March 11, 2015
Brad thinks he has a winner policy with TPP, taking issue with Paul Krugman who says the deal is not worth doing. Brad argues that even if the deal is worth half of the 0.5 percent of GDP figure that is widely cited, we are still talking about 0.25 percent of GDP, or $75 billion a year for the region as a whole and $45 billion for the U.S.
He acknowledges that these gains may not be spread evenly, but wants to see evidence that the losses to workers would be larger than their share of this $75 billion. He also notes Krugman’s complaint about increased protection for intellectual property, especially drug patents, and wants to see evidence that these losses will be large enough to offset the $75 billion in annual gains. Okay, let’s take the DeLong challenge.
First, one of the issues raised by many TPP opponents is that it will almost certainly have nothing on currency. This mean that it will not make it any easier, and could well make it more difficult, for the United States to address the trade deficit that results from having an over-valued dollar. Whether or not that ends up being the case is of course speculative, but this could be a very big deal.
As some folks have argued, the United States has faced a serious problem of secular stagnation, meaning it does not have enough demand to bring the economy to full employment. In principle this problem can be easily addressed by a big government stimulus program. But we don’t live in principle, we live in Washington, where no one in a position of power is prepared to talk about big increases in the government deficit. Hence, secular stagnation is a real live problem.
One way we can get the missing demand is by reducing the trade deficit. This is best accomplished by lowering the value of the dollar against the currencies of our trading partners. If we could reduce the value of the dollar enough to lower the trade deficit by just 0.2 percent of GDP, but are blocked from this path by TPP provisions, then the resulting loss of 0.3 percent of GDP (assumes a multiplier of 1.5 on net exports) would exceed the gains that have Brad so excited. Of course the losses from not reducing the value of the dollar could be much larger (our trade deficit is @ 3.0 percent of GDP), but it’s worth noting that Brad has not set a very high bar.
Next we have Brad asking how bad the increase on patent protection and copyright protection can be. Well, the countries of the region spend close to $700 billion a year on pharmaceuticals. The difference between patent protected prices and free market prices can easily be more than a 1000 percent (with the Hepatitis-C drug Sovaldi, it’s close to 10,000 percent). Let’s say the TPP raises drug prices by 20 percent. That gets $140 billion a year, a sum that’s more than 80 percent larger than Brad’s $75 billion.
Will TPP raise drug prices by this much? Certainly the drug companies who are at the table would like to see this sort of number. We probably won’t know for years after the fact since much will depend on interpretations of the deal, as well as the course of innovation in the industry. Note also that I just mentioned drugs. TPP will mean higher prices on fertilizers, pesticides and a wide range of other chemicals as well as books, movies, recorded music, video games and all sorts of other good things.
Finally, we should consider the issue of the mix between winners and losers. There probably won’t be much further direct downward pressure on the wages of workers subject to international competition (i.e. manufacturing workers) as opposed to protected workers (e.g. doctors and lawyers) since the barriers were already very low. However it is possible to see a way in which the increased protection overseas for our patents and copyrights hurts ordinary workers.
The basic point is straightforward. Increased money coming to Pfizer and Merck for patent fees and Microsoft and Disney for royalties will effectively crowd out net exports of manufacturing goods. Other things equal, the protectionist parts of the deal should make the dollar higher relative to other currencies. This will cause us to run larger deficits in manufacturing, putting further downward pressure on the wages of manufacturing workers and service sector workers who will compete with displaced manufacturing workers for jobs.
Could this downward pressure be more than 0.25 percent of their pay, making the TPP a net loser for them through this channel? According to BEA, our direct royalty fees comes to around $140 billion a year or about 0.8 percent of GDP. This doesn’t include fees for patents and copyrights that are embodied in the product, such as a computer or package of fertilizer. If we say that this would raise our exports by 50 percent, then we are currently looking at exports equal to around 1.2 percent of GDP associated with intellectual property. If the TPP can raise this by 30 percent, then we would see an increase in these exports of roughly 0.4 percent of GDP.
Suppose that this rise in royalty payments from abroad and the resulting rise in the dollar led to a loss of net exports of manufactured goods of 0.4 percent of GDP. This probably would not be large enough to offset a gain to workers of 0.25 percent of their wages, but could easily be in the neighborhood of 0.1 percent, or 40 percent of their TPP dividend.
Okay, all of this is incredibly crude, but it is possible to think of plausible scenarios in which most of the people in this country end up as losers from the TPP. So, why should we buy this industry-crafted deal?
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