Democratic presidential candidate and Senator Elizabeth Warren recently published "A Plan For Economic Patriotism," a proposal laying out a broad vision for US economic policies if she were to be elected. Monica de Bolle and Jeromin Zettelmeyer write their quick reactions to her plan below in their own handwriting and discuss their comments in accompanying audio commentary.
Listen to their overall reaction
De Bolle: I felt that it was hitting the right notes on a number of issues. But I thought it fell short of exactly answering how do you really go about doing these things in a way that is substantially different from what Trump is doing. The whole economic patriotism idea sounded like a mixture—sort of a strange mixture—of economic nationalism and statism. So there are parts of this document which sounded to me like "America First."
Zettelmeyer: She takes an interventionist policy program, much of which I think can be justified in terms of basically correcting market failures and pushing surplus from big companies to workers. So there's a pretty standard left-wing agenda there. It may be over the top in some areas. But then what she does is this strange thing, that she justifies these ideas that would completely stand on their own feet as just fixing the American economy, by this notion of economic patriotism where it's suddenly about American workers winning out in some race against foreign workers. The fact that she mixes these two dimensions is confusing, and it makes you wonder, does she really mean it? Or is this just her way of selling an interventionist platform in the age of Trump? Because in many points of the document she sounds shockingly like Trump.
Listen to Zettelmeyer explain the real reasons why Germany's manufacturing sector has been more successful
Zettelmeyer: She repeatedly points to Germany as kind of the country that was most successful and did it differently. And it is true that Germany was quote-unquote more successful than the US in the sense of keeping the share of manufacturing much higher, more stable, than in the US over the same period. Now, she thinks that it's because of three things: trade policy, some sort of industrial planning or industrial policy, and possibly worker training. So on the worker training stuff, she's right, and I also think that her proposals in this area—apprenticeship programs and so forth—go in the right direction. But you have to bear in mind they are very difficult to transplant to the US because it's all about a specific form of business-government collaboration that has to be created here first.
On her other two points—trade policy and industrial policy—she's wrong. The German stability of the manufacturing share had nothing to do with the fact that we did a different trade policy than the US. Germany essentially did the same type of trade policy, and it did not have particularly active industrial policies. It certainly had nothing in any way resembling employment planning. The real difference between Germany and the US were twofold. One—Germany got lucky because at that time when China opened up, it just happened to be good at exporting specific goods that China needed during its growth phase. So it was about a different type of manufacturing specialization that enabled it to benefit from the China growth boom rather than just have China as a competitor. So that's one factor.
And then the second enormously important factor that's completely missed in this document and also in the papers that she cites is the macroeconomy. So Germany ran a trade surplus over this period mostly by really increasing saving, and consuming and investing relatively little, whereas the US went on a consumption binge. And if you go on a consumption binge, then automatically your manufacturing share declines. And the reason is that you consume tradeable and nontradeable goods, services, and so since you cannot import services, you reallocate your employment towards these services and away from manufacturing goods. It's just a mechanical thing. So it's about the US going on a consumption binge in the 2000s and using this to import lots of Chinese goods and to specialize in services.
Listen to why Warren's currency intervention plan is a flawed idea
De Bolle: She's basically speaking of actively managing the exchange rate, actively managing the dollar in order to help American companies, and in order to ultimately help American workers by doing this. And then she's citing a Policy Brief written by two people from the Peterson Institute back in 2012—Joe Gagnon and Fred Bergsten—where they were specifically talking about this issue but in a completely different context. What these authors are talking about was how you deal with active exchange rate management being done by other countries. Elizabeth Warren seems to have misunderstood that message. And she's sort of recasting [this study] as having defended the active use of the exchange rate to benefit American companies and American workers, and that's not at all what that study did.
Zettelmeyer: Unless a country is prepared to back up currency intervention by actually saving more, you cannot sustain this.
De Bolle: It would probably lead other countries to follow suit, and we could very quickly have a kind of a currency war on our hands, which is exactly what we want to avoid.
Listen to why Warren's trade and industrial policies are problematic
Zettelmeyer: She needs to come clean on trade policy. She doesn't do it in this document. So she insinuates that trade policy is a big problem and a reason—a principal reason—for the decline of manufacturing in America. I think that it is uncontroversial that international trade, particularly the opening up of China, has something to do with the decline of US manufacturing in the 2000s. It's probably not the main story. But in any case, it's unclear that a different trade policy would have had a hugely different outcome. Moreover, it's unclear what she wants now with trade policy. So if what she wants are trade agreements that protect labor standards, that's totally fine. If what she wants is Trump-style protectionism, that's not fine, and she leaves that question unanswered.
De Bolle: It tries to, in a sense, speak nicely about trade but at the same time, it very clearly wants control of trade because it sees trade as the one issue that's going to make American firms get ahead and American workers get ahead. You can't have it both ways. So it's ultimately nationalist, but she's not calling it that.
And secondly, on industrial policy, if you're going to lean more nationalist, this means you are going to prioritize some specific sectors, and you are going to use certain tools and certain policy instruments to do that. Both in the economic patriotism document but also in the accompanying document about green manufacturing, she proposes a massive government procurement plan basically to "Buy American." Buy American is a protectionist policy, and at the same time, it is very much in the vein of industrial policy that leans nationalist.
The creation of this Department for Economic Development, which would encompass ultimately USTR and Commerce, would basically be in charge of trade. And given that she has been in this document, at least, very opaque about what she means or what she wants in terms of trade policy, this could lead one to interpret that this is just recasting protectionism in a different way.
Zettelmeyer: Consolidating various agencies into one doesn't strike me as unreasonable, and indeed many advanced countries have more powerful economic ministries that combine these functions. So Germany is one, Japan is one. That's not unreasonable. What is a little strange I think is that she doesn't really seem to push this only to have greater strategic clarity and maybe more efficiency, but there is sort of this sense that you need to reign in the USTR—that the USTR, if left to its own devices, is kind of under the control of corporate lobbies. And I don't know if that's true. I think the USTR does, more or less, what the president of the United States tells it to do.