The formal debates among the Republicans who would be president have exceeded all expectations. Even the most hardened cynics couldn’t have imagined that the candidates would sink so low, and stay so focused on personal insults.
Yet last week, offstage, there was in effect a real debate about economic policy between Donald Trump and Mitt Romney, who is trying to block his nomination.
Unfortunately, both men are talking nonsense. Are you surprised? The starting point for this debate is Trump’s deviation from free-market orthodoxy on international trade.
Attacks on immigrants are still the central theme of the Republican front-runner’s campaign, but he has opened a second front on trade deficits, which he asserts are being caused by the currency manipulation of other countries, especially China. This manipulation, he says, is “robbing Americans of billions of dollars of capital and millions of jobs”.
His solution is “countervailing duties” , basically tariffs , similar to those the US routinely imposes when foreign countries are found to be subsidising exports in violation of trade agreements. Romney claims to be aghast.
In his stop-Trump speech last week he warned that if The Donald became president America would “sink into prolonged recession” . Why?
The only specific reason he gave was that those duties would “instigate a trade war and that would raise prices for consumers, kill our export jobs and lead entrepreneurs and businesses of all stripes to flee America”.
This is pretty funny if you remember anything about the 2012 campaign. Back then, in accepting Trump’s endorsement, Romney praised the businessman (who was already a well-known “birther”) as someone with an “extraordinary ability to understand how our economy works.”
But wait, it gets better: at the time, Romney was saying almost exactly the same things Trump is saying now. He promised to – you guessed it – declare China a currency manipulator, while attacking President Barack Obama for failing to do so. And he brushed off concerns about starting a trade war, declaring that one was underway: “It’s a silent one, and they’re winning.”
More important than Romney’s awkward history here, however, is the fact that his economic analysis is all wrong. Protectionism can do real harm, making economies less efficient and reducing long-run growth. But it doesn’t cause recessions.
Why not? Doesn’t a trade war reduce employment in export industries? Yes, and it also increases employment in industries that compete with imports. In fact, a worldwide trade war would, by definition, reduce imports by exactly the same amount that it reduces exports. There’s no reason to assume that the net effect on employment would be strongly negative.
But didn’t protectionism cause the Great Depression? No, it didn’t – protectionism was a result of the Depression, not its cause. By the way, if you want an example of a policy that really did have a lot to do with the Great Depression’s spread, that would be the gold standard, which Ted Cruz wants to restore.
So Romney is talking nonsense. But so is Trump. Five years ago the Trump complaint that Chinese currency manipulation was costing US jobs had some validity – in fact, serious economists were making the same point.
But these days China is in big trouble, and is trying to keep the value of its currency up, not down: foreign exchange reserves are plunging in the face of huge capital flight, to the tune of a trillion dollars over the past year.
Nor is China alone. All around the world, capital is fleeing troubled economies – including, by the way, the euro area, which these days tends to run bigger trade surpluses than China. And much of that flight capital is heading for the United States, pushing up the dollar and making our industries less competitive.
It’s a real problem; US economic fundamentals are fairly strong, but we risk, in effect, importing economic weakness from the rest of the world. But it’s not a problem we can address by lashing out at foreigners we falsely imagine are winning at our expense.
What can we do to fight imported economic weakness? That's a big subject, but one thing is for sure: given the pressures from abroad, and the worrying strength of the dollar, the Federal Reserve really, really needs to hold off on raising interest rates.
Did I mention that Trump wants to see rates rise? Not only that, but he’s a full-on conspiracy theorist, declaring that Janet Yellen, the Fed’s chairwoman, is keeping interest rates down as a favour to Obama, who “wants to be out playing golf a year from now”.
So there you have it. The good news is that there was a real policy debate going on within the GOP last week. The bad news is that it was junk economics on both sides.
