Democrats Max Baucus and Charles Schumer and Republicans Charles Grassley and Lindsey Graham — bristle at being labeled protectionist, in part because they generally agree that free trade is superior to trade constraints. But they also clearly believe in threatening protectionism to get their way.

Threats can backfire. They also obscure workable solutions to today’s global imbalances.

Even if China were to give in, there is no guarantee that a stronger yuan would be a big plus for the United States’ economy.

It would be better if Congress focused on the problems from globalization that it could actually solve rather than blaming China for America’s economic ills. The problem of American business competitiveness — and Americans’ economic anxiety — would be best addressed by health care reform. The problem of growing income inequality could be ameliorated with a more progressive tax code.

The public says it fears global warming, but the public will also make sure nothing done in the name of global warming damages voters' lifestyle in a way voters can notice. Thank heaven for small favors. The U.S. accounts for 22% of the world's carbon dioxide emissions. Before the year is over, China will become the world's biggest outputter. Anything Congress does will be, at best, a gesture and an experiment, at worst, a special-interest blowout. And there's every reason to expect the worst -- a spasm of subsidies, mandates and prohibitions better calculated to win campaign donations and snooker voters than to deal rationally with a possible human role in climate change.

Congress, after all, is a machine for matching pronouncements with policy actions in a way that will get members re-elected; any relation to desirable policy ends is largely incidental. Global warming, meanwhile, is a true conundrum -- nothing is known with any certainty about the risks we face or whether we can do anything to avoid them.

Boy, this is an awkward moment for Whole Foods CEO John Mackey, not to mention for the Bush Administration's antitrust policy. The Federal Trade Commission recently announced it will sue to block Whole Foods from buying Wild Oats, a competitor in the high-end, organic supermarket space.

The FTC's argument is that "premium" organic-food peddlers don't compete against regular supermarkets, and its justification reads like promotional materials from Whole Foods. The FTC waxes lyrically about "the breadth and quality of their perishables -- produce, meats, fish, bakery items, and prepared foods -- and the wide array of natural and organic products and services and amenities they offer," adding that Whole Foods is not so much a supermarket as a "shopping 'experience.'" Mr. Mackey, the Whole Foods CEO, would have to be tickled if the FTC weren't deploying this talk to kill the merger.

Which is where the awkwardness comes in. In order to fight the FTC, Mr. Mackey will have to argue that Whole Foods is just another supermarket.

Politicians and many others in the United States have recently grown concerned that earnings inequality has increased among Americans. But as the example of China—or India, for that matter—illustrates, the rise in inequality does not occur in a vacuum. In the case of China and India, the rise in inequality came along with an acceleration of eco­nomic growth that raised the standard of living for both the rich and the poor. In the United States, the rise in inequality accompanied a rise in the payoff to education and other skills. We believe that the rise in returns on investments in human capital is ben­eficial and desirable, and policies designed to deal with inequality must take account of its cause.

...The potential generated by higher returns to education extends from individuals to the economy as a whole. Growth in the education level of the population has been a significant source of rising wages, productivity, and living standards over the past century. Higher returns to educa­tion will accelerate growth in living standards as existing investments have a higher return, and additional investments in education will be made in response to the higher returns. Gains from the higher returns will not be limited to GDP and other measures of economic activity; education provides a wide range of benefits not captured in GDP, and these will grow more rapidly as well due to the addi­tional investments in schooling.

Why is the earnings gap widening? Because the demand for educated and other skilled persons is growing. That is hardly surprising, given developments in computers and the Internet, advances in biotechnology, and a general shift in economic activity to more edu­cation-intensive sectors, such as finance and professional services. Also, globalization has encouraged the import­ing of products using relatively low-skilled labor from abroad. At the same time, world demand has risen for the kinds of products and services that are provided by high-skilled employees.

The new guidelines add as a new principle that the IMF's 185 nations should avoid “exchange rate policies that result in external instability.”

The new rules cap a yearlong effort by the IMF to overhaul its surveillance program, by which the international lending agency seeks to promote the stability of the global economy. The work has gained urgency as an effort to address growing global imbalances including soaring trade deficits in the United States and surging trade surpluses in countries such as China.

Rato said the new rule “gives clear guidance to our members on how they should run their exchange rate policies, on what is acceptable to the international community and what is not.”

Must it? Consider this thought experiment. Suppose the United States and China have perfect trade parity. Imports and exports completely match. No trade deficit, no trade surplus. Nirvana. Now suppose I come along and want to spend $1000 to buy a computer made in China. That will create a "trade deficit." Is there any possible reason in the world why I shouldn't do that? What harm does it conceivably do? No reason? No harm? Then what difference does it make if it's a trillion dollars rather than a thousand?

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Sunday, June 17, 2007