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November 21, 2008



The two nations with the largest non-petroleum trade surpluses -- China and Japan* -- aggressively manipulate their exchange rates to provide very large subsidies to their exporters.

From 2003 through Q1 2004 Japan bought $320 billion worth of dollars to suppress the yen-dollar rate, budgeting $1 trillion more as backup to put Soros et al on notice they'd better not try to repeat their gambit against the pound. As that was just too blatant, they then switched to using their zero-interest-rate policy to enable the yen carry trade and force Japanese individuals and institutions needing interest income to sell yen and buy foreign securities.

How can a trading environment in which prices are so manipulated be in any way characterized as one of free trade????

*(much of whose trade surplus with the US is masked by exporting high value-added components to other nations for final assembly such that the nominal exporter of the final product is not Japan)


I suppose I find it pretty astonishing that so many economists (like your interlocutor at Brown) still not only seem ready to overlook the distributive consequences any institutional arrangement will generate and focus instead on aggregate efficiency, but they then are "shocked!shocked!" that those distributive considerations actually motivate individuals and groups in the real world to support or oppose the institutional arrangements in question. Isn't econo-land the terrain on which everyone (primarily if not exclusively) pursues their own advantage as they see it? Given the plurality of possible institutional arrangements doesn't that basic motivational premise prompt one to wonder why aggregate efficiency would ever be a plausible motivation for (nearly) anyone? And given the often massive payoffs to the differential distributional consequences one or another institutional arrangement will generate, should we be surprised if those who are able will in fact try to bring their bargaining power to bear on the processes of institutional creation or change?


A few months back Summers wrote a piece in the Financial Times questioning the legitimacy of free trade and the social responsibility of multinational corporations which play one nation off against another in order to avoid taxes.

That's thinking anew. Just what Obama called for, right? Wrong, the financial media is fixated on Summers' credentials as a free trader. Why let Summers' thinking get in the way of stereotyping when examining Obama's economic team.

Instead of economic news from the media, the costomer is getting the economic communities need to reassure itself.

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