More Economists and Leading Politicians Recognize the Trade Problem

German Finance Minister Schauble admitted euro undervalued for German economy.

Sometimes the victories come so thick and fast, you have to sit down, take a deep breath, and count them. 

And sometimes your victories come wrapped in so many layers of pious self-justifying twaddle that you don’t even recognize them.

In the past few weeks, those of us who believe in balanced trade and believe that America’s dismal record of trade deficits are the cause of many of our economic problems have won so many intellectual victories that it’s just stunning. Now you do have to read the free traders’ utterances carefully. But when you do, you can see that the light is beginning to dawn—and growing brighter by the day. The forces of the “free trade” religion are in retreat. Read on.

[NOTE: This post, with reader comments, can also be found at the Coalition for a Prosperous America site here.]

The most hopeful sign this past week was the comment by German Finance Minister Wolfgang Schauble to a German newspaper that “The euro exchange rate is, strictly speaking, too low for the German economy’s competitive position.” Schauble was responding to comments by President Trump’s trade advisor Peter Navarro that the low euro was benefiting German industry at the expense of U.S. industry. With that comment, Schauble effectively admitted he agrees with Navarro. Germany has been running trade surpluses for years now, globally and bilaterally with the U.S. In fact, according to recent data, Germany had the world’s largest trade surplus last year at around $270 billion. Admitting the exchange rate is undervalued is tantamount to saying the economic system isn’t working as it’s supposed to work in conventional economic theory—that there’s no hope the trade balance will fix itself. Schauble effectively admitted that Germany is building up its industry at the expense of the U.S.  (as well as many of Germany’s so-called partners in the European Union).

 But it gets even more interesting.  The Financial Times quoted European Central Bank President Mario Draghi, who said last Friday: “There are some today who believe that Europe would be better off if we did not have the single currency and could devalue our exchange rates instead.” Draghi went on to say that he thought “structural reform” was a better solution than allowing those countries that have suffered from the single currency to escape the euro prison.  Nevertheless, this was a fascinating acknowledgement from a man who said a few years ago he would do “whatever it takes” to preserve the euro. He may have been motivated by economic reality—such as the bitter, almost unbelievable, fact that after Greek GDP fell by 26.5% between 2008 and 2014, it actually fell another 1.3% last year. Seven years of economic decline! I’ve heard of sado-masochism, but this is euro-masochism.

 Meanwhile, on this side of the Atlantic, we are also seeing glimmers of reality intruding into the complacent world of our own free traders. Former Treasury Secretary and keen free trade proponent Larry Summers, also writing in the FT, finally came clean, saying: “I acknowledge that global trends and new studies show that the impact of trade on wages is much more pronounced than a decade ago.”  Wow. I had to sit down after reading that.

And then, last month, Berkeley economics professor Brad DeLong, whose blog is keenly followed within the economic profession, dropped another bombshell. Writing in Vox.com, DeLong said: “Assume that under the best policies, the U.S. would have matched Germany [in maintaining manufacturing employment]. It would have shed about 50% of its manufacturing job share since 1971, rather than the 62% that we did shed…That represents a gap between reality and one theoretical alternative world of 5.4 million manufacturing jobs. Call that the excess shrinkage of US manufacturing.”

Of course, DeLong surrounded this admission with no fewer than 8,000 words of tortured discussion trying to argue that neither China trade nor Mexico trade can be blamed for U.S. manufacturing job loss. But: 5.4 million jobs? When today the entire U.S. manufacturing industry provides a total of just 12.8 million jobs? That’s a lot of jobs and a lot of income for a LOT of people. That would be a whole different Midwest.

And last December came a similar admission from Paul Krugman, Nobel Laureate in economics, ardent free-trader and something of a liberal pop star to his readers in the New York Times. In a short paper, Trade and Manufacturing Employment: No Real Disagreement, published on Dec. 4^th last year (at this CUNY academic website) Krugman said he accepts that the trade deficit is responsible for more than two million lost manufacturing jobs since 2000, out of the roughly 5.8 million total lost in those 15 years.  “Absent the trade deficit,” Krugman wrote, “manufacturing would be maybe a fifth bigger than it is.” A fifth? 20%? What would the folks in Ohio say to that: “Yes, please, we’ll take that, thank you very much Professor Krugman.”

Panglossian Economics

Now all these free traders surround their somewhat grudging acceptance of economic reality with lengthy explanations of why they continue to support NAFTA (North America Free Trade Agreement), the WTO (World Trade Organization), and all the increasingly rickety constructions of the free trade world. I would argue that it is wrong even to call their doctrine free trade. Since three of the world’s largest trading nations (China, Germany, Japan) practice mercantilism (i.e. trade rigged in favor of their own exports), it seems odd to call this a free trade world. A better name for it would be Panglossian economics, in honor of Voltaire’s famous Dr. Pangloss, the ever-optimistic doctor who said: “In the best of all possible worlds, all is for the best.” Voltaire made Pangloss a doctor because the great French writer had utter contempt for doctors. Writing in the late 1700s, Voltaire viewed them as pseudo-scientists who claimed to believe in their ridiculous outdated remedies (such as using leeches to bleed sickness out of people), when the new medical science (and the constant, sad deaths of patients at the hands of their doctors) made it increasingly clear that those doctors were quacks—often well-meaning and trying their best, but quacks nevertheless.

Today’s Panglossians argue that American “free trade” in a world bent on mercantilism will be good for Americans. But do they really believe that? Larry Summers provided an insight into his thought process when he wrote: “The real strategic choice Americans face is whether the objective of their policies is to see the economies of the rest of the world grow and prosper.”

Hello? The “rest of the world?” I’m sorry, but in President Xi, Chancellor Merkel, Prime Minister Modi, and many other leaders, our trading partners have some excellent leadership stewarding their own economies. They don’t need our help. The strategic challenge Americans and their leaders face is how to restore our own country to economic growth sufficient to lift the incomes of the working class and the middle class back to the growth rates that their parents enjoyed in the 20^th century. Pity the poor Panglossians. They try desperately hard to make their outdated economics relevant. But reality keeps intruding.