Dean Baker on Something "All Economists Agree On"
Dean Baker has a post in which he expresses skepticism about fast-track authority for the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Pact (TTIP). He argues that the deals are not mainly about free trade. Paul Krugman argued earlier, incorrectly, that the deals are not about trade at all. I’ll let Obama spokesman Jason Furman weigh in on the fact that there is a large dose of freer trade in the TPP:
The most comprehensive estimates of the benefits of TPP are those of Peter Petri, Michael Plummer, and Fan Zhai, who employ an 18-sector, 24-region computable general equilibrium model to simulate policy changes in more than twenty different areas including tariffs, non-tariff barriers, and rules governing foreign direct investment. They find that by 2025, TPP would raise U.S. incomes by 0.4 percent per year, the equivalent of $77 billion in 2007 dollars, although the actual estimate could vary somewhat depending on the details of the agreement and alternative modelling assumptions. The European Union has said that the United States would gain a comparable amount from T-TIP. Some have described these totals as small, but I think I would risk losing my license to offer economic advice if I counseled anyone to leave $77 billion lying on the sidewalk each year.
Of course, this does not directly contradict Baker because Baker was careful not to say that there were no freer trade elements. It does contradict Krugman.
But I want to challenge another part of Dean Baker’s post, the part on trade deficits. Dean writes:
This means that if we want to get back to full employment, we have to reduce our $500 billion (@ 3 percent of GDP) trade deficit. (This is the intro econ on which all economists agree. It can even be found in Mankiw’s textbook.) Reducing the trade deficit means taking steps to lower the value of the dollar against other currencies.
It’s not true that “all economists agree” about that. I don’t. In fact, I would be surprised if even most economists agree.
And why don’t many of us agree? Because the trade deficit is endogenous. It’s the result of fundamental factors in world economies as well as government policies. One government policy that has traditionally reduced the trade deficit is a policy that causes a recession. It’s clear that Dean is not advocating that, but what is he advocating?
Dean proposes lowering the value of the dollar against other currencies. But that’s not a policy. The value of the dollar against other currencies is a price. You need a policy to reduce that price. How do you lower the price of a currency? Either by increasing the supply of the currency or by reducing the demand for the currency. He doesn’t say which he favors.
UPDATE: Don Boudreaux correctly reminds me, in the comments, that I should reference the late Herb Stein’s (who was one of my three favorite bosses of all time) excellent short article in my Encyclopedia. It’s “Balance of Payments.”