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Article Artículo

Robert Samuelson Finds Currency Values Far More Complicated Than They Are

As a general rule, when someone tries to tell you an economic issue is more complicated than it seems, they are trying to mislead you. This doesn't mean there are not occasionally some complex issues in economics, but these are much rarer than the experts want you to believe. After all, who would pay economists salaries well into the six figures if their work was as simple as washing dishes?

This should be kept in mind by anyone reading Robert Samuelson's column telling readers not to worry about an over-valued dollar leading to a large trade deficit and costing us millions of jobs. This piece includes the memorable lines:

"To be clear: China’s currency manipulation has been real and harmful to U.S.-based firms and workers. By a variety of estimates, Chinese exports have probably cost 2 million or more American jobs since 2000. I have been a critic of the currency manipulation in the past and still am. In an ideal world, we would have moved energetically to eliminate it. But (surprise!) we do not live in an ideal world and, for many reasons, it’s less important now than it once was.

"For starters, recall that trade-induced job losses are not (and never have been) the United States’ main employment problem. Domestic developments dominate the U.S. labor market, for good and ill. The U.S. economy now supports about 150 million jobs; 2 million is a small share of that."

Hey, 2 million jobs, no big deal! Wait, weren't we supposed to think the 20,000 jobs at stake with the Keystone Pipeline are a big deal? So now losing a hundred times (2 million is 100 times 20,000) as many jobs because of an over-valued currency is not a big deal? And of course Samuelson's number is just an estimate of the jobs lost to China. Other countries also prop up the dollar against their currency, likely raising the total to 3-4 million.

Dean Baker / May 18, 2015

Article Artículo

Don't Be Sure that Powerful People Want the Economy to Return to Normal

Tyler Cowen warns readers in his Upshot piece that we may be entering a new era in which growth is weak and the bulk of the workforce, including those with college degrees, see stagnant or declining wages. The warning is well taken, but what's missing is a serious discussion of the policies that are driving this outcome.

Cowen begins his story by pointing out that universities are replacing tenured faculty with low-paid adjuncts. He points out that major manufacturers are doing something similar by paying new hires much less than their incumbent workforce. He could also point to the large number of people who end up working in low paying sectors like retail and restaurants, including many with college degrees.

This is clearly bad news, but all evidence of a weak labor market. We could make the labor market stronger, for example by having the government spend more money on infrastructure, education, and other good things. We could also make the labor market stronger by getting down the value of the dollar to bring our trade deficit closer to balance. If we had balanced trade, it would generate somewhere in the neighborhood of 5-6 million jobs. That would quickly absorb the slack in the labor market and give workers the bargaining power to demand higher wages and turn down low paying jobs.

We don't see this happening because our political leaders don't want to spend more money, preferring higher unemployment. They also have little interest in addressing the trade deficit, hence the decision by the Obama administration not to include currency rules in the Trans-Pacific Partnership (TPP). In fact, the folks in policy positions are prepared to act to ensure that the labor market does not tighten; that would be the purpose of an interest rate hike by the Fed. Higher interest rates slow growth and reduce the pace of job creation.

Dean Baker / May 16, 2015

Article Artículo

The Economic Analogy to the War on Iraq Is the Housing Bubble, Not Paul Ryan

I'm afraid that I have to take some issue with Paul Krugman's claim that the economic equivalent of accepting nonsense about WMDs to support the war in Iraq was taking seriously the deficit hawks concerns about high interest rates and soaring inflation. While Krugman is right in calling many of these people frauds and cranks, this distracts attention from the real Iraq moment in economics: ignoring the housing bubble.

The accepted view in elite circles is that the crash in 2007-2008 was some sort of natural disaster like Hurricane Katrina. It was impossible to see it coming and only the most astute observers could detect evidence of problems in little things like an explosion in subprime loans and some questionable bank practices in securitization.

This view is very comforting to the elites since almost all of them chose to ignore the evidence that there was a huge bubble and that it's collapse would be really bad news. But just as it should have been easy to see that the dog and pony show the Bush administration put on about weapons of mass destruction was nonsense, it should have been easy to recognize the housing bubble and to know that its collapse would devastate the economy.

In terms of evidence for the bubble, we had a hundred year long history in which house prices had just tracked the overall rate of inflation. Why did they suddenly hugely outpace the rate of inflation? By 2002, when I first wrote about the bubble, the gap was 30 percentage points. In 2006, at the peak of the bubble, the gap was more than 70 percentage points. If this reflected the fundamentals of the housing market, why wasn't anything going on with rents, which were just rising in step with inflation? And why did we have a record vacancy rate as early as 2002?

Dean Baker / May 16, 2015

Article Artículo

Question for Fareed Zakaria: Can We Stop the Trade Deal Hype Machine?

That's the inevitable question people would ask after reading his column headlined, "you can't stop the trade machine." The piece conflates trade, which obviously is not going to be stopped, with the Trans-Pacific Partnership (TPP). There is of course no direct connection, but if you're trying to promote the TPP, why not?

Whether or not the TPP passes, trade between the United States and the countries in the region will continue to grow. It's not even clear that it will grow faster with the trade deal. While the TPP will lower tariffs, most tariffs with most of the countries in the region are already low. (Six of the eleven non-U.S. countries in the TPP already have trade agreements with the U.S.)

On the other hand a major thrust of the deal is to strengthen and lengthen patent and copyright protection. This will raise the price of many items, most importantly prescription drugs, thereby reducing trade. The price increases from these forms of protectionism are equivalent to large tariffs. In the case of drugs, patent protection can raise the price by close to 100 times the free market price.

For example, the Hepatitis-C drug Sovaldi sells for $84,000 for a 3-month course of treatment in the United States. A high quality generic version is available in India for less than $1,000. This has the same effect on the market as imposing a tariff of 10,000 percent. Since the economic distortions from a tariff are proportionate to the square of the size of the patent, the distortions from patent and copyright protection on a limited number of items can easily exceed the gains from eliminating small tariffs on a large number of items. In other words, Zakaria has little basis for even asserting that the TPP will increase trade and growth.

Furthermore, the deal imposes a business friendly regulatory structure that Zakaria just assumes we should want. As Canada's finance minister recently demonstrated when he argued that the Volcker Rule violates NAFTA, these trade deals can impede our ability to regulate the financial industry. The TPP may in fact limit the ability for the federal, state, and local governments to impose regulation in a wide range of areas, including the environment, consumer safety, and labor rules. Since the terms of the agreement will be enforced in the United States by an Investor State Dispute Settlement system, not the U.S. judiciary, it is entirely possible that a wide range of regulations in these areas could be considered violations of the trade agreement.

Dean Baker / May 15, 2015

Article Artículo

Health and Social Programs

No Time for Retirement

Last month, CEPR’s David Rosnick wrote a blog post critiquing a study by the American Enterprise Institute on workers’ retirement incomes. David talked about how middle-income households are increasingly financially unprepared for retirement.

This may be having an effect on the job market. When my colleague Kevin Cashman and I were putting together an age-adjusted employment-to-population (EPOP) ratio to track recovery in the labor market, we split employment amongst six different age groups: Americans aged 16 to 24, 25 to 34, 35 to 44, 45 to 54, 55 to 64, and 65 and over. We found that while employment rates had fallen significantly during the recession for Americans under 65, employment had actually gone up for those 65 and over. One possible explanation for this rise is that insufficient pensions and savings are forcing many Americans to work longer than they would otherwise prefer.

CEPR and Nicolas Buffie / May 11, 2015

Article Artículo

Globalization and Trade

Latin America and the Caribbean

Mexico

World

Mexican Farmworkers Strike for Better Pay and an End to Abuses on the Job

On January 21, Mexican President Enrique Peña Nieto announced the beginning of a national program called “Mexico with Decent Work” (México con Trabajo Digno), with the stated mission to “promote the respect, protection and guarantee of human rights for workers in Mexico, as well as to ensure decent work is fully in force.” However, only two months later, as Secretary of Labor Alfonso Navarrete boasted that the program was rescuing people working practically in slave conditions, thousands of farmworkers in the San Quintín Valley in the Northeastern state of Baja California went on strike, demanding higher wages and better working conditions from the government and multinational corporations.

Negotiations have yet to move forward. The Mexican government seems unable to respond, perhaps because the organized farmworkers are challenging an alliance between multinational corporations, public officials who also have business in the valley, and corporate unionism– a system that protects the interests of employers.

San Quintín Valley is one of Mexico’s largest export regions, employing tens of thousands of farmworkers, many of them first or second generation indigenous migrants [PDF] originally from Southern Mexico. Each year the region generates more than six billion pesos (about $410 million) worth of agricultural products. It is estimated that there are 80 thousand farmworkers in the San Quintín Valley, and yet in the municipality of Ensenada, which encompasses all of San Quintín, there are less than 24 thousand farm workers registered with the Mexican Institute of Social Security (IMSS). The most important good produced is strawberries, but only a small portion of these are consumed in Mexico. Most are exported to the U.S. market to be sold by fast food chains, or in supermarkets like Wal-Mart, Safeway, or Whole Foods. Around 84 percent of U.S. imports of fresh strawberries come from Mexico, and Baja California leads Mexico’s production and export of strawberries.

Luis Hernández Navarro, Mexican journalist and coordinator of the opinion section of La Jornada, referred to the working conditions this way:

San Quintín’s day farmworkers labour in humiliating conditions on farms that grow produce for export: tomatoes, strawberries, blackberries. In exchange for starvation wages, they work up to 14- hour days without a weekly day of rest, let alone holidays or social security. Foremen sexually abuse the women, and they are forced to take their children to the premises to perform work.

… Many [workers] are indigenous migrants from Oaxaca (Mixtec and Triqui), Guerrero, Puebla and Veracruz, who have made San Quintín into another of their communities. Three generations of Oaxacalifornianos live there. They suffer constant police harassment. They rely on a single hospital [run by the] Mexican Social Security Institute [IMSS].

CEPR and Mateo Crossa / May 11, 2015