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Thursday, October 15, 2015

TPP and Inflation: Weekly News

Mike Smitka, Washington and Lee University

First, Wednesday Oct 14 and Thursday Oct 15 (today, but after taping my radio segment) saw the release of the latest inflation data. Neither suggests a rise in inflation; if anything, they point in the opposite direction and reinforce the sense that growth is not speeding up, and may even be slowing. Thus the Monday (Oct 12) speech by Federal Reserve Board Governor Lael Brainard suggesting that the Fed should hold off on interest rate increases until next year. (She is, of course, a voting member of the FOMC, which sets short-term interest rates.)

Headline PPI (the Producer Price Index) for September increased – er, fell! – 8.4% year-over-year, and fell at an annualized 1.6% month-over-month. Not surprisingly, lower energy prices were a big contributor. To give the full name of the relevant series, the Producer Price Index by Commodity for Crude Materials for Further Processing was below its level of 10 years ago, down 26% from last year and dropped at a 32% rate from August. Eliminating food and energy suggests not everything is down, as this "all other" price measure rose 2.1% over last year, and at an annualized 1.8% over August. That however is at or below the level of recent months.

Headline CPI is now out, and gives a similar picture. The headline index is unchanged from a year ago, and down 0.2% from August (an annualized rate of -2.4%). All items less food and energy rose 1.9% from a year ago, with rises of 3.2% for shelter, 2.4% for medical care services and 2.7% for medical care commodities pulling up the average. In other words, without new housing being built, rents are up in much of the US, and our lack of a national healthcare system means medical costs go up with every new service that hospitals offer and drug or device that pharmaceutical companies develop. (You may of course have read about companies buying up generic drug rights and boosting prices 5- and 6-fold.)

OK, for a longer-term item there's TPP, the Trans-Pacific Partnership agreement. It includes countries with whom we have just under half our trade, Mexico and Canada at the top, and Japan, Australia and New Zealand but also Chile and Peru in the Americas and Malaysia, Brunei, Singapore and Vietnam in Southeast Asia. Now with US tariffs already low, those that remain are in politically sensitive areas such as agriculture. Even though that's now a trivial share of the overall economy, it's not in Wyoming and many other states. And while Wyoming may have only one Congressman, it has 2 Senators so can't be ignored. So dairy and tobacco and sugar remain coddled. Then there are other special interests such as pharmaceuticals. If we're to get other countries to offer lower trade barriers, we have to offer something in return. Furthermore, most of the big gains have already been had through the WTO process, including China lowering trade barriers in many of its markets. So it's hard to get really excited about it.

In any case, it's a political dead letter with the start of our election season. The negotiations are handled by the Office of the US Trade Representative, which is under the White House and not the State Department. Nevertheless, the Secretary of State wields influence in such negotiations, and most of the work was done while that person was Hillary Clinton. She's now come out against it, as has essentially every other Democrat. But given some concessions on dairy, so has Wisconsin Senator Paul Ryan. From the US end, trade agreements are negotiated under "fast track" authority that mandates an up-or-down vote, without amendments. No other country would want to spend years horse trading with us, making concessions painful to their own constituents only to have the Senate in effect try to renegotiate the deal by tacking on changes. And of course negotiations are behind closed doors, because no one would be willing to make tentative offers if they were in the newspapers the next day, particularly as not everything is negotiated at once, so industry X would start screaming about one part of the deal before things that benefit them in another part of the deal are in place. But the same is true for every other multiparty negotiation that I know of, the bargaining is done out of the limelight, and only the final agreement released.

If it's ever brought to a vote, it won't happen until after the new administration takes office in early 2017. But Japan will then be in its election cycle. So I suspect it may never come into effect. The "fast track" depended on Republicans; only 13 Democratic Senators voted in favor. But the Democrats are now even more timid, with Bernie Sanders an outright protectionist, and many Republicans also feel compelled to cater to special interests in the primary cycle, even if the issues aren't harmful in a general election.

And special interests abound. US media firms wanted all sorts of special copyright restrictions, such as pushing for counting the data stored temporarily in a computer printer as an extra copy for which a fee is due. Obviously, no other country will accept that. Likewise pharmaceutical companies in the US can keep test results secret for 12 years, so that even if the foreign patent runs out a drug, it's not practical to actually make it because the data needed to get it approved in (say) Australia isn't available. Other countries pushed for 0 years, and Big Pharma didn't get what it wanted. These special interests may come around in the end, but their initial "disappointment" is what matters in an election season.

For more information, you can go to the USTR's web site for TPP, though the detailed agreement isn't yet available and unless you've followed trade deals, the details are hard to wade through. There are lots of items in the blogosphere; I suggest looking at a post by Jeffrey Frankel, though the Peterson Institute for International Economics and Paul Krugman have also weighed in.

Next week it's perhaps time to talk about Walmart and beer: Walmart because their engine stalled long ago and they're running out of the ability to manipulate their finances to paper over that fact, and beer with the tentative merger of AB InBev (Budweiser!) and SABMiller, the world's #1 and #2 brewers.

Finally, my United Way of Rockbridge spot, as our annual campaign gets up a head of steam with the launch of the workplace campaign at W&L later this month, and those at Mohawk (carpet) and Modine and Lowes also this fall.

I've talked about RAOC and BRAAC. Today I want to talk about a component of our strategic initiative. Most of what UWR funds are short-term "safety net" functions, food and health and help for the aged and support for families that face emergencies. But we also have an initiative to improve long-run outcomes in the Rockbridge area, with a focus on things that will improve early childhood education outcomes. This includes things such as the Campus Kitchen backpack program, and the Rockbridge Area Health Center program to provide dental care through our local schools. In addition, we have long supported Yellow Brick Road, providing funds so they can offer scholarships for daycare.

We also have our Rockbridge Reads program that focuses on preparing young children for kindergarten. One concrete measure was Mr. Ryan's reading program through the Rockbridge Regional Library, held in Glasgow and Fairfield that exposed youngsters to books, and adults on what sort of books work and how to make reading fun. Unfortunately Mr. Ryan moved out of the area, so that program is currently stalled until a new reader can be located. Then there are other programs. In the past the Blues Education Foundation of Buena Vista received funding, but they didn't apply this year. We did provide a small grant to Lexington schools for a pre-K program run this past summer. Hopefully we'll get local schools and daycare programs and the library and others coming up with concrete programs in the next few months so that they can apply for funds.

Go to our website at uwrockbridge.org to support us, or for more information.


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