Monday, July 11, 2016

The TPP And NAFTA. Trump Says They Are Bad. He's Wrong.


I love economics. It's an obsession of mine. So today, I want to talk about free trade. Specifically, N.A.F.T.A. and the T.P.P., and why Trump is wrong on both.

Okay, trade tariffs and free trade agreements are complex subjects, so I'm going to try to condense Macroeconomics 101 into a nice, compact blog post so that people can at least try to follow how they work. You might be under the impression that N.A.F.T.A. and the T.P.P. are bad deals which cost America jobs, but think again.

Let's say you have two countries, Latveria, and Symkaria (borrowed from the Marvel Universe). Latveria is ruled by Dr. Victor Von Doom, and Symkaria is ruled by Silba Sablinova (a.k.a. Silver Sable). Dr. Doom is concerned that his country is importing more goods from Symkaria than it is exporting to them. Something must be done about this, he reasons. His country is losing money to its Eastern neighbor. So he decides to enact a tariff of 5% on all imported goods from Symkaria.

A tariff, for those who don't know, is a tax on an import. If an import is worth, say, $100, a 5% tariff would mean that any product imported to Latveria would carry an additional cost of $5. That means that consumers in Latveria must pay $105 for Symkarian products, because Symkaria must raise its price to $105 to offset the tariff, which discourages Latverians from buying a more expensive product. But if they do, the government of Latveria pockets the extra $5 from Symkaria, which it can use for roads, bridges, clean water, sewage systems, waste disposal and recycling, etc. etc. This is a win for Latveria, right?

Ah, not so. Because when Silver Sable gets wind of this, she decides to counter Doom's tariff with one of her own. Now, all imports from Latveria will also have a 5% tariff, and this evens the scales.

"No one defies Doom!" cries Victor, who then enacts a 10% tariff on Symkaria.

But Silver Sable knows that two can play at this game. She responds with a 10% tariff of her own.

And now we have a tariff war. Each country will raise its tariffs until trade between the nations has virtually stopped. The tariffs are now essentially worthless, because the tariff only applies to imports, and with the countries not importing each other's goods due to the high disincentives, neither government makes any money. Also, both countries now have a lower G.D.P. because their businesses have fewer customers, their trade volume is lessened, and so their hiring drops. With a smaller customer base, the jobs that remain must be fewer in number because demand for the products is smaller.

One of the key factors that led to the Great Depression was the Smoot-Hawley Tariff Act, which caused other nations to raise tariffs of their own. Soon, trade between many nations all but halted, and the Great Depression would continue until World War II forced the Allied nations to drop their tariffs for the sake of importing military goods.

But suppose the two countries take a different approach. Victor Von Doom invites Silver to dine at his castle, and says, "Let's strike a bargain. Both our countries do better with lower tariffs, so let's agree to eliminate them. My country may do a little poorer in the short term, but that will eventually even itself out in the free market."

Silba likes this idea, and says, "Agreed." And so they form the Marvel Universe Fictional Adjunct State Trade Agreement, or M.U.F.A.S.T.A. Tariffs are eliminated, and goods between the two nations increase. Trade expands, and hiring goes up. Everyone wins, right?

Well, no. When you lower trade tariffs, unskilled jobs can more easily flow to the weaker economy because of lower wages. Companies can send low-skilled jobs to Symkaria, have the employees build parts there by hand more cheaply, and then ship them back to Latveria for final assembly. Because of the lack of any tariffs, the parts shipped, even though they are WIP (work in process) count as exports, and are not levied with any tariff penalty (which they would be if a tariff were in place). In some cases, the products might be entirely built in Symkaria outright.

Well some of Doom's constituents aren't happy about this. "Our jobs are going to that other fictional city-state, and we don't like it! The big corporations who are in league with Castle Doom are willing to ship our jobs over there because their wages are lower! And then sell their goods to us at cheaper prices as a result!"

Yes, that would be bad for a little while. But wages in Symkaria would begin to increase until they reached a point of equilibrium with Latveria. The trade imbalance that temporarily exists between Latveria and its neighbor eventually goes away, because Latverians are able to buy cheaper goods, giving them a higher standard of living which results in more entrepreneurs. Eventually, both nations prosper more with free trade than they would have otherwise.

But this is a hard sell for Dr. Doom, politically. He's getting challenged in the next election by M.O.D.A.R.K., who is promising to "Level the playing field" with Symkaria. He's also concerned about illegal immigration from Wakanda. M.O.D.A.R.K. says, "They're bringing drugs, they're bringing crime, they're rapists, and some of them, I assume, are good people." He proposes protectionist tariffs be replaced, and that M.U.F.A.S.T.A. be thrown out.

This is essentially the same sort of argument we're hearing from Trump today. But Protectionism doesn't work for an economy. It never has. All it does is shrink an economy and leave businesses with fewer customers. So why does it sound so appealing?

Because it gives the illusion that it will save jobs. After all, N.A.F.T.A. cost Americans many jobs which were shipped off to Mexico, right?

Not really. Yes, N.A.F.T.A. lowered tariffs which made it cheaper for corporations to hire labor abroad than at home. But the "giant sucking sound" predicted by H. Ross Perot during the 1992 presidential elections never took place after N.A.F.T.A. passed. The migration of jobs to Mexico was slow and gradual - even anemic. Why?

Because Mexico lacked certain things that would have made moving jobs to Mexico much easier. It lacked adequate roads to ship raw materials to manufacturing plants and then ship the finished product to market. It lacked adequate rails which could do the same. It lacked sufficient electrical grids, clean water, water towers and sewage systems that would make running any business possible, especially in Mexico's hot climate. It had an unstable political system, and rampant gangs of drug lords which constantly destabilized the regions, making the running of any business much more difficult. (That condition still exists, and is a major problem for Mexico.) And lastly, it lacked basic education-level workers to hire. At least at first.

And this is why India leapfrogged Mexico as the world's new economic power. It was much farther away, but it was willing to build the infrastructure necessary to attract the jobs. It invested in education for its citizens. It built ports, roads, and rail for its businesses. But we had no N.A.F.T.A. treaty with India. The jobs went to India because that country was better suited for business.

Which means N.A.F.T.A. is ruled out as a primary cause of American jobs going abroad.

You see, N.A.F.T.A. and T.P.P. do not really do much to encourage jobs going overseas, and tariffs don't do much to keep them at home, either. If there's some Pacific Rim nation (for example) with cheap labor going for $1 per day, which is a princely sum in that country, you could enact a tariff as high as 80% on that nation, and corporations will still save a ton of money by hiring there. Bark about the T.P.P. all you want, but it won't cost any jobs that weren't already on their way out the door.

So why aren't more jobs fleeing the U.S.?

Because it's not just simple cost of labor! If one country has a much lower cost of labor than another one, then jobs will naturally migrate to the country with lower labor costs, that much is true. But other factors weigh in. Ideal infrastructure is essential. Without adequate roads, bridges, rail, developed harbors and large airports, no nation can build very much, no matter how cheap the labor. Power and water are essential for building anything. You need the electricity to make the machines go, and the water to keep your workers hydrated and your cooling systems working. There are considerations regarding raw materials (steel, textiles, lumber, etc.). If the raw materials have to be shipped a long way, that adds to the cost. There's the presence of supporting industries to consider. If the industries that make items that you need are located too far away (computer chips, for example) then your cheap labor is going to get a lot more expensive. The size of a company's tax burden plays a role. Lower taxes abroad may cause a company to consider uprooting in the U.S. and moving to a country with little or even no taxes. Lax environmental regulations abroad may also make moving moving jobs overseas to another nation more appealing. There are language barriers to consider. Can your company overcome the difficulties in non-English speaking cultures to establish a usable workforce? There's climate and natural disasters to consider. If the foreign nation you are considering relocating jobs to has problems with hurricanes, or typhoons, or earthquakes, then you have a much bigger problem than just building adequate factories to consider. (This is part of why Mexico has enjoyed more prosperity than, say, Haiti.) And finally, there's location, location, location. If your cheap-labor island nation is situated far away from any other country, your shipping costs will be high enough to offset any money you might save by getting those cheap workers. Better to stay at home.

There's a lot to consider.

The real culprit when it comes to jobs going overseas is banking. The ability to send millions to any nation at the click of a mouse has made it possible for money to go into the paycheck of a foreign country much easier, and that means the payrolls can move more easily too. But we can't go back to the days of paper checking, so we're basically painted into a corner on that one. We need to do what we can with the technology we have to save jobs here in the U.S. and build new ones as well.

So how does one keep jobs at home? How does a nation build new jobs?

Some of the ideas I'll present are counter-intuitive, but there are a few things we can do. First, let's recognize that most of the nations in the TPP agreement already have low or no tariffs. Jobs that the U.S. may lose to those nations are already going to be gone. So by expanding our trade base by lowering tariffs even further will help jobs in the U.S. How? By expanding the customer base and lowering prices here. We lose some jobs overseas, but gain others back with business benefiting from lower prices on goods and more profitability overall.

Here's the big one: EDUCATION! In a world economy where jobs could go anywhere, the nation with the most skilled workforce wins. That means we have to give our labor the best skills possible, and that means educating them - NOW. We need the best mathematicians, engineers and scientists. Too often, these skills are imported into the U.S. from other nations, like Germany. Bad show! We need to invest in technical training so that those without the ambition or ability to obtain a four-year degree can at least obtain a good paying job. Right now, America is suffering from a lack of welders and CNC machinists. Talk about jobs going overseas! Manufacturing plants may have no other choice but to go to China if they can't find enough welders and machinists here at home! At the same time, we have lots of unemployed black youth in the inner cities who need jobs. We can kill two birds with one stone! Three, in fact! By investing in the training of black factory workers, we 1) keep jobs at home 2) provide jobs to those that need it most and 3) make even more jobs by building up average income among the inner-city's populations. We also lower crime and, by extension, police violence. It's a win-win-win-win-win!

So why aren't we doing that?

Economies change. Job skills which are needed shift with them. The only things which can allow a nation's workforce to pivot and meet the needs of tomorrow's job requirements is a strong social safety net and an effective education system for all. Without these, jobs go overseas to workers with better skills, usually because those nations, like India and China, were wise enough to invest in its citizens.

We must rebuild crumbling infrastructure! Better roads, bridges and rail will mean less money has to be spent by businesses for transportation of raw materials and finished goods. Better water systems can not only provide fresh water for industry, but farming as well. Better systems for capturing rain water can help industry in uncountable ways. This helps keep jobs here at home.

I mean, if you ran a business, would you really want to build a plant in Flint, Michigan? Where there's lead in the water?

And here's an idea: A transcontinental bullet-train network can move not only passengers but goods at lightning-speed across vast distances at a mere fraction of the fuel costs of a jet airplane. Isn't that worth the megamillion-dollar price tag? For millions of more jobs at home? Other nations have bullet trains. Why not us? Why is our rail system so - third world?

Here's another idea: Upgrade our nations's power grid. Imagine how many jobs we could both save and create if we didn't rely on any fossil fuels for our own energy needs. With all our power coming from solar, wind, hydroelectric power and nuclear sources, we would become the largest exporter of coal, natural gas, and petroleum in the world. Why should we cannibalize our nation's profits by feeding off the natural resources which are one of this nation's primary economic advantages? Yes, those other nations who buy from us would want to become environmentally friendly too, but for a good long while, America would be the world's power-cell!

And those petroleum resources are better spent on things like cheap plastics, chemicals, polymers and resins. Cheaper resources like that also keep jobs at home by lowering the cost of raw materials.

Here's something more controversial: Lower taxes on corporations. I know, it's against every Democratic Party principle, but lower taxes really does prevent a corporation from leaving. Take Puerto Rico, for example. It was once a tax haven, and brought millions in jobs and profitability to a U.S. territory. But when the tax loophole was removed, Puerto Rico began to suffer. Now, it's completely broke, and it doesn't look like that's going to end anytime soon. Yes, lower taxes can have a beneficial effect to an economy. And for all our bitching about corporate welfare, no politician can resist the temptation to provide a tax break to a large corporation which is considering building a new facility in his district. So the correct approach is to grant the corporations their tax breaks. Next time you hear a politician say, "So-and-so gave corporations tax breaks for moving jobs overseas," you might want to consider the possibility that we were trying to lure those jobs back to the U.S. Yes, there are corporations who were unduly rewarded for their job-killing practices, but there are also some corporations, like Masterlock, who were lured back to the U.S. from China, in part, because of those tax breaks.

But after granting the tax breaks, let's make sure the executives pay their fair share on their income taxes and capital gains, shall we?

Want an idea that flies in the face of Republican politics? Allow more immigration!

What?! More immigration?! Aren't immigrants taking our jobs enough already?

Yes, but look at what jobs they are taking. Generally low-skilled non-education-dependent jobs that we who are used to a different standard of living are unwilling to take.

Here's how it works: Say you live in an impoverished nation. You have two paths by which you can climb out of poverty. You can either educate yourself to become a high-paid job holder in your own country, or you can go to America and make nearly as much or even more working a menial job. For many, the second choice is more appealing. And it saves american jobs because every one of those workers is one less person who may become an engineer, accountant, doctor, lawyer, executive or scientist in a foreign country. Companies that move jobs overseas need such people, too. And they would love nothing more than to let an American engineer go in favor of (for example) one living in Mexico. Because a Mexican engineer makes about $36,000 MEX. That's the equivalent of only $2,016 USD! Naturally, we want fewer Mexican engineers and more American ones, and no Mexican is going to want to study engineering for six years when they could simply hop a wall and earn $15,080 USD (which is what a minimum wage earner gets here in the U.S.), which is the equivalent of nearly 27 million in Mexican Pesos!

Relaxing the border guard actually saves american jobs!

And if you build a wall, you force Mexicans to resort to college education as their one avenue out of poverty. Those people then become more highly-skilled laborers, which American corporations will take advantage of. They will fire the $60,000 per year professionals in the U.S. and hire the Mexican ones at five cents on the dollar. Is that really what we want?

Isn't it worth having a browner America tomorrow in exchange for job security today?

And here's where I should point out that the ratio of Mexicans crossing into the U.S. to Mexicans leaving to return back to Mexico is actually negative, meaning more Mexicans are going back to Mexico than are crossing over to live here in the U.S.!

Okay, anybody still blaming N.A.F.T.A. for job losses needs to have his racist head examined.

Here's something else we can do: Protect copyright on intellectual property. One of the biggest money-losers for the American economy is bootlegging. A poor country trying to build its economy can easily bring lots of money in the form of bootlegging movies, music and video games. Americans get cheap knockoffs that are just as good as the originals, and the poor country gets lots of new jobs. In the meantime, movie studios, recording companies and video game programmers get the shaft - or even fired - as a direct result, and the incomes associated with those industries cannot spend as much money on other American service industries, which also suffer. By protecting copyright laws, we bring more money into Hollywood, Silicon Valley, EMI and American Records. They, in turn, have more money for houses, restaurants, and other American goods.

What the T.P.P. does is protect intellectual property. If a poor nation wants to build its economy, it will have to do so by investing in roads, water and education rather than by stealing jobs from rich nations, and that's the way it should be.

Here's something we can do: prevent other nations from engaging in currency manipulation.

What is currency manipulation? Well, it works like this: Supply and demand work with everything else, even money. If a nation prints too much money, the value of each bill or note goes down. That's called inflation, and it usually happens naturally and slowly as a nation's economy grows, but if it does too much of it at once, the value of the currency goes way down and prices start to shoot way up. BUT, your jobs become cheaper for other nations to invest in, and you increase your exports because your prices are lower!

Some nations with nothing to lose will deliberately print too much money in order to bring in jobs and increase exports. I mean, if your citizens are starving anyway, why not? But this isn't playing fair in a free market, because a government is trying to tip the scales. Arguably, that's the same sort of thing a tariff tries to do, but enacting tariffs isn't playing fair, either.

The T.P.P. is trying to enact an anti-currency-manipulation clause into itself. So far, this hasn't been successful. But even if no currency manipulation clause is in the T.P.P., we still need it to stop the practice overall. Why? Because the biggest currency manipulator is China! If all the nations of the T.P.P. are banded together by treaty, and all call upon China to cease and desist its over-printing of the Yuen, China will eventually be forced to the negotiating table. That's a big job-protector right there!

You see, trade agreements like N.A.F.T.A. and T.P.P. can actually save jobs. Yes! Why? Because they can create trading blocs which China and India must reckon with. Two of the world's largest economies, the U.S.A. and Japan, are part of the T.P.P., and with the other nations of the Pacific Rim, can exert huge economic pressure everywhere along China's sea-front - it's only real economic interface. That's why the T.P.P. can help.

Here's yet another job-saver in the T.P.P.: It enacts restrictions upon child labor and eases restrictions upon unionization. For many years, unions have been weakened by jobs going overseas. But if other nations are allowed to unionize, the corporations have fewer and fewer outlets to run to in order to get around labor unions. Global unionizing leads to more money for everyone. Yes, unions can be stupid at times. At some junctures in history, unions have even been usurped by organized crime (such as the mafia). But unions also increase salaries and benefits in a way no other system can. An economy without labor unions is an economy doomed to eventual failure. Opponents to T.P.P. say that these rules will have no teeth. But even if not, it's a start, and teeth will eventually grow in - if not in T.P.P., then in subsequent deals because T.P.P. paved the way.

We can save jobs here in the U.S. by persuading other nations to enact stricter environmental standards. After all, having more lax environmental standards is one of the more appealing lures to corporations who want to relocate jobs overseas, right? The T.P.P. does require nations to enact tougher environmental regulations, particularly about the fishing industry. Our oceans must replenish in order to feed a growing human population!

Opponent of the T.P.P. complain that such environmental standards will not be enforced. Yet in almost the same breath, other opponents (or sometimes even the same ones) complain that a foreign corporation could sue the United States and win for enforcing an environmental regulation on U.S. soil that corporation does not want to have to deal with.

So, it has teeth with us, but not abroad? That's just not logical.

So, to recap, the T.P.P. is, overall, a jobs saver. Ultimately, so was N.A.F.T.A.

Let's be blunt for a moment. Did N.A.F.T.A. cost Americans some jobs? You bet it did! But it took many years for that to happen. Mexico did not have the infrastructure that America did, and so private companies had to invest in their own roads, bridges and power lines in order to build the factories that would be able to hire lower-waged workers. That meant that Mexicans who wanted to find work had to come to the United States. The giant sucking sound predicted by H. Ross Perot back in 1992 ended up happening north of the Mexican border, not south.

But the free trade agreement eventually paid off. Factories and roads were built, Mexicans began getting more jobs, wages began to increase, and now, decades after N.A.F.T.A. was first put into place, more Mexicans are returning to Mexico than are coming across the border into the U.S.

We don't need a wall anymore, thanks to N.A.F.T.A.! Donald Trump is preaching an outdated message to a very old choir.

And N.A.F.T.A. eventually paid off here at home as well. The manufacturing jobs here in the U.S. that we expected to be gone did not disappear entirely. Why? Because skilled laborers were still here in the U.S., but not in Mexico. Small components could be built south of the border, then brought north of the border to be welded and assembled by Americans. Companies like Master Lock came back to Milwaukee. Companies like Cooper Power Systems got bought up by Eaton, but never left Waukesha. General Electric was able to expand its manufacturing base and retain more American engineers.

All those jobs would be gone without N.A.F.T.A. Do they pay less now? Yes. But that's better than gone for good.

Here's an illustration to show how free trade works, and we'll just stick to N.A.F.T.A. since it offers the simplicity of using only two countries, the U.S.A. and Mexico.

As the illustration shows, Mexico benefits more from free trade than the U.S. does. And yes, some of that growth comes because some jobs migrate from the United States to Mexico. But both countries also see greater growth overall. Greater GDP in both countries is a net win, even if some jobs get lost in a move south of the border. And without such free trade, the size of the economy in the U.S.A. would remain the same, or even possibly shrink.

Economies shift and change. After World War II, America enjoyed unprecedented prosperity because it monopolized all the manufacturing. America was literally the world's machine shop, especially in cities like Milwaukee, Pittsburg and Detroit. A system of interstate highways instituted by the Eisenhower administration which were intended to allow cities to be quickly evacuated in the event of a war with the Soviets accidentally became an economic powerhouse for the nation, making commerce far easier and more interconnected. Prices dropped. Babies were born. Home sales went through the roof. But that was unsustainable. Competition eventually came from Germany and Japan. Lots of other nations learned the manufacturing trick.

Eventually, America had to share in its good fortune. And when other nations rise dramatically when your own nation rises only a little bit, it can often feel like you're falling.

But that's an illusion.

And now we're facing T.P.P., the Trans-Pacific Partnership. Will we have a similar fate as that with N.A.F.T.A., with only a little growth for ourselves and Japan but a lot of growth for other nations?

Yes, indeed! And we want this! We want more depressed nations to develop and climb up here to our level to enjoy a better life!

Economists love to disagree about things. But what they all seem to agree on is that if you build cars or airplanes for a living, TPP might not be so good in the short run. But if you do any other sort of business, things will get better. U.S. G.D.P. will go up, but only a little bit. Meanwhile, smaller nations will do much better and receive much higher wages over time. Eventually, that comes back to benefit us.

Here's a list of economists that agree and disagree with the TPP deal. And interestingly, many opposed are superstars in economics from the Left, but many more are in favor and come from both sides of the aisle:

Opposed:
Joseph Stiglitz – TPP is the “worst trade deal ever.”
Paul Krugman – “I’ve described myself as a lukewarm opponent.”
Ha Joon Chang – Argues that TPP would prevent third-world countries from developing by forbidding trade protections. (Brunei, Malaysia, Vietnam)
Robert Reich – “It’s a Trojan horse in a global race to the bottom.”
Jeffrey Sachs – Director of the Earth Institute at Columbia University.

In favor:
Charles L. Schultze – Chairperson of the Council of Economic Advisers during the President Carter Administration
Martin Feldstein – Professor of Economics, Harvard. President Emeritus of the National Bureau of Economic Research.
Michael J. Boskin – Professor of Economics, Stanford University. Chief Executive Officer and President of Boskin & Co., an economic consulting company
Laura D’Andrea Tyson – Former Chair of the US President's Council of Economic Advisers during the Clinton Administration.
Martin Neil Baily –  Economist at the Brookings Institution and formerly at the Peterson Institute. Cabinet member on Council of Economic Advisers under Clinton from 1994 to 1996, and chairman of the Council from 1999 to 2001. Currently co-chairs the Bipartisan Policy Center's Financial Regulatory Reform Initiative.
R. Glenn Hubbard –  Deputy Assistant Treasury Secretary, 1991 to 1993. Chairman of the Council of Economic Advisors to George W. Bush, 2001 to 2003.
N. Gregory Mankiw – Professor of Economics at Harvard University. Chairman of the Council of Economic Advisers under President George W. Bush. Former economics advisor to Mitt Romney. “Among economists, the issue is a no-brainer.” (Arguing yes, he’s in favor of TPP.)
Harvey S. Rosen – Professor of Economics and Business Policy, Princeton University. Chairperson of the Council of Economic Advisers, 2005.
Alan Greenspan – Former Federal Reserve Chairman.
Ben S. Bernanke – Former Federal Reserve Chairman.
Edward P. Lazear – Chairman of the Council of Economic Advisors from 2006 to 2009.
Christina D. Romer – Chaired President's Council of Economic Advisers, 2009-2013 in succession.
Austan D. Goolsbee – Professor of Economics at The University of Chicago's Booth School of Business. Chairman of the Council of Economic Advisers, 2010 – 2011.
Alan B. Krueger – Professor of Economics and Public Affairs, Princeton. University and Research Associate at the National Bureau of Economic Research. United States Assistant Secretary of the Treasury for economic policy, 2009 – 2010. Chairman of the White House Council of Economic Advisers, 2011.

Paul Krugman describes himself as a "lukewarm opponent" of TPP. I, by contrast am a "lukewarm advocate." But I'm not quite the economist he is. The consensus, politics aside, is that TPP has its problems, but is generally a positive thing. Ultimately, I trust Barack Obama's judgment on this, although I reserve the right to change my mind.

And if Trump wants to campaign against it, calling it a bad deal, just know that the consensus among economists disagrees with him, and so do I.

So what if Hillary flip-flops on it after the election?


Eric

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