Dems, NAFTA, trade, etc.

Someone recently asked me what I thought about the Democrats' "NAFTA spat."

I didn't see the debate in which Obama and Clinton both proposed renegotiating NAFTA (and then wrangled about how to do it), but it seems that, as in many areas, the Democratic candidates' positions aren't very different. Any "argument" they had is probably 99% posturing and 1% real policy difference.

The real issue here is trade policy. America's middle class is feeling squeezed - even before the current recession, real wages had been stagnant or falling for seven years. So, naturally, people have been looking around and asking "Why is this happening, and what can we do to stop it?"

The easiest answer to the first question - not necessarily the correct one - is that free trade is causing our wages to fall. People understand the idea of supply and demand. They know that if you dump billions of poor workers on the labor market, wages should fall (at least in the short run). That is the thinking behind the rise of anti-trade sentiment (also called "economic populism," "fair trade," "protectionism," etc.). On the political right, this has taken the form of the anti-immigration movement; on the left, opposition to trade deals. That's why you have instinctive free-traders like Obama and Clinton bashing NAFTA, and an instinctive pro-immigration guy like McCain flip-flopping to a tough stance on immigration.

But even if you believe that free trade is causing woe for the American middle class - and believe me, the jury is still out on that - there's still the second question of "What do we do about it?" And no matter what Clinton and Obama said in their debate, rolling back trade deals is not likely to help. Not only would trade reductions hurt our economy (causing layoffs), we'd still have to compete with foreigners in export markets (putting downward pressure on wages). And most of the trade deals Democrats have threatened to scuttle are chump change anyway - the kind of thing that helps our overseas image and influence but has basically no economic impact.

So what should a liberal trade policy be? Yglesias recommends "higher taxes and better public services," an approach that I broadly agree with, since U.S. public goods provision pretty much sucks right now. He also recommends Dean Baker's suggestion that the answer to free trade is more free trade - in high-paid professional services. This is an approach I've also supported for a long time. Allowing foreign doctors to ply their trade in the U.S., for example, would reduce inequality at the same time that it lowered health care costs.

A third idea is to try to force China to revalue its currency. This will lead to a cascade of countries allowing their own currencies to appreciate against the dollar (right now, Thailand has to keep its currency cheap in order to compete with China in the U.S. market, but it would rather not do that, since holding your currency down is expensive). Right now, foreign wages look artificially low because of the Chinese currency peg and all the other little countries being forced to follow suit. Take away the peg, and foreign wages basically jump up by a lot - good for their purchasing power, and good for our wages. Sadly, I haven't heard Obama or Clinton (or, for that matter, McCain) making this suggestion - apparently they're all too scared to take on China.

But in any case, bashing NAFTA - which is really just a pale imitation of the right's "blame Mexico" strategy - makes a rotten cornerstone for liberal trade policy. NAFTA's impact on Mexico may have been mixed, but it certainly isn't a noticeable part of the reason for falling American wages. I'd like to see Obama drop this issue as soon as possible.

PS - Here's a good NYT article about this whole subject.