This prospect has many folks, including Paul Krugman, terrified. I don’t share his fear.Not only is Paul not terrified, Dean later notes that high tariffs on Chinese goods such bad policy that he might be terrified. Can we stop we these cheap shots? Here is the basic underlying premise of Dean’s substantive comments:
I should also say that tariffs are not my preferred way of dealing with the country’s trade deficit, which I do consider a problem. Anyone who thinks secular stagnation (i.e. not enough demand in the economy) is a problem should believe the trade deficit is a problem. If the trade deficit were 1.0 percent of GDP rather than 3.0 percent of GDP we would have been approaching full employment many years ago.In other words, Dean is assuming we are not close to full employment so we can go all Keynesian here. Look, I agree we are not at full employment so I will go all Keynesian too. If Dean is suggesting Paul does not share this view when we are below full employment, he is not being honest with his audience. And yes I know some think we are at full employment right now. Can we simply say these folks are wrong? Dean continues:
But the normal mechanism for reducing a trade deficit is an adjustment in currency values. This means that the currency of the country (the United States) with the deficit falls and the country with surplus (much of the rest of the world) rises. When the dollar falls in value relative to other currencies, U.S. made goods and services become more competitive internationally. That will lead to more U.S. exports, and fewer imports, bringing trade closer to balance.Not disagreement here or from Paul I would presume. But now Dean goes a bit off the rails:
This adjustment in currency values has not taken place primarily because foreign governments have bought up massive amounts of dollars. This is partly as a reserve currency to protect themselves against financial crises.Does Dean really think we are in a world of pegged exchange rates? Maybe China was doing currency manipulation a decade ago but they are not now. The main reason that the dollar is too strong is that the ECB is adopting easier monetary policies than we are. Dean notes that Trump has finally abandoned this currency manipulation nonsense and is going for trade wars. Of course the folly of both trade wars or currency manipulation was exposed by Joan Robinson in 1937 when at least some countries were under a pegged exchange rate regime. But I challenge Dean to think about tariffs under floating exchange rates. If we adopt Trumps tariffs, the dollar would further appreciate hurting export sectors even if it helps the favored import sectors. Dean to his credit wants to talk about the distributional aspects of all of this but he needs to address what Paul wrote:
the tariffs now being proposed would boost capital-intensive industries that employ relatively few workers per dollar of sales; these tariffs would, if anything, further tilt the distribution of income against labor.I’m sure Dean has heard of the Stopler-Samuelson theorem which in this application would imply higher profits and lower wages. So explain to me – how is Dean being more progressive than Paul on this issue?