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View Diary: The Rotten Core of Populism. (79 comments)

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  •  On the economic of immigration & trade (1+ / 0-)
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    This is a very good diary; didn't mean to hijack it with my response to the (I thought) provocative title. On the intended topic, though, the potential for backlash against immigrants and trade, it is right on target.

    The problem with the economics of these issues is that when the economy is operating near capacity, these things tend to be positive. When the economy is below capacity, and you have high unemployment, they can turn into negatives. When the worker who becomes unemployed, because his job is taken by an immigrant or shipped overseas, then ends up on unemployment, there is no net economic benefit. Indeed, society ends up paying twice, as taxpayers then have to pay the worker who is no longer working. The theory of "comparative advantage" only works when the economy is actively managed to remain near full employment.

    The trick is in convincing people that the real culprit is the mismanaged economy, and not the immigrant or foreign worker who is only trying to provide for his own family.

    Bill Clinton as president managed to do this fairly well; free trade at that time likely had a net positive impact, as his economic team got the economy to a low unemployment rate, and the government actively instituted aggressive programs to help retrain workers who were displaced. But, we also have to recognize that the economic costs of the trade deficit which also resulted.

    Large trade deficits can be unsustainable over time. They essentially represent a relative loss of wealth in the US, as more is owed to foreigners. This doesn't mean that trade must be completely "balanced"; the US is a wealthy country which can probably afford to lose a bit of ground in relative terms if it means we are all better off (a smaller share of a larger global pie).

    But, there are limits, and negative effects of persistent large trade deficits. One under emphasized impact is the effect on the banking sector. If the economy as a whole is borrowing in order to consume more than we produce, then this gets mediated through the banks: banks end up with more loans than deposits.

    Banks thus must raise the additional capital either directly from foreigners (such as by "securitizing" mortgages and selling them overseas) or from the US government (more borrowing from the Fed, while the treasury itself concurrently sells more bonds to foreigners). So even the banking crisis is related to our policy on trade.

    The ultimate solution is likely to be some middle ground, where the deficit is still there but smaller than it has been, and US export industries play a larger role. In order for this to happen, however, there likely needs to be some devaluation of the currency.

    But, the economic elites would prefer to have deflation, rather than full employment. The banks themselves would prefer deflation, as inflation would cut into future profits for lenders. In the current deflation, banks are very profitable on the loans that are actually being paid off; so they would prefer to simply sell off the bad loans to taxpayers, keeping those future large profits for themselves.

    And so, in a roundabout way we are somehow back to the original meaning of the word Populism, and the "cross of gold".  In the years leading up to this crisis, while lending, and broader money measures went through the roof, it is instructive that the expansion of the actual currency was no more than it would have been under a gold standard.

    I am optimistic that Obama, and a Democratic Congress, will be able to engineer some form of economic recovery, through a greatly improved fiscal policy.  But policy will still be far from ideal without the full co-operation of the Federal Reserve, as well as without some global international co-operation aimed towards achieving some reasonable balance in trade and foreign currency exchange.

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