Did Harry Reid KO Obama's Asian, European FTAs?

Reid Floors Obama with Lethal 1-2 Combination

The traditional constituency of the United States' Democratic Party has always included organized labor. Despite union membership continuing to fall, organized labor remains crucial to the fortunes of many Democratic candidates come election time given their organizational strengths in mounting get-out-the-vote efforts. Tensions have always existed in the Democratic Party about the benefits of "modernizing" in the Reaganite, investor-friendly sense: fewer worker benefits, easier to hire and fire, etc.

Both Democratic presidents of recent memory, Bill Clinton and Barack Obama, have made it a standard ploy to court organized labor during election time and then ditch it after elections are won. However, it is not that easy for rank-and-file members in the legislature who do not have term limits to pull off this about-face. What's more, these can be quite powerful politicians.

A sign of Obama's lame duck status--he cannot have another term as president--is of Senate Majority Leader Harry Reid (D-NV) hitting Obama with massive blows on trade. A few days ago, the one-time boxer Reid reiterated that he will not grant Obama fast-track status for negotiated free trade agreements. At the moment, the major US initiatives are expanding the Trans-Pacific Partnership (TPP) in Asia and forming the Transatlantic Trade and Investment Partnership (TTIP) with the European Union. I've already mentioned how it will be quite challenging for either to be concluded unless significantly watered-down, but Harry Reid adds another complication. Without granting fast-track status to his president, Reid makes it possible for lawmakers to change the contents of the negotiated agreements with Asian or European counterparts instead of the legislature simply voting for or against these FTAs as hammered out during international negotiations:

Senate Majority Leader Harry Reid broke publicly with the White House Wednesday on trade policy, instantly imperiling two major international trade deals and punching a hole in one piece of the economic agenda the president outlined in his State of the Union address a day earlier. Mr. Reid told reporters he opposed legislation aimed at smoothing the passage of free-trade agreements, a vital component to negotiating any deal, and pointedly said supporters should back down.

"I'm against fast track," Mr. Reid (D., Nev.) said, using the shorthand term for legislation that prevents overseas trade agreements from being amended during the congressional approval process. "I think everyone would be well-advised just not to push this right now."

The move spells trouble for two sets of complicated talks, one with the European Union and the other with countries in the Asia-Pacific region. Both deals likely would have required such a "fast track" approval to clear the Congress. The U.S.'s negotiating partners wouldn't likely commit to a final agreement that could be unpopular back home without assurances that it couldn't be modified by U.S. lawmakers. 

And lest we forget, there's organized labor lurking...

Mr. Reid, whose state has a heavy union presence, has long opposed trade deals. He also represents a caucus with several vulnerable Democrats up for election in November who might have been forced to choose between Mr. Obama and the unions that help finance campaigns.

"I think there's a lot of dubiousness in our caucus to fast track, given that every time we sign a free-trade agreement it seems other countries violate the rules and we don't," said Sen. Chuck Schumer (D., N.Y.), a member of the Senate Democratic leadership.

So much for party discipline as Reid hits Obama immediately after his SOTU address. Reid is probably calculating that Obama's days are already numbered anyway, and that it's better to offend the president than traditional Democratic constituencies. Can the party afford to lose its majority in the Senate? Especially during sour economic times like the present, the Democrats' protectionist streak usually comes to the forefront. Republicans are usually more in favor of free trade and vote for such deals, but the current political situation may be inauspicious as Tea Party Republicans seemingly vote against Obama on anything--even expanding trade which is a traditional Republican advocacy.

Moreover, George W. Bush had fast track authority for most of his presidency but was unable to get any major FTAs completed, so its efficacy in concluding deals is very much dependent on first having successful negotiations at the international level.

Humility-based Libertarianism

On the suggestion of Bryan Caplan, I just read In Praise of Passivity by philosopher Michael Huemer. A lot in the article makes sense to me.  As a social scientist, I think there is much we don't know about how the world works, and that intellectual humility goes a long way to explaining my skepticism about many governmental interventions into private behavior.  In any event, I also recommend the article.

A debt-free stimulus?

Economies may need to be stimulated sometimes, through tax reductions or public expenditures. The problem is that this costs. Opposition to such stimulus programs is typically grounded on the unavoidable debt run-up, which implies that at some point in the future taxes will need to be raised at a level that is higher than before the stimulus. Would there be a way to pacify this opposition?

According to Laurence Seidman there is. It involves the Federal Reserve, or the corresponding central bank, making a loan to the government treasury for the amount engaged in the stimulus, and then the Fed conveniently forgiving this debt. That is a different way of putting what Seidman proposes: the Fed makes simply a transfer to the Treasury that satisfies the dual mandate of the Fed, full employment and stable prices. Despite what Seidman claims, this is monetizing the debt. Even if no debt is explicitly created, the government is still financing its stimulus by (virtually) printing money, and with the same effect on inflation which guarantees that the dual mandate will not be satisfied for stable prices, and one can have doubts about full employment, too. Seidman argues that there would be no inflation if aggregate demand gets back to the "normal" level with the stimulus. But you still have increased the money supply for the same quantity of goods. The price level needs to increase accordingly. The only way to avoid the inflation is if the Treasury returns the transfer to the Fed. The transfer is thus again a debt.

I find it really strange that a chaired professor at the University of Delaware would write this. The only way I can rationalize his writing is that he confuses real and nominal quantities. He also seems to reason in partial equilibrium, not thinking that prices adjust to such large changes in macroeconomic aggregates, especially in the medium run. We are used to seeing this from crackpots with little economics education, but not with apparently well-educated economists.

An Econ Conference for Undergrads

In April in Washington, DC.

Goldhater: Can India Fix Its Current Account Deficit?

First came the James Bond film Goldfinger, then came the spoof movie Goldmember. Now we have the threequel...Goldhater. It is generally well-known that India is a major if not the #1 market for the precious metal since many cultural traditions are based on it--especially as gifts. However, the substantial rise in gold prices in the past decade or so has served to increase India's current account deficit. How to control rises in the deficit, then? India has been busy slapping one tax on gold after another:

India will not revise its record high import duty on gold and other restrictions on imports until the nation's current account deficit is firmly under control, Finance Minister P Chidambaram said in Davos on 23 January. India has a record high 10% import duty on gold and a rule that says 20% of all bullion imports must exit the country as exports.

The subcontinent used to be the world's largest consumer of the precious metal until the government made three upward revisions to the import taxes on gold, to reign in a record current account deficit (CAD). The country's CAD could hover below the $50bn mark in the year to 31 March, 2014, a $20bn reduction from previous estimates.

In the longer term, officials indicate that changing consumption patterns of gold will be affected less by government fiat and more by cultural changes away from prioritizing exchanges of the precious metal. According to RBI Deputy Governor K C Chakrabarty::

Speaking at a panel discussion on Gold and its status in India - at IIMB, he said gold intoxication [don't you just love that term?] is prevalent only to India, and society as a whole must work together to change mindsets.

"Stop giving or taking gold as dowry and stop giving gold to temples," he advised. Maintaining that RBI has never stopped import of gold, he said: "Do not borrow money from banks to import gold." "Consumer has never benefitted from gold and gold has given a negative return world-wide, it is not an investment but a speculation," he added.

To be sure, the Congress Party has an eye on winning the next elections too, and all of these restrictions of gold imports may partly be responsible for its current unpopularity. Will Congress Party leaders loosen restrictions, then? They at least claim to be sticking to their guns:

Answering a query about an earlier media report that Sonia Gandhi, the leader of the ruling Congress party, had written to the Indian government asking for gold import restrictions to be relaxed, Chidambaram said he had not read the letter.

"Until we have a firm grip on the current account deficit I do not contemplate any roll back in any measure. We will have a full idea of the current account deficit only when the budget is presented and when the year comes to an end," Chidambaram told CNBC TV18 in Davos.

We'll see...

My Proposed (but not accepted) Bet with Paul Krugman on the Obama Forecast

Scott Sumner declares that I would have been the winner.

What worries Americans?

When Gallup recently asked Americans what the biggest problem facing the United States is, the four most common answers were dissatisfaction with government, the economy in general, unemployment, and healthcare.  Each was mentioned by more than 15 percent of those polled.  The gap between rich and poor was mentioned by only 4 percent.


If President Obama wants to make the 2014 electoral debate about income inequality, as he seems to, he has an uphill climb ahead of him.