparently believes that the victory of the Conservative Party in the U.K. election last week showed that he was correct to endorse their austerity policy and that Paul Krugman was wrong to criticize it. If he was familiar at all with the literature on the impact of the economy on elections he would know that elections are largely determined by the economy's performance in the last year before an election, not an administration's entire term. And, since the conservatives relaxed their austerity in the last two years (as had been widely noted long before the election), the economy was not performing badly in the immediate lead up to the election.
Ferguson's piece presents a cornucopia of silly mistakes, which I don't have time to address, but I will give my favorite:
"On more than one occasion during the crisis, Krugman applauded Gordon Brown for injecting capital directly into the British banks rather than relying on purchases of "troubled assets," the initial thrust of the Troubled Asset Relief Program in the United States. In October 2008, Krugman engaged in the kind of sycophancy that usually indicates a man angling for a knighthood:
'Has Gordon Brown, the British prime minister, saved the world financial system? ... The Brown government has shown itself willing to think clearly about the financial crisis, and act quickly on its conclusions. .... Governments [should] provide financial institutions with more capital in return for a share of ownership ... [a] sort of temporary part-nationalization ... The British government went straight to the heart of the problem - and moved to address it with stunning speed.'
"TARP has of course proved far more successful than the UK's nationalization of too-big-to-fail behemoths like RBS."
The small detail that Ferguson apparently missed is that TARP also went the route of giving the banks capital in exchange for share ownership in the form of the purchase of shares of preferred stock. At the time, Plan A from the Bush administration was to directly purchase the bad assets from the banks (hence the name "Troubled Asset Relief Program"). Krugman and others argued that the better route was to give the banks capital, which is what TARP eventually did, following Gordon Brown's lead. (I personally favored letting the market work its magic and then pick up the pieces after the Wall Street behemoths were buried in the ground.) In other words, Ferguson is bizarrely holding up TARP as an alternative course to the path set out by Brown, when in fact it followed the path set out by Brown.
But the real story is the overall performance of the U.K. economy, which Ferguson somehow thinks was extraordinary. The data beg to differ, even if the U.K. has done better in the last couple of years as the government relaxed its austerity. Here is the per capita GDP record of the G-7 economies since the crisis.
Source: International Monetary Fund.
As can be seen, the U.K. ties France for fifth place, only beating out Italy for last place. If we treat 2010 as the start point, it managed to close the gap with France in the next four years (which also was forced to pursue austerity since it was in the euro zone), but fell further behind Germany, Japan, Canada, and the U.S.
In 2014, seven years after the beginning of the crisis, per capita GDP in the U.K. was virtually identical to what it had been in 2007. By comparison, per capita GDP in the U.S. in 1988 was 20.1 percent higher than it had been at start of the 1981 recession. In 1997 it was 12.8 percent larger than it had been at the start of the recession in 1990. It would require some extraordinary affirmative action for conservative politicians to follow Ferguson and declare the Cameron record a success.
For folks who thought I was being unfair to use 2010 as a reference point, since Cameron only took office mid-year, you're right. The OECD has the quarterly data. The UK economy grew at a 2.0 percent annual rate in the first quarter and a 4.0 percent rate in the second quarter when Cameron took office. This slowed to 2.6 percent in the third quarter and 0.1 percent in the fourth quarter. So taking the year as a whole as the start point for Cameron is undoubtedly too generous.
I should also explain that there is a reason for using the pre-recession level of output as a reference point. In the old days (i.e. before the pathetic recovery from this downturn) economists expected economies to bounce back quickly from a recession, making up the ground lost in the recession. This is why we had years of 5-7 percent growth following the steep downturns in 1974-1975 and 1981-1982. This recession has been different in that we have not seen a steep bounce back in any country. I feel it is appropriate to apply normal economic standards to evaluate policy performance instead of using affirmative action for inept policymakers.
Robert Samuelson apparently doesn't understand much about the economy and economics. That's fine, many people don't. Unfortunately, Mr. Samuelson has an economics column in a major national newspaper and he wants to attribute his ignorance to the rest of us.
In his column today bemoaning the seeming end of a trade-off between inequality and efficiency (we could buy ourselves some more equality at the price of a loss of efficiency) he tells readers:
"We do not know enough to manipulate economic growth, productivity and income distribution. ...
"Okun’s book is emblematic of an era of overconfident economics. The underlying questions remain. Is the convergence of rising inequality and falling economic growth simply a coincidence? Or is more inequality a cause of weaker growth, a consequence of it — perhaps both? We lack definitive answers. Government must routinely act without full knowledge. That’s the point: In the real world, we often don’t know the true tradeoffs."
Actually "we" know pretty well what happened. Since the rise in the dollar in the late 1990s, the U.S. has had a large trade deficit, which creates a big gap in demand. This gap in demand was filled by a stock bubble at the end of the 1990s and a housing bubble in the last decade. When the housing bubble burst, there was nothing to fill the demand gap created by the trade deficit.
Since it is not politically acceptable to talk about large budget deficits, and there is little interest in work sharing and other policies to reduce supply, the economy is likely to remain well below full employment levels of output. When the economy is below full employment, workers lack the bargaining power to secure their share of productivity growth, leading to upward redistribution. Upward redistribution is also helped by stronger and longer patent and copyright protection, special tax breaks that cultivate niches for finance, and subsidies to top management at non-profits (e.g. universities, hospitals, and foundations) in the form of tax exempt status.
We could reverse the situation by either having the government spend more money, pushing legislation that will tighten the labor market by reducing average hours worked per worker, or by measures that will reduce the value of the dollar against other currencies, thereby reducing the trade deficit. All of these measures would boost growth and led to stronger wage growth, thereby lessening inequality.
There is very little mystery about any of this, even if Robert Samuelson finds the situation confusing.
The NYT appeared to be pushing for approval of the Trans-Pacific Partnership (TPP) in a news article that massively misrepresented the pact's importance as a mechanism for reducing trade barriers and completely ignored the ways in which it would increase trade barriers. It also failed to mention the issue of currency rules or the extra-judicial system of investor-state dispute settlement mechanisms, both of which are main reasons given for opposition to the TPP.
The first paragraph describes the TPP as:
"a massive trade accord with 11 nations across the Pacific Rim."
Later it refers to it as:
"an accord that would reach 40 percent of the global economy."
"The accord would reduce tariffs on a vast array of goods and services, and would affect about 40 percent of America’s exports and imports."
In fact, the vast majority of "40 percent of the global economy" and the "40 percent of America's exports and imports" are already covered by trade agreements with the United States. Of the eleven countries other than the United States in the TPP, six (Australia, Canada, Chile, Mexico, Peru, and Singapore) already have trade deals with the United States. That leaves Brunei, Japan, Malaysia, New Zealand, and Vietnam as countries being brought into a deal for the first time.
In an interview with Matt Bai, a political columnist with Yahoo, President Obama took issue with Senator Elizabeth Warren's claim that the Trans-Pacific Partnership (TPP) and other trade deals that could be allowed special rules under fast-track status, could unravel financial regulation put in place by Dodd-Frank.
"'Think about the logic of that, right?' he went on. 'The notion that I had this massive fight with Wall Street to make sure that we don’t repeat what happened in 2007, 2008. And then I sign a provision that would unravel it?'
“'I’d have to be pretty stupid,' Obama said, laughing."
President Obama may not want to rest the case for TPP on the strength of his status as a foe of Wall Street. He has not always been the strongest proponent of financial reform. Among other noteworthy items:
1) He has not sought the criminal prosecution of any executives at major banks for issuing or securitizing fraudulent mortgages, nor against executives at credit rating agencies for knowingly granting investment grade ratings to securities containing large numbers of improper or fraudulent mortgages;
3) He did nothing to push cram-down legislation in Congress, which would have required banks to write-down the value of some underwater mortgages to the current market value of the home;
4) He supported the stripping of the Franken Amendment from Dodd-Frank. This amendment (which was approved by a large bi-partisan majority in the Senate) would have eliminated the conflict of interest faced by bond-rating agencies by having the Securities and Exchange Commission, rather than the issuer, pick the rating agency. (The line from opponents was that the SEC might send over unqualified analysts. Think about that one for a while.)
5) He only began to push the Volcker rule as a political move to shore up support the day after Republican Scott Brown won an upset election for a Senate seat in Massachusetts.
6) The administration had to be pushed by labor and consumer groups to keep a strong and independent consumer financial protection bureau in Dodd-Frank.
If President Obama wants to push the case for TPP he should probably rely on something other than his status as a foe of Wall Street.
It is worth noting that the fast-track legislation being requested by President Obama would extend for five years. This means that if a Republican is elected in 2016, they would be able to have future trade agreements approved on a straight up or down vote by a majority in Congress. If it is difficult to see how President Obama can assure Senator Warren, and other critics of fast-track, that a future Republican president would not use this power to weaken financial regulation, if they could not otherwise get the 60 votes needed in the Senate to overcome a filibuster.
The Trans-Pacific Partnership (TPP) is often referred to in the media as a "free-trade" agreement. This is not true. Most of the pact is about putting in place a business-friendly regulatory structure, not reducing trade barriers. Perhaps more importantly, the deal will explicitly increase protectionist barriers in the form of stronger and longer copyright and patent-related protections.
These forms of protection impose the same sort of costs as any other form of protection. Markets are not smart enough to know that they aren't supposed to create distortions for protections that our politicians like (e.g. copyrights and patents) as opposed to the protections they ostensibly don't like (tariffs and quotas).
These distortions are likely to be large since copyrights and patents raise prices by many multiples of their free market price. For example, the patent protected version of the Hepatitis-C drug Sovaldi sells for $84,000 for a treatment in the United States. A high quality generic version is sold in India for less than $1,000. This gap implies that the patent would have the same effect in creating distortions as a 9000 percent tariff. Since the TPP would strengthen such protections, we can assume that the resulting distortions would increase.
In the case of drugs, because there is such asymmetry in knowledge between the drug companies and the patients and doctors, patent monopolies provide both enormous incentive and opportunity for drug companies to increase profits at the expense of patients. An analysis of the damage done by mismarketing of just five drugs found average costs of $27 billion a year between 1994-2008.
While the TPP may be increasing the incentives for drug companies to mislead the public about the safety and effectiveness of drugs, it is possible that the government's ability to restrain such abuses may get even weaker. A drug company is now suing the Food and Drug Administration (FDA), claiming that it has the right to provide information about off-label uses of its drugs. The company claims this is a free speech issue. Given recent rulings from the Supreme Court on efforts to restrict campaign spending, it is certainly possible that the Court will rule for the company.
If drug companies win the right to promote their drugs for off-label uses (i.e. provide information), then it will make the FDA even less effective in restraining abuses in the future than it has been in the past. And the TPP will give drug companies more incentive for such abuses.
That was the main takeaway from a NYT article on his trip to Nike. According to the article, he made many claims about the Trans-Pacific Partnership (TPP) and opponents of the deal which are clearly wrong.
For example, the article tells readers:
"he [President Obama] scorned critics who say it would undermine American laws and regulations on food safety, worker rights and even financial regulations, an implicit pushback against Ms. Warren. 'They’re making this stuff up,' he said. 'This is just not true. No trade agreement’s going to force us to change our laws.'"
President Obama apparently doesn't realize that the TPP will create an investor-state dispute settlement mechanism which will allow tribunals to impose huge penalties on the federal government, as well as state and local governments, whose laws are found to be in violation of the TPP. These fines could effectively bankrupt a government unless they change the law.
It is also worth noting that rulings by these tribunals are not subject to appeal, nor are they bound by precedent. Given the structure of the tribunal (the investor appoints one member of the panel, the government appoints a second, and the third is appointed jointly), a future Bush or Walker administration could appoint panelists who would side with foreign investors to overturn environmental, safety, and labor regulations at all levels of government. (Think of Antonin Scalia.)
President Obama apparently also doesn't realize that the higher drug prices that would result from the stronger patent and related protections will be a drag on growth. In addition to creating distortions in the economy, the higher licensing fees paid to Pfizer, Merck, and other U.S. drug companies will crowd out U.S. exports of other goods and services.
Obama is also mistaken in apparently believing that the only alternative to the TPP is the status quo. In fact, many critics of the TPP have argued that a deal that included rules on currency would have their support.
This issue is hugely important, since it is highly unlikely that the U.S. economy will be able to reach full employment with trade deficits close to current levels. (It could be done with larger budget deficits, but no one thinks this is politically realistic.) Without a considerably tighter labor market, workers will lack the bargaining power to achieve wage gains. This means that income would continue to be redistributed upward.
The only plausible way to bring the trade deficit down is with a lower valued dollar which would make U.S. goods and services more competitive internationally. The TPP would provide an opportunity to address currency values, as many critics of the trade agreement have pointed out. It seems that Mr. Obama is unaware of this argument.
Wow, the Social Security trustees have no better grasp of the economy than Alan Greenspan and the clowns at the Fed, the Congressional Budget Office, and other economic forecasting outfits! That is the implicit punch line of an article NBC ran with the headline, "Social Security may be in worse shape than we thought: study."
The gist of the piece is that the Trustees projections have been overly optimistic since 2000. This is true. The trustees failed to recognize that the stock market bubble would collapse and throw the economy into a recession in 2001 and that the recovery from this recession would be very weak. Nor did they recognize that the housing bubble would collapse and throw the economy into an even deeper recession in 2007-2009 and the recovery would be even weaker.
It is reasonable to blame the trustees for missing these really huge bubbles, the collapse of which and the resulting damage were predictable. However, they erred in the same way as the vast majority of the economics profession. This does not excuse these huge errors. These people and their staffs are paid very well -- say compared to people who don't make mistakes cleaning rest rooms. However, it is extremely misleading to imply that the trustees are uniquely wearing rose-colored glasses in their view of the economy. It's also worth noting that they erred on the pessimistic side when the economy had a growth and employment boom in the late 1990s.
The piece then tells us about a preferred approach using an infinite horizon rather than Social Security's 75-year forecast period:
"Kotlikoff [Boston University economics professor, Larry Kotlikoff] wants the administration to calculate unfunded obligations using the "infinite horizon," which accounts for funding after 75 years. Under this accounting system, SSA's projected unfunded liabilities would be $24.9 trillion (instead of the $10.6 trillion projected in 2088)."
Presumably the point is to make readers really scared with a liability of $24.9 trillion! Scaring people could be the only possible motivation, since almost no one reading this piece has any idea of how much money $24.9 trillion is over the infinite future.
It would not have been difficult to make the number understandable to readers, since it can be found expressed as a share of GDP right in the trustees report. Table V1.F1 shows that $24.9 trillion is equal to 1.4 percent of future GDP. By comparison, the increase in military spending associated with the wars in Iraq and Afghanistan was equal to 1.6 percent of GDP at its peak.
If the concern is that mistaken assumptions will generate misleading numbers then that concern should be far greater with an infinite horizon calculation than a calculation for a 75-year horizon. After all, our knowledge of the 22nd and 23rd century is really not very good. (That is where most of the infinite horizon shortfall comes from.) Of course, people alive today also don't get to make policy for people living 100 and 200 years from now. Assuming the country remains a democracy, the people alive at the time will decide what their social insurance programs look like.
If the point is to inform people and not to scare them, NBC might have celebrated the sharp reduction in the infinite horizon shortfall in Medicare. Back in 2008 the Trustees (Table III.B10) projected it would be $34.4 trillion (in 2008 dollars). The most recent report puts the shortfall at just $1.9 trillion (in 2014 dollars) or 0.1 percent of GDP. The change implies a reduction in the infinite horizon shortfall of almost $36 trillion (in 2014 dollars). This should be cause for real celebration for those arguing that infinite horizon projections are the way to go.
We look forward to the NBC piece on this good news.
Andrew Biggs called my attention to the fact that the main point in the underlying article is that people are living longer than had been projected by the Social Security trustees, not that the they had over-predicted economic growth. As a consequence, we should expect more people to collect benefits, which worsens the program's finances. There appears to be good evidence for this view.
A flip side is that if people are living longer than projected, and therefore presumably healthier, then we may expect more people to work later in life, which would improve the system's finances. The article did not attempt to assess projections on retirement ages.
It is worth noting that whether or not workers share in the gains of economic growth over the next two decades, will swamp the impact of any conceivable increase in Social Security taxes that might be used to fund the program. Wages will be on average more than 40 percent higher in three decades according to the Social Security trustees projections. If the tax rate were raised by 3 full percentage points, it would take back less than 10 percent of the increase in wages.
A post by Paul Krugman on the price of credit default swaps (CDS) on bonds issued by the United Kingdom reminds me of the dark days of the financial crisis when otherwise serious people used the price of CDS on U.S. Treasury bonds as a measure of the risk of a default by the U.S. government. With the price of the CDS rising, we had some of these people getting very concerned about the prospect of a default.
As the more calm among us tried to explain, it's not clear that the price of a CDS on U.S. Treasury bonds measured anything. A person holding the CDS can only get paid off, if the U.S. government defaults on its debt and the bank that issued the CDS is around to make the payment. If there is a real default (I don't mean a delay of a few hours or days over debt ceiling fights), it is hard to imagine what banks would still be standing to make good on the CDS they had issued.
In other words the probability that the U.S. government would default and there would be bank in a situation to meet its CDS obligations is very close to zero. This is why the price of a CDS issued on U.S. Treasury bonds is virtually meaningless as a measure of default risk.
Most Post readers know that the paper is prepared to say pretty much anything to push the Trans-Pacific Partnership (TPP) and other trade deals that are likely to have the effect of redistributing income upward. Therefore it is not surprising to see a column by Edward Alden, a senior fellow at the Council on Foreign Relations, lecturing the labor movement that they should support President Obama's trade deals.
Alden's basic point is that rather than oppose a trade deal that would likely further the upward redistribution of income, labor should demand conditions that ensure workers will benefit.
"They could insist, for example, on linking trade to new investments in infrastructure that would help U.S. exports flow to world markets. Or they could demand funding for comprehensive worker retraining programs like those in Europe, rather than the paltry Trade Adjustment Assistance that isn’t available to 99 percent of the unemployed."
This sounds great. My guess is that most unions would gladly sign on to a deal that included $2 trillion in spending on infrastructure and education over the next decade as a quid pro quo for TPP. Or, if we're making comparisons to Europe, how about a package that made U.S. look more like European welfare states, with the government largely picking up the tab on health care, college education, and childcare. Also, no more dismissal at will. If an employer wants to dump workers who have been with the company for twenty five years, how about six months of severance pay. That's small by European standards, but a big step over what they get now (i.e. nothing).
Anyhow, if Alden could produce a deal with these provisions from President Obama and the Republican leadership in Congress, I'm sure those dunderheads in the labor movement would quickly sign on. Of course, my guess is Alden is instead arguing that the labor movement should settle for a few largely meaningless trinkets, and pretend that they are a big deal. As a practical matter that is all that would be on the table.
At the beginning of the piece Alden quotes president Obama:
"The Chamber of Commerce didn’t elect me twice — working folks did."
This is partly true. President Obama did win because of votes from workers, but like his Republican opponents he raised huge amounts of money from rich people. No presidential candidate can win election in the United States without raising large amounts of money from rich people. This likely explains the structure of the TPP (which increases protection in areas that benefit corporations) and the president's determination to get it through Congress.
Matt O'Brien gets the story right. By most measures the stock market is above its normal levels, but given unusually low interest rates, it is not unreasonably priced. The price to earnings ratios are only slightly higher than in 2007, when almost no one thought the market was in a bubble. Back then the interest rate on 10-year Treasury bonds was over 5.0 percent, compared to around 2.0 percent today. That makes today's market look like a decent buy, but don't expect high returns.
One point is worth qualifying in O'Brien's piece. He notes Greenspan's famous irrational exuberance remark and says it didn't do much beyond its immediate impact (markets did fall). This is likely because Greenspan backed away from it with doublespeak about how market valuations may be justified if profits accelerated. It would have been interesting to see what would have happened if he doubled down and continued to hit on the point, backed by data from the Fed. Janet Yellen's foray into attacking bubbles this way last summer suggests that it can work.
USA Today got its numbers seriously wrong in pushing the case for the Trans-Pacific Partnership (TPP). Its editorial told readers:
"Democrats, however, are wedded to unions who blame trade, and trade agreements, for the decline in manufacturing jobs.
"Theirs is a simplistic view that ignores the fact that manufacturing output has nearly doubled since the late 1990s, showing that technology is the real job killer."
It's USA Today, not the unions, who are being simplistic here. The data they are relying on refers to gross output. This would include the full value of a car assembled in the United States even if the engine, transmission, and the other major components are imported. It also doesn't adjust for inflation. If USA used the correct table it would find that real value added in manufacturing has risen by a bit less than 41.0 percent since 1997, compared to growth of 45.8 percent for the economy as a whole.
The story here is a one of very basic marcoeconomics. The $500 billion annual trade deficit ($600 billion at an annual rate in March), implies a loss of demand of almost 3.0 percent of GDP. In the context of an economy that is below full employment, this has the same impact on the economy as if consumers took $500 billion every year and stuffed it under their mattress instead of spending it. USA Today might try working on its numbers and economics a bit before calling people names.
The sharp jump in the March trade deficit reported this morning means that GDP in the first quarter will be revised into negative territory. The $51.4 billion trade deficit reported for March, was $15.5 billion increase from the $35.9 billion deficit reported in February. Some of this is undoubtedly noise in the data (the February number was surprisingly low), but some of the rise is likely due to the impact of the higher dollar which is making U.S. goods and services less competitive internationally.
This is a really big deal, much bigger than the news about greater or smaller than expected budget deficits that can often be found on the front page. There is no easy mechanism to offset the demand lost as a result of a trade deficit that was running at more than a $600 billion annual rate in March. It is difficult to see how the economy can get to full employment with a trade deficit of this size, without the government running large budget deficits or an asset bubble spurring demand.
Catherine Rampell used her column to note the decline in birthrates among millennials. She identifies the weak economy as a main factor behind the drop. However she warns that this drop in birthrates is "bad news for older folks" because:
"for economic reasons — including cultivating the next generation of Americans to work and pay for the benefits of their many, many elders — we still need more babies."
This is not true. If we have fewer people entering the labor force, we would expect that they would move into higher productivity, higher paying jobs. This might mean that fewer people would be willing to work at near minimum wages at McDonalds or Walmart (we would therefore have fewer McDonalds and Walmarts) and would instead work at higher paying jobs in health care, manufacturing, or other sectors. A worker earning $60,000 a year in the health care sector can afford to pay much more to support retirees than a worker earning $20,000 a year at Walmart. The impact of a smaller number of workers can easily be offset by an increase in the productivity per worker.
Fewer children will also mean less demand on public services (e.g schools) and infrastructure. It also means less environmental damage.
It is also worth noting that Rampell's concern about too few children goes 180 degrees against the concern that robots will take the jobs. In other words, if you are concerned that we won't have enough workers, then you must think the robot worriers are nuts.
It is a problem if people feel they are unable to have children for financial reasons because we should want people to have good lives. That means having children if they want them. It is definitely not a problem for the rest of us if they don't have children.
The advocates of the Trans-Pacific Partnership must really be desperate. Why else would they continue to make such ridiculous assertions? (And why does the Post print them?)
Thomas McLarty puts on the show today. McLarty was President Clinton's chief of staff when they pushed NAFTA through Congress. He used his column to tout all the jobs created through exports as a result of NAFTA. He never once mentions the jobs lost to imports. In fact, the United States went from having a modest trade surplus with Mexico, to having a trade deficit of $54 billion in 2014.
While this rise in the trade deficit may not be all or even mostly attributable to NAFTA, in the context of an economy that is below full employment, a trade deficit of this size would be expected to lead to a loss of roughly 600,000 jobs.
Robert Samuelson begins his argument for the Trans-Pacific Partnership (TPP) by telling readers:
"The trouble with our trade debates is that people assume they’re only about economics."
I suppose this means that the advocates of TPP think they are losing the economic argument so now it is a matter of national security. (Just out of curiosity, I wonder how many of the foreign policy experts arguing for the necessity of the TPP supported the Iraq war.)
Anyhow, we do get some economics in Samuelson's piece, which deserve comment. He refers readers to a study by the Peterson Institute which shows that the increase in U.S. GDP by 2025 could be $85 billion, a bit less than 0.4 percent. It's worth noting that this study took no account of the higher prices in drugs and other products due to stronger and longer patent and copyright protections.
The higher prices would be expected to slow growth in the same way that increases in protectionist barriers in general slow growth. The impact could be large. For example, if a country is forced to pay the $84,000 patent protected price for Sovaldi, the hepatitis C drug, rather than the $900 generic price, it will be a drain on its purchasing power and an impediment to growth.
The Peterson Institute analysis also does not take account of the costs that would result from rent-seeking behavior due to stronger and longer patent protection. A recent CEPR analysis found that the mismarketing of just five drugs imposed annual costs of $27 billion a year in the form of increased mortality and morbidity between 1994 and 2008.
Samuelson also turns to a peculiar analysis by Robert Lawrence to question the widely accepted view among economists that trade has cost manufacturing jobs and lowered wages for workers without college degrees. The study argues that we have seen nothing unusual in the sharp loss of manufacturing jobs as the trade deficit exploded in the last 15 years, claiming that the manufacturing share of employment has continued to decline at a trend rate of 0.4 percentage points a year.
This is bizarre, because we might expect manufacturing to decline at constant rate, not a constant percentage of total employment. If manufacturing employment fell by 0.4 percentage points when manufacturing accounted for 20 percent of total employment, the drop would be 2 percent. If it declines by 0.4 percentage points when manufacturing is 10 percent of total employment, the loss of jobs is 4 percent of manufacturing. There is no reason we would expect this pattern to hold. The implication is that if manufacturing employment were 4 percent of total employment then we would see 10 percent of total manufacturing employment to disappear in a single year.
Lawrence also criticizes Paul Krugman's analysis showing that trade with China has lowered wages by complaining that his model is "simplistic." He seems unaware of the research by David Autor and others that support this assessment.
A NYT piece analyzing White House efforts to push the Trans-Pacific Partnership (TPP) began with the sentence:
"When President Obama defends the Trans-Pacific Partnership, a far-reaching agreement to tear down trade barriers between the United States and 11 other nations, he often argues it would cure the ills inflicted on American workers by trade pacts of the past, particularly the North American Free Trade Agreement."
The problem with this sentence is that the TPP is not obviously, "a far-reaching agreement to tear down trade barriers." The barriers to trade in most cases are already low. The main focus of the TPP is putting in place a new regulatory structure, which is likely to be very business friendly. The most obvious evidence of the business friendly nature of this structure is that the TPP would establish an extra-judicial legal system for enforcing the agreement. This system can only be used by foreign investors to sue governments; it is not open to governments, workers, or communities to sue foreign investors.
The deal also does much to increase barriers in the form of stronger patent and copyright protection. These barriers will raise prices and reduce trade.
For these reasons, it is a major distortion of reality to describe the TPP as "a far-reaching agreement to tear down trade barriers." While the proponents of TPP may like to characterize the deal this way in order to appeal to the principle of "free trade," it is not an accurate description of the agreement.
Actually, I don't know that he is, but he would be if he were consistent. Earlier in the week, he complained that I thought there should be rules on currency manipulation in the Trans-Pacific Partnership (TPP). The gist of his argument is that if another country wants to deliberately under-value its currency, so that we can buy their exports at a lower price, our response should be "thank you very much." In effect the currency manipulator is subsidizing our consumption.
This is of course true and the same logic applies to export subsidies. If Japan, Australia, or some other country wants to provide a 20 percent subsidy on exports of cars, computers, or other goods and services, then they are making those items cheaper for U.S. consumers. Worstall would presumably want us to say "thank you very much" and leave it at that.
But those dunderheads negotiating the TPP are banning export subsidies. They will make it a trade violation if Australia wants to subsidize our consumers. I assume Worstall is very angry about this.
There are two points here. First there is a small one about optimal allocations in the economists' perfect world of full employment. Even though U.S. consumers may benefit in this world from the stupidity of other countries subsidizing our consumption through their export subsidies, this is not an optimal allocation. In principle, the world economy would be larger if governments did not subsidize exports and instead let the market make allocations. Note, this argument applies with equal force to currency values that are deliberately set below market rates by governments seeking trade advantages.
The other more important point is that we're typically not living in the economists' perfect world of full employment, and certainly have not been there lately. In a context of an economy that is below full employment, both an export subsidy and under-valued currency have the effect of increasing the U.S. trade deficit and reducing U.S. employment. (There appears to be some serious confusion on trade and jobs by Worstall and his friends. If foreigners use the dollars they get from their exports to buy U.S. government bonds, shares or U.S. stock, or real estate, it does not create jobs in the United States, except for the small number of people involved in the sale of financial assets.)
Anyhow, in the world where we live there can be, and is now, a very direct link between the trade deficit and jobs. If we run a larger trade deficit, neither Worstall nor his friends have some magic formula that can fill the gap in demand that would be created. This is why it is important to have rules in the TPP on currency values. We simply have no mechanism for replacing the demand we are losing through a $500 billion plus annual trade deficit.
I see Tim has responded. I think I see the problem. Tim seems to believe the economy is always at full employment so that lack of demand is not a problem. If the economy were always at full employment, he would of course be right. There is no obvious reason we shouldn't be happy if other countries are willing to subsidize our consumption. (There may still be some issues about market power and potential monopolization, but we can skip those for now.)
However in the world I live, the economy is often nowhere near full employment. This means that anything that reduces demand (like a larger trade deficit due to a rise in the value of the dollar) reduce output and employment. We can offset this loss of jobs and output through larger government budget deficits, but as a practical matter, we don't. This is why I am concerned about an over-valued currency, but if I thought unemployment wasn't a problem, I'd be with Tim.
In the United States it's considered fine to just make crap up when talking about the government, especially when it comes to programs for poor people. That is why Ronald Reagan ran around the country telling people about the welfare queen who drove up to the welfare office every month in her new Cadillac to pick up her check.
Today, David Brooks does the welfare queen routine in his NYT column, telling readers:
"Since 1980 federal antipoverty spending has exploded. As Robert Samuelson of The Washington Post has pointed out, in 2013 the federal government spent nearly $14,000 per poor person. If you simply took that money and handed it to the poor, a family of four would have a household income roughly twice the poverty rate."
Of course if NYT columnists were expected to be accurate when they talked about government programs, Brooks would have been forced to tell readers that around 40 percent of these payments are Medicaid payments that go directly to doctors and other health care providers. We pay twice as much per person for our health care as people in other wealthy countries, with little to show in the way of outcomes. We can think of these high health care costs as a generous payment to the poor, but what this actually means is that every time David Brooks' cardiologist neighbor raises his fees, David Brooks will complain about how we are being too generous to the poor.
The other point that an honest columnist would be forced to make is that the vast majority of these payments do not go to people who are below the poverty line and therefore don't count in the denominator for his "poor person" calculation. The cutoff for Medicaid is well above the poverty level in most states. The same is true for food stamps, the Earned Income Tax Credit (EITC), and most of the other programs that make up Brooks' $14,000 per person figure. In other words, he has taken the spending that goes to a much larger population and divided it by the number of people who are classified as poor.
If Brooks actually wants to tell readers what we spend on poor people, it's not hard to find the data. The average family of three on TANF gets less than $500 a month. The average food stamp benefit is $133 per person. If low income people are working, they can get around $5,000 a year from the EITC for a single person with two children at the poverty level. (They would get less at lower income levels.)
These programs account for the vast majority of federal government payments to poor people. It won't get you anywhere near David Brooks' $14,000 per person per year, but why spoil a good story with facts?
Folks seem anxious to count Medicaid spending as spending on the poor. That's fine by me. The point I was making is that we pay twice as much as people elsewhere in the world for care that is no better because doctors and other providers get paid twice as much.
That seems worth noting in an assessment of how generous we are to the poor. To take an overblown analogy, suppose terrorists took some number of poor people hostage and demanded tens of millions of dollars for their release. We can include our ransom payments as money spent on the poor and say again how generous we are.
In this case, the folks playing the role of the terrorists in making big money demands are the doctors and other health care providers. In other words, they are David Brooks' cardiologist neighbor who gets well over $400,000 a year in large part due to payments from the government. You're welcome to see this as generosity to the poor, I see it as generosity to David Brooks' cardiologist neighbor.
E.J. Dionne and Harold Meyerson both had interesting columns in the Post this morning, but they suffer from the same major error. Both note the loss of manufacturing jobs and downward pressure on the wages of non-college educated workers due to effects of trade. But both speak of this as being the result of a natural process of globalization.
This is wrong. The downward pressure on wages was the deliberate outcome of government policies designed to put U.S. manufacturing workers in direct competition with low-paid workers in the developing world. This was a conscious choice. Our trade deals could have been designed to put our doctors and lawyers in direct competition with much lower paid professionals in the developing world.
Trade deals could have focused on developing clear standards that would allow students in Mexico, India, and China to train to U.S. levels and then practice as professionals in the United States on the same terms as someone born in New York or Kansas. This would have provided enormous savings to consumers in the form of lower health care costs, legal fees, and professional services more generally. The argument for free trade in professional services is exactly the same as the argument for free trade in manufactured goods.
The big difference is that doctors and lawyers have much more power than autoworkers and textile workers, therefore the politicians won't consider subjecting them to international competition. However that is no reason for columnists not to talk about this fact.
More generally, the heavy hand of government is all over the upward redistribution of the last three and a half decades. We have a Federal Reserve Board that has repeatedly raised interest rates to keep workers from getting jobs and bargaining power. A tax system that directly and explicitly subsidizes many people getting high six or even seven-figure salaries at universities, hospitals, and private charities and foundations. We have government subsidies for too big to fail banks.
Anyhow, inequality, like the path of globalization, is not something that happened. It was and is the result of conscious policy. We won't be able to deal with it effectively until we acknowledge this simple fact.