August 13, 2003

The Economist Is Unhappy at the U.S.-E.U. Trade "Deal"

Better than nothing, but not much better than nothing, is what the Economist says. I find this infuriating. The AFL-CIO provides a large share of funding for the Democratic Party. The AFL-CIO was scarred for life when the Reagan deficits of the 1980s pushed up the value of the dollar and devastated many union-heavy manufacturing industries. The AFL-CIO now fears free trade greatly--and this makes making progress on free trade very, very difficult when a Democrat is president. Nevertheless, Bill Clinton worked hard and made a lot of progress toward a better world.

By contrast, building momentum for freer trade in a Republican administration should be as easy as falling off a log. But the Bush Administration can't even fall off a log reliably:

Economist.com: LATE on Tuesday night, bleary-eyed trade negotiators from the European Union and the United States claimed to have sealed a pact for reforming agricultural trade.... But the text of this latest deal is a classic of the genre, full of fuzzy language, fussy jargon and fudged commitments. It calls for reforms, cuts and caps without putting figures on any of them.... The text offers a commitment to eliminate subsidies, over time, on those products of "particular interest" to poor countries. Which products, exactly? It doesn't say. And how long before the subsidies are eliminated? Again, we are left to fill in the blanks.... The pact's "commitments" on import tariffs are even more opaque.... The pact is not so much a trade deal as it is a signal that the EU and the United States are not yet willing to give up on the Doha round. After the American farm bill last year, and the EU's anaemic efforts to reform its common agricultural policy, the Doha round had looked set to fail. Don't cancel your tickets to Cancún just yet, is the unstated but substantive message of this pact...

Posted by DeLong at August 13, 2003 06:58 PM | TrackBack

Comments

How can Mr. Bush negotiate away farm subsidies when he needs all the red states to win in 2004? Plus he needs to keep WV and would need PA (steel tariffs) if he loses FL again. Look at the electoral map and ask whether the states that supported Bush in 2000 support free trade or have powerful special interests that oppose free trade.

Posted by: bakho on August 13, 2003 07:16 PM

What bakho said.

And call me naive, but I don't get the free trade mantra. Comparative advantages in some things, yes; interdependence based on trade, yes. But, not forgetting that it's really *political* economy, doesn't the job of a government involve not only achieving (comparative) economic efficiency, but also encouraging the possibility of achieving a decent living to law-abiding citizens of merely average attainments? And in a consumer-based society, wouldn't that involve some cultivation of high-value-added pursuits, which tend to be based on making things which weren't there before? And isn't there some element of beggar-thy-neighbor, or a race to the bottom, in shifting that kind of economic activity outside our political borders to other places with lower wages and lower environmental standards? And wouldn't a consumer-based economy have to be underpinned by relatively high average incomes? And isn't it hard to achieve that by simply shifting money around without actually making things that weren't there before?

All I'm after is returning to our historical roots and being rational, even expedient, about free trade, rather than dogmatic. We developed industrially behind high tariff walls, after all. Free trade was a response to the drive to autarky in the 20s and 30s that, it was thought, strongly influenced the rise of the Nazis. Or so I always thought.

On a perhaps related note, I was talking with someone the other day who says that corporations no longer price capital investments based on unit cost reduction the way I'd been taught they do; apparently they regard it as a one-time lump expense. I'm no economist, but even I thought I understood the importance of the unit-cost-based investment principle as explained by Harold Livesay in his biography of Carnegie. Can anyone enlighten me on this?

Posted by: Altoid on August 13, 2003 09:30 PM

Shouldn't the Reagan deficits of the 1980s have pushed the dollar down?

Posted by: Matthew Yglesias on August 14, 2003 01:26 AM

Shouldn't the Reagan deficits of the 1980s have pushed the dollar down?

Posted by: Matthew Yglesias on August 14, 2003 01:28 AM

Matthew Yglesias wrote, "Shouldn't the Reagan deficits of the 1980s have pushed the dollar down?"

I'm not so clear on this, but my impression is "no, not if foreigners are willing to purchase US assets".

The problem being that at the current rate, they will run out of assets to purchase in a few decades; hence the current situation is not stable.

Posted by: Stephen J Fromm on August 14, 2003 05:54 AM

Note to DeLong: There's no 'new' economy. There's no free lunch. And there's no free trade...

>"...The AFL-CIO was scarred for life when the Reagan deficits of the 1980s pushed up the value of the dollar and devastated many union-heavy manufacturing industries. The AFL-CIO now fears free trade greatly--and this makes making progress on free trade very, very difficult when a Democrat is president..."

I tell you what. It's almost enough to make a full-grown, red white and blue-blooded, Wall Street Transnational Corporate lawyer/banker/analyst/broker break down and cry real tears....

>"...Nevertheless, Bill Clinton worked hard and made a lot of progress toward a better world..."

...Real crocodile tears, that is.

Speaking "free" trade dotcompatriots, get a load of THIS 'fertilizer':

China Under U.S. Scrutiny as Trade Anger Grows

Wed Aug 6, 5:42 PM ET

By Glenn Somerville and Doug Palmer

WASHINGTON (Reuters) - A shrinking U.S. job market has put China under an increasingly harsh spotlight as manufacturers and labor unions complain about the Asian giant's trade practices and currency policy.

With the 2004 presidential election looming, the rumblings are an uncomfortable reminder for President Bush of a staggering loss of jobs in his tenure -- some 2.6 million in manufacturing alone since mid-2000..."

http://story.news.yahoo.com/news?tmpl=story&u=/nm/20030806/wl_nm/economy_china_dc_2

Don't worry though, those brainy 'big guys' on Wall Street and Capitol Hill (in London, and Bonn, and Rome and Tokyo and Berkley too) have everything 'under control'...

China to tell U.S. to cool yuan criticism--sources

Fri August 8, 2003 03:47 PM ET

By Eric Burroughs and Gertrude Chavez

NEW YORK, Aug 8 (Reuters) - Chinese officials plan to tell U.S. Treasury Secretary John Snow they might reconsider the country's hefty buying of Treasuries and U.S. agency debt if Washington doesn't cool its calls for China to revalue the yuan, according to a report this week seen by market sources.

This week, the currency market buzzed with speculation about the report, which is sent only to paying subscribers and which was one factor behind the dollar's dive of more than one percent against the yen on Thursday.

"Part of the (dollar)'s decline may have (also) been caused by rumors of a consultant's report that official Asian accounts will be less inclined to purchase U.S. Treasuries," strategists with BNP Paribas wrote in a research note on Friday.

The report, by geopolitical advisory group Medley Global Advisors, quotes Chinese officials saying they will reiterate that they have not sold any Treasuries or agencies and have in fact continued to buy those securities, sources said.

But unless the U.S. calms its criticism, Chinese officials plan to tell Snow during an expected visit this year they may reconsider their purchases of Treasuries and the debt sold by the two biggest U.S. mortgage financing agencies, Fannie Mae FNM.N and Freddie Mac FRE.N , market sources quoted the report as saying.

Those steady purchases from China and other Asian countries have helped bolster the dollar and keep a lid on long-term U.S. interest rates..."

http://reuters.com/financeNewsArticle.jhtml?storyID=3248307&type=bondsNews

...No REALLY. They DO--have everything figured out AND under control--I mean. Really. TRUST me...

Notes on the U.S. Trade and Balance of Payments Deficits

Wynne Godley

Summary

"1 The United States has a balance of payments deficit worth nearly 4 percent of GDP and negative net foreign assets (or foreign debt) worth nearly 20 percent of GDP...

[This data in piece is somewhat dated: The trade deficit's closer to 5% of GDP now. And the 'foreign debt' is approaching 25%.

See: http://www.bea.gov/bea/di1.htm for the 'latest' numbers.]*

"...If U.S. growth is sustained in the medium term, it is quite likely that the balance of trade in goods and services will not improve...

[In fact, the situation has been bad and getting worse since 1980.]*

"...The United States is the only major country, or country "bloc," to have a substantial trade deficit and this is proving of great advantage to the rest of the world.

2 If the balance of trade does not improve, there is a danger that over a period of time the United States will find itself in a "debt trap," with an accelerating deterioration both in its net foreign asset position and in its overall current balance of payments (as net income paid abroad starts to explode). Such a trap would call imperatively for corrective action if it is not at some stage to unravel chaotically.

3 The emergence of a debt trap is put forward as a possibility that must be taken seriously rather than as a forecast of what is most likely to happen. Policymakers are advised to ensure that adequate instruments are available should things start getting out of hand.

4 Whether the outflow of property income starts to accelerate depends critically on the rate of return earned on internationally owned assets and liabilities. The well-known condition for exploding payments on debt is that the rate of interest exceeds the growth rate...."

http://www.levy.org/docs/stratan/stratan.html

* [The comments in brackets [] are mine.]

Posted by: Mike on August 14, 2003 06:00 AM

>Posted by: Matthew Yglesias on August 14, 2003 01:28 AM

>"Shouldn't the Reagan deficits of the 1980s have pushed the dollar down?"

The short answer is: Yes, of course. But that answer is premised upon the assumption that the MOST "influential" people in society AND the world are also 'rational'....

Maybe this will help:

Ronald Reagan and the Commitment of the Mentally Ill:

Capital, Interest Groups, and the Eclipse of Social Policy

Alexandar Thomas

Department of Sociology and Anthropology

Northeastern University

ABSTRACT

Conventional wisdom suggests that the reduction of funding for social welfare policies during the 1980s is the result of a conservative backlash against the welfare state. With such a backlash, it should be expected that changes in the policies toward involuntary commitment of the mentally ill reflect a generally conservative approach to social policy more generally. In this case, however, the complex of social forces that lead to less restrictive guidelines for involuntary commitment are not the result of conservative politics per se, but rather a coalition of fiscal conservatives, law and order Republicans, relatives of mentally ill patients, and the practitioners working with those patients. Combined with a sharp rise in homelessness during the 1980s, Ronald Reagan pursued a policy toward the treatment of mental illness that satisfied special interest groups and the demands of the business community, but failed to address the issue: the treatment of mental illness

Introduction

Almost ten years after Ronald Reagan left office as president, the legacy of his administration continues to be studied. What is almost indisputable is that the changes in public policy that were implemented during the 1980s were sweeping and marked a turning point in American domestic policy. Faced with increasing competition from overseas, American business found it necessary to alter the social contract. This would require a realignment of the political economy so as to weaken labor unions and the social safety net. In Reagan, the Right found a spokesman capable of aligning conservatives, centrists, and working class whites. With this coalition, Reagan was able to bring about a number of reactionary changes in public policy (Alford, 1988).

This paper provides an illustration of this co-optation by examining the policies regarding involuntary commitment of the mentally ill. The shifts in such policies were not the result of overt attempts at change, but rather part of an overall effort to realign the political economy to be more profitable for business. The overall result was that political discourse shifted from a focus on social policy to a focus on fiscal policy. As such, social programs that necessitated financial outlays on the part of the federal government were overlooked in favour of policies that seemed less costly...

The Economy

In the aftermath of World War II, the United States experienced a period of dramatic economic growth. The industrial economies of Western Europe and Japan were by and large devastated by the war. As a result, American firms found little competition abroad in an expanding world market. The implementation of the Marshall Plan under President Truman provided American goods and services on credit to the war ravaged economies. During this period of economic hegemony, American companies were able to make concessions to labor in regard to wages and fringe benefits. Thus, the postwar political economy of the United States was characterized by relative peace between management and labor. With record corporate profits and rising standards of living, the United States government passed a series of liberal reforms throughout the period. Among these reforms was the passage of the Civil Rights Act, various social welfare programs, the construction of the interstate highway system, and the deinstitutionalization of the mentally ill.

During the late 1960s and early 1970s, the rebuilt economies of Europe and Japan began to give American companies stiff competition in the world marketplace. The growth experienced by American firms during the previous two decades began to slow, and profit margins were deemed to be too low (Barlett and Steele, 1996; Gruchy, 1985). In order to increase profits, many American firms attempted to become more competitive by trimming labor costs through layoffs and the relocation of factories (Bluestone, 1990; Bluestone and Harrison, 1982; Gruchy, 1985; Harrison and Bluestone, 1988; Moriarty, 1991; Perrucci et al, 1988; Sassen, 1991; Wallerstein, 1979). In addition, the reduction of corporate taxes was pursued with a renewed vigor (Barlett and Steele, 1994).

In order to reduce corporate taxes, it was necessary to reduce the size of the welfare state. This objective was carried out by the Reagan administration (Abramovitz, 1992). After taking office in 1981, the administration set out on a course to alter the (relatively) labor sensitive political economy to be more business friendly. Reagan appointed anti-union officials to the National Labor Relations Board, "implicitly [granting] employers permission to revive long shunned anti-union practices: decertifying unions, outsourcing production, and hiring permanent replacements for striking workers" (102). Reagan himself pursued such a policy when he fired eleven thousand striking air traffic controllers in 1981. Regulations designed to protect the environment, worker safety, and consumer rights were summarily decried as unnecessary government meddling in the marketplace (Abramovitz, 1992; Barlett and Steele, 1996). Programs designed to help the poor were also characterized as "big government," and the people who utilized such programs were often stigmatized as lazy or even criminal. With the help of both political parties, the administration drastically cut social welfare spending and the budgets of many regulatory agencies.

The new emphasis was on "supply side" economics, which essentially "blamed the nation's ills on 'big government' and called for lower taxes, reduced federal spending (military exempted), fewer government regulations, and more private sector initiatives" (Abramovitz, 1992, 101)...

http://www.sociology.org/content/vol003.004/thomas_d.html

Posted by: Mike on August 14, 2003 06:22 AM

A great line from Marx: "But, in general, the protective system of our day is conservative, while the free trade system is destructive. It breaks up old nationalities and pushes the antagonism of the proletariat and the bourgeoisie to the extreme point. In a word, the free trade system hastens the social revolution. It is in this revolutionary sense alone, gentlemen, that I vote in favor of free trade."

Posted by: General Glut on August 14, 2003 06:33 AM

Even Chicken Hawks Must Eventually Come Home to Roost

All of the above--coupled with a truly bizzare ideological/religious 'covert' war on the religious, social, political AND economic 'left' here at home AND abroad--

(See: Iran-Contra, Amplified

Published on Monday, August 11, 2003 by the Inter Press Service

by Jim Lobe

WASHINGTON - As Karl Marx might have said, ''A specter is haunting Washington -- the specter of Iran-Contra''.

Even some of the people and countries are the same. And the methods -- particularly the pursuit by a network of well-placed individuals of a covert, parallel foreign policy that is at odds with official policy -- are definitely the same.

Boiled down to its essentials, the Iran-Contra affair was about a small group of officials based in the National Security Agency (NSC) and the Central Intelligence Agency (CIA) that ran an ''off-the-books'' operation to secretly sell arms to Iran in exchange for hostages.

They used the proceeds to sustain the Nicaraguan contras -- U.S.-sponsored rebels fighting Managua's left-wing government -- in defiance of both a congressional ban and of official U.S. policy as enunciated by the State Department and President Ronald Reagan. It was never clear whether Reagan understood, let alone approved, the operation.

The picture emerging from the latest reports about the manipulation of intelligence in the drive to war with Iraq, as well as efforts by administration hawks to deliberately aggravate tensions with Syria, Iran, and North Korea in defiance of official State Department and U.S. policy, suggest a similar but much more ambitious scheme at work...

http://www.commondreams.org/headlines03/0811-01.htm )

--led SOME "brainy 'big guys' on Wall Street and Capitol Hill [AND] in London, and Bonn, and Rome and Tokyo and Berkley too " (and even a few merely 'pointy' heads in various Economics Departments here and there) to actually believe a bunch of their own lies about how the world really works, their own financial and intellectual prowess and 'macroeconomics' in general.

The product(s) of this extended mass 'fugue state'?

Well, that's a BIG 'account' but here's SOME of the 'highlights':

The [US] Debt To the Penny

08/12/2003 6,744,943,168,393.25

http://www.publicdebt.treas.gov/opd/opdpenny.htm

Latest news release -- 6/19/03

The U.S. current-account deficit increased to $136.1 billion (preliminary) in the first quarter of 2003.

Latest news release -- 6/30/03

At yearend 2002, the value of foreign investments in the United States exceeded the value of U.S. investments abroad by $2,387.2 billion (preliminary) with direct investment valued at current cost.

http://www.bea.gov/bea/di1.htm

In hock to the hilt

"...Most of the attention is focused now on the federal budget deficit, which could reach an astonishing half-trillion dollars next year. The overall national debt could almost reach its congressionally mandated limit of $7.4 trillion. State governments, most of which are required by their constitutions to balance their budgets, will have combined deficits of an estimated $70 billion next year...

...Consumer debt is on the rise, and personal bankruptcies are skyrocketing. Reports show that consumer credit increased 5 percent in May, to $1.76 trillion, and household debt now stands at 110 percent of annual disposable income, up from 76 percent in 1986. Americans set a new record last year for going broke, with 1.6 million people filing for personal bankruptcy....

...Joseph Pomykala, professor of economics at Towson University, points out, "The bankruptcy rate is atrociously high right now . . . 12 times the rate of the Great Depression on a per capita basis...."

http://www.usnews.com/usnews/issue/030721/opinion/21dobbs.htm

Posted by: Mike on August 14, 2003 07:10 AM

While it is true that the free-trade agreements of the 80's and 90's mostly affected manufacturing jobs, that is because they affected manufactured goods tariffs. The remaining barriers to trade primarily affect industries in rural areas, (farming as an example) or in the South (textiles in North Carolina). Any major trade initiative today is going to negatively impact protected US interests in REPUBLICAN areas, so it will probably be a Democrat who pushes them through. (It will have to be a non-southern or Midwestern Democrat - this is an issue I can't see Edwards or Gephardt pushing into the teeth of their own bases.)

Unfortunately, there are few Democratic leaders who are interested in free trade, preferring to try to force "fair trade" initiatives designed to drive up the cost of manufacture in foreign countries, defeating comparative advantage and protecting wages in the United States.

Posted by: rvman on August 14, 2003 07:34 AM

*sigh* Does it take a rocket scientist to figure out that western nations want free trade in all goods except those in which the third world has a comparative advantage?

(I'm deliberately not including labour intensive manufaturing because the level of FDI grossly distorts the picture of who benefits from that. It's not the same for a shoe maker in China to sell shoes in the U.S. as it is for a U.S. shoe company to buy or build a plant in China and then sell the shoes in the states. In the first instance the wages and profits acrue to China, in the second only the wages do.)

Posted by: Lorenzo on August 14, 2003 07:55 AM

*sigh* Does it take a rocket scientist to figure out that western nations want free trade in all goods except those in which the third world has a comparative advantage?

(I'm deliberately not including labour intensive manufaturing because the level of FDI grossly distorts the picture of who benefits from that. It's not the same for a shoe maker in China to sell shoes in the U.S. as it is for a U.S. shoe company to buy or build a plant in China and then sell the shoes in the states. In the first instance the wages and profits acrue to China, in the second only the wages do.)

Posted by: Lorenzo on August 14, 2003 08:46 AM

I'm puzzled by the comments here and by Brad de Long's
comment because a free trade agreement in food would obviously
require that all sides agree to such. I thought the
EU in particular was opposed to this. So how could there
be an agreement? I don't mean just any agreement, such
as the agreement that EU wants, but a real agreement.
Why the assumption here that an agreement failed because
of american action or inaction?

Also and I guess it will seem unrelated to some, but
I don't think it is really, this item:

In the first seven months of this year China has placed
orders for 30 gigawatts of new power plants (see "Chinese
orders for power generation surge in 2003," Financial Times,
8-12-2003). To put that in context the United Kingdom has
55 gigawatts of electric power generation -- not what they
are adding this year but all they have.


Lorenzo comments sardonically, "Does it take a rocket
scientist to figure out that western nations want free
trade in all goods except those in which the third world
has a comparative advantage?"

A statement like that always has some truth to it. Actually,
most times in places it would be the whole and only truth.

But it's not today, given that we seem to be shipping our
employment to China (and pretty soon India) I'm starting
to wonder if I should wish it were more true.

Posted by: Mark Amerman on August 14, 2003 09:38 AM

Note: The dollar declined more than 40% in value against the major European currencies and the Yen from 1985 to 1989.

Posted by: anne on August 14, 2003 10:48 AM

The steel tariff lobby is running TV ads.

http://www.steel201.org/about/index.asp

The red states want both open markets for farm product exports and subsidies.

Posted by: bakho on August 14, 2003 10:51 AM

The assumption in this post seems to be that if the Bush administration was more consistent and less hypocritical in supporting free trade, the job of getting the EU to slash its massive trade-distorting subsidies would be as easy as "falling off a log." I don't know of any evidence supporting this. Instead, it seems quite clear that even if the Bush administration was simon pure in its devotion to free trade the EU, along with Japan, would be as obstinate and relunctant to dismantle these programs as they have been for decades. Along with the justified criticism of its free trade derelections, the Bush administration should get credit for the degree of difficulty in its ambitions. Trade negotiations now focus on programs that would have been regarded as politically untouchable in years past.

Posted by: rd on August 14, 2003 11:10 AM

This Administration deals in political hypocrisy only in trade, although there is no hypocrisy in the love affair with the large energy companies.

Posted by: arthur on August 14, 2003 11:18 AM

A few observations, some political, some economic, about the comments here:

[1] Bush hypocrisy and lies etc. A Democrat, I've no fondness for the Bush economic policies, but --- along with 60% of the American people --- I supported the war against Saddamite Iraq; and the claims of deliberate lying about Saddam's weapons of mass destruction --- by either Bush or Blair --- strike me as not just wrongheaded but irrational, and for reasons clearly set out in a lengthy analysis at the buggy prof website:

See http://www.thebuggyprofessor.org/archives/00000086.php

[2 ] Despite my disagreements with the Bush tax cuts and the failure of the administration to deal forthrightly and honestly with corporate accounting machinations, the gloom that most of these comments radiate about the US economy's near-term prospects isn't simply unjustified in my view, but reflects ideological biases, I fear, that keep popping up in recurrent comments about the economy. Those who want can find my reasoning set out at length in four articles on the US economy's short-term prospects at http://www.thebuggyprofessor.org See the ones for July 20th, 21st, 23rd, and 24th.

[3] A couple of the comments about the big imbalance in the global economy seem accurate: the EU's countries, especially Germany, and Japan, and China, and Pacific Asia generally are way too oriented toward export-led growth . . . which means they're waiting for the recovery of the US economy, as a means of kick-starting their own growth. That happened in the early 1980s, when world economic growth slowed down even more. The the subsequent Reagan deficits --- whatever else they might have done --- led the Fed to raise interest rates to very high levels and keep them there. The resulting inflow of investment funds into the recovering US economy, with inflation tamed and real interest rates unusually high, then raised the price of the dollar through the roof compared to European and Asian currencies. The resulting flood of imports into the US from Europe and Asia accounted for around 50% of their GDP growth in the first two years or so of their own recoveries.

See the buggy article on this global imbalance, which is just as bad as it was 20 years ago . . . and maybe worse.
http://www.thebuggyprofessor.org/archives/00000102.php It deals with the Chinese economy: a short-term problem for the US(owing to the huge flood of imports, buoyed by an undervalued Yuan fixed at 8.3 to the dollar, that is concentrated in certain industries), but a long-term boon for the US as it grows more wealthy.

[4] To continue in this vein, what to do about China in the short-term is not easy to say, assuming that you're not in favor of outright long-term protection, a suicidal policy in my view anyway. The article just mentioned at the buggy site for August 3rd sets out a list of prescriptions for handling the short-term pressures on certain US industries and employment. Note the caveat: short-term.

[5]Bush deficits.

5a. We can dislike specific aspects of the Bush tax cuts --- as I do --- but I'd urge you to be cautious with your leaping to conclusions that these deficits will go skyhooting for years and years and cause some sort of long-term damage to the US economy . . . or even, if we're to believe some comments here, catastrophe.

5b. You see, the same thing was predicted in the early 1980s during the Reagan era --- especially by Democrats --- but they not only kickstarted US economic growth after the sharp if short recession of 1981 (over 10% unemployment in the US, soemthing we'd not experienced since the 1930s), but also then, through the huge trade deficits we rightly absorbed, kickstarted world economic recovery as well.

5c. More to the point, at least one well-known liberal economist --- a former president of the American Economic Association, Robert Eisner --- broke with the liberal howling against the deficits, found the size was being exaggerated for various reasons by liberal critics, claimed they were essentially indispensable and even good for the US economy's revival and even long-term prospects, and eventually was proved generally right.

See Eisner's 1993 post-Reagan appraisal of these at http://www.econlib.org/library/Enc/FederalDebt.html

For an up-to-date review by another well-known liberal economist on Eisner and his much maligned views that he espoused in liberal circles in the 1980s, see Benjamin Friedman at http://www.worldbank.org/wbi/publicfinance/publicresources/friedman.pdf He finds Eisner rights on many things, wrong on others; and in the process gives a good and balanced overview of the pluses and minuses of the Reagan-era deficits.

5d. I add only in passing that the concept of "net investment" used by Friedman to criticize Eisner --- though widely employed in economics --- may be very misleading in an era of information-and-communication technologies of a radically restructuring sort. Gross investment may be more meaningful, what with the obvious fact that "replacement capital" for depreciated computers and software and modems etc may in fact lead to far more updated, efficient, and hence more productive machines and software.

Beyond that, deciding what is investment as opposed to consumption isn't at all self-evident. Spending on education, for instance. Or government spending on defense to buy security. Or spending by households to buy a new car for commuting to work (if government spends money on building the road and that counts as investment now, why wouldn't spending on a car to use the road --- especially since it's a durable, with an average life-use now by the first buyer of 7 years or so --- count as investment too?

5e. Note that the large federal deficit projected for this year --- around $450 billion --- will make it around 4.0% of GDP. That's a third smaller than the federal deficit of 1992 left by the Bush-Sr team.


[6] A more general observation now, with some queries.

Specifically, some of you complaining here about free trade --- some saying US policies are hypocritical on the score (they are, but less so than those of the EU or Japan or certainly China as one observer noted earlier), others saying that we practice it too much at the expense of [presumably both short- and long-term] American employment --- are likely to be among the critics of globalization, and that leads to a query: how can you have it both ways? Which industries would you protect, and what would be the consequences, long-term, for the US economy? Which ones would you free up for the sake of helping developing countries export more to the US, and why would freeing up only this industry or that be the way to go?

Fortunately, there alternative ways for handling a flood of imports that are undermining employment rapidly in certain industries: safeguards for handling such a flood are written into the WTO charter and are legal, by means of temporary protection backed by a clear program of adjustment; and we have alternative policies to boot --- including new forms just being experimented with of trade-adjustment assistance --- for workers laid-off because of such import surges.

Again, the program and the safeguards are discussed in the buggy article on China. (It's only one of two articles on China. The one listed earlier, for August 2nd, deals with the short-term problem of China for the US. The second, one of many planned for the future by the way, will deal with China's long-term prospects, and how this will affect two things for Americans: 1) the prospects for US exports and other boons to the US economy as China grows wealthy, and 2) China's own prospects for becoming a great-power rival to the US in the future.

--- Michael Gordon
http://www.thebuggyprofessor.org

Posted by: michael gordon on August 14, 2003 02:15 PM

Is there any combination of Free Trade and cheep, resonably skilled foreign labor that doesn't result in the loss of US jobs? How does complete Free Trade result in economic growth for a rich welfare state?

The EU has a large number hidden subsidies and continue to add more. A recent example would be tax break to EU farmers for "maintaining the environment" due to the green open space. It is highly doubtful that the EU would have removed all subsidies, even had the US gone with complete free trade.

Posted by: James on August 14, 2003 02:26 PM


Hi - a quick comment for posters - could you post the links to the story, but not the entire thing, or even those huge extracts? It makes it difficult to follow the flow of conversation.

Thanks!

sz

Posted by: SZ - FairAndBalanced on August 14, 2003 02:28 PM


Hi - a quick comment for posters - could you post the links to the story, but not the entire thing, or even those huge extracts? It makes it difficult to follow the flow of conversation.

Thanks!

sz

Posted by: SZ - FairAndBalanced on August 14, 2003 02:31 PM

>michael gordon on August 14, 2003 02:15 PM

Addresses

>"...a query [to]...the critics of globalization [he inferred existed here:] how can you have it both ways?...Which industries would you protect...[he asks, and]...Which ones would you free up?"

By "both ways" he surely doesn't mean to imply that (as a nation) WE must choose between keeping OUR expensive, high 'overhead', free, democratic, tolerant, advanced, developed, 'first world' kind of society OR joining THEM in one of those 'developing world' labor camps disguised as a country for the sake of cheap toys and tennis shoes. Because, if that's the choice he's offering us, the answer truly is a 'no-brainer' of the first order.

Assuming on the other hand, for the sake of argument, that he wasn't just being 'cute', he might want to begin his long, hard journey to 'the awful truth' about trade (AND political-economic life on earth) with a single click here:

on Global Keynesianism

James K. Galbraith

>...We must confront the global inequality crisis. For this, we must, in the final analysis, raise real wages in the countries with which our workers compete, expand their markets for our goods, and reduce their pressure on our wage structure. You cannot have this without free trade unions in those countries.

>You cannot have free trade unions in the long run without democracy (nor democracy without the freedom to form unions). You cannot have democracy without human rights. And therefore, our economic agenda should really begin a long way from economic policy itself, with the campaign for human rights, democracy, and free unionism around the world...

>...The great economic powers -- the United States, Germany, Japan -- must stop thinking in purely national terms and start thinking of the larger community of which they are a part. They must understand that the growth of income in the countries to which they sell eventually determines the growth of income in their own countries.

>We have not faced the responsibilities of interdependence since the end of the earlier Keynesian period and breakdown of the Bretton Woods system in the 1970s, perhaps not since promulgation of the Marshall Plan. We have abandoned governmental power to market forces, particularly to the global capital markets and the large financial institutions that play in them. However, market forces cannot replace governments in the functions of governance -- neither within national boundaries nor in relations between nations.

>We can harbour no illusions about the difficulty of rebuilding a multinational structure dedicated to growth and employment, and of controlling the powerful private forces whose interests would be threatened by our doing so. However, this very difficulty is in one way a virtue. We have suffered because of the short shelf life of the various economic theories put forth over the last 25 years. We try one thing, if it fails to work in a few years, we throw it out.

>But if our current difficulties force us to think our problem through to the end and to adopt a set of ideas that contain a vision to which the public can respond -- a vision that holds out neither pointless sacrifice nor immediate gratification but the serious possibility of positive results in a medium and long terms-- we may be able to free ourselves of the cycle of short-lived economic theories, with their false promises and perceived failures.

http://www.jobsletter.org.nz/art/artg0002.htm

In a 'nutshell': 'free' trade between legal, social, political and 'developmentally' equivalent nations isn't controversial. Joining a 'race to the bottom' with the political-economic cesspools of the world for the sake of 'living up' to some over-wrought ideological baloney, on the other hand, is just plain stupid.

The Race to the Bottom Speeds Up

Alan Tonelson

Monday, March 25, 2002


>"...Today’s version of globalization is portrayed as the ultimate anti-poverty weapon because it promises to raise worldwide living standards by using free market forces. Indeed, this version of globalization foresees turning the third world’s poverty-stricken masses into robust consumers. Therefore, rather than representing competitors for workers in the wealthy countries, they will become customers.

The ideas and observations behind “the race to the bottom” explain why this thinking is pie-in-the-sky. Specifically, as precious investment capital becomes free to roam the world in search of the lowest costs, the greatest efficiencies, and the highest rates of return, governments everywhere will feel powerful pressure to lure that capital by offering the cheapest workers and the weakest regulations protecting health, safety, and the environment..."

http://www.tradealert.org/view_art.asp?Prod_ID=403

Posted by: Mike on August 14, 2003 04:20 PM

>"...In a 'nutshell': 'free' trade between legal, social, political and 'developmentally' equivalent nations isn't controversial. Joining a 'race to the bottom' with the political-economic cesspools of the world for the sake of 'living up' to some over-wrought ideological baloney, on the other hand, is just plain stupid."

Not only that,
>michael gordon on August 14, 2003 02:15 PM,
(and just in case you 'missed' it) the 'results' are 'in':

>Mike on August 14, 2003 06:00 AM

>Mike on August 14, 2003 06:22 AM

>Mike on August 14, 2003 07:10 AM

Unless you're one of the 'fortunate few'* who just happens to own just about everything and every(political)one, "voodoo" economics didn't and DOESN'T 'work'.

[*See: Facts on the Concentration of Wealth

>...In the late 1970s, the top one percent of the US population held 13 percent of the wealth; in 1995 it held 38 percent. (Levy, Frank. The New Dollars and Dreams ).

>The top ten percent of the U.S. population owns 81.8 percent of the real estate, 81.2 percent of the stock, and 88 percent of the bonds. (Federal Reserve Bank data in Left Business Observer, No. 72, Apr. 3, 1996, p. 5).

>One percent of the U.S. population owns sixty percent of the stock and forty percent of the total wealth. (Hawken, Paul, The Ecology of Commerce: A Declaration of Sustainability. New York: HarperBusiness, 1993)...


http://www.endgame.org/primer-wealth.html ]


Posted by: Mike on August 14, 2003 05:11 PM

Mike:

I learned decades ago not to argue with people who speak with such categorical assurance about their views. If you don't want to read Benjamin Friedman's assessment of the Reagan years in the light of Robert Eisner's own positions during those years, that's fine. Others of you reading these comments might find that a Clinton Council of Economic Advisers' report, put out in early 2000, entitled "20 Million Jobs: January 1993 - November 1999" on the nature of the jobs created, see http://clinton3.nara.gov/WH/EOP/CEA/html/20miljobs.pdf

It's short and easy to read.

-- Michael Gordon
http://www.thebuggyprofessor.org

Posted by: michael gordon on August 14, 2003 06:56 PM

>michael gordon on August 14, 2003 06:56 PM

Says:

>"I learned decades ago not to argue with people who speak with such categorical assurance about their views...."

If you actually believe dodging the issue(s) by attempting to rhetorically "raise yourself above" our little 'debate' here is fooling ALL the people, it's HIGH time you "learned" one more lesson: you're just kidding yourself--and THAT'S "just fine" too.

It's a free country.

Posted by: Mike on August 15, 2003 01:58 AM

By the way "others of you reading these comments", THIS 'critique' of voodoo economics (of the Reagan sort AND the Clinton variety) is "short and easy to read" too:

>Watch Out Below

>Is deflation caused by too many goods or too few global consumers?

>By Jodie T. Allen

>Falling prices and a falling dollar; rising bond prices and rising federal borrowing. Wait a minute. This isn't the way things are supposed to work--at least not according to the standard textbooks...

http://www.usnewsclassroom.com/issue/030526/biztech/26deflation.htm


Posted by: Mike on August 15, 2003 02:22 AM

Even as steel producers demand tariff protection, the mfg demand an end to tariffs. In the late 60s, attempts to shore up US steel making dinosaurs put US automakers at a disadvantage. They responded by producing reduced steel content lemons like Ford Pintos and Chevy Vegas. These were competing against Japanese imports made with less expensive steel. That is repeating with the latest steel tariffs. Mfg can get around the steel tariff by importing steel parts mfg overseas instead of steel itself and by switching from steel to plastics and concrete. Again and again this administration seems to make quick decisions for political reasons without discussion and input from the stakeholders most affected by the policy.

From the Chicago Trib:

"Domestic steel prices spiked when the tariffs were imposed and there were spot shortages of some products. That forced some steel-consuming companies out of business and forced others to cut jobs or move more production offshore so they would have more reliable prices and supplies of steel.

Dan Murphy, in charge of Caterpillar's global purchasing, testified at an International Trade Commission hearing in June on the devastating impact the tariffs have had on steel consumers. Caterpillar has been able to mitigate some of the higher costs but has still been hurt by the ripple effect on its suppliers, many of them smaller family-owned companies.

Murphy also spoke of the price hikes and supply problems faced by the Emergency Committee for American Trade, comprised of companies that sell a collective $2 trillion worth of cars, tractors, construction equipment, electric motors, tools and appliances each year and provide jobs for 5 million people."

Posted by: bakho on August 15, 2003 06:54 AM

Matthew Yglesias wrote, "Shouldn't the Reagan deficits of the 1980s have pushed the dollar down?"

Stephen Fromm replied, "I'm not so clear on this, but my impression is 'no, not if foreigners are willing to purchase US assets'".

Well, then why is Dr. DeLong blaming Ronald Reagan, then? (Other than the fact that he hates Ronald Reagan.) It's not Ronald Reagan's fault that those $#@% furriners thought investing in the U.S. was a good thing.

You'd think that Dr. DeLong would credit Ronald Reagan for doing his very best to devalue the dollar. Essentially, Reagan ran the deficits by creating a huge increase in military spending. Military spending when there isn't a war on should be unique (e.g., as opposed to spending on infrastructure or education) in driving down the value of a dollar. Buy a lot of tanks and airplanes, and then they don't get used, because there isn't any war.

About the only thing I can think of that would more likely to drive down the value of a dollar would be creating huge deficits digging holes, and filling them in. And Ronald Reagan even tried that, with the Super-Conducting Super Collider.

But I'll bet if Ronald Reagan had spent all the money on digging holes and filling them in, Dr. DeLong would STILL find some way to criticize. ;-)

Posted by: Mark Bahner on August 16, 2003 08:36 PM
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