When it comes to cracking down on opponents of the selective protectionism that passes for free trade in Washington policy circles, David Broder is one of the foremost enforcers. He is working overtime this Sunday, denouncing the irresponsibility of the Democratic presidential candidates for not supporting his trade agenda.



Just to remind everyone, these trade deals are slectively protectionist because they only break down some trade barriers, while leaving others in place, and actually strengthening some forms of protectionism. The main barriers that the "free-traders" want to eliminate are the barriers to importing manufactured goods into the United States. Eliminating these barriers has the effect of placing U.S. manufacturing workers into direct competition with low paid workers in the developing world. While this lowers the price of manufactured goods for consumers in the United States, it also reduces the wages of manufacturing workers and less-educated (non-college educated) workers more generally. As a practical matter, the "free-traders" have largely succeeded in removing the barriers to trade in manufactured goods (we can buy anything we want from China), so the remaining deals will have little impact in this regard.



The free-traders are absolutely fine with the protectionist barriers which keep up the wages of highly paid professionals. There are professional and licensing barriers that prevent foreign doctors, lawyers, and other professionals from working in the United States. These barriers cost U.S. consumers hundreds of billions of dollars every year. The "free-traders" don't object to barriers that sustain their own high wages or those of their friends. (They all claim to oppose such barriers, but no one has ever been denounced in the pages of the Washington Post for not supporting liberalized trade in physicians services.)



The protectionist part of these trade deals is increasing the stringency of patent and copyright protection. Almost all of the trade deals pushed by the U.S. increase patent protection for prescription drugs and copyright protection for music, movies, and software. These are incredibly costly forms of protectionism since items that would otherwise be cheap (drugs) or free (downloaded music and software) are made very expensive as the result of government granted monopolies. But, the free traders like pharmaceutical companies and software tycoons more than they like textile workers and autoworkers, so they denounce the opponents of protectionism for their products as "protectionist."



So, it's ad hominum Sunday as Mr. Broder calls out those who aren't with the program. Enjoy the entertainment.



--Dean Baker

Posted at 08:35 AM

The Fed Does Not Buy Mortgage-Backed Securities!!!!!!

The headline writer at USA Today got it wrong today. We don't know that "home loan demand surges as interest rates drop." The article reports on a large increase in the Mortgage Bankers Association weekly mortgage application index.



I am usually a big fan of this index as an up-to-date source of data on the current state of the housing market. However, recent numbers are likely skewed upward for two reasons. First, while the association gets data from close to half of all mortgage lenders, subprime lenders are under-represented in the index. This means that an important segment of the mortgage market that is contracting rapidly is not getting weighted properly. In addition, some applicants who might have otherwise gone to subprime lenders not included in the survey, are now going to members of the MBA, because the subprime lenders have shut down.



The other reason why the applications number is likely skewed upward is that mortgages are being denied with far greater frequency than was the case a year or even six months ago. While the overwhelming majority of applications were approved last year, the percentage of denials is far higher now. This means that the same number of applications corresponds to fewer mortgage actually being issued. In principle we can adjust for this change if we have current data on the success rate of applications, but lacking this information, we really can't make good comparisons between periods in which the success rate of mortgage applications is likely to differ substantially.



--Dean Baker

Posted at 09:14 AM

NYT Is Too Obsessed With Bush Bashing to Think Seriously About the Economy



As the economy slows the Fed usually acts to lower interest rates to boost the economy. The NYT says that this is what the Fed should be doing now, except that it can't because if the Fed lowered interest rates, the dollar might fall. The editorial then blames the Bush tax cuts for this problem.



Okay, Econ 101 time. One of the main ways in which lowering interest rates is supposed to affect demand and stimulate the economy is by lowering the dollar and improving our trade balance. A lower dollar makes imports more expensive to people in the U.S., thereby encouraging people to buy domestically produced goods. It also makes our exports cheaper for people living in other countries, thereby encouraging exports. The link between interest rates and the dollar can't be blamed on Bush's tax cuts, it is basic economics.



In fact, we all should want a lower dollar, unless we think that the country should have a trade deficit equal to 5 percent of GDP forever (which of course we can't). As an alternative to the falling dollar, the NYT proposes that we can correct the trade deficit by increasing savings, especially by taking back the tax cuts. (Actually, the main reason that savings are despressed in the U.S. is the housing bubble, which has boosted consumption. The impact of the tax cuts is much smaller.)



But, the NYT is right that higher savings can reduce the trade deficit. There are two routes through which higher savings can reduce the deficit. Other things equal, higher savings slow the economy. (If we have less consumption, and no offsetting increase in other demand, then we have a weaker economy.) When the economy weakens, we buy less of everything, including fewer imports. In other words, if we throw the economy into a severe recession, we can move towards balanced trade.



Is the NYT advocating a severe recession to cure the trade deficit? It seems that they are, because the other mechanism through which increased saving can be expected to reduce the trade deficit is by (drum roll please ……..) yes, A LOWER DOLLAR!



Of course the surging trade deficit predated Bush and the tax cuts. The trade deficit went from just 1.2 percent of GDP in 1996 to 3.9 percent of GDP in 2000. You remember 2000, that was the year when we had a budget surplus of more than $200 billion, about 2.4 percent of GDP. It's a bit hard to blame the huge 2000 trade deficit on a budget deficit in the real world. The bottom line here is that the U.S. (under Clinton and Rubin) had a high dollar policy. They said it was a good thing to have a high dollar -- it keeps inflation low.



Of course, in the short-term, a high dollar is good. Just like a tax cut, it can allow people to enjoy higher living standards by consuming goods that they are not paying for. But, in the long-run, the trade deficits from an over-valued dollar are no more sustainable than tax cuts that lead to bloated budget deficits. The dollar is at risk of falling -- in fact must fall -- because Rubin and Clinton allowed it to rise to an unsustainable level. It's that simple.



There are plenty of good reasons for criticizing Bush's economic policies and especially his tax cuts for the wealthy. But Bush can't be blamed for basic economic relationships. The trade deficit can only realistically be addressed by a falling dollar. We cannot blame President Bush for this fact.



--Dean Baker

Posted at 05:16 AM

Did Senators Clinton, Dodd, and Schumer Really Know Nothing About the Housing Bubble?

This is the obvious unasked question in a Financial Times piece on plans for helping homebuyers who stand to lose their homes. It does seem incredible that these people could really have been oblivious to the unprecedented run-up in house prices over the last decade. It would have been reasonable for the FT to question the senators or their staffers about how they could have overlooked the most important force driving the economy.



Incidentally, the bailouts being discussed would quite likely benefit holders of mortgages that might otherwise be nearly worthless. Some of the holders of these mortgages include banks and also hedge funds. Yes, you've heard of hedge funds -- the funds that are managed by people who earn hundreds of millions of dollars but don't have to pay the same tax rates as the rest of us. It is said that hedge fund managers are highly skilled investors. Since they can get the Senate to bail them out when they get in trouble, I suppose this is true.



--Dean Baker

Posted at 10:58 PM

Are Taxpayers About to Bailout the Hedge Funds?