The Fruits of NAFTA

To fepcat readers, I must plead practical and common-sense ignorance. One of the hazards of a college degree in economics is that 1) I knew it all-at least in economics, and 2)specifically, that free trade economic policy was wise and beyond dispute. After a few short, incisive but memorable lessons from Paul Craig Roberts and political-economic analysis of Pat Buchanan, I'm humbler and better informed. That is not to say I've completely changed my mind on the subject but I'm checking my own premises regarding international economics. Read Pat's article and check your premises (free trade premises, that is) and quiz your congressmen and congresswomen. Read up on free trade and international economics(a la Ricardo to late 20th writers and economists like Roberts, Batra, and Friedman). I know, your eyes glaze over at the mere mention of such topics. There are non-technical tomes by these writers (especially by Friedman, Roberts and Batra) that can help you. It is well worth the effort. But check your premises and see if reality matches with rhetoric. --------lee

Posted: March 10, 2006
1:00 am Eastern
By Patrick J. Buchanan
© 2010 Creators Syndicate Inc.

As I write these lines, the big black headline on Drudge reads, "Arizona Governor Orders Troops to Mexican Border." Both Arizona Gov. Janet Napolitano and New Mexico's Bill Richardson have now declared a "state of emergency" on their border. Why? Because our border is descending into a state of anarchy, as 5,000 illegal aliens daily attempt to cross our Mexican frontier and drug traffickers, with renegade Mexican army troops sometimes backing them up, attempt to run narcotics into the United States.

It is now a dozen years since NAFTA passed. We can measure its success in the clamor for fences and troops on the border, and in Mexico's having displaced Colombia as the primary source of the marijuana, meth and cocaine flowing into the United States. But it was the economic argument that our elites – Bush I and James Baker, Dole and Gingrich, Clinton and Carter – used to sell NAFTA. In one of the big propaganda pieces of that great debate, "NAFTA: An Assessment," an October 1993 paper published by the International Institute of Economics, Gary Hufbauer and Jeffrey Schott wrote: "Our job projections reflect a judgment that, with NAFTA, U.S. exports to Mexico will continue to outstrip Mexican exports to the United States, leading to a U.S. trade surplus with Mexico of about $7 to $9 billion annually by 1995." The authors further predicted the U.S. trade surplus with Mexico would rise to $9 billion to $12 billion a year between 2000 and 2010.

And what happened? Charles McMillion of MGB Services, using Commerce Department data through 2005, has tallied the results. A year after NAFTA passed, the U.S. trade surplus had vanished. From 1995 through 1998, we ran $20 billion trade deficits with Mexico. From 1999 through 2005, the U.S. trade deficit with Mexico grew every year, from $27 billion in 1999 to last year's $54 billion. Where Hufbauer and Schott had predicted $100-plus billion in trade surpluses with Mexico from 1994 to today, NAFTA delivered some $400 billion in cumulative U.S. trade deficits. A $500 billion mistake by the crack Hufbauer-Schott team.

Is there a silver lining? Are we not selling Mexico high-value items, while she exports to us the products of her less-skilled labor? Again, the opposite has occurred. When NAFTA passed in 1993, we imported some 225,000 cars and trucks from Mexico, but exported about 500,000 vehicles to the world. In 2005, our exports to the world were still a shade under 500,000 vehicles, but our auto and truck imports from Mexico had tripled to 700,000 vehicles.

As McMillion writes, Mexico now exports more cars and trucks to the United States than the United States exports to the whole world. A fine end, is it not, to the United States as "Auto Capital of the World"? What happened? Post-NAFTA, the Big Three just picked up a huge slice of our auto industry and moved it, and the jobs, to Mexico. Consider the range of items the most advanced nation on earth now sells to Mexico, and Mexico sells to us. Mexico's leading exports to the United States in 2005 were autos, oil, electrical machinery, computers, furniture, textiles and apparel. The Made-in-the-USA goods that reaped us the greatest revenue in trade with Mexico were plastics, chemicals, cereals, cotton, meat, paper, oil seed, aluminum, copper and knitted or crocheted fabrics.

U.S.-Mexico trade calls to mind the trade relationship between Betsy Ross' America and the England of the Industrial Revolution, with Mexico in the role of England. Our exports to Mexico read like a ship's manifest from Bangladesh.
The American people were had. NAFTA was never a trade deal. NAFTA was always an enabling act – to enable U.S. corporations to dump their American workers and move their factories to Mexico.

For U.S. companies, it was one sweet deal. At zero cost, they were allowed to rid themselves of their American workers; get out from under contributing to Social Security and Medicare; and slough off the burden of environmental, health-and-safety, wage-and-hour and civil-rights laws – and were liberated to go abroad and hire Mexicans who would work for one-fifth to one-tenth of what their unwanted American workers cost.

What NAFTA, GATT, Davos and the WTO have always been about is freeing up transnationals to get rid of First World workers, while assuring them they could hold on, at no cost, to their First World customers. When one considers who finances the Republican Party, funds its candidates, and hires its former congressmen, senators and Cabinet officers at six- and seven-figure retainers to lobby, it is understandable that the GOP went into the tank. But why did the liberals, who paid the price of mandating all those benefits for American workers and imposing all those regulations on U.S. corporations, go along? That's the mystery. About NAFTA there is no mystery. There never really was.

"Second Thoughts on Free Trade"

Free trade---its not just a academic debate anymore. Is it necessary now to reexamine the underlying assumptions and premises which gird our current economic landscape? Read this important article by Roberts and Schumer back from 2004 that lays the groundwork for a lively discussion on the effects of free trade on our economy. ----lee

Charles Schumer and Paul Craig Roberts,
New York Times, 6 January 2004

"I was brought up, like most Englishmen, to respect free trade not only as an economic doctrine which a rational and instructed person could not doubt but almost as a part of the moral law," wrote John Maynard Keynes in 1933. And indeed, to this day, nothing gets an economist's blood boiling more quickly than a challenge to the doctrine of free trade.

Yet in that essay of 70 years ago, Keynes himself was beginning to question some of the assumptions supporting free trade. The question today is whether the case for free trade made two centuries ago is undermined by the changes now evident in the modern global economy.

Two recent examples illustrate this concern. Over the next three years, a major New York securities firm plans to replace its team of 800 American software engineers, who each earns about $150,000 per year, with an equally competent team in India earning an average of only $20,000. Second, within five years the number of radiologists in this country is expected to decline significantly because M.R.I. data can be sent over the Internet to Asian radiologists capable of diagnosing the problem at a small fraction of the cost.

These anecdotes suggest a seismic shift in the world economy brought on by three major developments. First, new political stability is allowing capital and technology to flow far more freely around the world. Second, strong educational systems are producing tens of millions of intelligent, motivated workers in the developing world, particularly in India and China, who are as capable as the most highly educated workers in the developed world but available to work at a tiny fraction of the cost. Last, inexpensive, high-bandwidth communications make it feasible for large work forces to be located and effectively managed anywhere.

We are concerned that the United States may be entering a new economic era in which American workers will face direct global competition at almost every job level—from the machinist to the software engineer to the Wall Street analyst. Any worker whose job does not require daily face-to-face interaction is now in jeopardy of being replaced by a lower-paid, equally skilled worker thousands of miles away. American jobs are being lost not to competition from foreign companies, but to multinational corporations, often with American roots, that are cutting costs by shifting operations to low-wage countries.

Most economists want to view these changes through the classic prism of "free trade," and they label any challenge as protectionism. But these new developments call into question some of the key assumptions supporting the doctrine of free trade.

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Morning Bell: The Lawyers and Lobbyists Full Employment Act

An excellent example of how not to do full employment. Instead of real jobs, the Obama administration gives us make work for lawyers. ...rng

From blogheritage.org

Posted July 16th, 2010 at 9:21am in Enterprise and Free Markets

Without spending a single dime, the Obama administration did more yesterday to create jobs for the U.S. economy than it has throughout its entire existence. With the single stroke of a pen, President Barack Obama signed the Dodd-Frank financial regulation bill that set in motion 243 new formal rule-makings by 11 different federal agencies. Each of the 243 rule-makings will employ hundreds of banking lobbyists as they try to shape what the final actual laws will look like. And when the rules are finally written, thousands of lawyers will bill millions of hours as the richest incumbent financial firms that caused the last crisis figure out how to game the new system. Yesterday, the Washington law firm Jones Day snapped up the Securities and Exchange Commission head enforcement division lawyer, and J.P. Morgan Chase, one of the biggest U.S. banks by assets, assigned more than 100 teams to examine the legislation. University of Massachusetts political science professor Thomas Ferguson tells The Christian Science Monitor:

By delegating so much to the regulators, Congress is inviting everyone interested in the outcome to make more campaign contributions, as they intervene in the regulatory process to influence the regulators. Nothing is settled. It’s a gold mine for members of Congress.

So if the richest big banks, lawyers, lobbyists and Congress were the big winners yesterday, who are the losers? Small banks, entrepreneurs and you.

Smaller community banks do not have the same resources that the Goldman Sachs of the world do to hire armies of lawyers and lobbyists to shape and comply with new regulations. The cost of compliance will eat up a much larger share of small bank revenue. Jim MacPhee, CEO of Kalamazoo County State Bank in Michigan and chairman of the Independent Community Bankers of America (ICBA), told USA Today: “We weren’t part of the subprime (mortgage) meltdown. Why throw more regulations at us?”

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NAFTA's effect on United States employment

This article from Wikipedia is a short helpful introduction to a controversial topic. There are also links you can investigate to widen your knowledge. I have highlighted the job loss aspects below. ----lee

From Wikipedia, the free encyclopedia (Redirected from NAFTA's Impact on US Employment)

The North American Free Trade Agreement's impact on United States employment has been the object of ongoing debate since the 1994 inception of the North American Free Trade Agreement (NAFTA) with Canada and Mexico. NAFTA's proponents believe that more jobs are ultimately created in the USA. They point to factors such as growth in the export industry and lower unemployment rates as evidence of NAFTA’s benevolence to U.S. workers. Opponents see the agreements as costly to well-paying American jobs in the short run. Declines in employment opportunities within manufacturing industries and increases in trade deficits are some of the negative side effects of NAFTA pointed out by the critics...

Job loss

NAFTA's opponents attribute much of the displacement caused in the US labor market to the United States’ growing trade deficits with Mexico and Canada. According to the EPI, the widening of the deficit has caused the dislocation of domestic production to other countries with cheaper labor and supported the loss of 879,280 US jobs.[9] Critics see the argument of the proponents of NAFTA as being one-sided because they only take into consideration export-oriented job impact instead of looking at the trade balance in aggregate. They argue that increases in imports ultimately displaced the production of goods that would have been made domestically by workers within the United States.[9]

The export-oriented argument is also critiqued because of the discrepancy between domestically-produced exports and exports produced in foreign countries. For example, many US exports are simply being shipped to Mexican maquiladores where they are assembled, and then shipped back to the U.S. as final products.[9] These are not products destined for consumption by Mexicans, yet they made up 61% of exports in 2002. However, only domestically-produced exports are the ones that support U.S. labor. Therefore, the measure of net impact of trade should be calculated using only domestically-produced exports as an indicator of job creation.

78% of the net job losses under NAFTA, 686,700 jobs, were relatively-high paying manufacturing jobs.[9] Certain states with heavy emphasis on manufacturing industries like Michigan, Ohio, Pennsylvania, Indiana, and California were significantly affected by these job losses. For example, in Ohio, TAA and NAFTA-TAA identified 14,653 jobs directly lost due to NAFTA-related reasons like relocation of U.S. firms to Mexico.[10] Similarly, in Pennsylvania, Keystone Research Center attributed 150,000 job losses in the state to the rising U.S. trade deficit.[11] Since 1993, 38,325 of those job losses are directly related to trade with Mexico and Canada. Opponents point out the fact that although most of these jobs were reallocated to other sectors, the majority of workers were relocated to the service industry, where average wages are 4/5 to that of the manufacturing sector.[9]

Opponents also argue that the ability for firms to increase in capital mobility and flexibility has undermined the bargaining power of U.S. workers. Fifteen percent of employers in manufacturing, communication, and wholesale/distribution shut down or relocated plants due to union organizing drives since NAFTA’s implementation.[12] The weakening of rights for the American labor force is one example of the “race to the bottom” theory advocated by most opponents that will result from these trade policies. Ultimately, workers are faced with the dilemma of settling for less worker’s rights because the firm always will have the ability to relocate to another country, notably Mexico, where they can attain cheaper labor and will face less resistance from workers.[citation needed] However, it is now common that these incentives are enough to cost American laborers their jobs regardless of the status of the labor unions.


To read more...

http://en.wikipedia.org/wiki/NAFTA%27s_effect_on_United_States_employment

Was Ross Perot Right?

For my money, I think Ross Perot was right. -----lee

From creators.com

David Sirota

"Ross Perot was fiercely against NAFTA. Knowing what we know now, was Ross Perot right?"

That's what CNN's Wolf Blitzer asked Hillary Clinton at last week's Democratic presidential debate. It was a straightforward query about a Clinton administration trade policy that polls show the public now hates, and it was appropriately directed to a candidate who has previously praised NAFTA.

In response, Clinton stumbled. First she laughed at Perot, then she joked that "all I can remember from that is a bunch of charts," and then she claimed the whole NAFTA debate "is a vague memory." The behavior showed how politically tone deaf some Democratic leaders are.

To refresh Clinton's "vague memory," let's recall that Perot's anti-NAFTA presidential campaign in 1992 won 19 percent of the presidential vote — the highest total for any third-party candidate since Teddy Roosevelt. That included huge tallies in closely divided regions like the Rocky Mountain West, which Democrats say they need to win in the upcoming election.

A Democrat laughing at Perot on national television is a big mistake. Simply put, it risks alienating the roughly 20 million people who cast their votes for the Texas businessman.

But Clinton's flippant comments and feigned memory lapse about NAFTA were the bigger mistakes in that they insulted the millions of Americans (Perot voters or otherwise) harmed by the trade pact. These are people who have seen their jobs outsourced and paychecks slashed thanks to a trade policy forcing them into a wage-cutting war with oppressed foreign workers.

Why is Clinton desperate to avoid discussing NAFTA? Because she and other congressional Democrats are currently pushing a Peru Free Trade Agreement at the behest of their corporate campaign contributors — an agreement expanding the unpopular NAFTA model. When pressed, Clinton claims she is for a "timeout" from such trade deals — but, as her husband might say, it depends on what the meaning of the word "is" is, since she simultaneously supports the NAFTA expansion.

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Just when you get your hopes up

Just when you get your hopes up they get dashed again. I saw this headline and I immediately linked up thinking somebody on the left finally gets it, but, as usual, the liberals are up to their old, tired tricks. Instead of asking for an end to outsourcing, offshoring and illegal immigration, all of which the Democrats can accomplish easily with their ownership of the presidency and both houses of Congress, this article says the problem is we didn't borrow enough stimulus money we don't have to juice the economy.

We can't borrow and spend our way out of this. Keep the jobs in America, but the Democrats too are controlled by the Moneyparty...rng

From progressive.org

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Obama Needs a Full-Employment Policy

By Matthew Rothschild, November 6, 2009

The new unemployment figures are a stinging indictment of the Obama economic policy.

Standing now at 10.2 percent, the highest in 26 years, the rate is much worse than Obama’s advisers predicted.

And their song is getting tiresome.

They keep singing that the economy would be much worse off without the $700 billion stimulus.

But that’s no solace to the more than 15 million people who are out of work today.

You can’t tell a guy who got laid off that it could have been much worse for him? What are you going to say: You could have been doubly laid off?

You can’t tell someone who just lost her home that it could have been much worse for her.

It already is much worse for her.

And to keep saying that we’re saving or creating 3.5 million jobs, as the Administration contends, is no solace either when so many more people are out of work.

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Lying Statistics Prevent Public Action

This article is self explanatory, and shows how the government now must lie to us about pretty much everything in order to hang on to power...rng

While Economists Lied, the Economy Died

Deceptive Economic Statistics

By PAUL CRAIG ROBERTS

On August 17, Bloomberg reported a US government release that industrial production rose twice as much as forecast, climbing 1 percent. Bloomberg interpreted this to mean that “increased business investment is propelling the gains in manufacturing, which accounts for 11 percent of the world’s largest economy.”

The stock market rose.

Let’s look at this through the lens of statistician John Williams ofshadowstats.com.

Williams reports that “the primary driver of a 1.0% monthly gain in seasonally-adjusted July industrial production” was “warped seasonal factors” caused by “the irregular patterns in U.S. auto production in the last two years.” Industrial production “shrank by 1.0% before seasonal adjustments.”

If the government and Bloomberg had announced that industrial production fell by 1.0% in July, would the stock market have risen 104 points on August 17?

Notice that Bloomberg reports that manufacturing accounts for 11 percent of the US economy. I remember when manufacturing accounted for 18% of the US economy. The decline of 39% is due to jobs offshoring.

Think about that. Wall Street and shareholders and executives of transnational corporations have made billions by moving 39% of US manufacturing offshore to boost the GDP and employment of foreign countries, such as China, while impoverishing their former American work force. Congress and the economics profession have cheered this on as “the New Economy.”

Bought-and-paid-for-economists told us that “the new economy” would make us all rich, and so did the financial press. We were well rid, they claimed, of the “old” industries and manufactures, the departure of which destroyed the tax base of so many American cities and states and the livelihood of millions of Americans.

The bought-and-paid-for-economists got all the media forums for a decade. While they lied, the US economy died.

Now, back to statistical deception. On August 17 the census Bureau reported a small gain in July 2010 residential construction housing starts. More hope orchestrated. In fact, the “gain,” as John Williams reports, was due to a large downward revision” in June’s reporting. The reported July “gain” would “have been a contraction” without the downward revision in June’s “gain.”

So, the overestimate of June housing not only made June look good, but also the downward correction of the June number makes July look good, because starts rose above the corrected June number. The same manipulation is likely to happen again next month.

If the government will lie to you about Iraqi weapons of mass production, Iranian nukes, why won’t they lie to you about the economy?

We now have an all-time high of Americans on food stamps, 40.8 million people, about 14% of the population. By next year the government estimates that food stamp dependency will rise to 43 million Americans. So last week Congress cut food stamp benefits. Let them eat cake.

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A Progressive Voice on Full Employment Policy

Excellent article by Thom Hartman, whom I normally do not agree with, but he got this one right. He does make one glaring mistake. He blames only the Republicans and seems to assume that the Democrats will do something about the problem. Of course, this was written in 2006 so he can be forgiven his lack of prescience. But now, after almost a year and a half, with a veto proof majority and a President, the Democrats have done nothing to end outsourcing, offshoring or illegal immigration. Seems like both parties work for the same financial interests and no one works for the American people. Still, very well written and very worth reading. rng Published on Wednesday, March 29, 2006 by CommonDreams.org Today's Immigration Battle Corporatists vs. Racists (and Labor is Left Behind) by Thom Hartmann The corporatist Republicans ("amnesty!") are fighting with the racist Republicans ("fence!"), and it provides an opportunity for progressives to step forward with a clear solution to the immigration problem facing America. Both the corporatists and the racists are fond of the mantra, "There are some jobs Americans won't do." It's a lie. Americans will do virtually any job if they're paid a decent wage. This isn't about immigration - it's about economics. Industry and agriculture won't collapse without illegal labor, but the middle class is being crushed by it. The reason why thirty years ago United Farm Workers' Union (UFW) founder C�sar Ch�vez fought against illegal immigration, and the UFW turned in illegals during his tenure as president, was because Ch�vez, like progressives since the 1870s, understood the simple reality that labor rises and falls in price as a function of availability. As Wikipedia notes: "In 1969, Ch�vez and members of the UFW marched through the Imperial and Coachella Valley to the border of Mexico to protest growers' use of illegal aliens as temporary replacement workers during a strike. Joining him on the march were both the Reverend Ralph Abernathy and U.S. Senator Walter Mondale. Ch�vez and the UFW would often report suspected illegal aliens who served as temporary replacement workers as well as who refused to unionize to the INS." Working Americans have always known this simple equation: More workers, lower wages. Fewer workers, higher wages. Working Americans have always known this simple equation: More workers, lower wages. Fewer workers, higher wages. Progressives fought - and many lost their lives in the battle - to limit the pool of "labor hours" available to the Robber Barons from the 1870s through the 1930s and thus created the modern middle class. They limited labor-hours by pushing for the 50-hour week and the 10-hour day (and then later the 40-hour week and the 8-hour day). They limited labor-hours by pushing for laws against child labor (which competed with adult labor). They limited labor-hours by working for passage of the 1935 Wagner Act that provided for union shops. And they limited labor-hours by supporting laws that would regulate immigration into the United States to a small enough flow that it wouldn't dilute the unionized labor pool. As Wikipedia notes: "The first laws creating a quota for immigrants were passed in the 1920s, in response to a sense that the country could no longer absorb large numbers of unskilled workers, despite pleas by big business that it wanted the new workers." Do a little math. The Bureau of Labor Statistics says there are 7.6 million unemployed Americans right now. Another 1.5 million Americans are no longer counted because they've become "long term" or "discouraged" unemployed workers. And although various groups have different ways of measuring it, most agree that at least another five to ten million Americans are either working part-time when they want to work full-time, or are "underemployed," doing jobs below their level of training, education, or experience. That's between eight and twenty million un- and under-employed Americans, many unable to find above-poverty-level work. At the same time, there are between seven and fifteen million working illegal immigrants diluting our labor pool. to continue reading

Resharing Prosperity

This is superb article. A little on the dry side, but worth reading, and it is worth taking the time to study the graphs. I've started the post a few paragraphs into the article so if you want to read the whole thing, click on the link at the bottom...rng June 22, 2007 | EPI Briefing Paper #191 Reviving full employment policy Challenging the Wall Street paradigm by Thomas Palley The Erosion of Shared Prosperity Over the last 30 years the U.S. economy has experienced a sea change in performance defined by the emergence of a disconnection between wages and productivity growth. The disconnection is captured in Figure A, which shows growth of productivity and hourly compensation for production and non-supervisory workers (who constitute over 80% of wage and salary employment). From 1959 to 1979 compensation moved with productivity. Since 1979 productivity has kept growing but hourly compensation has essentially flat-lined. The flipside of the wage/productivity-growth disconnection is increasing income inequality. Figure B shows how family incomes at the top (95th percentile) and the bottom (20th percentile) of the scale grew together between 1947 and 1973. Indeed, family incomes at the bottom of the distribution actually grew fractionally faster than those at the top. Since 1973, however, this situation has been transformed: instead of growing together, the nation has grown apart, with the productivity growth dividend accumulating almost entirely to those in the top 20%—and especially the top one percent—of the family income distribution. These developments occurred in two stages. Stage one involved widening of wage inequality, exemplified by the CEO-pay explosion. Figure C shows that between 1979 and 2005 CEO pay went from being 38 times average worker pay to 262 times. Stage two has occurred post-2000 and has been marked by a jump in the profit share of national income. Digging deeper, the disaggregated wage data show that male workers at the bottom of the wage distribution have seen their real wages fall, while those in the middle have seen increases of about 10% spread over 25 years.1 From a cross-generational perspective, male workers at the bottom of the wage distribution now earn less than the previous generation, and their wages also grow more slowly. That means these workers have suffered both cross-generational wage “level” and wage “growth” deterioration. Male workers in the middle of the wage distribution have had some small wage gains relative to the previous generation, but their wages grow more slowly than in the past. They have therefore experienced a cross-generational deterioration of wage growth. This gloomy family income and compensation picture is compounded by other adverse labor market trends. Thus, average Americans are carrying more economic risk in the form of greater job loss risk, greater risk of permanent wage reductions, reduced length of job tenure, reduced health care coverage or increased health care costs, and greater retirement income security risk owing to the shift away from defined-benefit pension plans to defined-contribution plans (Hacker 2006). Macroeconomic Policy and the Erosion of Shared Prosperity The role of macroeconomic policy The disconnection between wages and productivity growth has been caused by many factors, including globalization and the changed balance of power in labor markets. But macroeconomic policy has also played a significant role through its impact on overall economic performance. Moreover, there also has been resistance to new policies that could have moderated or altered these trends. As such, policy has been marked by both sins of commission and omission. The current policy regime accommodates a new type of business cycle that emerged post-1979, in part due to policies of financial deregulation and global economic integration. This new type of business cycle is financially driven by asset price inflation and borrowing, with cheap imports helping contain inflation. This kind of cycle contrasts with the pre-1979 business cycles that rested on wages tied to productivity growth, full-employment, and high rates of capacity utilization that provided an inducement to invest.2 This new business cycle has, in turn, called forth a new macroeconomic policy regime. Thus, whereas the pre-1980 macroeconomic policy regime can be viewed as having put a floor under labor markets, the post-1980 regime implicitly puts a floor under financial markets.3 With regard to specific failures of macroeconomic policy, two standout: the first concerns monetary policy and the setting of interest rates, while the second concerns exchange rates and policy attitudes to the trade deficit. Additionally, fiscal policy has been problematic with regard to its impact on after-tax income inequality, and its response to the 2001 recession was particularly poorly designed. In the post-World War II era the Federal Reserve’s macroeconomic policy goals have always been a combination of full employment and price stability. During this era all Federal Reserve chairmen have wrestled with the problem of inflation. However, since 1979 there has been a significant shift in emphasis toward concern with inflation. The new regime manifests itself in several ways, the most noticeable feature of which is the prominence given to combating inflation. This has replaced earlier concerns with full employment, easy job availability, and rising real wages. Indeed, rising wages are actually viewed as cause for concern on the grounds that they may be inflationary, but the same standard is never applied to rising profit rates. The impact of this shift in macroeconomic policy is captured in Figure D, which shows the U.S. Beveridge curve that relates job vacancies and the unemployment rate. The 45-degree line splits the diagram in half, and regions above the line correspond to conditions of relatively full employment since the vacancies are high relative to the unemployment rate. Figure D shows that, whereas in the 1960s and 1970s the U.S. economy operated at a high vacancy-to-unemployment rate, this has been reversed since the 1980s. The Beveridge curve shifted adversely in the 1970s and 1980s (Bleakley and Fuhrer 1997). Part of this shift was due to demographic factors and the entry of the baby-boom into the workforce, which tended to increase job market churn. However, part of the shift can be attributed to policy, particularly the lack of attention to exchange rates and manufacturing. This contributed to waves of job loss in manufacturing, which created pockets of structural unemployment that have taken years to erase. A second critical contribution of macroeconomic policy concerns exchange rate policy, whose impact is felt in the trade deficit and manufacturing employment. The new policy regime has the Federal Reserve and Treasury turning a blind eye to the foreign exchange value of the dollar despite its critical impacts on manufacturing employment and the trade deficit. Indeed, the Fed has even tended to view an over-valued, “strong” dollar as a bonus that helps contain inflation by putting the squeeze on prices of manufacturing goods. Meanwhile, the Treasury has pursued a form of “exchange rate populism” whereby an over-valued dollar results in cheaper consumption good imports, which buys public acceptance of international economic policies that erode wages and manufacturing employment. The formal economic rationalization of this neglect of the trade deficit is that the deficit supposedly represents the decisions of “consenting adults” who are making consumption and investment choices that maximize their economic well-being. The putative logic is that economic agents are taking advantage of new opportunities for exchange created by trade agreements that have fashioned a global market, and if that results in a trade deficit, then so be it. This policy stance contrasts fundamentally with the policy that prevailed in the pre-1979 era, and it reflects the changed character of the American economy’s business cycle. Today’s economy is fuelled by credit expansion and asset price inflation, with cheap imports helping contain inflation. The pre-1979 business cycle rested on wage growth tied to productivity and full employment, which together fuelled consumption and investment spending. In that earlier regime, trade deficits represented a leakage of aggregate demand that undermined the virtuous circle whereby robust domestic market conditions promoted investment and capacity expansion. Trade deficits were therefore a problem, whereas now policymakers view them as assisting with control of inflation. The natural rate of unemployment4 Ideas have played an important role in driving these changes, promoting a retreat from full-employment policy on the grounds that it is not needed and that activist stabilization policies may actually worsen outcomes. No idea has been more influential than Milton Friedman’s (1968) theory of a natural rate of unemployment.5 Friedman’s natural rate of unemployment challenged the earlier view that there existed a trade-off between inflation and unemployment, and that the Federal Reserve could lower unemployment by enduring slightly higher inflation. Instead, Friedman asserted that the economy automatically and quickly gravitates to a natural rate of unemployment, determined by the economy’s institutions. Moreover, that rate cannot be affected by monetary policy, and attempts to use expansionary monetary policy to push unemployment below the floor set by the natural rate will be unsuccessful and only generate ever-accelerating inflation. This claim regarding the ineffectiveness of monetary policy and the absence of a long-run tradeoff between inflation and unemployment has been hugely influential in shaping policy choices on monetary policy. First, the claim of policy ineffectiveness has contributed to abandonment of earlier concerns with full employment. The logic is that, since monetary policy cannot have lasting effects on employment, trying to use policy to secure some concept of full employment is a useless exercise. In other words, employment and full employment should not be the focus of policy since they are simply beyond its reach. Second, the claim that monetary policy cannot affect unemployment and only affects inflation leads to a focus on inflation. And because inflation is considered detrimental, that pushes the case for price stability or zero inflation. For much of the 1990s the Alan Greenspan-led Fed explicitly talked of price stability being the long-run goal. However, after the brief flirtation with deflation during the recession of 2000, the Fed has now settled on a 2% inflation target to leave itself room to lower real interest rates in economic downturns. Third, the theory of a “natural rate” provides the Fed with cover when it comes to questions of wage and income distribution. According to the theory, real wages are determined in the labor market and are completely unaffected by Federal Reserve policy. Thus, the Fed may lament wage stagnation and worsening income distribution, but it bears no responsibility, nor can it do anything about it. Indeed, the situation is even worse because of the Fed’s asymmetric approach to nominal wages. When wages lag prices, the Fed sits on its hands, albeit with expressions of sympathy for workers. However, when wages outrun prices, the Fed stands ready to raise interest rates on the grounds that rising unit labor costs are inflationary. This creates a monetary policy trap for real wages and has macroeconomic policy supporting a higher profit share—something that is also supported by current labor market and international economic policy. Fourth, the theory of the natural rate contributes to driving the so-called “labor market flexibility” agenda that attacks unions, the minimum wage, and employment and worker protections. The logic is that these institutions prevent wages from adjusting downward, and thereby increasing the natural rate of unemployment. This explains opposition to the minimum wage by former Federal Reserve Chairman Alan Greenspan. Since the Fed adheres to natural rate theory, the Fed implicitly places its weight and influence behind the labor market “flexibility” agenda. The theory of the natural rate has been extensively criticized on both theoretical and empirical grounds (see Galbraith 1997; Palley 1999 and 2007). At the theoretical level it makes grand, unrealistic assumptions about wage flexibility and the way labor markets work, and at the empirical level it has been impossible to establish a tight, stable estimate of the natural rate. Thus, empirical estimates at any moment in time vary enormously, and the average estimate tends to track the actual rate of unemployment (see Staiger et al. 1997). The one clear theoretical prediction is that anticipated monetary policy should have no impact on unemployment and output. Yet studies have repeatedly found that this is not so—and among the best of these studies is one by current Federal Reserve Vice Chairman Frederic Mishkin (1982). Despite this, the “natural state” theory has been widely adopted by Federal Reserve policy makers, with enormous consequences for the framing and conduct of policy and for the way that the economy is understood and discussed more broadly. Constructing a New Macroeconomic Policy Regime Monetary policy Full employment is key to restoring the link between wages and productivity growth. That means that change in Federal Reserve thinking and in monetary policy is at the fulcrum of an agenda for shared prosperity. Full employment interest rate policy The first and most critical change the Fed must undertake concerns its construction of interest rate policy. Currently, the Fed hawkishly watches inflation and devotes much less attention to employment. This stance implicitly rests on economic understanding rooted in the theory of the natural rate of unemployment. Restoring proper policy weight to full employment therefore requires taking the theory of the natural rate of unemployment off the table and out of policy discourse. In its place must be put a new discourse that emphasizes full employment and rejects the notion that the Fed has no permanent impact on employment outcomes and wages. Full-employment monetary policy begs the question of what is full employment. Lord Beveridge, the originator of the Beveridge curve, defined it as a situation in which vacancies equaled unemployment so that there is a job available for everyone wishing to work. The Humphrey-Hawkins Act (1978) defined full employment as an unemployment rate of 4%. However, an unemployment metric is subject to some serious criticisms because the official unemployment rate (the Bureau of Labor Statistics U-3 measure) does not include workers who are “discouraged” or “marginally attached” to the labor force. These are workers not actively looking for work because they think they cannot find appropriate jobs. Additionally, the official rate does not include workers who want full-time work but are only able to find part-time work. An alternative employment-focused measure of full employment is the employment to working-age population ratio, which captures the extent to which the working-age population is employed. This ratio peaked at 67.1% in 2000, and that peak can serve as an indicator of full employment for the current economy. Pornography is difficult to define, which prompted U.S. Supreme Court Justice Potter Stewart to famously observe “I know it when I see it.” The same holds for full employment, which is also hard to define, but we know it when we see it. Simply put, full employment constitutes a condition in which jobs are easy to find. That implies a relatively high vacancy-to-unemployment ratio, a low official unemployment rate, low numbers of discouraged workers, little involuntary part-time work, and a high employment-to-population ratio. Under those conditions, the duration of spells of unemployment will also be short since jobs are plentiful. With full employment, wage growth will also track productivity growth as firms compete for scarce workers. Currently, the Fed defines full employment as a situation of rising inflation. A better definition would be one of wages systematically rising with productivity. According to that measure, the United States has operated below full employment for most of the last 30 years. The exceptions have been the late 1970s, the late 1980s, and the late 1990s, when wages started rising with productivity at the tail end of booms. The dangers of inflation targeting Not only has Federal Reserve interest rate policy privileged concerns with inflation over full employment, there are now indications that it is moving to adopt an explicit inflation-targeting policy regime. This would entail monetary policy being guided by the goal of hitting an explicit numerical inflation target. Federal Reserve Chairman Ben Bernanke has written extensively in favor of inflation targets (Bernanke et al. 1997 and 1999). Moreover, a co-author of his book on inflation targeting, Frederic Mishkin, has recently been appointed vice-chairman of the Fed. Additionally, there is much support for inflation targeting within the economics profession, again showing the importance of ideas in shaping policy. Considerable damage has already been done through persistent talk about the existence of an informal 2% inflation target. This talk has coordinated the bond market and given it a focal point against which to bind the Fed. Formally institutionalizing inflation targeting would compound this damage and further entrench natural-rate-based interest rate policy. The intellectual justification for inflation targeting comes out of the Fed’s natural rate framework. This framework claims that the Fed cannot do anything about unemployment and inflation is always bad. Given that, it therefore makes sense to aim for low and stable inflation subject to retaining a margin of space to lower nominal interest rates in recessions. However, the natural rate model is flawed. The reality is that the Fed manages macroeconomic activity, and in doing so it implicitly influences inflation, the unemployment rate, and the real wage.6 It is easy to see how an inflation target policy will bias all macroeconomic policy decisions toward low inflation. If policy is framed exclusively in terms of inflation, a 2% target will trump a 3% target even if that means higher unemployment. Conversely, if policy is framed exclusively in terms of unemployment, a 4% target will trump a 5% target even if it means higher inflation. How policies are framed matters to the outcomes because it affects perceptions and politics. The reality is that Federal Reserve policy influences inflation, unemployment, and wages, not just one of those areas, and needs to create policies accordingly. Modernizing financial regulation A key feature of the new business cycle is its reliance on credit expansion and asset price inflation as sources of demand. The increased presence of credit and asset prices is the result of both financial innovation and deregulation, and with it has come several problems. First, the economy is increasingly exposed to debt-driven asset price inflation. This process is potentially unstable, and the bursting of bubbles can generate serious economic harm. Yet, because of the reliance on asset price inflation and borrowing for demand growth, the Fed is reluctant to intervene in this process. Instead, it has an incentive to put a floor under asset prices. Second, individuals are not necessarily made better off by this process. Increased house prices go hand-in-hand with increased debt, meaning individuals carry more balance sheet and bankruptcy risk. Increased house prices also mean greater interest payments on the increased debt. Additionally, increased house prices strain the economic prospects of younger workers. With regard to stock markets, over-paying for stocks can have significant consequences for retirement income. For the Fed, the problem is that it has relinquished all of its tools except interest rates. That means it must now manage activity in both the real economy and the financial sector with just one instrument—the short-term interest rate. If it uses interest rates to manage asset prices, then it risks damaging manufacturing and the broader economy, which can be termed the “blunderbuss effect.” Conversely, if it ignores asset prices and uses interest rates to manage the real economy, it risks an unstable asset price bubble and debt build-up. to continue reading article Top of page

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