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Article Artículo

Having the World's Reserve Currency Does Not Mean the U.S. Has to Run Huge Trade Deficits

We can always count on Robert Samuelson to give us some economic misinformation on Monday morning and he didn't let us down this week. In a very balanced column (yes, many tons of sarcasm here) decrying the economic proposals of both Donald Trump and Hillary Clinton he told readers:

"The United States runs chronic trade deficits because the dollar serves as the main global currency. This raises its exchange rate, putting U.S. manufacturers at a disadvantage."

This is wrong at just about every level. First, there are multiple reserve currencies, not just dollars. And, they trade frequently against each other, so there is a limit to how much the dollar will rise relative to the euro, yen, or pound because it is the main reserve currency. So, that is not the biggest part of the story of the trade deficit.

The more important part of the story is that countries are holding much larger reserves relative to their GDP now than they did in the years prior to the East Asian financial crisis in 1997. This is due to the harsh terms of the bailout imposed by the Clinton administration through the I.M.F. As a result of these terms, virtually every country in the developing world in a position to do so began accumulating massive amounts of foreign reserves. This was to avoid ever having to be in the same situation as the East Asian countries and have to rely on the I.M.F. for help.

The result was that instead of being net importers of capital from rich countries and running trade deficits, as standard economic theory would predict, developing countries became large exporters of capital running trade surpluses with rich countries. This was the origin of the "global savings glut" and secular stagnation that many prominent economists have complained about in recent years.

This is all worth mentioning in the context of the rest of Samuelson's piece since he seems obsessed with the idea that we face inadequate supply when the economy's problem is quite obviously one of inadequate demand. In other words, he is recommending that someone on the edge of starvation go on a diet.

His complaint about Hillary Clinton's proposals to expand Social Security and pay for college tuition for poor and middle-class children is that we don't have enough money. The whole story of secular stagnation is that we aren't spending enough money.

CEPR / October 10, 2016

Article Artículo

When It Comes to Unemployment, Pundits Are Less In Touch With Reality Than Donald Trump

The line that large numbers of people are out of work or seeing declining wages due to the wonders of new technology is really popular among pundits and elite-types. If technology is the culprit then we can all wring our hands and say how unfortunate it is that we have these losers, but it means that the folks on top are not to blame. After all, we aren't going to blame the Steve Jobs or Elon Musks of the world for their great innovations.

For this reason, it is understandable that news outlets owned by rich people would endlessly promote this line even though it is utter nonsense with no basis in reality. Yet one more piece in this genre is a column by Ryan Avent in the Guardian. The column is taken from his new book, "The Wealth of Humans", which touts the great developments in technology in recent years. The column sees large numbers of workers being displaced by technology, leading to wide-scale unemployment.

The obvious problem with this argument for those in the reality-based community is that it is a story of massive unemployment due to rapid productivity growth. But we haven't seen rapid productivity growth in recent years. In fact, productivity growth has averaged just 1.0 percent annually over the last decade. That compares to a rate of almost 3.0 percent in the decade from 1995 and 2005 and the quarter century from 1947–1973.

Year over Year Change in Productivity

prod2
Source: Bureau of Labor Statistics.

So what we are seeing here is a continuing effort to misrepresent the nature of the problem of unemployment with something which clearly cannot offer a plausible explanation. If productivity growth is very slow then it doesn't make sense to argue that people are losing their jobs because of rapid productivity growth.

CEPR / October 09, 2016

Article Artículo

Want an Exclusive Sneak Peek of Dean's New Book?

By Dawn Niederhauser

My name is Dawn Niederhauser, and I am the Director of Development for the Center for Economic and Policy Research. You may have received some emails from me in the past (OK I never signed them, but if you were asked to donate, well, that was me). This time I am writing to you directly because I have some exciting news — and I want to make you an offer that I hope you won’t be able to refuse.

The exciting news first: CEPR’s Co-Director Dean Baker has written a new book! Titled Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer, the book looks at the various ways in which the elites rig the game to ensure that income flows upward. It also offers policy prescriptions that would serve to reverse this trend.

Early blurbs are glowing: 

"This is an important and compelling book about how the rules governing the American economy have been rigged in favor of those with the wealth and political clout to rig them. Baker shows why and how the nation's staggering inequality has been the consequence of staggeringly unequal political influence.” writes Robert B. Reich, while Katrina vanden Heuvel of The Nation says “Dean Baker’s timely book Rigged is a must-read for the many who believe the status quo is unsustainable."

Dawn Niederhauser / October 07, 2016

Article Artículo

Trump on Trade, Closer to the Mark than CNN

It's a sad day when the Republican Presidential nominee is closer to the mark on an issue than a major news outlet, but that appears to be the case when it comes to CNN and trade. CNN managed to get badly confused as it confronted Trump's "myths" with "reality. It rightly criticized the idea that trade is a zero sum game, trade is typically mutually beneficial so that both parties gain, but the situation is still not quite as CNN presents it.

Its myth #1 is that "America is losing money to Mexico, China, and others." The piece then gives us the "reality," which it claims is:

"There's no proof that a trade deficit is bad for an advanced economy like the United States."

While a trade deficit is not necessarily bad for an advanced country (actually, trade deficits are likely to be worse for advanced countries, in theory fast-growing developing countries should be the ones running deficits), it certainly is bad in a context where an economy is operating below its full employment level of output. The trade deficit means that spending in the United States is creating demand in other countries rather than the United States. In a context of secular stagnation, which many economists believe the U.S. is now experiencing, the trade deficit is making the lack of demand worse than it would otherwise be.

It's true that the demand lost to a trade deficit could be offset by a larger government budget deficit, but at the moment there is little explicit support in either political party for larger budget deficits. This means that there is nothing to offset the demand lost to trade deficit, therefore the trade deficit means slower growth and higher unemployment.

CEPR / October 05, 2016

Article Artículo

Mike Pence's Regressive Economic Policy Agenda

During tonight’s vice-presidential debate, Republican candidate Mike Pence will likely discuss his track record as governor of Indiana. However, Pence will likely leave out a few important facts about that record — including unsuccessful healthcare, tax, and labor market policies. Let’s look at each of these in turn.

CEPR and Nicolas Buffie / October 04, 2016