Monday, May 6, 2019

Interview: Kenneth Rogoff says "although free trade generally benefits a country as a whole, not everyone gains equally"

Editor's note: This interview was originally published in February 2017.

Story by Joseph Ford Cotto

Tired of carrying cash around? Does one fellow have a plan for you.

"I am not advocating a cashless society, which will be neither feasible nor desirable anytime soon," Dr. Kenneth Rogoff wrote in a recent article for Project Syndicate. "But a less-cash society would be a fairer and safer place."

His main beef is with large-denomination notes; specifically the $100 bill. In the same piece, he said it "accounts for almost 80% of the US’s stunning $4,200 per capita cash supply" while, overall, physical currency "facilitates crime because it is anonymous, and big bills are especially problematic because they are so easy to carry and conceal."

Rogoff, who holds the Thomas D. Cabot professorship of public policy -- in addition to an economic teaching post -- at Harvard University, has much more to say about the campaign for a cash-free country. Last year, his book, The Curse of Cash, was published by Princeton University Press and found no shortage of attention. One might say it became something of a lightning rod.
Clancy Yeates of The Sydney Morning Herald declared Rogoff's work "a fascinating contribution to the debate about what might be done to help get many wealthy countries out of an economic funk." Yeates noted that Rogoff's argument "says boring old paper (or plastic, in our case) bank notes are a major barrier to monetary policy--changing interest rates--fulfilling its potential."

On the other hand, The Wall Street Journal's James Grant unleashed the following: "If there is a curse between the covers of this thin, self-satisfied volume, it doesn’t have to do with cash, the title to the contrary notwithstanding. Freedom is rather the subject of the author’s malediction. He’s not against it in principle, only in practice."

Aside from his currency activism, Rogoff is a chess grandmaster and the co-author of This Time is Different: Eight Centuries of Financial Folly, which soared to bestseller status in 2009. He recently spoke with me about many issues pertaining to the United States's economy. Some of our conversation is included below. 


Joseph Ford Cotto: Prominent economists and politicians often say that free trade will benefit America in the long run. Many Americans disagree strongly. What is your take on this situation?

Dr. Kenneth Rogoff: The general economic case in favor of free trade is overwhelming and, as history has shown, countries that are too inward focused fall behind. Until the last decade or two, inward looking policies stifled growth in Latin America, India and the former Soviet Union.  Look what happened to China when it opened itself up to trade. The big picture is that countries that are more open to trade are more competitive, dynamic and eventually much richer than countries that don’t.

But there are important nuances. First and foremost, although free trade generally benefits a country as a whole, not everyone gains equally.  Indeed, some sectors can lose unless they receive adequate compensation from the winners.  That is where the United States has come up short in recent decades. There is always churn in jobs and opportunities in a dynamic innovative economy such as ours, but the impact of having billions of Indian and Chinese workers suddenly come into the global force has strained our ability to adapt. Mind you, most ordinary Americans have gained phenomenally, even if they don’t realize it.  Lower income consumers would be paying much higher prices at Target and Walmart but for trade with China.  Call service centers in India bring down the cost of plane tickets and many other goods.  Certainly, though, trade with Asia has accelerated the rate of decline in US manufacturing.

There are many things we could do better.  Vocational training in the US is extremely poor and limited compared to say, Germany, which has remained an export powerhouse.  During a period trade and technology are exacerbating inequality, the tax system should be made more progressive, not less. Policies to resist the decline in social mobility would help give substance to the mantra that in the long run trade is good for everyone.

Yes, it would be great if the US can strike deals that pry open other countries to trade, and help protect the intellectual property rights of US companies. (Think of the cheap pirated DVDs of Hollywood movies one can buy in Russia and China.)  The TransPacific Partnership that both Bernie Sanders and Donald Trump sadly campaigned against would have helped expand the market for US services (75% of our economy and vastly more important than manufactures), while prying open Japan to far more of our agricultural produce.  The romantic notion that trade isolationism will bring back huge numbers of high-paying manufacturing jobs is pure romanticism.  With or without trade, factories of the future will be increasingly automated, much as happened with our farms.  At the end of the Civil War, roughly half of all Americans worked in agriculture. Today only 2 percent of US jobs are in agriculture despite the fact the US is agricultural powerhouse.

Cotto: Libertarian economic theorists tend to believe that trade deficits are of minimal importance. Do these deficits really have a great impact on America's economy?

Rogoff: Right now, the trade deficit has to be considered pretty low on the list of US macroeconomic problems.  This is mainly because foreigners seem willing to finance our deficits at extremely low interest rates, and there is little sign this is going to change anytime soon. Indeed, there is a strong and continuing global demand for US assets of all types, in no small part because of world-wide confidence in US institutions and the rule of law.  

Can US trade deficits become a problem?  During the leadup to the financial crisis, foreign money pouring into the US helped fuel the subprime mortgage boom, and certainly played a role in the massive lending boom that eventually led to the financial crisis.  Although better regulation would have greatly mitigated the problem, massive trade deficits should have been recognized as a signal that a major problem might be brewing.  Interestingly, despite the fact the US regularly spends more importing foreign goods and services than it earns from exporting, its net debt position (counting assets of all types including bonds, stocks, housing, physical plants, etc.) has not been rising nearly as quickly as one might imagine, in part because US borrowers pay such low interest rates on their debt. If that situation were ever to change (say because US policy became more erratic and foreigners started demanding higher interest rates on US debt), the situation could become more problematic.  Although the US is extremely unlikely to experience the kinds of debt crisis that Greece has suffered in recent years, it is folly to assume that foreign borrowing is a free lunch.