Beat the Press is Dean Baker's commentary on economic reporting. Dean Baker is co-director of the Center for Economic and Policy Research (CEPR).

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I generally restrict my comments on this blog to economic issues. But the Post really went over the top in its criticisms of Donna Edwards when it endorsed her opponent Chris Van Hollen in the race for the Democratic nomination the fill the open Maryland senate seat.

Before commenting, I should say that I know Representative Edwards and consider her somewhat of a friend. I also know and like her opponent, with whom I went to college many years ago.

Anyhow, the Post complained that Edwards is too ideological and uncompromising. By contrast, it argued that Van Hollen can make the compromises needed to get things done. The editorial told readers:

"Her allergy to compromise, comparable to the disdain expressed by tea party Republicans, is what has brought Congress to a standstill. She is proof that doctrinaire ideology is alive and well on both sides of the aisle."

Comparing Representative Edwards to the Tea Party is way over the top. The Tea Party denies reality in fundamental areas. It insists that human caused global warming is not happening. The Tea Party contends the 2008 economic collapse was because the government forced banks to make loans to minorities. It also complains that government spending is out of control on programs other than the ones Tea Party supporters like (Social Security, Medicare and Medicaid, and the military). 

If the Post can identify an issue where Edwards has been comparably out of touch with reality then they should share it with readers. Otherwise they owe Ms. Edwards an apology. The Post may think Edwards approach is unproductive, but that is not the same thing as bringing your own reality to policy debates.

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Kevin still thinks that we don't especially protect doctors, or at least not more than any other country. His key factoid is that 25 percent of our doctors were educated in foreign medical schools and then entered U.S. residency programs. He argues that this is roughly the same percentage as for other wealthy countries.

There are two important reasons why this means less than the NCAA basketball tournament scores about the issue at hand. First, we should expect many more foreign doctors would want to work in the U.S., than say in the U.K., because doctors in the U.S. earn more than twice as much as doctors in the U.K. If you're a "free trader" who has a hard time understanding this point, suppose that we paid twice as much for oil as they do anywhere else in the world. Where do we think the oil would go?

The second point is why would anyone care about the 25 percent number? I have had endless people defiantly given me this statistic as if they have shown something other than their own ignorance. What percent of our shoes comes from overseas? What percent of our clothes? Of our toys? My guess is that it would be around 70–90 percent in each category.

Suppose that just 25 percent of our consumption came from abroad in these categories because we had huge import tariffs. By the Kevin Drum standard I could say, "What do you mean we have protectionism, 25 percent of our shoes, clothes, and toys are imported."

Kevin also argues that this is an immigration issue, not a trade protection issue. Nope, it isn't. If doctors from the U.K., Germany, or India wanted to work in the construction industry, in restaurant kitchens, or as nannies for rich people, they probably would not have any problem. But they would get arrested if they worked as doctors. The issue isn't being in the U.S. or even working in the U.S., the issue is that the protectionists won't let them work in the United States as doctors.

Finally, it is worth considering the potential numbers here compared with current immigration flows. At present, we have around 1.4 million immigrants a year. Suppose we brought in 50,000 additional doctors a year for the next decade. This would be a net increase of 500,000 doctors, increasing the supply by more than 50 percent. That would hugely affect the market for doctors and likely be more than sufficient to bring their wages down to world levels.

However, this inflow of doctors would imply a net increase of immigration flows of less than 4.0 percent. If we double the number to account for immigrants of dentists, lawyers, and other currently protected professionals, we're still only talking about an increase in immigration of less than 8.0 percent. If we think that this is too many immigrants, we could reduce the flow of immigrants in other areas by an offsetting amount. 

In short, we do prop up the pay of our doctors through protectionism. We can argue whether it is good policy or not, but we can't argue that our barriers are not protectionist.

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Most newspapers try to avoid the self-serving studies that industry groups put out to try to gain public support for their favored policies. But apparently the New York Times does not feel bound by such standards. It ran a major news story on a study by Citigroup that was designed to scare people about the state of public pensions and encourage them to trust more of their retirement savings to the financial industry.

Both the article and the study itself seem intended to scare more than inform. For example, the piece tells readers;

"Twenty countries of the Organization for Economic Cooperation and Development have promised their retirees a total $78 trillion, much of it unfunded, according to the Citigroup report.

"That is close to twice the $44 trillion total national debt of those 20 countries, and the pension obligations are 'not on government balance sheets,' Citigroup said."

Okay folks, how much is $78 trillion over the rest of the century for the 20 OECD countries mentioned? Is it bigger than a breadbox?

The NYT has committed itself to putting numbers in context, where is the context here? Virtually none of the NYT's readers has any clue how large a burden $78 trillion is for the OECD countries over the rest of the century. The article did not inform readers with this comment, it tried to scare them. That is not journalism.

For those who are keeping score, GDP in these countries for the next 80 years will be around $2,000 trillion (very rough approximation, not a careful calculation) so we're talking about a big expense, roughly 4 percent of GDP, but hardly one that should be bankrupting.

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I usually think Kevin Drum makes pretty good arguments even when I disagree with them, but his trade case really strikes out badly. He wants to take issue with my argument that we protect doctors with average paychecks of more than $250k a year, while deliberately putting autoworkers in direct competition with their low paid counterparts in the developing world.

He quotes my comment that we ban foreign trained physicians unless they go through a U.S. residency program. He then comments:

"Cars made overseas are required to meet American standards. You can't just build anything you want and sell it here. In the case of doctors, the doctor herself is the product, and we require the product to meet American standards. Aside from the minor jolt of hearing a human being called a "product," there's not really much difference. You can argue that standards for cars and standards for doctors are poorly designed, but that's a much subtler case to make. One way or another, both doctors and cars are going to be required to meet certain standards."

Umm, the reason that cars overseas meet American standards is because we negotiated a set of standards for them to meet. In other words, that is what our trade negotiators were doing so that they could place U.S. autoworkers in direct competition with low paid workers in Mexico, China and elsewhere.

Our trade negotiators could have been negotiating standards for foreign residency programs. (I know Donald Trump says they are stupid, but they can't possibly be that stupid.) This would mean that other countries could establish residency programs that ensure that doctors in Germany, Canada, and hopefully many other countries were trained to a level where they were as good as U.S. trained doctors. The reason this didn't happen is because doctors have much more political power than autoworkers.

Sorry Kevin, you're a knuckle-scraping Neanderthal protectionist.

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The proponents of the protectionist Trans-Pacific Partnership (TPP) trade agreement are getting ever more shrill as it becomes clearer that the public is not buying what they have to sell. David Ignatius does the rant for the deal in his column in the Post today. The title of his column warns against "Trump and Sanders' dangerous revolt against free trade."

The first point that everyone should remember is "free trade" is just a term that the proponents of these deals throw around to make themselves feel virtuous and so that they can call their political opponents names. These deals are actually about selective protection, where protections that benefit some groups are left in place, while other groups (i.e. ordinary workers) are forced to compete with much lower paid workers in the developing world.

As far as the protectionism in the TPP, the deal is quite explicitly about increasing the length and strength of patent and copyright protection. Yes, that is "protection" as in "protectionism." Patent and copyright protection do serve a purpose in providing an incentive for innovation and creative work, but all forms of protection serve a purpose. The question that serious people ask is whether there is a better way to serve the purpose.

There are lots of reasons for thinking that our rules on patent and copyright protection are already too strong, as they have led to massive abuses. This is especially true in the case of prescription drugs. To take one prominent example, generic versions of the Hepatitis C drug Sovaldi can be profitably manufactured for $300 to $500 per treatment. The list price for the drug in the United States is $84,000.

And raising the price of a drug by more than 10,000 percent as a result of patent monopoly causes all the economic waste and corruption that imposing a 10,000 percent would. The market doesn't care that we call the intervention a "patent" rather than a "tariff."

The TPP will also do nothing to reduce the protectionist barriers that allow our doctors and dentists to earn twice as much as their counterparts in other wealthy countries. Unlike autoworkers and textile workers, doctors and dentists have the political power to protect themselves from being forced to compete with their lower paid counterparts in the developing world.

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That is the question millions are asking, or at least the question that people who talk about whether China's government is holding down the value of its currency should be asking. Neil Irwin is on that list.

In a NYT column today he argued that China is no longer holding down the value of the yuan to maintain a competitive advantage in trade. He pointed to their recent sale of reserves to keep the yuan from falling against the dollar and other currencies. However, however his discussion ignores the country's massive holdings of foreign exchange reserves. 

The conventional rule of thumb is that a country needs reserves that are equal to six months of imports. In China's case this would be $1 trillion. The country in fact holds more than $3 trillion in reserves. These excess reserves would be expected to keep down the value of the Chinese yuan against the dollar in the same way that the Fed's holding of more than $3 trillion in assets is thought to hold down long-term interest rates.

As long as China's central bank holds such a large amount of reserves, it is deliberately keeping down the value of its currency. As a practical matter, we would expect a rapidly growing developing country like China to be running large trade deficits. While its surplus is down from its peak of more than 10 percent of GDP in the last decade, it is still more than 2.0 percent of GDP.

The U.S. trade deficit with China and other matters hugely in the context of an economy that is below full employment. The trade deficit creates a gap in demand that cannot be easily filled from other sources. In principle we could run a larger budget deficit to fill the $500 billion gap (@ 3.0 percent of GDP) created by the trade deficit, but this has proven to be politically impossible.

For this reason, the trade deficit is hugely important since it directly leads to more unemployment. Also, since the wages of the workers at the middle and bottom of the labor market depend hugely on the strength of the labor market, the trade deficit directly reduces the wages of large segments of the U.S. workforce, contributing to the rise in inequality.

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Thomas Friedman once again stumbled into trade policy, telling us that the Trans-Pacific Partnership (TPP) is exactly the sort of trade deal that tough negotiator Donald Trump would have gotten. Unfortunately, he gets some of the big things badly wrong.

First, he would have us believe that the TPP is a really good deal for the U.S. because the tariffs that we eliminate on imports are mostly small, whereas the tariffs other countries will eliminate on our exports are in some cases very large. He cites Vietnam’s “peak tariffs of over 50 percent on cars and machines” and refers to over 18,000 foreign tariffs that will be eliminated as a result of the TPP.

While it might be good if Vietnam eliminated its tariffs on U.S. cars and machines, it is highly unlikely that the U.S. will ever export any significant number of cars and machines to Vietnam. It is certainly possible that U.S. corporations General Motors and GE will export cars and machines (???) to Vietnam, but these products will almost certainly be produced in other Asian countries. That might be good for the bottom lines of General Motors and GE, but not especially good news for workers in the United States.

The 18,000 tariffs are a joke line that the Obama administration came up with for ill-informed members of Congress and pundits. As Public Citizen points out, the U.S. exports in less than half of these 18,000 categories and in most of the others the volume of exports is trivial. Among the 18,000 tariffs on the Obama administration’s list are Malaysia’s shark fin tariffs, Vietnam’s whale meat tariffs, and Japan’s ivory tariffs. (Would Donald Trump really spend time negotiating the removal of these tariffs?)

But the really good part is when Friedman told readers about how the TPP gets tough on enforcing intellectual property rules for U.S. corporations:

“He certainly would have insisted on strong intellectual property protections for America’s software industry, one of our greatest export assets, and taken an approach to pharmaceuticals that splits the difference between what the big drug companies want in the way of intellectual property protection time for their products and what the generic manufacturers want.”

Getting more money for Microsoft and Merck is of course good news for shareholders of Microsoft and Merck, but it’s bad news for the rest of us. As the Peterson Institute’s new study of the impact of the TPP pointed out:

“The model assumes that the TPP will affect neither total employment nor the national savings (or equivalently trade balances) of countries.”

If the trade balance of the United States does not change, and we get more money for Microsoft’s software and Merck’s drugs, then we must get less money for everything else. It is hard to see why most people would be celebrating a rise in the U.S. trade deficit in manufactured goods and other items that is offset by higher royalty and patent fees for our software and drug companies.

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The Washington Post had a piece on the latest efforts by centrist Democrats to counter the rise of the progressive wing of the party. It tells readers:

"Many of them pushed in the 1990s, under President Bill Clinton, to expand global trade and deregulate the financial sector. They now concede those efforts did not go according to script, particularly for middle-class workers, but they are not calling for a full rewrite in response."

Actually, increasing inequality was an entirely predictable outcome of expanded trade with developing countries with large amounts of low-paid labor. Reduced wages for manufacturing workers and less-educated workers is exactly what the Stolper-Samuelson theory, one of the bedrocks of trade theory, predicts. 

In fact, since the trade agreements of the last quarter century left in place or increased protections for highly paid professionals and also increased patent and copyright protections, it is difficult to believe anyone would not have expected the upward redistribution that occurred. It certainly was entirely predictable at the time.

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The Washington Post ran a major piece pointing out some of the difficulties involved in shifting over to a universal Medicare system as advocated by Senator Bernie Sanders. While the piece notes many of the problems, it never mentions that the United States pays hugely more per person for its health care with little obvious benefit in terms of outcomes. As a result, there would be enormous potential savings from switching to a universal Medicare-type system.

For example, according to the OECD, the UK spends less than half as much per person as the United States. This means that if the United States could get its costs down to UK levels, it would save more than $20 trillion (@ $60,000 per person) over the next decade. While accomplishing a transition to a more efficient system would be difficult, as the piece notes, but the potential gains are enormous.

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Actually that is not quite what Pearlstein said. The billionaire-owned Post, which has largely turned itself in recent weeks into a Bernie Sanders attack organ, apparently wanted yet another hit piece. Pearlstein in fact told readers that if the country elected Senator Sanders, and he was able to implement his policies to make the United States more like Scandinavia, then we would have to get used to a higher unemployment rate (twice). 

While the unemployment rates in these countries are somewhat higher than in the United States, the employment rates are also higher. According to the OECD, the percentage of people between the ages of 15 and 64 who are working is 75.5 percent in Sweden, 74.4 percent in Norway, and 73.2 percent in Denmark compared to 68.9 percent in the United States. If the United States had the same share of its population working as Denmark employed, 10 million more people would have jobs. If we had the same employment rates as Sweden, 15 million more people would be working.

The reason that these countries can have both a higher employment rate and unemployment rate is that more people in these countries are in the labor market. This is in part because they have more family friendly policies, such as long periods of paid parental leave and good publicly supported child care. (The employment gap is much larger for women than men.) It is also because they have better education systems that ensure even people at the bottom have decent educations. And, they don't incarcerate almost one percent of their population like the United States.

Pearlstein also cites a paper by Daron Acemoglu, Thierry Verdier, and James Robinson which argues that countries with strong welfare states like the Scandanavian countries don't produce the same sort of innovation as countries like the United States. This paper relies far more on hand-waving than data to make its case. These countries have high rates of new business formation and innovation by most measures.

Pearlstein also cites an analysis by the Tax Policy Center which argues that a financial transactions tax can only raise $50 billion a year rather than the $75 billion a year assumed by Sanders campaign. (He proposes this tax to pay for free college for all.) It is worth noting that this difference is due to the fact that the Tax Policy Center assumes that trading of stocks and other assets is highly responsive to the tax. Under the Tax Policy Center's assumptions, the decline in trading expenses would actually be larger than the revenue raised through the tax. This means that the entire burden of the tax would be borne from Wall Street in the form of less revenue from trading. (This assumes that less trading — falling back to 1990s levels — does not reduce the ability of firms to raise capital.)

It would be very impressive if a tax could raise $50 billion a year by eliminating wasteful trading on Wall Street. It would have been useful if Pearlstein had pointed out this implication of the Tax Policy Center's analysis.

Anyhow, it is clear that the billionaire owned Post is prepared to do its part to undermine a candidate who wants to reduce the wealth and power of billionaires. It is also not surprising that it very much objects to a candidate who thinks billionaires should pay taxes.

 

Addendum:

For a fuller set of comparisons between the United States and the larger group of Nordic countries, see CEPR's chartbook.

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Paul Krugman has agreed to use his blog this week as a jumping off point for great CEPR papers of the past (yes, I'm kidding), but he gives us a great segue into an old paper on unionization rates in Canada with his latest blogpost. In his post Krugman makes the simple point that if inevitable forces like globalization and technology were responsible for the decline in unionization rates in the United States then we should expect to see a comparable decline in Canada. After all, Canada's economy is even more exposed to trade than the United States and the country has all the same technologies that we enjoy south of the border.

Yet, Canada has seen only a modest decline in its unionization rate over the last three decades. It is still close to 28 percent, compared to just 11 percent in the United States.

The CEPR paper, by former research associate Kris Warner, explains that the difference is the result of differing institutional structures around the unionization process. In most Canadian provinces (labor law is set at provincial level in Canada, as opposed to the national level in the United States), workers can organize through a process of majority sign-up. This means that if a majority of workers in a bargaining unit sign cards indicating their desire to join a union, then the employer must recognize the union.

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Paul Krugman had a blogpost this morning that included a simple chart showing that Mexico's per capita GDP has actually diverged from U.S. per capita GDP in the years since NAFTA. This is not supposed to happen, our econ textbooks tell us that poor countries are supposed to grow more rapidly than rich countries and this should have been especially true with Mexico post-NAFTA.

There should not be anything particularly controversial about Krugman's post, after all it comes directly from World Bank data, but it is worth noting that the World Bank tried to tell an opposite story. Back in 2004, on the tenth anniversary of NAFTA, the World Bank published a study that purported to show a convergence of per capita GDP between Mexico and the United States in the years since NAFTA was passed.

We tried to set them straight, since we knew the data did not support this claim. The World Bank refused to acknowledge the obvious error (it seems their study used exchange rate measures instead of purchasing power parity measures of GDP) and presumably continues to this day to treat their study as being valid. Perhaps Krugman's simple chart will force them to acknowledge the truth.

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E.J. Dionne used his column to argue that it is not just the establishment Republicans who are facing a crisis because of the rise of Donald Trump. He argues that the establishment Democrats also face a crisis:

“Its ideology was rooted in a belief that capitalism would deliver the economic goods and could be balanced by a ‘competent public sector, providing services of quality to the citizen and social protection for those who are vulnerable.’”

This is far too generous an account. The Clinton Democrats were actively steering the economy in a direction to redistribute income upward. This was clear in a number of areas.

First, their trade policy was quite explicitly designed to put U.S. manufacturing workers in direct competition with low paid workers in the developing world, but maintaining or increasing protections for highly paid professionals like doctors and lawyers. The predicted and actual outcome of this policy is a redistribution from ordinary workers to those at the top. This effect of this policy was aggravated by the massive trade deficit that was the predictable result of the high dollar policy promoted by Robert Rubin.

They also pushed for longer and stronger patent and copyright protection both domestically and internationally in trade pacts. This meant more money for the pharmaceutical, software, and entertainment industry at the expense of the rest of society.

They pushed deregulation in the financial industry, which allowed for an explosion in the share of national income that went to the financial sector. Again, this upward redistribution came at the expense of the rest of society.

And, they effectively supported the explosion of CEO pay. Clinton pushed a transparently absurd measure to cap CEO pay. (He pushed a measure that removed the tax deductibility for non-performance related pay in excess of $1 million a year. This green-lighted huge option based packages.)

Clinton also promoted the outsourcing of government services (a.k.a. re-inventing government). This typically meant replacing relatively well-paid union workers with much lower paid contract workers. At the same time it often meant big profits for well-connected contractors, which meant that taxpayers received no benefit from the deal. The fact a Democratic president pushed this process at the national level encouraged many state and local governments to follow the same path.

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A Washington Post piece on the Fed and the presidential elections told readers:

“A strong economy tends to boost the party currently in power, which is why President Nixon installed confidante Arthur Burns as head of the Fed in 1970, urging him to keep interest rates low to stoke the job market. The result was a decade of runaway inflation that was tamed only by a painful recession.”

This is a very strong and implausible claim. The inflation in the 1970s was fueled in large part by two huge rises in the price of oil. The first was associated with an OPEC oil embargo directed against the United States, which led to a quadrupling in the price of oil between 1973 and 1974. The second was associated with the Iranian revolution, which essentially stopped Iran’s oil exports. At the time, Iran was the world’s second largest oil exporter. There was also a sharp surge in food prices associated with massive sales of wheat to the Soviet Union in 1973.

In addition, there was a sharp slowdown in productivity growth beginning in 1973, which persisted until 1995. This slowdown was completely unexpected and to this day there still is no agreed upon explanation among economists. With workers expecting wage growth in line with the prior rate of productivity growth (2.5–3.0 percent annually), it is not surprising that slower productivity growth would be lead to higher inflation.

Furthermore, there was an error in the official measure of inflation, the consumer price index (CPI), which added approximately 6 percentage points to its measure of inflation over the course of the decade compared to the way the CPI is calculated today. This overstatement of inflation in the CPI likely lead to higher actual inflation since many contracts, most importantly wage contracts, were explicitly tied to the CPI. This means that if mis-measurement caused the CPI to show a higher rate of inflation it would lead to higher wages and prices in many sectors of the economy.

Finally, inflation rose sharply in the 1970s not only in the United States, but almost everywhere in the world. Arthur Burns’ policies could not in any obvious way lead to greater inflation in Europe, Canada, and elsewhere.

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In recent weeks the Washington Post has virtually transformed itself into a Bernie Sanders attack platform, filling both its news and opinion pages with critical pieces. For this reason it was not surprising to see its lead editorial today criticizing Senator Sanders for not supporting an auto bailout because it was attached to funding for the Wall Street bailout. 

First, it worth once again correcting its misstatements about the Wall Street bailout. The piece tells readers:

"In September 2008, Ms. Clinton and Mr. Sanders were both U.S. senators deciding whether to vote for a $700 billion fund to prop up the rapidly collapsing U.S. financial system. Ms. Clinton voted yes, on the sound view that the likely alternative to this admittedly undeserved rescue of Wall Street would have been global calamity. Mr. Sanders voted no, demanding that Wall Street pay for its own bailout. As it happens, the bailout fund, known as the Troubled Asset Relief Program (TARP), ended up costing far less than the initial headline figure suggested, and even made taxpayers some money; but, as was foreseeable at the time, that hasn’t stopped the country’s political purists, left and right, from second-guessing and making political hay."

As I and others have pointed out, the "second Great Depression" story pushed by bailout supporters assumes that Washington does nothing even as the unemployment rate soars into the double digits. There is no historical support for anything like this. Even President George W. Bush supported a stimulus package when the unemployment rate was just 4.9 percent. Furthermore, the fact the bailout "made taxpayers some money" really has nothing to do with the time of day. The government lent billions of dollars (trillions of dollars counting the loans from the Fed) to some of the richest people in the country at rates that were far below what they would have been forced to pay in the market. This was an enormous transfer of wealth from the rest of us to Wall Street.

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That is what Binyamin Appelbaum argued in a Upshot column with the headline, “on trade, Donald Trump breaks with 200 years of economic orthodoxy.” The piece points to Trump’s rhetoric in which he claims that other countries are taking advantage of the United States because they are running large trade surpluses with us.

It then turns to an old speech from Milton Friedman saying the opposite is true:

“'Economists have spoken with almost one voice for some 200 years,’ the economist Milton Friedman said in a 1978 speech. ‘The gain from foreign trade is what we import. What we export is the cost of getting those imports. And the proper objective for a nation, as Adam Smith put it, is to arrange things so we get as large a volume of imports as possible for as small a volume of exports as possible.’”

This is in fact the classic economics argument for the merits of trade, but there is an important assumption in the argument which is not mentioned. The assumption is that the trade deficit has no effect on the level of aggregate demand and output in the United States. In the standard economic view, if our annual trade deficit increases by $200 billion we will simply make up this demand elsewhere in the economy.

A combination of higher consumption, investment, and government spending will fully offset the $200 billion reduction in demand resulting from the rise in the trade deficit. This means that total demand in the economy will not change, nor will total employment. There could be some shift in employment, from the import competing industries to the industries that meet the new demand, but in the standard economics story of trade, overall unemployment is not a problem.

This view of trade is less tenable in an economy that faces a chronic shortfall of demand, as is the case in the United States. Most economists now recognize that advanced economies like those in the United States, Japan, and the European Union can have prolonged periods of inadequate demand (a.k.a. “secular stagnation”) leading to unemployment and underemployment.

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Since the TARP has come up repeatedly in the debates between Secretary Hillary Clinton and Senator Bernie Sanders, it is worth briefly correcting a couple of major misconceptions. The first one is that we would have had a second Great Depression without the bailout. This assertion requires rejecting everything we know about the first Great Depression.

The first Great Depression was caused by a series of bank collapses as runs spread from bank to bank. The country was much better positioned to prevent the same sort of destruction of wealth and liquidity most importantly because of the existence of deposit insurance backed up by the Federal Deposit Insurance Corporation.

More importantly, the downturn from the collapse persisted for over a decade because of the lack of an adequate fiscal response. In other words, if we had spent lots of money, we could have quickly ended the depression as we eventually did with the spending associated with World War II in 1941. There is no reason in principle that we could not have had this spending for peaceful purposes in 1931, which would have quickly brought the depression to an end.

The claim that we risked a second Great Depression in 2008 (defined as a decade of double-digit unemployment) is not only a claim that we faced a Great Depression sized financial collapse but also that we would be too stupid to spend the money needed to get us out of the downturn for a decade. None of the second Great Depression myth promulgators has yet made that case.

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Hey, can an experienced doctor from Germany show up and start practicing in New York next week? Since the answer is no, we can say that we don't have free trade. It's not an immigration issue, if the doctor wants to work in a restaurant kitchen, she would probably get away with it. We have protectionist measures that limit the number of foreign doctors in order to keep their pay high. These protectionist measures have actually been strengthened in the last two decades.

We also have strengthened patent and copyright protections, making drugs and other affected items far more expensive. These protections are also forms of protectionism.

This is why Morning Edition seriously misled its listeners in an interview with ice cream barons Ben Cohen and Jerry Greenfield over their support of Senator Bernie Sanders. The interviewer repeatedly referred to "free trade" agreements and Sanders' opposition to them. While these deals are all called "free trade" deals to make them sound more palatable ("selective protectionism to redistribute income upward" doesn't sound very appealing), that doesn't mean they are actually about free trade. Morning Edition should not have used the term employed by promoters to push their trade agenda.

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I see that Peter Petri and Michael Plummer (PP) have responded to my blog post on their models projections for the TPP. In essence, they minimize the concern that the TPP or even trade deficits more generally can lead to a prolonged period of high unemployment or secular stagnation to use the currently fashionable term.

Dealing with the second issue first, they argue:

“While trade agreements include many provisions on exports and imports, they typically contain no provisions to affect savings behavior. Thus, net national savings, and hence trade balances, will remain at levels determined by other variables, and real exchange rates will adjust instead.

“A similar argument applies to overall employment. The TPP could affect employment in the short run — a possibility that we examine below — but those effects will fade because of market and policy adjustments. Since there is nothing in TPP provisions to affect long-term employment trends, employment too will converge to these levels, as long as adjustments are completed in the model’s 10 to 15 year time horizon.”

In short, PP explicitly argues that trade agreements neither affect the trade balance nor employment as a definitional matter. They argue that the trade balance is determined by net national savings. They explicitly disavow the contention in my prior note that we cannot assume an adjustment process that will restore the economy to full employment:

“In fact, critics of microeconomic analysis often challenge the credibility of market adjustment even in the long term. Dean Baker (2016) argues, for example, that mechanisms that may have once enabled the US economy to return to equilibrium are no longer working in the aftermath of the financial crisis. But the data tell a different, less pessimistic story (figure 1). Since 2010, the US economy has added 13 million jobs, a substantial gain compared to job growth episodes in recent decades, and the US civilian unemployment rate has declined from nearly 10 percent to under 5 percent. The broadest measure of unemployment (U6), which also includes part-time and discouraged workers, has declined almost as sharply, from 17 to 10 percent, and is now nearly back to average levels in precrisis, nonrecession years.”

As I noted in my original blog post, the PP analysis is entirely consistent with standard trade and macroeconomic approaches, however these approaches do not seem credible in the wake of the Great Recession. The standard view was that the economy would quickly bounce back to its pre-recession trend levels of output and employment. This view provides the basis for the projections made by the Congressional Budget Office (CBO) in its 2010 Budget and Economic Outlook (CBO, 2010). These projections are useful both because they were made with a full knowledge of the depth of the downturn (the recovery had begun in June of 2009) and also because CBO explicitly tries to make projections that are in line with the mainstream of the economics profession.

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Eduardo Porter noted the rise in income inequality over the last three decades. He then suggests a few policies that could raise incomes for those at the middle and bottom, such as the wage insurance policy recently proposed by President Obama and the Earned Income Tax Credit. While these are reasonable proposals, it is also reasonable to suggest ending the protections that act to raise incomes for those at the top.

For example, we can use trade policy to provide more competition for doctors, dentists, lawyers and other highly paid professionals who occupy the top 1–2 percent of the wage distribution. There are plenty of very bright people in the developing world (and even West Europe) who would be happy to train to U.S. standards and work in the United States at a fraction of the wages of the people who currently hold these positions.

This would directly reduce inequality by eliminating the walls that now sustain the living standards of these highly educated workers. It would also raise the real wages of less-educated workers by reducing the cost of health care and the other services they provide.

We can also use trade policy to reduce the length and strength of patent and copyright protection. This would reduce the cost of drugs and software, further raising the wages of ordinary workers. This would also reduce the income of those at the top, like Bill Gates and the executives in the pharmaceutical industry.

We can also stop using the Federal Reserve Board as a tool to keep down the wages of ordinary workers, which thereby boosts the wages of those at the top. This means not raising interest rates at the first hint of any real wage growth by those at the middle and bottom of the wage ladder.

There are many other policies that could be introduced that would raise the wages of ordinary workers by reducing the income of those at the top. It is remarkable that such policies rarely seem to appear on the national agenda. It is not surprising that this leaves many working class voters resentful.

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I see Paul Krugman was taking cheap shots at my heroes while I was on vacation. Krugman argues that Trump is wrong to claim that China is acting to keep down the value of its currency against the dollar. He points to recent efforts to prop up the value of the yuan by selling foreign exchange as evidence that China is actually doing the opposite of what Trump claims. Krugman should know better.

This is a story of stocks and flows. It’s true that China’s central bank is now selling reserves rather than buying them, but it still holds more than $3 trillion in reserves. The conventional rule of thumb is that reserves should be equal to six months of imports, which would be around $1 trillion in China’s case. This means that China’s stock of reserves is more than $2 trillion above what would be expected if it were just managing its reserves for standard purposes.

We should expect the stock of reserves to put upward pressure on the value of the dollar in international currency markets. This is the same story as with the Fed’s holding of $3 trillion in assets. It is widely argued (including by Paul Krugman) that the Fed’s holding of a large stock of assets reduces interest rates, even if it is not currently adding to that stock. The point is that if the private investors were to hold these assets instead of the Fed, they would carry a lower price and interest rates would be higher.

To take the stock and flow China analogy to the Fed, when the Fed raised the federal funds rate in December, it was trying to put some upward pressure on interest rates. But if we snapped our fingers and imagined that the federal funds rate was still zero, but the Fed’s asset holding were at more normal levels, do we think interest rates would be higher or lower?

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