Former Obama administration economist Jared Bernstein is taking his former White House colleagues to task in his new book, “The Reconnection Agenda,” for a missed connection between trade policy and jobs.
Specifically, Bernstein disagrees with the administration’s decision to not address what’s commonly called currency manipulation in the Trans-Pacific Partnership agreement being negotiated with 11 other trading partners.
President Obama last month ruled out writing rules on currency into the treaty, although he raised the possibility that concerns could be addressed in “something parallel to TPP.” Bernstein writes that the treaty “should definitely contain a currency chapter specifying that signatories who are found to manage their currencies will temporarily lose privileges granted under the treaty.”
Bernstein, who worked in the White House as an advisor to Vice President Joe Biden, calls dollar policy a “linchpin of a full employment strategy” because countries can either strengthen or weaken their currencies to control the price of imports and exports. A country with a “weak” or low-cost currency relative to the U.S. dollar is able to effectively subsidize their exports so that the items can be sold more cheaply inside the U.S. Meanwhile, goods that the U.S. exports to that country will end up being more expensive.
Whether you call this “manipulation,” or use Bernstein’s preferred word, “management” (only because, he writes manipulation “implies a shadowy secrecy to the currency strategy when, in fact, it’s out there for all to see”), the U.S. should, in Bernstein’s words, “fight back.”
“The knee-jerk reaction is that ‘if we do that, we’ll start a trade war.’ I must say, I don’t even know what that means,” he writes. “There’s already, if not a trade war, a perfectly obvious and easy-to-see set of competitive trade battles going on out there in the real world. We’re only losing because we refuse to see them for what they are: strategic efforts to manage the price of your goods in international markets in order to boost your growth and jobs at the expense of those same variables in your trading partner’s country.”
Bernstein argues in his book that “it will be very tough to get to and stay at full employment unless we deal with the drag on growth created by our persistent trade deficits.”
He also argues that, contrary to much of the conventional wisdom uttered by economists, politicians and pundits, trade deficits are not solely the blame of the country with the deficit. To a significant degree, U.S. trade deficits have been thrust upon the U.S. by its trading partners. The book explains how the U.S. dollar’s status as an in-demand reserve currency comes with a big curse: A chain of events that ends with the U.S. exporting jobs.
We do not, by ourselves, determine our savings rates. We’re part of a global system where these determinations are made both by us and for us. Just like you can’t squeeze a balloon and have it not get bigger somewhere else, you can’t have surplus and excess savings in one country and avoid deficits and lower savings in other countries. … When other countries under-consume and under-invest in order to generate excess savings with which they can buy dollar reserves, our savings rates must fall. Second, when other countries export their savings to us, our trade deficit must grow. From the perspective of full employment, this point is key: it means we’re exporting jobs, and not just any old jobs, but factory jobs.
In addition to writing a punitive provision on currency into the Trans-Pacific Partnership, Bernstein writes that there are other ways that U.S. could address persistent trade imbalances linked to how other countries manage their currencies. One well-worn approach is to simply impose a tax or tariff on goods from offending countries – an approach the administration occasionally uses on individual products but not broadly against all of the imports of a particular country.
Another approach is “reciprocal currency intervention” – in other words, if another country stockpiles U.S. dollars in an effort to make their exports cheaper, the U.S. should be able to stockpile that country’s currency in response. “That simple move would block China, for example, from buying hundreds of billions of our Treasuries in order to boost the value of the dollar to lower the cost of their exports to us,”
“The Reconnection Agenda: Reuniting Growth and Prosperity” was written by Bernstein as part of the Center for Budget and Policy Priorities’ Full Employment Project. The book is available as a free download.