Noah Smith Gives Elizabeth Warren’s Economic Patriotism Plan Two Cheers; I Give it a Bit Less

Update 2/25/20 4:41pm EST: I wrote this post many months ago; I actually don’t remember where or when, but never posted it. I don’t remember why I didn’t post it. I don’t even know how it got posted, because, having long forgotten about it, I certainly wasn’t trying to post it. I was just searching for another old and published post of mine that I wanted to look at. But since it’s seen the light of day, I guess I will just leave it out there for whoever is interested.

Elizabeth Warren issued another one of her policy documents, this one a plan for advancing what she calls “economic patriotism,” a term that certainly doesn’t resonate in my own ears. But to each his own. Noah Smith lost no time publishing his own analysis of Warren’s proposals, no doubt after giving it a careful reading and a lot of careful thought.

Being less diligent than Noah, I haven’t actually read Warren’s policy proposals, but I did read Noah’s analysis of Warren’s proposals, and  here are some quick reactions to Noah and indirectly to Senator Warren.

It’s safe to say that the postwar free-trade consensus in Washington has crumbled. The main agent of its destruction was President Donald Trump, who fulfilled his campaign promises by canceling free-trade deals and launching trade wars with almost every country with which the U.S. does business. But the turn against free trade is bipartisan — socialist presidential candidate Bernie Sanders also promised to pull out of some international deals, and some prominent Democrats have backed Trump’s tariffs against China.

Now Senator and 2020 presidential candidate Elizabeth Warren has released a trade plan that goes squarely against the old consensus. Warren’s “A Plan For Economic Patriotism” would seek to revive U.S. industry in a number of ways — some of them smart, some of them problematic. The plan would leverage government-funded research and development to boost industry — a very good but hardly novel idea — and promote manufacturing (Warren also released a companion proposal specifically about manufacturing). The plan also would aggressively promote U.S. exports.

Although the purpose of the plan may be to triangulate Trump on trade, doing more to promote exports is probably a good idea in its own right. There is a growing body of evidence that nudging developing-country manufacturers to export increases their productivity, and some studies suggest that the phenomenon extends to rich countries like the U.S. This makes sense — when a company starts competing in international markets, it must up its game against global competition, improving efficiency, developing new products and so on.  But the U.S. domestic market is so large that American companies are often tempted to ignore the outside world; export promotion would fight this corrosive complacency.

I am inclined to favor free trade, but as I have observed before, the standard case for unilateral free trade is based on a number of implicit welfare assumptions that are not necessarily true and may leave out important considerations that are relevant to an appropriate analysis of trade policy. If we are trying to promote high employment then the best way of doing that is not by raising the price of imports which mainly benefits the owners of specialized domestic capital used in import-competing industries. It would be better to subsidize employment in industries that produce exports encouraging their expansion.

Then there’s the trade deficit. Countries can’t all run trade surpluses at each other’s expense, and attempts to do so can easily degenerate into a game of beggar-thy-neighbor. If a country runs trade deficits in order to fuel a temporary investment boom, which can help growth. But for more than two decades now, the U.S. has run substantial trade deficits even as investment’s share of the economy has fallen:

That suggests that U.S. consumers are consistently living beyond their means, which seems unsustainable. Increasing exports, rather than trying to cut imports as Trump has done, is a smart way to try to make U.S. consumption levels more sustainable.

The problem is how exactly to do it. Warren would dramatically expand the Export-Import bank’s activities, and direct more of its loans to smaller companies instead of big ones — a great idea that I have called for in the past. Warren would also consolidate the vast array of federal government agencies responsible for industrial policy into a single Department of Economic Development — another smart move.

I’m not following Noah’s reasoning. If the trade deficit is, as Noah correctly suggests, a reflection of a low US saving rate compared to saving in other countries, how will subsidizing exports raise the US propensity to save. Increasing the exports of some products will not induce Americans to increase their saving rate. If aggregate US saving doesn’t increase, the size of the trade deficit will not change; only the composition of that deficit will change.

A less savory tool is Warren’s proposal to have the federal government buy only American-made goods — a protectionist move that would do nothing to promote exports and would simply raise costs for the infrastructure that U.S. manufacturers need to be competitive. Warren should discard this piece of the plan.


More actively managing our currency value to promote exports and domestic manufacturing…We should consider a number of tools and work with other countries harmed by currency misalignment to produce a currency value that’s better for our workers and our industries.

The dollar now functions as the world’s so-called reserve currency — other countries hold dollar assets as buffers against capital outflows, and many internationally traded commodities are priced in dollars. This increases global demand for dollars, which pushes up their value against other currencies. That makes it easier for Americans to borrow, but harder for them to export.

It’s hard to see how Warren’s plan would change that state of affairs. Currency intervention would probably come from the Federal Reserve; if the Fed prints dollars, it puts downward pressure on the dollar. But because the U.S. doesn’t have the same control over its financial system that China does, creating all those dollars would risk inflation.  The difficulty of maintaining an independent monetary policy while also targeting exchange rates is a well-known dilemma in international economics.

Precisely. Noah seems to referencing a policy of exchange-rate protection, which I have written about many times already on this blog, based on the classic article on the subject of the eminent Max Corden. The upshot of Corden’s article was that exchange-rate protection can only work if the monetary authority simultaneously intervenes to reduce the value of its currency in the foreign-exchange market by selling its currency in exchange for foreign currencies and tightens its domestic monetary policy. Exchange-rate intervention means increasing the quantity of the domestic currency, thereby causing domestic prices to rise. If domestic prices rise along with the depreciation of the exchange rate of the domestic currency, exporters gain no advantage. If exports are to be promoted by exchange-rate intervention, the monetary authority must either reduce the domestic quantity of money or increase the demand for it (usually by increasing reserve requirements for the banking system) while the exchange rate is depreciated, creating an excess domestic demand for money. If the domestic economy is chronically short of cash, the only way for cash balances to be increased is through reduced expenditure which means that imports will decrease and exports will increase as a result of reduced domestic expenditure. That doesn’t sound like the sort of strategy for currency manipulation to reduce the real effective exchange rate that Senator Warren would be inclined to support

As an alternative, the U.S. could try to stop other countries from holding U.S. dollar reserves and pricing commodities in dollars, thus forfeiting the dollar’s role as the global reserve currency. But this could destabilize the global financial system in ways that are poorly understood, and thus would be a risky move.

In the end, the best approach on the currency may simply be to put pressure on countries that intervene to reduce the value of their own currencies against the dollar. The problem is that China is by far the biggest of these — although it hasn’t had to intervene to hold down the yuan in recent years, its capital controls and currency management policies are still in place, limiting the potential for yuan appreciation. If other countries allow their own currencies to appreciate against the dollar, they’ll be putting themselves in an uncompetitive position relative to China.

Thus, the issues of economic patriotism, export promotion and currency revaluation will ultimately come back to China. Until and unless that giant country gives up its strategy of promoting manufactured exports to the U.S., it will be an uphill battle to correct the U.S.’s imbalances or revive its export competitiveness. A President Warren would be smarter than a President Trump on trade, but she would find herself confronting much the same challenges.

While China probably was a currency manipulator in the early years of this century, as reflected China’s rapid accumulation of foreign exchange, the pace of foreign exchange accumulation has since tapered off. China could be pressured to disgorge some of its enormous foreign-exchange holdings, which would require China to buy more foreign assets or increase imports from abroad. How that could be done is not exactly obvious, but the most likely way to achieve that result would be for the US to aim for a higher rate of inflation thereby increasing the cost to China and other holders of US foreign exchange of holding low-yielding US financial assets. Whether President Warren would find such a policy approach to her liking is far from obvious.


2 Responses to “Noah Smith Gives Elizabeth Warren’s Economic Patriotism Plan Two Cheers; I Give it a Bit Less”

  1. 1 Frank Restly February 26, 2020 at 6:27 pm


    “I’m not following Noah’s reasoning. If the trade deficit is, as Noah correctly suggests, a reflection of a low US saving rate compared to saving in other countries, how will subsidizing exports raise the US propensity to save.”

    You are not following the reasoning because you are putting the cart before the horse. To reduce the trade deficit you must increase the US propensity to save while simultaneously reducing the ability to save of the trade surplus country.

    To raise the national savings rate – Americans (and only Americans) must be able to obtain a positive real return on government securities and must be willing to buy up and retain the outstanding government securities that it sells.

    1. First consideration, the U. S. government would need to take an active role in determining the rate of return on the securities that it sells. That may sound like a violation of “free market principles” but consider that government securities are sold at auction with the following terms – buyer states the rate of return he / she is willing to accept, seller (government) states the duration of the security (1 year, 5 years, 10 years, etc.) they are willing to sell. This can easily be reversed – government seller sets the rate of return / buyer sets the duration.

    2. Second consideration, the securities that the U. S. government sells would need to be non-transferrable / non-resalable. Again, this may sound like a “free market principle” violation, but even today the U. S. government sells both marketable and non-marketable bonds (think Series E / EE / government pension bonds).

    3. Third consideration, monetary policy independence must be maintained. Because monetary policy operates in the credit markets, the securities that the government sells must be equity (as opposed to debt) in nature. In this way a “firewall” is permanently constructed between monetary (open market purchases) and fiscal policy. Even if the central bank wanted to interfere in fiscal policy measures, they would be legally precluded from doing so.

    4. Fourth consideration, there is a level of interplay between government and private debt that must be overcome. Certainly the federal government could state the interest rate it is willing to pay on debt securities and this would likely have an adverse effect in the private credit markets (as well as the increase in taxes / reduction in other spending needed to make the payments). If instead the U. S. government sells securities that are equity (risky) in nature, then the link is broken between the rate of return on government securities and the rate of interest charged in the private credit markets and by extension, the rate of interest charged by the Federal Reserve in the overnight lending market.

    5. Fifth consideration, with non-transferrable securities, the U. S. government’s liability dies when the owner of the security dies. Meaning that Congressional / Presidential action to “reign in” debt and / or deficits becomes more nuanced. Also with non-transferrable securities, those liabilities cannot be purchased domestically and then resold overseas.

    6. Sixth and final consideration, the securities that the federal government sells should have no intrinsic value overseas while having value domestically (I leave it to the reader to determine how to make that possible). Meaning that if someone bought a bunch of government securities as a domestic buyer and then later moved to a foreign country, those securities would essentially be worthless in that foreign country. Because they would be non-transferrable there would be no secondary market to resell those securities to a different domestic buyer.

    “The difficulty of maintaining an independent monetary policy while also targeting exchange rates is a well-known dilemma in international economics.”

    It’s a dilemma only because economists are not well educated in Constitutional Law. The U. S. government (Legislature, Treasury) is not legally obligated to sell debt securities, despite protestations from economists that government debt is a natural consequence of prior accumulated deficits. The U. S. Constitution gives the Legislative branch of government the sole authority (see plenary power) to borrow. It does not mandate that the Legislature must borrow in the face of deficits or at any time for that matter. The U. S. Legislature maintains a debt ceiling but not a debt floor.

    The power for the U. S. government to sell equity is in fact unclaimed by any of the three branches of government (Legislative, Executive, Judicial). If Senator Warren became elected President she could simply tell her Treasury Secretary to begin printing and auctioning “Government Equity Certificates” and neither the Legislature nor the Judiciary could say boo about it.


  2. 2 Frank Restly March 13, 2020 at 10:45 pm


    2. Second consideration, the securities that the U. S. government sells would need to be non-transferrable / non-resalable.

    5. Fifth consideration, with non-transferrable securities, the U. S. government’s liability dies when the owner of the security dies.

    6. Sixth and final consideration, the securities that the federal government sells should have no intrinsic value overseas while having value domestically.

    Doesn’t that sound a lot like Social Security? Social Security benefits are non-transferrable / non-resalable, when a person dies the Government’s liability to that person dies with them (with some exceptions), and Social Security benefits are unobtainable in the overseas markets.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey’s unduly neglected contributions to the attention of a wider audience.

My new book Studies in the History of Monetary Theory: Controversies and Clarifications has been published by Palgrave Macmillan

Follow me on Twitter @david_glasner


Enter your email address to follow this blog and receive notifications of new posts by email.

Join 3,244 other subscribers
Follow Uneasy Money on

%d bloggers like this: