April 02, 2015
Josh Barro comments on the exchange between former Federal Reserve Board Chair Ben Bernanke and Larry Summers and Paul Krugman. The key issue is whether the main problem with inadequate demand stems from the trade deficit or weak consumption and investment demand. I weighed in earlier on Bernanke’s side.
Josh’s question for Bernanke is that if the problem is the trade deficit, what do we do about it? Of course the main reason for the trade deficit is the over-valued dollar, which makes our goods and services less competitive internationally. This in turn is the result of the decision by other central banks, most importantly China’s, to buy up large amounts of U.S. government bonds.
As Josh notes, some folks, like me, have urged that there be rules on currency values in trade deals like the Trans-Pacific Partnership (TPP). Bernanke rejects this route saying that it would be too complicated. (Hey, if you want complicated, try the TPP chapter on intellectual property.)
While currency rules would be fairly simple by trade agreement standards, Bernanke is right, we don’t have to use trade deals like TPP to address the problem of an over-valued currency. Bernanke’s proposed alternative is to “ask nicely.”
Well, that’s not exactly the way things work in international negotiations. Obviously China and the other countries who are deliberately propping up the dollar against their currency see it as being in their interest to do so. They are not going to hurt their economies, if they view this as the outcome of ending their currency intervention, just because President Obama asked nicely.
They would of course be open to ending currency interventions if they got something in exchange. For example if we told them that we don’t really care if they want to produce generic versions of Pfizer’s latest drugs and decided they wouldn’t police their Internet for unauthorized copies of Disney’s latest movies. Clearly there is some combination of bones that we could toss China and other countries that would be sufficient to get them to raise the value of their currencies against the dollar.
This dealing can take place inside or outside a trade agreement, but it is really a question of priorities. I was once at a meeting with then Treasury Secretary Timothy Geithner. When someone asked Geithner about currency issues with China, he said that he always raises currency values with China. He then added something to the effect that we have lots of issues with China.
This really said everything about the priorities of the Obama administration and likely the administrations that preceded him. Their priorities in international economics are investment rules to protect U.S. based multinationals and stronger patent and copyright protections. Setting currency rules that can reduce the trade deficit and get us back to full employment comes way down on this list, if it comes at all. (Many powerful U.S. interests don’t especially want to see a lower valued dollar. For example, Walmart benefits from getting cheap imported goods.)
In this context, the fact that currency rules will not be in the TPP is indicative of a more general pattern. Bernanke is right, we don’t have to address currency imbalances in the TPP. The problem is that there is no reason to think the Obama administration has any intention of addressing them anywhere else either.
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