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Article Artículo

Donald Trump and U.S. Trade Policy: Different Isn't Necessarily Tougher

Media coverage of U.S. trade policy with China and other countries has been remarkably one-dimensional. The coverage almost exclusively treats the issue as being one of relative toughness. While this is certainly the way some politicians, notably Donald Trump, speak about trade, it conceals the real issues involved.

The United States pursues a variety of agendas in its trade negotiations. Naturally, it does not get everything it wants, it prioritizes some items over others. In some areas it clearly has been very "tough" as measured by outcomes. For example, Pfizer and Microsoft and other drug, software, and entertainment companies are collecting tens of billions of dollars a year from foreign countries because U.S. trade negotiators have been very tough in demanding that these countries adopt U.S.-type rules on patents and copyrights.

The United States has also demanded that other countries allow U.S. corporations to take their complaints to special tribunals outside of their domestic legal system. This is a central feature of the newly negotiated Trans-Pacific Partnership. Undoubtedly our negotiators had to be very tough to get these countries to surrender this aspect of their national sovereignty. (We even had to make a reciprocal sacrifice of sovereignty, allowing foreign investors a route around the U.S. legal system.)

Negotiators have not been tough in pressing demands on currency values, which would have meant a lower U.S. trade deficit with countries like China. While the trade deficit matters hugely to workers, some of whom directly lose jobs to imports and others who suffer indirectly from a weak labor market (in the era of secular stagnation we have no mechanism for making up the demand lost due to a trade deficit), it actually benefits many major corporations.

Companies like GE benefit from being able to produce at low cost in countries like China. Retailers like Walmart also benefit from having low-cost supply chains in the developing world. And highly-paid professionals like doctors, who are largely protected by regulations from foreign competition, benefit from a weak labor market by being able to hire cheap help.

In this context, a call to address currency values and thereby bring down the trade deficit, is not necessarily an issue about being tough with China and other trading partners. It is an issue about what will be prioritized in trade negotiations. Presumably if these countries met U.S. demands on currency, they would be less likely to meet demands on patents and copyrights or special courts for foreign investors.

CEPR / June 30, 2016

Article Artículo

Bursting Bubbles and the Fallout from Brexit

Neil Irwin had an Upshot piece trying to work through some of the fallout from the vote to leave the European Union. It is worth elaborating on a couple of the points in this piece.

First, Irwin seems to give financial markets undue credit in having a clue. He argues that the effects of the vote will be transmitted to the economy through financial markets. While this is largely true, financial markets are notoriously fickle. They often over-respond to events or even non-events, the most obvious being the 25 percent plunge in October of 1987 that wasn't linked to anything in the world. This plunge also had only a very limited impact on the economy. For this reason, it doesn't make much sense to project economic affects based on one day's market movements.

Second, Irwin highlights the 8.0 percent plunge in the value of the pound against the dollar as something that is likely to have a substantial impact on the UK economy. This is true, but a little more background here is important.

The UK was running a trade deficit in the neighborhood of 5 percent of GDP (@ $900 billion in the U.S.). This deficit was being in large part fueled by an inflow of foreign money to buy UK real estate, leading to an enormous run-up in housing prices, especially in London. This was unsustainable. (Some folks may have heard about housing bubbles but apparently it was difficult in the UK in the pre-Brexit era to get information on such things.)

Anyhow, the correction for a large trade deficit is a drop in the value of the currency. If the UK had competent economic managers, they would have tried to engineer a drop in the value of their currency. They also would have tried to prevent the bubble from growing so large. The plunge in the pound may now bring about the necessary correction in the trade deficit. It may also stop and even reverse the inflow of foreign capital to buy real estate, thereby crashing the bubble.

If that happens, then the Brexit vote will have merely brought forward events that were inevitable. While Washington Post types will inevitably engage in a round of intense finger-wagging at the Brexit voters, the real problem here was the incompetent management of the UK economy by Prime Minister Cameron and the English Central Bank.

CEPR / June 25, 2016

Article Artículo

Haiti

Latin America and the Caribbean

World

Martelly Bloc Formalizes Alliance with DEA Fugitive Guy Philippe

Days before the June 14 end of provisional president Jocelerme Privert’s mandate, a coalition of political parties close to former president Michel Martelly formalized an alliance and began advocating for Privert’s removal. Led by former de facto prime minister under Marelly, Evans Paul, the “Entente Democratique” (ED) or “democratic agreement” as they have called themselves, have denounced the “totalitarian tendencies” of Privert and categorized the possible extension of his mandate as an illegal power grab.

Haitian parliamentarians were expected to vote earlier this week on extending or replacing Privert, who was appointed provisional president in early February after Martelly’s term ended with no elected replacement. The vote was delayed, as it has been previously.  

The creation of ED has formalized an alliance between Martelly’s political movement, PHTK, and Guy Philippe, a notorious paramilitary leader who is running for a seat in the Senate. Philippe was the head of a paramilitary force that helped destabilize the country in the run-up to the 2004 coup against former president Jean-Bertrand Aristide. From its bases in the Dominican Republic, the group mounted numerous attacks targeting police stations and government supporters. According to Human Rights Watch, Philippe also oversaw extrajudicial killings while a police chief in the late 90s. Facing a sealed indictment in the U.S. for alleged drug trafficking ties and money laundering, Philippe remains a DEA most wanted fugitive.

Philippe appeared alongside Martelly’s chosen successor Jovenel Moïse at a December political rally and has voiced his support for Moïse’s candidacy in radio broadcasts, but the formal alliance is an indication that those ties are now deepening. Philippe, a former police chief who received training from U.S. military forces in Ecuador, found an ally in Martelly, who made the army’s restoration a central plank of his presidency and his party. The army was disbanded under Aristide after a long history of human rights abuses and involvement in coup d’états. “The army has always been a part of our policy…There is no way to have Haiti without an army,” Roudy Chute, a PHTK party representative, stated during an August interview.

In February, Philippe warned of a “civil war” if Privert did not hold elections in April. The political accord that brought Privert to office called for elections in April, but after an electoral verification commission recommended scrapping the entire first round due to fraud, new presidential elections have been scheduled for October.

Last month, Philippe was allegedly tied to a paramilitary attack on a police station in the rural town of Cayes that killed 6, though he has denied involvement and refused to appear for questioning. Philippe had previously been prevented from running for office due to his ties to drug trafficking, but certain regulations were removed last year, allowing a number of candidates with criminal pasts to register. In 2006 Philippe ran for president, garnering less than two percent of the vote.

A DEA spokesperson confirmed that Philippe remains a fugitive, adding that he has proven to be “very elusive,” and that U.S. Marshalls had been given apprehension authority. A spokesperson for the Marshalls contested this, saying the DEA has “solid information about the subject’s whereabouts,” so there was no need for them to transfer apprehension authority. The DEA later acknowledged its responsibility for apprehending Philippe, but would not confirm if any active efforts to do so were underway.

Though the DEA has been involved in a number of high profile arrests in Haiti during the last five years, Philippe remains free.

In the meantime, the ED has called for an uprising against Privert. In a June 12 letter, the group called on Haitian National Police director-general Michel Ange Gédéon to disobey “any illegal order coming from a person stripped of legality and legitimacy,” referring to Privert. The ED also called on the international community to withhold recognition of Privert’s government after June 14.

These calls have largely fallen on deaf ears. The international community has urged parliament to meet to decide Privert’s future and U.S. Haiti Special Coordinator Ken Merten offered a tepid recognition of Privert on a call with reporters last week. Anti-Privert protests planned for last week failed to materialize.

Jake Johnston / June 23, 2016

Article Artículo

Economic Growth

United States

Workers

Unemployment, Not Inflation, Drives Economic Misery

In the 1970s, economist Arthur Okun coined the term “misery index.” The misery index was meant to calculate the amount of economic misery by adding the unemployment rate to the annual inflation rate. This treats a one percentage-point rise in the unemployment rate as being no worse than a one percentage rise in the inflation rate.

In a sense, the Federal Reserve actually adheres to a version of Okun’s misery index when setting monetary policy. As part of its dual mandate, the Fed pursues the twin goals of “maximum employment” and “stable prices.” While the mandate allows room for ambiguity, many Fed officials seem to assign greater importance to inflation than unemployment.

However, as Binyamin Appelbaum reported three years ago in The New York Times, consumer surveys from both the U.S. and Europe indicate that unemployment creates about four times as much misery as inflation. This result has been attested to in a host of academic studies (see pages 1–3).

A properly constructed misery index would therefore place four times as much weight on a one percentage point rise in the unemployment rate as on a one percentage point rise in the inflation rate. In terms of promoting well-being, an economy with low unemployment will usually beat an economy with low inflation.

CEPR and Nicolas Buffie / June 23, 2016