Volcker: Does Trade Matter? The Old Guy Says, "Yes"
That Obama named “Mr. Volcker to lead the President’s Economic Recovery Advisory Board” suggest that trade might finally matter. Consider Fed Chairman Volcker’s remarks to the House Banking and Committee in 1986; consider also ex-Fed Chairman’s 2005 piece in the Washington Post.
At the time of his remarks to the House Banking Committee in 1986, U.S. trade deficit had dipped sharply to about $125 billion, far less than where it stands now.
Volcker saw the 1986 trade and fiscal deficits as “interrelated.” Those “deficits in our budget and trade accounts will take years to correct.”
Take for instance, the trade problem. The dollar had risen to extraordinary high levels by early 1985, with the effect of undercutting our trade position vis-à-vis major industrial competitor…The net result was to drive our trade deficit to a rate of close to $150 billion by the end of last year and to about $125 billion for the year as a whole.
In fact, the rate of demand increase, if maintained, would probably be beyond our long-term growth potential. In that sense we continued to live beyond our means, at the expense of a widening trade deficit.
Now consider his remarkable 2005 piece in the Washington Post. To many, those were boom years. For Volcker, there were “disturbing trends: huge imbalances, disequilibria, risks…”
It’s all quite comfortable for us. We fill our shops and our garages with goods from abroad, and the competition has been a powerful restraint on our internal prices. It’s surely helped keep interest rates exceptionally low despite our vanishing savings and rapid growth.
And it’s comfortable for our trading partners and for those supplying the capital. Some, such as China, depend heavily on our expanding domestic markets. And for the most part, the central banks of the emerging world have been willing to hold more and more dollars, which are, after all, the closest thing the world has to a truly international currency
The growth was a mirage; we produced little, imported almost double what we exported. Imports exceeded exports by a 2:1 ratio.
It’s not that it is so difficult intellectually to set out a scenario for a “soft landing” and sustained growth. There is a wide area of agreement among establishment economists about a textbook pretty picture: China and other continental Asian economies should permit and encourage a substantial exchange rate appreciation against the dollar. Japan and Europe should work promptly and aggressively toward domestic stimulus and deal more effectively and speedily with structural obstacles to growth. And the United States, by some combination of measures, should forcibly increase its rate of internal saving, thereby reducing its import demand. [Italics mine]
Volcker saw the problem as “intractable”–and perhaps sarcastically recognized the “establishment” solution for what it was: “pretty,” not very realistic.
Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it.
Fond dreams fed such pretty pictures. Did establishment economists really think any of the following would just miraculously happen?
- Asian economies would permit and encourage a substantial exchange rate appreciation? China had and still has no interest in such an appreciation if that appreciation hurt its exports. (Recently, China tightened its dollar exchange rate to protect some of its sensitive industries.) Furthermore, China is a country with a plan of rapid, non-stop, catch-up industrialization. Exports are its strategy for rapid growth. Import raw materials; export finished goods.
- Japan and Europe would stimulate their economies? Japan, which depends on exports, now is starting to run a trade deficit. Europe, to a lesser extend, had the same problem with China, a growing trade imbalance. Only this part of the picture, however, had any likelihood of occurring.
- The United States, by some combination of measures, would “forcibly increase its rate of internal savings, thereby reducing its import demand?” Very unlikely, given the corporate and financial honchos now in the U.S. saddle.
This last part of the pretty picture needs elaboration, for it is the part we can control–if we had the will to do so. But first, we should at least recognize some aspects of the game that has been played.
Those parts of corporate American that set up shop in China enjoyed enormous profits, from its great retailers–such as Walmart, which now should proudly and publicly flash it’s “Made in China” label–to its great manufacturers of drugs, auto parts, IT, and many others. Did we worry? No. We glowed over the stock market boom.
The yuan peg, together with cheap labor, export tax rebates, no environmental overhead–all of this increased profit margins. Business was good. If a goods could be manufactured where overhead is low and then sold to a country where the currency is much, much stronger, well, what CEO would not pay himself a handsome bonus for the wisdom of seeing that kind of light?
Remember when many complained not so long ago about the loss of our textile industry to China? Schumer demanded reports on the currency mismatch. How quickly that fuss ended. Once the shops were torn up in the U.S. and replanted in China–and the displaced workers were absorbed back into the U.S. work force–, who really cared? Industry after industry have left our shores. It is not that we desperately need a textile industry, but we do need a net trade balance.
Another part of the “pretty picture” we should understand is that our leaders have been primarily focused on the consumer–not the worker. What was Paulson’s and other leaders–Democrat and Republican–first response to the present crisis? Send out rebate checks! Get the consumer spending again!
Talk about grabbing the wrong end of the stick. What did Bush want in exchange for support for a loan to the Big Three? Free trade with Columbia! Regardless of how we viable we think our auto industry is, look at the priorities. Can we argue that free trade with drug-ridden, gangland Columbia is going to improve our net trade balance? Did it with Mexico? With no environmental or labor safeguards it failed miserably in Mexico.
In 2007, net trade (millions of dollars) with Mexico was $-77,590; with Columbia $-1,237, with South and Central America, $-106,463; and with the European Union, $-113,936 Again, can anyone argue that our recent trade agreements have improved our net trade balance–or that any subsequent ones will?
Or has anyone come up with an idea of how to force the American consumer to save more? Give him more credit cards? Lower interest rates? Pour money into banks so that the banks can lend more?
An eighty-year old straight-shooting geezer trundles forward, ready, I hope, to tell the truth to the President’s panel of Economic Advisors. Oh, to be fly on that wall. No more young pups with fond hopes and pretty pictures. No more squishy, left-wingers painting teary pictures of poor struggling Columbian florists. No more grim-faced, tight-lipped right-wing hard ballers pumping for a stronger dollar, less regulation, and a trade policy that has been a disaster..
Let’s take Volcker’s old-fashioned view: Think about trade.
Quick globalization has become a terrible mess.
Maybe we should export our financial wizards, our corporate honchos, our lobby-dizzy politicians.
Let them plant rice fields or work for Nike. At least we would be rid of their “get-me-rich-quick” schemes. With them, we should send their Jesuit-style, free trade apologists, those economists who proclaimed that quick globalization promises endless bounty for everyone.
Furthermore, we could finally put those high salaries and stunning bonuses to good use. Those economists could explain to their CEO and financial masters that every CEO working for peanuts in a Chinese Nike plant or painfully planting a Chinese rice field creates thousands of productive jobs in America.