Free Lunch: Two meetings in Washington

Δημοσιεύθηκε: 29 Απριλίου 2015 - 11:25

Two encounters of big economic significance take place today: Japanese prime minister Shinzo Abe will address the US Congress, and the Federal Reserve's monetary policy makers finish their meeting amid a lot of confusion about the right monetary policy course.

Beyond rice and cars

The huge economic issue at stake in the US-Japanese relationship is of course the Trans-Pacific Partnership. The two countries will be by far the largest two members if the multilateral trade agreement is reached. A lot will be determined in the next few weeks, when negotiations may be concluded and the US Congress may reactivate the White House's "fast-track" authority on trade (Abe will no doubt try to prod legislators in his address). The FT's Shawn Donnan has a quick guide to what you need to know about the TPP. Here we'll focus on the economics and put aside the strategic argument about creating alliances against China, which has not been invited to join.

Economists have shown an uncharacteristic lack of consensus on the TPP. Paul Krugman is a lukewarm opponent, largely because he thinks the TPP will have little effect given that US trade is so free with the other prospective members already. That is not entirely right - there is still room for conventional gains from trade if Japan and the US can lower their respective barriers in agriculture and carmaking. More importantly, as two Peterson Institute briefings point out, the TPP aims to liberalise trade in services and encourage more investment. And looking beyond countries that are already rich, even small gains may make a big difference to poorer prospective members such as Vietnam.

That drive towards services trade and investment, however, is also why many are opposed. This is not your old-style trade liberalisation deal. An important and controversial part involves intellectual property protection - patent laws and the like - which, as the word "protection" implies, are not about liberalisation but about stricter rules. When even Cato Institute writers oppose the TPP because of its IP protections, we should know that this is more "managed trade" than "free trade". Timothy Lee has an excellent and disturbing article on Vox about just how far from "free" to "managed" things have moved.

Honest proponents argue that the restrictions create the right incentives for beneficial economic activity. But opponents - including top-rate economists such as Bradford DeLong - say their arguments are unconvincing and insufficient: the case that broader IP restrictions are on the whole beneficial is at best unproven, and in any case does not address the standard distributional and democratic worries about the latest generation of (less-than-free) trade deals.

On the whole, proponents have not fully answered the sceptics' case. And just wait: the rows over TPP are nothing compared with what the still-embryonic Transatlantic Trade and Investment Partnership will trigger.

Bernanke and the robots

Nobody expects the Fed to raise rates today: if anything, the question is how much more doveish its signals will be. The first-quarter GDP numbers today will confirm a slowdown and make it very hard to justify the June rate rise some have been expecting. The WSJ has a list of what to watch in the Fed statement, including its observations on the level of the dollar, inflation prospects, and the role of the weather in the first-quarter disappointment. Also watch closely the Fed's take on labour markets. A lot depends on whether policy makers take their lead from the rate of unemployment or employment - one points to a squeeze, the other to slack.

But much more fundamental questions are being asked about monetary policy. Several regional Fed governors have opened a debate on whether to target a higher inflation rate. If the economy needs deeply negative real interest rates, then the 2 per cent inflation target make it hard to set the right policy so long as central bankers (wrongly) resist lowering nominal rates below zero. Ben Bernanke, an influential thinker on these matters even if no longer at the Fed, has showed a surprising openness to the question of whether monetary policy must move past 2 per cent inflation targeting.

Then there is the relentless march of technology, which, it turns out, threatens central bankers at least as much as those with more routine, menial tasks. Technological innovation is disrupting banking business in a way that may weaken the "monetary transmission mechanism" by which Fed decisions feed into the wider economy, one Fed governor has warned. Another threat is the idea that monetary policy itself would be better done by a robot - or at least by mechanically following a rule. Bernanke has picked up the gauntlet in defence of judgment in policy making: "Monetary policy should be systematic, not automatic."