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Article Artículo

David Brooks' Class Bias Is So Deep He Doesn't Even Realize He Is a Protectionist

David Brooks apparently thinks he has things down. The major divide isn't between supporters of big government and small government, it's a debate between supporters of an open economy that looks to increase trade and a closed economy that looks to protectionism. This is the theme of his column that tells us about "the coming political realignment."

To make his case, he gets a lot of things wrong. For example, he seriously misrepresents research on the impact of trade liberalization. Brooks refers to a study by the Peterson Institute that "found that past trade liberalization laws added between $7,100 to 12,900 in additional income to the average household." The vast majority of the gains estimated from liberalization by this study occurred before 1980, a point at which trade was largely non-controversial. The gains estimated from the trade deals of the last quarter century (post-NAFTA) have been far more limited.

Brooks then notes a study from the Peterson Institute for International Economics which projects that the Trans-Pacific Partnership (TPP) would increase national income by $131 billion. It would have been useful to point out that this gain is projected for 2030, a point at which it would be equal to 0.5 percent of GDP. This means that if the study projections are correct, we will as wealthy on January 1, 2030 with the TPP as we would be in mid-March of 2030 without the TPP.

It is also worth noting the Peterson Institute's projection of gains from the TPP assumes the economy is at full employment. It also does not calculate any costs associated with the increased protections in the TPP as a result of stronger and longer patent and copyright protections. This increased protectionism could easily offset the projected gains from the modest tariff reductions in the TPP. It is also worth noting that the non-partisan International Trade Commission projected gains that were less than half as large (roughly one month's growth) also while assuming full employment and not counting any negative impact from the increased protections in the TPP.

CEPR / July 01, 2016

Article Artículo

Paul Krugman, Brexit, and Bubbles

Paul Krugman has an excellent blog post ridiculing the doomsayers on Brexit. I agree with just about everything he says. His basic point is that, while the UK will pay a substantial economic price if it leaves the European Union (especially if the EU imposes punitive tariffs), there is not a plausible story that Brexit will lead to a near-term recession.

Krugman furthermore makes the point that many economists feel the need to exaggerate their case when arguing on trade. The point is that they believe their "free trade" policies to be good and therefore are willing to sort of make stuff up to advance their case. (Can you say "TPP?")

This is all very well-taken and I agree with Krugman 100 percent on these issues. Where I would differ is on the assumption that Brexit won't lead to a recession in the near-term. The argument is not that the reduction in trade resulting from the withdrawal would be so large as to lead to a recession. Rather, the reason stems from the fallout of collapsing bubbles.

There is a very credible case that the UK was experiencing a serious housing bubble, especially in the London market. Brexit may be bringing this to an end for two reasons.

First, UK real estate was seen as a safe haven for rich people across the globe. Therefore, they were willing to sink large chunks of money to purchase condos and houses in the UK. This perception of safety may no longer hold in the post-Brexit world. Instead of money flowing into London real estate it may start to flow out.

The other reason has to do with the strength of the London economy. It is virtually certain that the financial industry will take a big hit from the Brexit vote; the only question is how large a hit. The London finance boys were big buyers of London real estate. If they have to relocate to Paris, Frankfurt, or elsewhere, it could send London prices plummeting. 

The net effect of a plunge in real estate prices could very well be a recession. The construction sector will see a sharp fall in demand, leading a major contraction and large-scale layoffs. Similarly, as millions of homeowners see their house prices plummet they will cut back spending in response to the loss of wealth. (Have we ever seen anything like this?)

CEPR / July 01, 2016

Article Artículo

FedWatch: John Williams, President of the Federal Reserve Bank of San Francisco

This is the seventh in a series of profiles of the members of the Federal Reserve Board’s Open Market Committee [FOMC]. The profiles will focus on their writings, public statements, and voting records as members of the FOMC.

John Williams took over as President of the San Francisco Federal Reserve in March 2011, five months after Janet Yellen’s departure from the post. Williams, who previously served as Yellen’s director of research, is generally considered a moderate dove. He upholds the employment side of the Fed’s dual mandate and has consistently supported quantitative easing and a gradual path for interest rate normalization. The exception to Williams’ more dovish views is that he has called for rate hikes to begin at a relatively early date; however, this is largely because of Williams’ aforementioned support for a slow, gradual course of rate hikes.

Williams has published extensively on monetary policy. In 2006 — about two years before the Fed would reduce the federal funds interest rate to almost zero percent — Williams published a paper warning about the dangers of the zero lower bound (ZLB) on interest rates.[1] He found that the ZLB can be a significant constraint on monetary policy when the general public has imperfect knowledge of policy and the economy; in the paper’s conclusion, Williams noted that the ZLB placed greater emphasis on “the potential use of fiscal policy interventions,” i.e. deficit spending.[1]

CEPR and Nicolas Buffie / June 30, 2016

Article Artículo

Donald Trump and U.S. Trade Policy: Different Isn't Necessarily Tougher

Media coverage of U.S. trade policy with China and other countries has been remarkably one-dimensional. The coverage almost exclusively treats the issue as being one of relative toughness. While this is certainly the way some politicians, notably Donald Trump, speak about trade, it conceals the real issues involved.

The United States pursues a variety of agendas in its trade negotiations. Naturally, it does not get everything it wants, it prioritizes some items over others. In some areas it clearly has been very "tough" as measured by outcomes. For example, Pfizer and Microsoft and other drug, software, and entertainment companies are collecting tens of billions of dollars a year from foreign countries because U.S. trade negotiators have been very tough in demanding that these countries adopt U.S.-type rules on patents and copyrights.

The United States has also demanded that other countries allow U.S. corporations to take their complaints to special tribunals outside of their domestic legal system. This is a central feature of the newly negotiated Trans-Pacific Partnership. Undoubtedly our negotiators had to be very tough to get these countries to surrender this aspect of their national sovereignty. (We even had to make a reciprocal sacrifice of sovereignty, allowing foreign investors a route around the U.S. legal system.)

Negotiators have not been tough in pressing demands on currency values, which would have meant a lower U.S. trade deficit with countries like China. While the trade deficit matters hugely to workers, some of whom directly lose jobs to imports and others who suffer indirectly from a weak labor market (in the era of secular stagnation we have no mechanism for making up the demand lost due to a trade deficit), it actually benefits many major corporations.

Companies like GE benefit from being able to produce at low cost in countries like China. Retailers like Walmart also benefit from having low-cost supply chains in the developing world. And highly-paid professionals like doctors, who are largely protected by regulations from foreign competition, benefit from a weak labor market by being able to hire cheap help.

In this context, a call to address currency values and thereby bring down the trade deficit, is not necessarily an issue about being tough with China and other trading partners. It is an issue about what will be prioritized in trade negotiations. Presumably if these countries met U.S. demands on currency, they would be less likely to meet demands on patents and copyrights or special courts for foreign investors.

CEPR / June 30, 2016

Article Artículo

Bursting Bubbles and the Fallout from Brexit

Neil Irwin had an Upshot piece trying to work through some of the fallout from the vote to leave the European Union. It is worth elaborating on a couple of the points in this piece.

First, Irwin seems to give financial markets undue credit in having a clue. He argues that the effects of the vote will be transmitted to the economy through financial markets. While this is largely true, financial markets are notoriously fickle. They often over-respond to events or even non-events, the most obvious being the 25 percent plunge in October of 1987 that wasn't linked to anything in the world. This plunge also had only a very limited impact on the economy. For this reason, it doesn't make much sense to project economic affects based on one day's market movements.

Second, Irwin highlights the 8.0 percent plunge in the value of the pound against the dollar as something that is likely to have a substantial impact on the UK economy. This is true, but a little more background here is important.

The UK was running a trade deficit in the neighborhood of 5 percent of GDP (@ $900 billion in the U.S.). This deficit was being in large part fueled by an inflow of foreign money to buy UK real estate, leading to an enormous run-up in housing prices, especially in London. This was unsustainable. (Some folks may have heard about housing bubbles but apparently it was difficult in the UK in the pre-Brexit era to get information on such things.)

Anyhow, the correction for a large trade deficit is a drop in the value of the currency. If the UK had competent economic managers, they would have tried to engineer a drop in the value of their currency. They also would have tried to prevent the bubble from growing so large. The plunge in the pound may now bring about the necessary correction in the trade deficit. It may also stop and even reverse the inflow of foreign capital to buy real estate, thereby crashing the bubble.

If that happens, then the Brexit vote will have merely brought forward events that were inevitable. While Washington Post types will inevitably engage in a round of intense finger-wagging at the Brexit voters, the real problem here was the incompetent management of the UK economy by Prime Minister Cameron and the English Central Bank.

CEPR / June 25, 2016