January 30, 2015
Okay folks, get out those umbrellas, we are about to showered with all sorts of garbage as the corporate interests pushing for the Trans-Pacific Partnership (TPP) and Trans-Atlantic Trade and Investment Pact ((TTIP) go into overdrive to get Congress to approve their deals. We are entering the logic-free zone where ostensibly serious people say any sort of nonsense imaginable to advance these trade deals (not free-trade deals).
Today’s entry is a piece by David Ignatius in the Washington Post pushing the merits of the Trans-Pacific Partnership (TPP). Ignatius’ big punch line is:
“The Peterson Institute for International Economics estimates that the market-opening features of the TPP will boost U.S. exports by about $123 billion annually by 2025 and add 600,000 jobs.”
Hey, 600,000 jobs sounds pretty good. What sort of troglodyte could be opposed to that?
There are a few points that are worth noting on this. First, the comment on exports is a big giveaway. No serious person would talk about exports. Exports do not create jobs in an underemployed economy, net exports create jobs. To see the distinction, suppose that GM shuts a car assembly plant in Ohio and instead ships the parts to Mexico to be assembled. The finished cars are then imported back into the United States.
Exports have risen in this story by the value of the car parts. If you think GM’s move of the assembly plant to Mexico was a job creator in the United States, then think more carefully. Anyone who understands basic economics knows that exports by themselves don’t create jobs, you have to look at net exports (exports minus imports). Someone who just discusses exports is either ignorant of economics or not being honest.
The next point is that standard trade models are full employment models. This means that everyone who wants a job at the prevailing wage has a job. (Ignatius does not provide a link so it’s not clear where he got his numbers.) This means that they create jobs through increasing efficiency. The job creation effect will almost invariably be small and it results from an increased supply of labor. Greater efficiency means higher wages (in these models) and therefore more people want to work.
Standard trade models would not place this number at 600,000 or anything close to it. A study by the Centre for Economic Policy Research in the U.K. said that the employment effect of the sister TTIP would be small and could go in either direction. The projections from a model that are shown on the Peterson Institute’s website shows an increase in national income when the deal is fully phased in 2025 of 0.4 percent of GDP. This is presumably mostly due to greater efficiency, but if half was due to increased labor supply it would only translate into 300,000 additional people working.
The issue of full employment is important in discussing trade since the trade deficit is the main reason that the United States is suffering from its now widely touted bout of “secular stagnation.” Our trade deficit is currently running at an annual rate of almost $550 billion (@ 3.0 percent of GDP). The deficit represents demand generated in the United States that is creating demand in other countries rather than here. There is no easy mechanism for replacing this demand, which is the reason that the economy is running well below its potential and millions of workers are still unemployed or unemployed seven years after the onset of the recession.
TPP could have included wording on currency rules that would have led to a reduction in the value of the dollar against other currencies. This would have made U.S. produced goods and services more competitive internationally, thereby reducing the size of our trade deficit. However the Obama administration chose to ignore this issue and not include any provisions on currency values in the TPP.
It is also important to note that a major thrust of these trade deals is protectionist in the form of increasing patent and copyright protection. This will lead to higher prices for prescription drugs and other protected products. This will slow growth and reduce purchasing power. Stronger patent protection is also likely to further disadvantage U.S. workers as increased royalty payments for patents will crowd out exports of goods, reducing manufacturing employment in the United States.
The stronger patent rules are part of a larger story. These “trade” deals have little to do with reducing trade barriers, since these are already low, with few exceptions. They are mostly about imposing a corporate friendly regulatory structure that would never pass through the U.S. Congress or democratically elected bodies in other countries.
But if people don’t really know what is in these packages and actually can be convinced that they will lead to more jobs and higher wages, then it may be possible to jam them through Congress. This is the explanation for the Ignatius piece and many more to come. Make sure you have a good umbrella.
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