Social Costs of Economic Policy: TPP Edition

There’s a new study out of Tufts University that basically shows that  Trans-pacific Partnership trade deal that many countries have engaged in, including the United States and Canada, will hurt labour. Where and when have we heard this before? As the Great Yogi Berra said: “It’s deja-vu all over again.”

We heard this with NAFTA in the 1990s of course; that NAFTA would kill jobs in the U.S. and Canada, and lower wages for Mexico. Economist Brad DeLong, who was one of the original creators of NAFTA, and now teaches Economics at U.C. Berkeley has even come out to say that he was wrong (something surprisingly few economists do). And there are some musings that Robert Reich, who is also at U.C. Berkeley now, and former Secretary of Labor under Bill Clinton resigned because of the administration ignoring impacts to labour, part of which involved NAFTA. NAFTA was great for Wall Street, and at best, complicated for everyone else.

We also heard some light squealing about Quantitative Easing – the Fed buying bad paper and kicking up Treasuries impacting labour. The Bernanke Theorem was that if you drop money from helicopters onto banks, then the banks will have to loan that money out as CAPEX loans, which will create jobs. Except that never happened: instead banks sat on the money, partly because the Federal Reserve thought it was a good idea to pay a higher interest on excess reserves than what the market would give in ROI. Now there is $2.3 Trillion sitting in banks with nowhere to go:


And if we take a real close look at a statistical smoke-making machine, there’s something there when OLS regressing (with Newey-West coefficients for Time Series) Labour Force Participation with Excess Bank Reserves and QE of bad paper separately:

Screen Shot 2016-01-22 at 10.01.47 AMScreen Shot 2016-01-22 at 9.09.06 AM

This of course doesn’t mean that Excess Bank Reserves or the Fed buying bad paper “caused” the lowest labour force participation ever in the United States. Correlation never equals causation. It means that when there’s this much smoke, there’s a helluva smoke-making machine, and that is what has to be tracked down.

In the meantime, if the research indicates that there may “smoke” in the labour market because of trade deals, then it’s probably best to not throw any gasoline on the BBQ. This is especially important in both TPP, and the fact that the Bank of Canada, caught in its own Liquidity Trap from it’s self-made Staples Trap (mainly, oil), may have to start some QE of its own if the political will isn’t there for fiscal spending.

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