Rational Action

The Senate Democrats have released a few documents outlining their plans for the new session…

MaxSpeak, You Listen! DEMO WONKFEST
The Senate Dems have unveiled their agenda for this year. They have released a raft of documents on election reform, fiscal policy, veterans, economic policy, Medicare, education, reproductive rights, health care, supporting the troops, terrorism, and “Keeping America’s Promise.” (These are MS Word files. Feel free to post and circulate.)

By and large the policies are sound. I’ll start with a few that I felt really hit the nail on its head.

Spend Within Our Means. This legislation would restore the Senate pay-as-you-go rule to require that mandatory spending and tax legislation be fully paid for, or be subject to a 60-vote point of order.
Reinstate Mandatory Spending Cuts to Balance the Budget. The bill would also reinstate sequestration (across-the-board spending cuts) to enforce pay-go and discretionary spending limits.

Fiscal policy can be a useful tool to help smooth out economic downturns, but Congress has had an unusual tendency to continue running deficits after the crisis is over. Our current deficits haven’t been much of strain on the economy, as evidenced by low short- and long-term interest rates. this short term gain, however, must be financed over the long term — tax cuts without complementary spending cuts are just tax shifts onto younger people.
These bills effectively tie the Senate’s hands, promoting fiscal policy soundness at the expense of flexibility. Since government spending has gone out of control, with little method behind its expansion, this tradeoff is a positive one. The deficits will harm us much more in the long run than they’re helping us now.
Since the Democrats have become the party of fiscal discipline, they take their attacks on deficits one step further. Unfortunately, the economics behind this attack make less sense.

Define a Ceiling for the U.S. Trade Deficit and Foreign Debt. … While Congress has set a ceiling on the national debt, it has set no limit on the U.S. foreign debt, nor on the annual trade deficits that feed it. … Whenever the overall foreign debt reaches 25 percent of our GDP, or when the annual trade deficit reaches five percent of GDP, the Administration would be required to convene an emergency interagency meeting, and provide Congress with a trade deficit reduction plan to lower debt levels below the statutory ceiling.

The language of this point makes it seem pretty toothless: when the current account (I assume that’s what it refers to) deficit gets too high, officials have to meet and come up with a plan to reduce it. Just a plan. But what is its purpose? With floating rates, the international financial markets are well equipped to handle these kinds of adjustments on their own; the money markets are already acting to equilibrate America’s current account deficit by weakening the dollar. If the government wants to help out, its best bets are to strive for fiscal prudence and to pressure fixed-rate trading partners like China to float their currencies. However, I suspect the intended effect of this bill is to play off of the word “deficit,” ignoring that a current account deficit can actually be a good sign (e.g. as a result of one country’s growth outpacing that of others).
All in all, the Democrats put forward much-needed proposals to reduce the Federal budget deficit. This deficit reduction would result in a huge corresponding reduction in the current account deficit, enough to make a bill to control foreign debt an overstretching of governmental concern. The proposals for trade policies are more of a mixed bag. I’ll start with two problematic points…

End Tax Break for Companies Exporting Jobs. The tax code allows companies that earn income in foreign countries to defer paying tax on these profits until they are brought back to the United States. This quirk in the tax code provides a tax incentive for companies to move U.S. production facilities abroad, even if the eventual market for their products remains in the United States. Democrats will eliminate this loophole by requiring companies to pay tax immediately on the profits they earn abroad, but only with respect to products that are imported back into the United States.

A company sets up a branch in Malaysia and uses it to produce sweaters. The sweaters are sold in the United States, but unless the profits are moved back into the U.S., too, the company (I assume) only pays taxes to Malaysia. In effect, this Malaysian branch of the American company competes in the American market as though it is a Malaysian exporter. If we levy American taxes on this branch (in addition to the taxes that Malaysia already makes it pay), the company will need to compensate for the cost increases by raising the prices of its Malaysian-manufactured goods. The Democrats want you to think that the government-induced cost increase of foreign labor would make the company bring its production facilities back to the U.S., but they ignore that purely Malaysian manufacturers wouldn’t get hit by the American corporate income tax. Oops! The manufacturing would remain offshore, the only difference being that goods would be sold by a Malaysian, not American, company.

Enforce Our Trade Agreements and Maintaining Level Playing Field. Democrats are determined to pursue a trade policy that protects American workers and addresses our record trade deficit. This bill requires the Administration to identify the most important export markets that remain closed to U.S. products and provides the tools needed to open them. It also creates the office of Chief Enforcement Negotiator, whose sole responsibility will be to police our trading partners’ performance of their obligations. This bill will force China to stop manipulating its currency and force China to choose between revaluing its currency to its market value or facing a tariff on all Chinese imports to the United States equal to the unfair trade advantage China currently enjoys.

It’s silly to think that levying a tariff on Chinese goods would result in China’s devaluing its currency. Such a bold move would most likely result in some sort of reciprocal action by China. Do the Democrats want to be responsible for starting a trade war with one of America’s biggest trading partners? Furthermore, since much of America’s foreign [federal] deficit is financed by China’s currency manipulation, attacking the country for buying up American treasuries is a bit ironic. Balance the budget first, and the currencies will sort themselves.
Another point: the focus on “enforcement” and “export markets” is wrongheaded. When a country seeks through protection to grow its exports and limit its imports, particularly when that country is the United States, it’s bound to inspire a similar response in its trading partners. If everyone protects imports, then no one can grow exports. The language is sufficiently vague so as to make this point a toothless political ploy, if that’s what the Democrats want it to be.
Finally, I’ll end on a positive note with a really good proposal:

Retrain Workers Displaced by Trade. Trade Adjustment Assistance has helped thousands of manufacturing workers get retraining, keep their health insurance, and make a new start. This bill will expand TAA to cover service workers who lose their jobs to offshoring. This bill will help rebuild communities hurt by outsourcing by integrating political and economic organizations and coordinating Federal, State, and local resources to develop a new plan and a new future for the people who live in them. Unemployed workers learning new skills can not stick with their training if they do not have effective health coverage. This bill allows them to complete their training by offering an effective health benefit.

We should pursue free trade because it makes nearly everyone (American citizens and foreigners) better off. There are two caveats to free trade, though, that we must acknowledge: it lessens job security, and it often makes those who lose their jobs to foreign competition worse off. The TAA helps the cause of free trade by making it palatable to workers — while their jobs might be less secure, they don’t have to worry that cheap foreign labor will suddenly reduce their income to zero. The winners still win, but TAA ensures that the losers don’t necessarily lose. Since outsourcing is just another form of free trade, it makes sense to extend TAA to cover it. Workers are thus insured against outsourcing, and don’t have to treat it as a constant threat.
So, in summary: the Democrats have got it mostly right on Economic policy. They attack the deficits in a useful way, one which will likely resonate well with the public. With respect to free trade, most of the fundamentals are there. The TAA proposal is a shining example of Democratic pragmatism. The other proposals tend to miss the mark, but in a mostly harmless way. My main worry is that the party will resort to pandering to public fears of foreign competition, when it instead should be emphasizing the benefits of increased world trade. Given what we can see here, the party has sufficiently many talking points on the side of free trade and protectionism to go in either direction. It’s my hope that they choose the former.

Phew. Longest. Blog post. Ever.

This entry was posted on Monday, January 24th, 2005 at 7:45 pm and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.