Dean Baker responds

I am fortunate to be in dialogue here with seven extraordinary intellectuals, from whom I have learned much over the years. Their responses address a wide range of issues, and I can’t possibly comment on all of them. But there are a few points that I want to clarify and emphasize.

First, Daron Acemoglu questions the extent to which certain policy choices could reduce the U.S. trade deficit. He correctly points out that a capital-account surplus implies a current-account deficit. In other words, because foreigners are anxious to invest the United States, it is inevitable that the country will run a current-account or trade deficit.

You can’t win an argument with an accounting identity, but it is important to look deeper, for the causal process. As I mention in my essay and underscore in my book, we didn’t always have this vast inflow of capital from the developing world. Until the East Asian financial crisis in 1997, the developing world followed the textbook path. It was a large net importer of capital from rich countries.

I argue that it was the failed bailout from this crisis that forced developing countries in East Asia and elsewhere to become net exporters of capital. They began accumulating massive reserves in the years after 1997. This is not a story of private investors putting money in the United States in hopes of obtaining returns and security. Rather, governments in developing countries realized that the International Monetary Fund could not be counted as a beneficent backstop in the event of crisis. Those governments sought protection elsewhere—in large foreign reserves. Which is to say, the U.S. capital-account surplus, and therefore trade deficit, is a policy outcome, not a simple result of market forces.

I very much agree with Acemoglu’s argument for a stronger welfare state and system of retraining displaced workers. However, I would add three qualifications.

First, there are real economic costs associated with an extensive system of taxes and transfers. The right often exaggerates them, but nonetheless they are real. The second point follows directly. If policies redistribute upward ever more before-tax income, efforts to offset that redistribution with taxes and transfers will inevitably run up against limits and prove inadequate. Third, we live in a country where tax and transfer policies face major political obstacles. If this path for reducing inequality is blocked, then we must look for other routes. We won’t get far touting policies that are politically impractical.

Susan Houseman makes several valuable points. She has done the best research disentangling the effects of trade and productivity growth as sources of job loss in manufacturing in the last two decades. It is unfortunate that many economists have sought to conceal the impact of trade rather than deal with the issue honestly. We can argue whether the benefits of recent trade patterns outweigh the costs, but we have to start by being honest about the costs.

Alan Tonelson also makes several interesting points, but I have to disagree with the thrust of his argument. He correctly focuses on lack of demand and is concerned with getting foreigners to buy more American goods, thereby reducing the trade deficit. (Americans can also buy fewer foreign goods.) But, while I agree that we should be looking to get the trade deficit closer to balance—my preferred route is currency policy—I don’t see this as essential for getting the economy to full employment. We could attain full employment through larger government budget deficits or policies designed to shorten workweeks or work years, thereby reducing supply.

For reasons I detail in Rigged and prior work, I see it as my job to push for policies that lead to full employment. Although trade balance is desirable, full employment is the more important goal. The best route to that goal is the one that proves politically feasible, and that may be consistent with substantial trade deficits. If an ambitious public investment program produces full employment, but the country still runs a large trade deficit, I don’t see that as a problem.

I strongly agree with the general direction of Michael Piore’s comments on technology. Technological development is not an autonomous process; it is driven by policy. Among the policies that have driven such development are the strengthening and lengthening of patent and copyright protections. Over the past four decades, these have been major contributors to inequality. We should be looking in the opposite direction, toward more open—and, I would argue, more efficient—mechanisms for financing innovation.

Harley Shaiken’s work has hugely shaped my view of NAFTA and subsequent trade deals. As Shaiken shows, these deals did not accidentally put downward pressure on the wages of large segments of the U.S. workforce. This outcome was achieved by design.

Robert Lepenies’s and Peter Evans’s comments raise a similar set of issues. As both point out, for most of the country’s workers, the negative redistributive effects of trade openness have been far more significant than the economy-wide gains from trade liberalization. While in principle it is possible to redistribute from winners to losers, this never happens in sufficient degree, leaving most of the country’s workers worse off.

Evans argues that we need a clearer view of capitalists as job destroyers rather than job creators. I take a more neutral stance and see them as profit maximizers who would gladly either destroy jobs or create them: whichever adds to the bottom line. As Lepenies emphasizes, drawing on Polyani—another influence on my thinking—markets are almost infinitely malleable. They can be, and often are, structured so that the best way to make profit is to squeeze wages and discard as many workers as possible. It is the job of progressives to create market structures that produce different outcomes.

One way to do so is by enhancing the bargain power of ordinary workers. The right has been extremely effective in doing the opposite—rigging the market in ways that undermine that bargaining power. I have focused on trade in part because the structure of trade has been an important factor in this process, but also because it is an especially visible one. Everyone knows the story of workers who have lost well-paying manufacturing jobs because they could not compete with lower-cost labor in the developing world. As I point out, it was conscious policy that confronted manufacturing workers with this competition, while protecting the most highly paid professionals.

But trade is only part of this story. When the Federal Reserve raised interest rates last month, it was acting to prevent the economy from creating too many jobs. The Fed is concerned that if more people earn more money, inflation will take off. But the Fed’s preventive medicine comes at great cost. By slowing job growth, the Fed is not only keeping employment down but also weakening the bargaining power of tens of millions of less-educated workers, depressing their wages. The workers who can’t get jobs or are paid less thanks to Fed policies are disproportionately African American and Hispanic.

The effects of policy are hardly trivial. I have focused on IP protections not just because they are good examples of selectively protective policy but because they also take a great deal of money out of the pockets of ordinary workers. The gap between the protected and free-market prices of pharmaceuticals and medical equipment alone may be more than $400 billion a year. This is an order of magnitude larger than the amount at stake in transfer programs such as food stamps and Transitional Assistance for Needy Families.

Similarly, the special treatment of the financial industry has led to enormous bloat at the public’s expense. The waste is effectively a tax on the economy in the neighborhood of $200 billion per year. The revenues collected are paid to some of the richest people in the country. A broken system of corporate governance allows CEOs and other top managers to get enormously rich at the expense of shareholders.

In these and other areas, policy has structured the market so that most economic gains of the past four decades have gone to the wealthiest one percent. The right was smart enough to understand that the key to its agenda of making the rich richer was to rig the market to this effect. If progressives don’t reverse this rigging, so that the market leads to more equal outcomes, we will not be able to create a society in which everyone is guaranteed a decent standard of living and shares in the gains of economic growth.