In the week since Secretary Clinton announced she is entering the presidential race there have been numerous stories asking about the agenda she will adopt in her campaign. In her announcement video, she indicated she wanted to be a champion for the average worker against the wealthy.
While many policies will be needed to improve the situation of the poor and middle class, there are three simple ones that could make a big difference: a more competitive dollar, a Federal Reserve Board committed to full employment and a financial transactions tax to rein in Wall Street. If Clinton or any other presidential candidate wants to level the playing field, these policies would be a great place to start.
The competitive dollar is an issue that is actually quite simple, but obscured by bad reporting in the media. The value of the dollar relative to other currencies is by far the main determinant of the country’s deficit. We currently have a trade deficit of more than $500 billion a year (at 3 percent of the Gross Domestic Product).
This trade deficit is money that is creating demand elsewhere rather than in the United States. This $500 billion trade deficit has the same impact on the economy as if households or businesses took $500 billion from their income each year and stuffed it under their mattress rather than spend it. This is a main reason that the economy remains well below full employment seven years after the collapse of the housing bubble.
A progressive presidential candidate should make reducing the value of the dollar against the currencies of our trading partners a top priority. This would make our goods and services more competitive internationally and get us closer to balanced trade. The job creation potential here is enormous. If we went from our current trade deficit to balanced trade, it would generate over 4 million jobs directly. This would get us back to full employment and hugely improve the bargaining power of ordinary workers, thereby driving up wages.
The second item is having a Federal Reserve Board that is committed to full employment. One of the main reasons that workers have had less bargaining power in the last three decades is that the Federal Reserve Board has quite deliberately acted to keep the unemployment rate up. On several occasions it has explicitly raised interest rates to slow the economy and reduce the pace of job creation out of a concern that a tighter labor market would lead to higher inflation. As a result, the Fed has prevented most workers from getting the bargaining power needed to share in the gains of economic growth.
The Fed is prepared to attack workers’ bargaining power yet again with its plan to raise interest rates at some point this year. Higher interest rates will reduce growth by reducing borrowing for home buying, car purchases and other purposes.
A progressive presidential candidate should commit themselves to appointing people to the Federal Reserve Board who place a top priority on its legal mandate to promote high employment. If the Fed is not prepared to allow the labor market to tighten, any employment gains from reducing the trade deficit could be reversed by higher interest rates choking off growth.
The third policy, a financial transactions tax, is a great way to raise revenue, reduce inequality and increase the efficiency of the financial sector. It should also be an easy political stand for a Democratic presidential candidate, since a broad-based financial transactions tax was recently proposed by Representative Chris Van Hollen and endorsed by other members of the Democratic leadership in the House.
A tax structured along the lines proposed by Van Hollen (e.g. 0.1 percent on stock trades and 0.01 percent on derivatives) could easily raise more than $1 trillion over a 10-year budget horizon. Virtually all of this money would come out of the pockets of the financial industry.
The industry would pay most of the money since the biggest traders are hedge funds engaged in high-frequency trading and other short-term transactions. The vast majority of ordinary investors would pay almost nothing, since their trading volume would decline roughly in proportion to the increase in trading costs, leaving what they spend on trading little changed.
In addition, the tax would reduce amount of economic resources wasted in useless financial transactions. As recent research from the Bank of International Settlements has shown, a bloated financial sector can be a major drag on economic growth.
So there you have it, three simple policies waiting to be embraced by a progressive candidate. We’ll have to see if anyone rises to the occasion.