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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.
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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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.
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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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.
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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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.
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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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.
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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