Using the Fed and trade to make the rich richer

One of the greatest scenes in movie history occurs at the end of “Casablanca.” Rick Blaine, played by Humphrey Bogart, is standing over the Gestapo major’s body with a smoking gun. When the police drive up, the French captain announces that the major has been shot and orders his men to “round up the usual suspects.”

Nearly all Democrats, and even many Republicans — including potential presidential candidates Sens. Rand Paul, Ted Cruz and Marco Rubio — now agree that inequality is a serious problem. They all profess to be struggling to find ways to address the problem. They spout the usual lines about their pet theories: lack of education and skills among the workforce, robots making workers obsolete and the increasing number of children raised in single-parent families.

Yet they will likely stand by and watch as government takes two obvious steps that will increase inequality: the Fed’s raising of interest rates and the signing of free trade deals. While these policies go into effect, which are designed to redistribute income upward, we can count on our political leaders to ignore these smoking guns and round up their usual suspects.

Starting with the Fed, the purpose of raising interest rates is to slow economic growth and to keep workers from getting jobs. The ostensible rationale is that if the unemployment rate gets too low, then wages will start rising more rapidly and then we could have a problem with inflation. In order to ensure that inflation doesn’t become a problem, then, the Fed raises rates and keeps the unemployment rate from falling further. This argument is hard to understand with inflation well below even the Fed’s target and far below the 2 to 3 percent range we saw through most the 1980s and 1990s.

This is about as much of smoking gun as anyone can ask for. After all, we know that wages will rise more rapidly if the unemployment rate falls further. We also know that workers at the middle and bottom of the income distribution will disproportionately benefit from wage increases as the unemployment rate falls. And as one more piece of the puzzle, we know that the unemployment rate has been much higher by any measure over the years since 1980, when inequality has been growing, than it was in the years up to 1980, when workers shared in the gains of economic growth.

Yet somehow we are supposed to ignore the Fed’s decisions when it comes to determining economic policy. The Washington Post editorial page, that great mouthpiece of elite opinion, expressed this sentiment perfectly last week. It essentially argued that it would be OK if the Fed started raising rates soon, or it could wait somewhat longer. Such nonchalance suggested the matter was as trivial as deciding which color suit to wear. Hey, might this decision affect the job prospects of millions of workers and the wages of tens of millions? Don’t bother the folks at the Post’s editorial board with the obvious; they’re busy sifting the evidence for the complex causes of wage inequality. 

There is a similar story on trade. Our trade pacts over the last three decades have been designed to redistribute income upward. They have quite deliberately placed U.S. manufacturing workers in direct competition with low-paid workers in the developing world. The predictable result of this policy is lower wages for U.S. manufacturing workers as millions lose jobs to foreign competition. Furthermore, the loss of jobs in manufacturing puts downward pressure on wages in other sectors as displaced workers in manufacturing are forced to look for jobs in the retail and service sector.

There was nothing inevitable about this pattern of trade. It was done by design. Instead of writing trade deals that focused on making it easier for foreign manufactured goods to be brought into the United States, we could have written trade deals that would have made it easier for foreign doctors, lawyers and other high-end professionals to train to U.S. standards and compete with our professionals. This would have offered gains to consumers and the economy in the same way as low-cost shirts and shoes from China offer gains. However in this case, the losers would be doctors, lawyers and other high-end professionals.

But the politicians in Washington chose not to write trade deals this way. High-end professionals have more political clout than ordinary workers. Therefore they are still largely protected from foreign competition. We subject only less-educated workers to international competition.

This situation is made worse when the dollar becomes overvalued, as is now the case. This increases the downward pressure on the wages of workers subject to international competition. To address the problem of foreign countries deliberately pushing up the value of the dollar to gain an edge in trade, many economists and unions have urged rules on currency in the Trans-Pacific Partnership (TPP) coming up for debate on Capitol Hill and other trade deals that may come before Congress.

Yet it seems virtually certain that the TPP will not include any currency rules, though the jobs and wages of ordinary workers will clearly be at stake. The Washington Post expressed elite concerns beautifully in an editorial that essentially said the deal was too important to risk scuttling with such proposals, the purposes of which are too difficult to divine, anyway. “Economic experts disagree as to the ‘correct’ valuations of major currencies,” the editorial said. “The precise intent behind any particular currency intervention is also hard to establish.”

Of course, there are issues in determining deliberate currency manipulations, just as issues can arise in assessing subsidies for exports of shoes and steel. However, there is no reason to think the issues regarding currency are intolerably complex; in fact, they are almost certainly less complex than in determining export subsidies. Designing currency rules is not especially difficult. If you want hard, look at the byzantine provisions of the leaked TPP chapter on intellectual property. There are plenty of very hard issues there. When the question is profits for Pfizer, Microsoft or Disney, our trade negotiators will be up to the task. But when the issue is currency rules that could benefit ordinary workers, they wave their hands at the complexity.

The main point of the TPP is writing rules on patents, copyrights and regulations more generally that will favor corporations. In other words, it’s about making the rich still richer. It is another obvious smoking gun. But elite commentators will once again ignore it in favor of their latest theories. After all, simple truths don’t get you invited to the Aspen Ideas Festival.