The left and the return of protectionism

So if you believe a simplified version of conservative views on the economy, Trumponomics is pretty contradictory (and yes they are contradictory, even if one may doubts about why). Tax cuts should lead to growth, via supply side economics, and the recently proposed tariffs on steel and aluminum do exactly the opposite. Protectionism (not a very good name, I prefer managed trade, as I discussed here before) has made a come back, but while many heterodox economists have suggested that 'free trade' is not always beneficial to all, and those concerned with the fate of manufacturing and the working class in the United States have decried Free Trade Agreements (FTAs) over the years, it seems that the association of these ideas with Trumponomics has made them less keen on the recent tariff proposal.

A typical example is the recent op-ed by Jared Bernstein and Dean Baker in WAPO, and I cite them exactly for my respect for their economic views in general, and their commitment to progressive causes. In their view: "The bigger dangers to our economy are twofold. One, that our trading partners will retaliate by taxing our exports to them, thus hurting a broad swath of our exporting industries, and two, by leading an emboldened, reckless Trump administration to enact more bad trade policy." Essentially, they agree that tariffs would have a negative effect on employment, but perhaps not as big as some Cassandras have suggested, and that this 'bad protectionist' policies would continue. A similar argument can be found in Brad DeLong's op-ed, another progressive economist, in which he argues that the tariff is a tax hike for consumers. Brad, I should note, has recently published a very good book in which he praises the Hamiltonian system, that is,  the use of managed trade to promote industrial development (I discussed it here).*

It's worth remembering that while on other issues Trumponomics is essentially Reaganomics (low taxes for the wealthy and increased military spending), on trade his views are a break with more recent Republican positions (and hence the push back in his own party against the tariffs) and closer to what many Dems, particularly those connected with trade unions, often defended. He has not signed TPP, has really started renegotiating NAFTA (something Obama promised to do as a candidate, but did not deliver as president) and now has imposed some tariffs (like, btw, Bush, so I'm not suggesting this is unprecedented; just that he has been more consistent on this topic).

Don't get me wrong, I'm not a big fan of Trumponomics, or even in particular of these tariffs. And this will not work probably, but the reasons are not the ones adduced by progressives. Their basic argument is that retaliation by other countries will make them innocuous. In all fairness, the US is already more 'protectionism' (manages trade) than most people understand. The ability to use trade treaties and organizations for defending the country's own advantage is considerably tilted in favor of advanced economies and their corporations that can use loopholes to creatively avoid rules and continue to subsidize their industries (and agricultural sector). The US use of the defense department, again used by Trump, is typical. Poor countries some times lack the basic technical capabilities (lawyers and economists) to face the trade teams of advanced economies. The complexity of the WTO dispute settlement process, the geopolitical role of the US and the importance of US markets for many developing countries render it a very ineffective tool for the interests of less developed economies.

It should not be a surprise that American corporations continue to thrive in international trade (it's the American working class that is in trouble). Manufacturing is doing well, with the support of what Fred Block has termed the hidden developmental state in the US. So the problem is not that tariffs could not work. In all fairness, tariffs together with significant expansion of domestic spending on infrastructure (and more steel demand), with a vigorous defense of trade unions, with higher minimum wages, with policies to improve income distribution, like progressive taxes on the wealthy, to strengthen the domestic market might actually be part of a Hamiltonian strategy of economic growth. Note also that the whole point of imposing tariffs is to depend less on exports and more on domestic markets, so that to some extent retaliation should matter less. A more closed (not closed, but more so, like Keynes suggested in his National Self-Sufficiency piece of 1933) international economic order, to role back of some of the excesses of the neoliberal, pro-corporate globalization process, used to be be, and should be, on the agenda of the left.

The problem, then is less the tariffs per se, and more the fact that the Trumpian agenda is empty, and has nothing for the working class. That was my biggest concern reading the progressive economists complaints about Trump's trade views. Their solutions are to stop protecting patents and professionals, that is more 'free trade,' and a more depreciated currency (I'll leave my skepticism about this one for another post, at any rate I discussed this before). While I'm more sympathetic to the skepticism on property rights, note that China, in part, thrives, exactly because they do explicitly infringe the rules on patents (the first Geely car was a knock off of a Mercedes, and they bought Volvo to have access to foreign technology; there are many examples; it's worth noticing that the US did that in the past too). That would not necessarily be good for American corporations. To weaken doctors, lawyers and other middle (and upper middle) class professionals is certainly not the way out of the hole for the American working class.

The political danger of these views, which I think still dominate the liberal wing of the Democratic Party, is considerable. I think, that even if his policies turn out not to be very helpful (for the reasons I outlined, meaning lower wages and protections for workers, lower taxes for the wealthy and corporations and so on) his true dislike of globalization and free trade policies would strengthen his position with working people in the Rust Belt, which were central for his victory (maybe you think it was Russia... oh, well). As I noticed before the election, this would make things so much hard for Dems in elections. I said back in September 2016 that: "Note that this doesn't mean he [Trump] is going to win the election. Demographic changes make it harder for Republicans to win now, since Dems get more of the electoral college to start with. And I hope he doesn't, btw. But there are good reasons to be afraid. This is going to be way closer than it should be." And so it was.

I'm afraid that his trade policies, and the Dems position that effectively are to his right (like Hillary, but not Bernie) would make it more likely (hopefully not enough) for a longer period of Trumponomics than it is acceptable. This suggests that a good chunk of Dems are stuck in the model that Mark Lilla has referred to as identity liberalism (see his book here), and have become vulnerable to right wing populism. It's getting increasingly difficult to have hope in the dark.

PS: For discussions of trade policy see this two previous entries which provide a simple discussion of the Ricardian and neoclassical models of trade and its limitations. I would also recommend the paper by Robert Wade linked here.

* There are many others that have written on this in the last couple of days. Paul Krugman could, arguably enter the list of progressives here, but he has been consistently more of a free trade guy. Krugman complain is more macro than the others. In his view, the Fed would hike rates, since we are close enough to full employment and any additional gains from the tariffs will be eroded, even without retaliation from other countries. In part, that would happen because higher interest rates would lead to inflows and an appreciation of the dollar (see here).

Tariffs or sales tax and corporate tax reduction?

The announcement, and backtracking, on a 20% tax on Mexican imports caused a lot of confusion yesterday. I assumed like most that this was a proposal for a tariff, which would both ditch NAFTA rules and run afoul of the WTO rules. The wall and the tariff led to a cancellation of the Mexican president's trip, and a souring of the diplomatic relations. But in all fairness, it seems that this had little to do with Mexico.

The Republican Tax Plan basically is to eliminate the corporate income tax, and to substitute if with a destination based cash flow tax (DBCFT, is the clumsy acronym of the beast; on this see Jared Bernstein). The idea is that this would reduce the incentive of US corporations to relocate abroad to scape the income tax, and to basically introduce a national sales tax. The tax is border adjusted, so to speak, since imports sold in the US would pay taxes, but exports wouldn't.

So it seems to me that Trump was trying to use the GOP tax plan, that already existed, and is still in place, as far as I understand, and use it to claim that as Mexican imports will be taxed, they will be paying for the wall, that it seems he really plans to build. They seem to at least temporarily backtracked on the proposal, mainly I think to avoid jeopardizing the tax plan, which seems to me to be regressive, sales taxes after all hit everybody, and solving the problem of corporate tax evasion, by making the US a tax haven, and shifting the burden to consumers (just a hunch, I'll wait for tax exports to do the hard work of calculating the effects).

The impact of such a policy, by the way, is less clear than one would think. Josh Mason wrote something about it here. Like him I'm skeptical that a sales tax on imports would bring a lot of manufacturing jobs back. But even if this reduces the trade deficit, with Mexico and other countries (China?), which again I doubt, the problem of the quality of jobs here (and manufacturing matters among other things because of the quality of jobs) in the US does not depend fundamentally on the trade deficit per se. On that front, what will be done with labor regulations, the minimum wage, and the overall macroeconomic picture seems to be more relevant, and there are reasons to be concerned.

On the natural rate and being always wrong

So I saw that someone linked to an old post of mine in a discussion on Jared Bernstein's blog. The discussion is on productivity slowdown.

In that post I quote Alan Blinder on his views (slightly more than a year ago) on the natural rate. He said :

"the 'central tendencies' in the Federal Open Market Committee’s latest published forecasts range from 5.2% to 5.5% for the 'full-employment' unemployment rate, and from 2% to 2.3% for the potential GDP trend."

So unemployment should be below the natural rate now, and arguably that could be seen as a reason for the FOMC hike last month, although I doubt that Yellen thinks we're at full employment. As I note on that post Blinder was wrong in the 1990s too about the potential GDP trend. I don't expect any surge in inflation any time soon. But it is amazing how serious economists can be wrong almost all the time.

Baker & Bernstein on The Incipient Inflation Freak-out

By Dean Baker and Jared Bernstein 

As predictable as August vacations, numerous economists and Federal Reserve watchers are arguing that the nation’s central bank must raise interest rates or risk an outbreak of spiraling inflation. Their campaign has heated up a bit in recent months, as one can cherry pick an indicator or two showing slightly faster growth in prices or wages. But an objective analysis of the recent data, along with longer-term wage trends, reveals that the stakes of premature tightening are unacceptably high. The vast majority of the population depends on their paychecks, not their stock portfolios. If the Fed were to slam on the breaks by raising interest rates as soon as workers started to see some long-awaited real wage gains, it would be acting to prevent most of the country from seeing improvements in living standards. To understand why continued support from the Fed is unlikely to be inflationary, consider three factors: the current state of key variables, the mechanics of inflationary pressures and the sharp rise in profits as a share of national income in recent years, along with its corollary, the fall in the compensation share.

Read rest here.

New Book By Baker & Bernstein: Getting Back to Full Employment - A Better Bargain for Working People

By Dean Baker and Jared Bernstein

From the Introduction:

A strong labor market with full employment need not be a rare economic anomaly that returns roughly twice for every one appearance of Halley’s Comet. Full employment can be a regular feature of the policy landscape, with tremendous benefits for rising living standards, poverty reduction, the federal budget, and equitable economic growth. In this book we present the benefits and importance of full employment in ways that are particularly germane to the economy today, and we offer policies to begin moving to full employment now. Full employment can be defined as the level of employment at which additional demand in the economy will not create more employment. All workers who seek a job have one, they are working for as many hours as they want to or can, and they are receiving a wage that is broadly consistent with their productivity.

Full PDF here.

The fairy tale the super rich earn their money is exactly what it is, a fairy tale!

From Jared Bernstein

Larry Mishel has a useful blog up responding to Greg Mankiw’s piece defending the top 1% (for much more discussion of Greg’s essay, start here and click through the many links).I’ll get to Larry’s point in a moment, but one thing re Greg’s paper. Much of the criticism, which I’ve (predictably) found resonant, is directed at a) his failure to comprehend that the opportunity set facing families and their kids on the have-not side of the inequality divide is diminished, and b) the role that inequality itself has played in that outcome (I’ll have a second post up soon on point b—it’s one I’ve consistently stressed in these parts).

Read rest here.

Seneca, Selma, Stonewall and Haymarket too

In his second inaugural President Obama referred to iconic events in the history of gender, race and gay rights, putting the idea of equality at the center of his agenda. While several pundits were surprised or offended, depending on their political leanings, with the liberalism of Obama’s discourse, and a few noted the momentous effect of pairing gay rights with gender and race, nobody (at least to my knowledge) complained about the conspicuous absence of workers’ rights.

Okay so maybe citing the notorious Haymarket riot and the martyrs of the Knights of Labor was too much to expect from an American president. In fact, Samuel Gompers and the American Federation of Labor (AFL), as it is well known, never had a positive view of the anarchists associated to more combative labor tactics. In part, that’s why while the whole world, knowingly or not, commemorates the Haymarket affair every May Day, Labor Day in the US is relegated to the first Monday of September. But still a nod to labor would have been essential to really claim that this is a president moving in a liberal direction.

Don’t get me wrong, I think the speech was great, and understand the difficulties of pushing a progressive agenda against a Republican party that refuses to engage in rational politics. But I’m still surprised of how low the idea of labor rights has sunk, that nobody even notices that they are not mentioned at all, this in a week in which we are told that the union membership rate was 11.3 percent, the lowest in almost a century.

Obama did talk about jobs, and the difficulties ahead, it’s true. And we should count our blessings, since things could have been much worse (not really a good campaign slogan though). The graph below shows the recovery in employment now compared with the Great Depression, and although slow, it’s clear that active fiscal and monetary policies stemmed a comparable fall in employment.

But that should not lead us to believe that thinks are all picture-perfect. Not only employment will take a long while to return to the pre-crisis level, but also the rate of unemployment (at 7.8 percent or so) is considerably higher than it is often understood. Since the late 1990s the participation rate, the number of workers in the labor force, has decreased from around 67 percent of population to less than 64 percent. In other words, discouraged workers that cannot find jobs, simply leave the labor market. If one were to recalculate the unemployment rate, but assume that those discouraged workers were still in the labor force (that is, using a participation rate similar to the late 1990s) then the level of unemployment would look like in the figure below.

 

The adjusted unemployment rate would be close to 12.5 percent. More importantly, it is clear that the labor market has been in bad shape throughout the whole 2000s. And, if anything things are getting worse for workers. The so-called “right-to-work” (RTW) laws, which are laws that prohibit unions from requiring a worker to pay dues even when the worker benefits from a union negotiated collective bargaining agreement, continue to expand, and with Michigan’s recent addition, now almost half States passed this union busting legislation. Also, restrictions on the ability of public employees to bargain collectively have been on the rise, as was prominently displayed in Wisconsin.

Note that RTW legislation seems to have a clear negative effect on real wages. If nothing else because union workers make more than non-union workers (the wage premium for union workers is 13.6 percent; see Table 4.33 in EPI’s State of Working America), and discouraging union membership then should have a negative impact on the wage mass. Note also that unionization does NOT really have a negative effect on employment (if this were true Swedes would all be unemployed), as noted by Jared Bernstein. By the way, this suggests that the evidence is that right-to-work legislation is to work creation as right to bear arms is to security of children in school. But we do live in a Doublespeak world in which job creators do not create jobs after all.

To stop this unrelenting campaign by corporations, that use State level legislation to undermine workers’ rights we need a national party willing to stand for those rights. So if not Haymarket, at least a reference to the National Labor Relations Act of 1935, the so-called Wagner Act, which protected the rights of unions, and spearheaded the prosperity of the so-called Golden Age. It’s great to expand the liberties of minorities, but it is also important not to forget that workers’ rights have been undermined by the rise of corporate power, and that work, as much as gender, race, ethnicity and sexuality, define who we are.

Originally published in Bob Pollin's Back to Full Employment Blog

MMT and its discontents

The Washington Post had a substantial profile on what is now termed Modern Monetary Theory (starts with Jamie Galbraith, and then goes on to the Kansas version of post Keynesian economics). A few reactions in the blogosphere. Two worth noticing are by Dean Baker and Jared Bernstein that provide qualified support.

Dean suggests that beyond fiscal deficits stimulus should also come from monetary policy (lower interest rate), and a more depreciated dollar. My guess is that, at least the Kansas MMTers would be fine with both, but suggest that lower rates of interest are not much in play now. But from what I understand a depreciated dollar has been seen as part of a solution by most progressive economists. Randy Wray, for example, is certainly less concerned with the size of a trade deficit than Dean, since the US is the issuer of the key currency [I have less confidence on flexible exchange rates as a way of solving balance of payments constraints in developing countries, but I'll leave that for another post].

My concern with Dean's notion of a more devalued dollar, which is generally fine and will not lead to the demise of the dollar in the near future, is that for the workers with low wages that depend on cheap imports at Walmart it implies higher prices and lower real wages. A boost to increase real wages would be necessary [see Jamie on that here]. So better income distribution should be the most important channel to boost consumption on a sustainable way.

Jared Bernstein fundamentally adds that taxes on the wealthy should be increased. Which he argues from a political standpoint, and I think it is quite reasonable, since that is one way (besides hiking minimum wages, and repealing right to work and other anti-labor legislation) to improve income distribution.

On a more personal level, my problem with the WaPo piece, and the general discussion of MMT, is that for the most part it sees MMT as just a policy program (the Kansas one is, for example, an Employer of Last Resort of some type, which is fine with me, by the way), and does not separate the theoretical discussions from the policy stuff.

Endogenous money, chartalism, and functional finance, are relevant because they fit the theoretical framework of a coherent heterodox alternative to the mainstream based on Keynes' Principle of Effective Demand [for a full alternative you need also long term pricing; in Kansas your man for that would be Fred Lee]. For my views on that go here. I think, hence, that a coherent alternative to the mainstream, beyond Keynesian economics, requires a good dose of the old and forgotten methods of classical political economy.

PS: My point about theoretical versus policy matters is driven by the fact that on certain policy issues, like the need for further fiscal stimulus, New Keynesians like Krugman and DeLong would be fundamentally in agreement with MMTers.

Inequality monster

So Steve tells me I have competition in the art the department.  I think I lost.  Great graph by Jared Bernstein, ex-advisor to Joe Biden, and the only truly heterodox economist they had in the White House.  Sadly he is not there any more.

The only thing is that this graph shows only short term fluctuations in corporate profits. Pretty cool anyway.