I don't generally comment on pieces that reference me, but Jordan Weissman has given me such a beautiful teachable moment that I can't resist. Weissman wrote about Donald Trump's reversal on his campaign pledge to declare China a currency manipulator. Weissman assures us that Trump was completely wrong in his campaign rhetoric and that China does not in fact try to depress the value of its currency.

"It's pretty hard to argue with that. Far from devaluing its currency, China has actually spent more than $1 trillion of its vaunted foreign reserves over the past couple of years trying to prop up the value of the yuan as investors have funneled money overseas. There are some on the left, like economist Dean Baker, who will argue that Beijing is still effectively suppressing the redback's value by refusing to unwind its dollar reserves more quickly. But if China were really keeping its currency severely underpriced, you'd expect it to still have a big current account surplus, reminiscent of 10 years ago, which it doesn't anymore."

Okay, to start with, I hate the word "manipulation" in this context. China isn't doing anything in the dark of the night that we are trying to catch them at. The country pretty explicitly manages the value of its currency against the dollar, that is why it holds more than $3 trillion in reserves. So let's just use the word "manage," in reference to its currency. It is more neutral and more accurate.

It also allows us to get away from the idea that China is somehow a villain and that we here in the good old U.S. of A are the victims. There are plenty of large US corporations that hugely benefit from having an under-valued Chinese currency. For example, Walmart has developed a low-cost supply chain that depends largely on goods manufactured in China. It is not anxious for the price of the items it imports to rise by 15–30 percent because of a rise in the value of the yuan against the dollar.

It is remarkable how the protectionist measures that redistribute income upward remain largely invisible to the folks who write about things like the upward redistribution of income. Thomas Edsall gave us a priceless example of this sort of oversight in a column talking about how non-metropolitan areas are losing out to major cities. 

The gem apperars in a quote from Andrew McAfee, the co-author The Second Machine Age. McAfee is warning about the course of future technology.

"We’ll continue to see the middle class hollowed out and will see growth at the low and high ends. Really good executives, entrepreneurs, investors, and novelists — they will all reap rewards. Yo-Yo Ma won’t be replaced by a robot anytime soon, but financially, I wouldn’t want to be the world’s 100th-best cellist."

Okay, let's get out the scorecards. People have always been prepared to pay lots of money to see top notch musicians. They also have been willing to pay to see very good, but less than the very best musicians, as in the world's 100th-best cellist. What has changed is not the willingness for people to pay for live performances, or at least not in any obvious way, but rather the ability of a small group of performers to completely dominate the market in recorded music.

This is not a function of technology, but rather a result of copyright protection. The government has made copyright protection both longer (extending it from 55 years to 95 years) and stronger. It has extended copyright protection to the web and also made everyone with a website into a copyright cop, with responsibility to make sure that copyright protected material is not distributed through their site. (The law makes a website liable if material is not removed after being notified by the copyright holder, thereby requiring the website owner to side with the copyright holder against its client. By contrast, in Canada, a website owner must notify the person who is alleged to have posted infringing material of the complaint.)

It is unfortunate that Donald Trump seems closer to the mark on China and trade than many economists and people who write on economic issues for major news outlets. Today, Eduardo Porter gets things partly right in his column telling readers "Trump isn't wrong on China currency manipulation just late." The thrust of the piece is that China did in fact deliberately prop up the dollar against its currency, thereby causing the U.S. trade deficit to explode. However, he argues this is all history now and that China's currency is properly valued.

Let's start with the first part of the story. It's hardly a secret that China bought trillions of dollars of foreign exchange in the last decade. The predicted and actual effect of this action was to raise the value of the dollar against the yuan. The result is that the price of U.S. exports were inflated for people living in China and the price of imports from China were held down.

Porter then asks why the Bush administration didn't do anything when this trade deficit was exploding in the years 2002–2007. We get the answer from Eswar Prasad, a former I.M.F. official who headed their oversight of China:

"'There were other dimensions of China’s economic policies that were seen as more important to U.S. economic and business interests,' Eswar Prasad, who headed the China desk at the International Monetary Fund and is now a professor at Cornell, told me. These included 'greater market access, better intellectual property rights protection, easier access to investment opportunities, etc.'"

Okay, step back and absorb this one. Mr. Prasad is saying that millions of manufacturing workers in the Midwest lost their jobs and saw their communities decimated because the Bush administration wanted to press China to enforce Pfizer's patents on drugs, Microsoft's copyrights on Windows, and to secure better access to China's financial markets for Goldman Sachs.

This is not a new story, in fact I say it all the time. But it's nice to have the story confirmed by the person who occupied the I.M.F.'s China desk at the time.

Dean Baker
Truthout, April 7, 2017

Dean Baker
The Los Angeles Times, April 10, 2017

Mark WeisbrotThe Sacramento Bee, April 7, 2017

Justin Wolfers had a piece in the NYT today warning that we face a situation in which the Fed may often find itself facing the zero lower bound, where it is unable to stimulate the economy further by lowering the short-term federal funds rate that is directly under its control. Wolfers notes that this can mean that growth ends up being slower and unemployment higher than would otherwise be the case. He argues that it should be possible to counteract this weakness with more aggressive use of countercyclical fiscal policy, which means increasing government spending during downturns.

While Wolfers' argument for the merits of countercyclical fiscal policy is reasonable, it is worth stepping back and asking about the origins of secular stagnation. The basic story is that we are looking at an economy in which investment spending is weak, partly due to low labor force growth, and consumption spending is also weak, in part due to the upward redistribution of income. (Rich people spend a smaller share of the their income than the middle class and poor.)

However, an important part of the demand story is net exports. Back in the old days, economists used to argue that rich countries should run trade surpluses. The idea is that capital is relatively abundant in rich countries, while it is relatively scarce in developing countries. This meant that capital would get a higher return in developing countries than in rich countries, so that we should expect rich nations to be net lenders of capital to developing countries. This lending would facilitate their growth.

The implication of being net lenders is that rich countries would run trade surpluses with developing countries. This would allow them to feed and house their populations, even as they built up their infrastructure and capital stock.

As it turns out, the world economy has not followed this course. While the rich countries as a whole (not the United States) were big net lenders in the 1990s, after the East Asian financial crisis in 1997, the flows switched course. Developing countries became big net lenders, as they began to run large trade surpluses especially with the United States. (The harsh terms of the I.M.F. bailout, engineered by Larry Summers, Robert Rubin, and Alan Greenspan, deserves the blame here.) 

April 7, 2017

April 7, 2017

April 7, 2017 (Jobs Byte)

Mark WeisbrotThe Huffington Post, April 6, 2017

March 27, 2017, Dean Baker