February 16, 2015
That would have an appropriate headline for a NYT article on the fact that many members of Congress may refuse to support fast-track trade authority without some rules on currency. At one point it refers to comments by Bruce Josten, a senior lobbyist at the U.S. Chamber of Commerce and supporter of fast-track, who argued that the administration could not effectively write rule on currency values:
“Would the Federal Reserve’s program of ‘quantitative easing’ — basically printing money to keep interest rates low — be an actionable offense under a strict currency regime? What about large government spending programs financed by international borrowing?”
It is difficult to believe that anyone involved in these negotiations would have difficulty distinguishing between policies explicitly focused on boosting the U.S. economy and policies that have the explicit purpose of lowering the value of the dollar. (If Mr. Josten is confused, quantitative easing is when the Fed buys U.S. government bonds. If the main purpose was to lower the value of the dollar the Fed would be buying the bonds of other countries.)
Fred Bergsten and Joe Gagnon, two prominent economist at the very pro-trade Peterson Institute for Economics have developed guidelines for defining currency manipulation that negotiators should be able to learn from if they are confused on the topic. As a practical matter, defining currency manipulation is almost certainly much simpler than many other topics covered in the Trans-Pacific Partnership (TPP), like defining “bio-similar” drugs so that patent protections can be extended to them or defining the types of regulatory takings that could be actionable under the investor-state dispute resolution tribunals established by the pact. (For example, can a company claim damages for a higher minimum wage?)
There are several other errors in the article. At one point it tells readers:
“The Obama administration fears that prohibitions on currency intervention could boomerang on Washington, allowing trading partners to challenge policies of the independent Federal Reserve Board and possibly even basic fiscal policies, like stimulus spending in times of recession. Officials also worry about other forms of potential retaliation, including reducing purchases of government debt, which help keep long-term interest rates low.”
The NYT does not know what the Obama administration “fears” nor whether they actually worry about potential retaliation. The NYT knows that the administration wants the public to think that it has these fears and worries. The paper should report what it knows, not what the Obama administration wants the public to believe.
On the latter point is is worth noting that the worry that countries will retaliate by “reducing purchases of government debt” makes no sense. Foreign purchases of U.S. government debt is the mechanism through which countries “manipulate” their currency. By buying dollar denominated assets (which are overwhelmingly U.S. government debt) they raise the value of the dollar against their currency. It would be scary if the Obama administration officials working on the TPP did not understand this fact.
It is also worth noting the larger context for the concern over currency values. The country currently has a trade deficit of close to 3 percent of GDP ($540 billion a year). There is no easy way to replace the gap in demand created by this deficit. It could fill this hole by running larger budget deficits, but there is almost no political support for going this route. The only way that the country has managed to get close to full employment with this sort of trade deficit has been by generating demand through asset bubbles: the stock bubble in the 1990s and the housing bubble in the last decade.
There is no plausible way to reduce the trade deficit to any significant extent in the near future without lowering the value of the dollar. This means that those opposed to actions to lower the value of the dollar are effectively condemning the country to a prolonged period of high unemployment. This will result in continued wage stagnation for most workers since they only will have enough bargaining power to achieve real wage gains in a labor market that is much tighter than the one we see today.
Addendum:
It is also worth pointing out that, contrary to what is implied in much of the article, there really is not much mystery about countries’ efforts to influence the value of their currency. For example, it tells readers:
“The trade promotion authority bill he [Paul Ryan] plans to push through his committee by March will include new reporting, monitoring and transparency rules to spotlight currency manipulation, but it will avoid retaliatory enforcement rules that he fears could prompt a trade war.”
First, this section again tries to tell readers what Mr. Ryan “fears,” which of course it does not know. It only knows what he says he fears. Since countries like China openly target their exchange rate and buy massive amounts of dollars to keep it from rising, there really is not a need for new reporting, monitoring, and transparency. This is a bit like saying that Representative Ryan wants to set up a new system of reporting, monitoring, and transparency to determine who won the last Super Bowl. Perhaps that would be necessary for Mr. Ryan, but just about everyone else saw the New England Patriots win the game.
See Jared Bernstein’s account on the same piece.
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