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Home Publications Blogs Beat the Press David Ignatius and the Washington Post Flunk Trade Arithmetic Again

David Ignatius and the Washington Post Flunk Trade Arithmetic Again

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Thursday, 06 December 2012 07:35

The Washington Post is notorious for getting numbers terribly wrong when it comes to trade. It once ran a lead editorial touting the wonders of NAFTA that claimed Mexico's GDP had quadrupled from 1987 to 2007. According to the IMF the number was 83 percent. But the Post is willing to toss numbers, logic, and arithmetic to the wind when it comes to pushing the trade agreements that have been on the political agenda in recent years.

Hence we have Post columnist David Ignatius telling us this morning that:

"What’s appealing in particular about the trans-Atlantic initiative [a Europe-U.S. trade agreement] is that it could be a big job creator for economies on both continents that are still recovering from the effects of the recession. ...

"I like the idea of an “economic NATO” because it addresses fiscal problems through growth and expansion. The alternative “austerity pill” advocated by conservative Germans (and some American budget-cutters) is doomed to fail. Big, new spending initiatives are not a realistic growth strategy, either, given debt worries on both continents. To many economists, it’s a no-brainer: Expanded trade offers the best path to new jobs, markets and investment opportunities."

There we go, we can cut the deficit and still produce jobs because of the wonders of increased trade.

Sounds great, let's check the numbers.

Later in the piece Ignatius tells us about a study that projects that a 50 percent reduction in non-tariff barriers (an ambitious target) would produce gains for the U.S. of $53 billion annually. Abolishing all tariffs would increase annual GDP by $82 billion. This gives us a total gain in GDP of $135 billion, a bit less than 0.9 percent of GDP. Note that this is likely an overstatement of actual gains because we will probably not reach these targets. Also the spending on adjustment measures, which accompany almost every trade agreement, would subtract from these projected gains.

But let's just take Igantius' gain of 0.9 percent of GDP at face value. If there is good progress and a deal is concluded relatively quickly, the changes will likely be phased in over a period of time, with the projected gains lagging the reduction in tariff and non-tariff barriers as the economy takes time to respond. Let's assume the whole process takes ten years. This means that Ignatius' trade deal will increase growth over the next decade by an average of 0.09 percent a year.

While it would be nice to see this boost to growth, that is not really important enough to change anyone's forecasts. In fact, even in retrospect we can't even estimate GDP growth to this degree of accuracy. By comparison, the Congressional Budget Office's projections show that the tax increases and spending cuts associated with the end of year fiscal dispute will reduce GDP by close to 4.0 percent, or roughly 40 times the impact of Ignatius's trade deal.

In short, the potential gains from these sorts of trade deals are swamped by the macroeconomic impact of the budget. It is unfortunate that Ignatius and his friends at the Post may not like budget deficits as a way of boosting demand, but they are not even in the right ballpark when they are talking about their latest trade deal.

Of course this does not mean that a Europe-U.S. trade deal would be a bad idea. If trade could bring the pay of U.S. doctors down to European levels (@$100,000 a year as opposed to $250,000 a year) it would save us close to $100 billion annually on our health care bill. The gains might be 2 or 3 times as large if lawyers, dentists and other highly paid professionals were also subjected to international competition. Unfortunately, our trade policy is so dominated by protectionists that it is unlikely that reducing protection for these professionals will even be on the agenda. 

Anyhow, if the editors at the Post had any knowledge of arithmetic they would not allow a column that suggested that the modest potential gains from a trade agreement were a substitute for macroeconomic stimulus. But hey, it's the Post.

Comments (15)Add Comment
...
written by bakho, December 06, 2012 9:33
Free lunch is usually an easy target.

I thought this report from Tom GJelton deserved more than a few whacks.

http://www.npr.org/2012/12/06/166574557/what-should-the-u-s-learn-from-europes-woes

Basically, it is pitch to not raise taxes on the wealthy, but go for the austerity. Gjelton is being spun. Since when did a UGrad degree in physics plus an MBA (David Malpass) make someone an economist? It even includes quotes from Mr Austerity, Alberto Alesina. People promoting austerity need to look at the results where austerity has been tried and failed, then hang their head in shame. Instead we get clueless arrogance and spinning naive journalists.
why european doctors?
written by pete, December 06, 2012 9:59
Why not Chinese or Indian? Bring wages down to $40,000 a year. And why not nurses and nurse practitioners too? These also earn globally high incomes.
Stop U.S. Bailouts of Germany
written by Paul Mathis, December 06, 2012 10:58
Thanks to current U.S. trade policies toward Germany, which enables them to run huge trade surpluses every year with the U.S., the Merkel government does not need to increase its domestic consumption which would benefit not only Germany, but also Greece and Spain.

http://www.census.gov/foreign-trade/balance/c4280.html

A "free trade" treaty with Germany would only make them more intransigent in their predatory trade practices, and less inclined to help their neighbors by purchasing goods and services from them.
a good op-ed
written by Peter K., December 06, 2012 11:07
Any comments (or nit-picking?) on Bernstein's Op-Ed? I think we need more active monetary policy.
...
written by jerry, December 06, 2012 12:00
Peter K.,

MORE active monetary policy?? Have you looked at the Fed's balance sheet lately?
more active monetary policy???
written by pete, December 06, 2012 3:31
If anything, the last 40 years should convince us that active monetary policy is very dangerous, either due to incomplete information or political pressure. The inflation rate has doubled over the previous 20 years (Bretton Woods era) to 4% from 2% per year. Inequality since an all time low in 1968 has gotten progressively worse, as the wealthy are more able to adjust to inflation. Even Marx new inflation would be harmful to workers. Keynes was not a Marxist.

We have had 2 (or 3 ) housing crises, a dot com fiasco, all aided if not driven by Fed policy. There are still court cases unraveling the bank cases from 80s (IRS v WAMU next week).
...
written by liberal, December 06, 2012 3:46
pete wrote,
Inequality since an all time low in 1968 has gotten progressively worse, as the wealthy are more able to adjust to inflation.


The insinuation that inflation is a prime driver of inequality is laughable.

We have had 2 (or 3 ) housing crises, a dot com fiasco, all aided if not driven by Fed policy.


The main driver of the housing bubble was deregulation of the finance sector. So the main way Fed policy "aided" (indeed, actually caused) the bubble was by refusing to regulate the mortgage/finance industry appropriately, not by e.g. keeping rates low.
...
written by liberal, December 06, 2012 3:51
pete wrote,
And why not nurses and nurse practitioners too? These also earn globally high incomes.


Uh, because doctors collect much more economic rent than nurses do?
foreign nurses
written by ethan, December 06, 2012 4:08
I've said this before, but I will repeat. My wife is an RN with BS and Masters degrees. During the mid 1960's there was a flood of Philippino nurses in the hospitals where she worked. We all thought this was engineered by the hospitals to drive down nurse wages, but we had no real evidence (except that my wife's salary for full time work was $5,000 per year.
If anyone has data/evidence about this time period, I would be interested.
...
written by liberal, December 06, 2012 4:39
bakho wrote,
Since when did a UGrad degree in physics plus an MBA (David Malpass) make someone an economist?


In light of the generally abysmal performance (Dean and a few others excepted) of the economics profession in the buildup of the housing bubble, I don't think credentials are relevant. (Not to mention idiocies routinely committed by prominent credentialled members of the profession like Real Business Cycle theory.)

Henry George, for one, had no formal degree in economics, and drew deep insights into optimal ways to design tax policy that modern credentialed economists appear strangely incapable of understanding.
...
written by JSeydl, December 06, 2012 5:27
bakho,

I saw the NPR piece as well. It was somewhat infuriating. Though they did kinda attempt to keep it balanced with Blanchard's views, I guess.
Inflation rate
written by David, December 06, 2012 7:46
more active monetary policy???
written by pete, December 06, 2012 3:31
...The inflation rate has doubled over the previous 20 years (Bretton Woods era) to 4% from 2% per year.


4%? Try 2.5%.



According to the figures, except for the hits in recession years, at least folks are keeping about 2.5% ahead of inflation:
do the math...tho admittedly the 70s drive eveything
written by pete, December 07, 2012 11:27
post bretton woods has 4% geometric average vs 2% 1948 to 1970.
Incorrect once again, Dean
written by Unsympathetic, December 09, 2012 9:03
European doctors have zero debt. If you want to cut pay to US doctors, you need to zero the debt first. Why won't this happen? You know who loves to originate student loan debt - Wall Street.
Debt is the problem of doctors and wall Street
written by Dean, December 09, 2012 12:09
Unsympathetic,

you seem to be overly sympathetic here -- if doctors don't have enough money to repay their loans that is there problem and the problem of their lenders. that may not be fair, but this is the United States where we routinely adopt policies that throw workers in their 40s and 50s out of jobs when there is little likelihood of their ever finding anything remotely comparable ever again.

btw, $200k would be a lot of debt for a med school grad. That is equal to about 2 years of the difference between U.S. comp and European comp for doctors.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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