Author Archives: Simon Johnson

What Is the Trans-Pacific Partnership (TPP) Really All About?

By Simon Johnson

The Trans-Pacific Partnership (TPP) is a proposed free trade agreement (FTA) between the United States and 11 other countries.  It is comprised of two main parts: reductions in tariffs (and related non-tariff barriers), of the kind typically seen in trade agreements; and new rules for foreign direct investment and intellectual property rights, which have not previously been prominent in FTAs.

The new rules part has become controversial.  The case for introducing an investor-state dispute settlement seems less than compelling – this would favor foreign investors over domestic investors, not an idea that sits well with the standard idea of equality before the law (going back at least 800 years) and a direct contradiction to the usual principles of FTAs (emphasizing non-discrimination across types of investors).  As currently formulated, it would also be open to considerable abuse.  And the precise rules under consideration for patent protection appear likely to reduce access to affordable medicines in both our trading partners and potentially also in the United States.

As a result, advocates of TPP are now emphasizing the benefits of tariff reductions in terms of boosting US exports.  But the administration’s claims in this regard are greatly exaggerated and the United States Trade Representative (USTR) is unfortunately refusing to fully discuss the broader trade impact, including the precise impact of higher imports into the United States. Continue reading

Why Is The White House Threatening To Veto An Imaginary Trade Promotion Authority (TPA)?

By Simon Johnson

At today’s daily briefing, White House spokesman Josh Earnest communicated the president’s threat to veto any trade promotion authority (TPA) that “could undermine the independence or ability of the Federal Reserve to make monetary policy decisions”.  (The question was posed at minute 42:50, Mr. Earnest’s answer starts at 43:31, and the lead up to this quote starts around 45:20.)

Mr. Earnest’s statement seems clear enough, but what potential TPA is he talking about?  Either the White House is confused or some other communications strategy is at work here.  Either way, Mr. Earnest is describing some imaginary version of TPA that is simply not on the congressional table.

He most certainly cannot be accurately describing the bipartisan Portman-Stabenow amendment, currently before the Senate.  This amendment specifically goes out of its way to state that it would not “restrict the exercise of domestic monetary policy.” Continue reading

The Trans-Pacific Partnership (TPP): This Is Not About Ricardo

By Simon Johnson and Andrei Levchenko

The Obama administration is lobbying hard for Congress to pass a trade promotion authority (TPA) and to quickly approve the Trans-Pacific Partnership (TPP), a free trade agreement that is on the verge of being finalized.

The administration and its supporters on this issue, including leading Republicans, argue that the case for TPP rests on basic economic principles and is only strengthened by the findings of modern research.  On both counts their claims are greatly exaggerated – particularly with regard to the notion that more trade, on these terms, is necessarily better for the United States.

There is a strong theoretical and empirical case – dating back to David Ricardo in 1817 – that freer trade should make countries better off. However, modern-day trade agreements, including those currently being negotiated, are very different from earlier experiences with trade liberalization. Continue reading

Preventing Currency Manipulation

By Simon Johnson

As Congress debates the trade promotion authority, TPA, the issue of currency manipulation remains firmly on the table.  The administration and Republican leadership insist that language discouraging currency manipulation should not be included in the TPA (and also not in the Trans-Pacific Partnership, TPP, a trade agreement currently under negotiation).  Many Democrats and Republicans continue to argue in favor of prohibiting currency manipulation.

On Tuesday, the Treasury Department and White House claimed that the amendment proposed by Senators Rob Portman (R., Ohio) and Deborah Stabenow (D., Michigan) would actually impede the ability of the Federal Reserve to conduct monetary policy.  This is absurd.  The Portman-Stabenow amendment clearly and precisely addresses protracted one-way intervention in foreign exchange markets, i.e., large-scale purchases of foreign assets by a central bank.  The Federal Reserve does not engage in such activities – nor will it engage in this kind of intervention in the foreseeable future.  US monetary policy involves buying and selling domestic assets.  The Fed does not buy foreign assets on any significant scale.  There is nothing in this amendment that would impede the workings of US monetary policy.  To suggest otherwise is to mischaracterize the nature of this amendment.

There are instead three main issues of substance worth further consideration. Continue reading

No More Cheating: Restoring the Rule of Law in Financial Markets

By Simon Johnson

The political debate about finance in the US is often cast as markets versus regulation, as if “more regulation” means the efficiency of private sector decisions will necessarily be impeded or distorted. But this is the wrong way to think about the real policy choices that – like it or not – are now being made. The question is actually what kind of markets do you want: fair and well-functioning, with widely shared benefits; or deceptive, dangerous, and favoring just a relatively few powerful people?

In a speech on Wednesday, Senator Elizabeth Warren (D., MA) laid out a vision for better financial markets. This is not a left-wing or pro-big government agenda. Senator Warren’s proposals are, first and foremost, pro-market. She wants – and we should all want – financial firms and markets that work for customers, that encourage innovation, and that do not build up massive risks which can threaten the financial system and bring down the economy. Continue reading

What Is Citigroup Hiding From Its Shareholders Now?

By Simon Johnson

In the early and mid-2000s, Citigroup had compensation practices that can fairly be described as a disaster for shareholders (and for the broader economy). Top executives, such as then-CEO Chuck Prince, received big bonuses and generous stock options. Lower level managers and traders were paid along similar lines. These incentives encouraged Citi employees to take risks and boost profits. Unfortunately for shareholders, the profits proved largely illusory – when the dangers around housing and derivatives materialized fully, the consequences almost destroyed the firm.

The market value of Citigroup’s stock dropped from $277 billion in late 2006 to under $6 billion in early 2009. The shareholders could easily have been wiped out – they were saved from oblivion by a generous series of bailouts provided by the federal government (see Figure 7 in the final report of the Congressional Oversight Panel; direct TARP assistance was $50 billion but “total federal exposure” was close to $500 billion). In the next credit cycle, the experience for Citi shareholders could be even worse. So it is entirely reasonable for shareholders to look carefully at, among other things, the details of how executives and other key employees are paid – and to understand the current incentives for taking and managing risk.

But Citigroup is resisting efforts to disclose fully the structure of relevant compensation contracts. What is Citigroup hiding now? Continue reading

Nominate A Qualified Undersecretary Of Domestic Finance Now

By Simon Johnson

The Obama administration urgently needs to nominate a qualified individual as Undersecretary for Domestic Finance at the Treasury Department. The Dodd-Frank financial reforms are under sustained and determined attack, and the lack of a confirmed Undersecretary is making it significantly harder for Treasury to effectively defend this important legislation. Failing to fill this Undersecretary position would constitute a serious mistake that jeopardizes a signature achievement of this presidency.

In the continuing absence of an Undersecretary for Domestic Finance, the administration has recently displayed an inconsistent – or perhaps even incoherent – policy stance on financial sector issues. On the one hand, in mid-December, the White House agreed to rollback a significant part of Dodd-Frank – the so-called “swaps push-out,” which was shamefully attached at the behest of Citigroup to a must-pass government spending bill. The White House put up little resistance to this tactic and, at the critical moment, lobbied House Democrats to support the repeal of Section 716. Continue reading