Trade, trickle down, and the Fed: Revisiting three points from the big debate

September 28th, 2016 at 6:00 am

Before the first presidential debate fades into the next news cycle, there are three economic points that bear revisiting:

We need a new paradigm for trade policy. The outsider campaigns of Trump and Sanders, along with the realities of many people and communities hurt by globalization, have elevated international trade as a major issue in this election. Trump advertises an unrealistic nostalgia, a return to a time when trade flows were a fraction of their current size. His word salad on the issue the other night underscores the fact that there is no coherent plan to get back there even if we wanted to. Clinton correctly points out that “we are 5 percent of the world’s population; we have to trade with the other 95 percent.” She aspires to reshape, not restrain, globalization.

What’s needed is a framework for the type of “smart, fair trade deals” that Clinton says should be the norm. Yes, that framework should include enforceable disciplines against other countries’ currency management, something both candidates support. But much more is needed.

Trade expert Lori Wallach and I just published our proposals in this space, which include both process reforms and new negotiating objectives.  Our ideas, if adopted, would increase the transparency of trade negotiations, reduce corporate influence over the eventual agreements, discontinue protectionist practices and provisions that put sovereign laws and taxpayer dollars at risk, and strengthen environmental, health, and labor standards both here and abroad.

Trickle-down economics still doesn’t work. Trump bragged that his “tax cut is the biggest since Ronald Reagan” and asserted that “[i]t will create tremendous numbers of new jobs.” To say the least, the empirical record belies that assertion, as I and others have often noted.  The graph below shows that, on the individual side of the tax code, there is no historical correlation between the United States’ top marginal tax rate and employment growth, a far different relationship than you’d expect to see if claims like Trump’s were correct.

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On the corporate side of the code, tax expert Bill Gale and his colleagues summarize that “there is virtually no evidence that broad-based [corporate] tax cuts have had a positive effect on [economic] growth…That has been amply demonstrated at the national level, where tax cuts have eroded revenue without discernable effect on economic activity.”

One of the most striking and recent real-world rebuttals to the narrative Trump continues to push comes from Kansas, where one of his top advisors made similarly rosy predictions about a massive tax cut that “have proved strikingly inaccurate.”

As I’ve said before, if facts could kill trickle-down propaganda, it would have died long ago. The one thing I can say is that, while it does seem to be the case that such tax plans may buy some votes from their beneficiaries, the rest of the electorate doesn’t buy it, and there are fortunately a lot more people in the latter group.

Federal Reserve policy matters and deserves discussion during election season. As I recently wrote, Trump’s comments about the Fed’s decision-making were completely wrong.  But the fact that the Fed came up in the debate was a positive; “there’s no reason such an important public institution – one with such a large impact on people’s lives – should be off limits in political debates.”  It was also great to see some discussion of the Fed during the Democratic primary, when both Bernie Sanders and Clinton indicated support for making the nation’s largest bank more representative of the general population.

There’s much beyond these points that matters to the economy, of course, and last night’s debate didn’t even mention several issues that affect millions of people and which the next president absolutely must address: poverty, health care, and immigration, to name a few.  But if we can get our trade policy right, debunk trickle-down tax nonsense once and for all, and inject progressive monetary policy discussions into the political debate, we’ll be introducing a lot more substance than I dared to hope for in an election season that’s been a touch devoid of such matters.

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7 comments in reply to "Trade, trickle down, and the Fed: Revisiting three points from the big debate"

  1. Person says:

    I didn’t watch the debate, so I cannot comment on anything said there other than to say that I’m glad I didn’t watch. I would have found it frustrating in many ways. There is one point on trade where I disagree with both sides, and neither side is being honest:

    “Trump advertises an unrealistic nostalgia, a return to a time when trade flows were a fraction of their current size. His word salad on the issue the other night underscores the fact that there is no coherent plan to get back there even if we wanted to. Clinton correctly points out that “we are 5 percent of the world’s population; we have to trade with the other 95 percent.” She aspires to reshape, not restrain, globalization.”

    I emphasize ‘even if we wanted to’, because that is the most pertinent point here. Nobody in Washington wants to change trade in any significant way. Essentially they don’t care what people think. ‘There is no coherent plan?’ Of course there isn’t a coherent plan because nobody in Washington wants to create a coherent plan. This is elitism at its best. This is PRECISELY what is wrong. Nobody anywhere that bows to the party elites has anything interesting to say on this issue. NOBODY. A little reversal of logic on Clinton’s part has clouded the issue.

    I’m certain Jared’s plan is better than most, but I’m also certain it won’t be enough to settle this problem of elitist vs. voter.

    They talk about trade like it is a law of physics. You lost us, and we’re not coming back! We’re waiting for the next crisis to inject anything interesting into this discussion.


  2. Person says:

    I have one final, practical idea that I think could begin to solve this problem.

    We need a US governmental agency that is dedicated to solving the problems we’re experiencing with globalization. Perhaps it could lure some people away from the Federal Reserve, the BLS, etc… It needs to be a team of economists and business leaders working together to solve these problems. But one absolutely necessary law would be to bar anyone working for that agency from ever becoming an executive or board member of a company that stands to profit from the outcome.

    What would this agency do? They would start with a single country that we wish to become a more productive better trading partner. They would be dedicated to helping that country develop their own economy by helping them to develop their own governmental policies and business strategies that would make them an EVENTUAL fair trading partner, but certain requirements would have to be met before that was placed on the table. Perfect it with one country and them move on to others.

    We cannot count on trade agreements or global capitalism (profit motivated business) to do this for us. It has never worked in the past and it won’t work in the future.

    It has to be a dedicated and free of ulterior, profit-driven motives. It would be dedicated to helping them and it would have to have very strong measures to guard against exploitation of their workers and our workers.


  3. PeterE says:

    Besides developing a framework for smart trade deals, perhaps you and others could develop a simple and persuasive way to explain the costs and benefits of trade to ordinary voters.


  4. Smith says:

    The new paradigm should be less trade. Americans can not and should not compete with Chinese labor that is not free. Where is the movement for labor rights in Mexico? Why are wage rates there still so low?
    The argument against tax cuts is weakened by the eight years of Democratic ineffectiveness. This is partly explained by Obama’s eagerness to strike a grand bargain, as if deficit cutting was the goal, vs recovery. The economic generals were trying to relive the Clinton years though faced with FDR’s economy.
    Federal Reserve policy is to create unemployment in order to control inflation. This must end. Other means of controlling inflation must be employed. Control prices by controlling prices, not by throwing people out of work.


  5. Chris Herbert says:

    I’m beginning to appreciate the movement away from globalization and towards more self sufficiency. The cost benefit analysis of globalization is incomplete, in my opinion. There’s the pollution and waste involved in transportation and distribution, for example, which seems to be ignored. And don’t forget that your spending is my income. Even if the price of a product is higher with domestic production, doesn’t that mean someone’s income is increased correspondingly? And again, what is the dollar benefit of less pollution, a cleaner environment and no doubt a healthier environment? How much of our spending is economically wasteful? I think closer to home may be a narrative that has economic justification.


  6. Person says:

    Wow, Jared! I’m sorry I commented before reading your proposals. I’ve gotten in the habit of doing that because so few people seem to be in touch with these issues the way you are.

    It seems like every time I have come up with some ideas, you are already ahead of me. You’ve captured the essence of what I’ve been trying to say on this subject for a lone time. Bravo!

    In my above recommendation for a new governmental agency (new is better because the employees need to be weeded out for ulterior motives), I would nominate Jared to run it.

    Great job! I’d like to see some evidence that Hillary plans to implement your recommendations. If she does that and makes it convincing, I’ll get behind her again.

    Thanks, Jared!


  7. Trumping Trade | Bruegel says:

    […] Jared Bernstein writes that, before the first presidential debate fades into the next news cycle, we need to realize that we need a new paradigm for trade policy. The outsider campaigns of Trump and Sanders, along with the realities of the many people and communities hurt by globalization, have elevated international trade as a major issue in this election. Trump advertises an unrealistic nostalgia, a return to a time when trade flows were a fraction of their current size. His statements during the debate underscore the fact that there is no coherent plan to get back there even if we wanted to. Clinton correctly points out that “we are 5 percent of the world’s population; we have to trade with the other 95 percent.” She aspires to reshape, not restrain, globalization. What’s needed is a framework for the type of “smart, fair trade deals” that Clinton says should be the norm. Yes, that framework should include enforceable disciplines against other countries’ currency management, something both candidates support. But much more is needed. […]


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