James Pethokoukis

Here is what James Carville and Stan Greenberg want Democrats to say about trade to voters (Via Sean Higgins at Investor’s Business Daily:

My passion is “made in America,” working to support small businesses, American companies and new American industries. (REPUBLICAN HOUSE CANDIDATE) has pledged to support the free trade agreements with Colombia, Panama, and South Korea and protect the loophole for companies outsourcing American jobs. I have a different approach to give tax breaks for small businesses that hire workers and give tax subsidies for companies that create jobs right here in America.

Via the GS econ team (as excerpted and outlined by me):

1. We see two main scenarios for the economy over the next 6-9 months—a fairly bad one in which the economy grows at a 1½%-2% rate through the middle of next year and the unemployment rate rises moderately to 10%, and a very bad one in which the economy returns to an outright recession.

2. There is not much probability of a significantly better outcome.  The reason is that “short-cycle” factors such as the inventory cycle and the impulse from fiscal policy are likely to continue deteriorating through early 2011, keeping GDP growth very sluggish.

3. However, the recession scenario also has significant probability (we still think about 25%-30%).

4. Relative to our baseline scenario of extension of the lower- and middle-income tax cuts, we estimate that full expiration would result in a further hit to GDP growth in early 2011 of nearly 2 percentage points (annualized).

5. Meanwhile, the slow-motion improvement in areas such as excess housing supply and bank credit quality is likely to continue.  This should add up to a gradual acceleration in growth to a trend or slightly above-trend pace by late 2011 and going into 2012.

Presidential approval ratings are hugely influential in congressional midterms. Unfortunately for Democrats:

China just lost Martin Wolf. The FT columnist spends a good chunk of his latest column on why the yuan needs to rise. He then outlines a plan of action:

This leads to the final question: how might China be cajoled or coerced into changing its policies? Negotiation remains a hope. The rest of Group of 20 leading countries should unite in calling for these changes. But if negotiation continues to fail, alternatives must be considered. Import surcharges are one possibility. Fred Bergsten of Washington’s Peterson Institute called for countervailing currency intervention in the FT this week; and Daniel Gros of the Centre for European Policy Studies in Brussels recommends capital account reciprocity: affected countries could prevent other countries from purchasing their financial instruments, unless the latter offered reciprocal access to their financial markets. This idea would also make the Bergsten plan more effective.

I find ideas for intervention in capital markets far more attractive than those involving action against trade, as the US House of Representatives proposed last week. First, action on trade would have to be discriminatory: there is no reason to attack all imports, merely to change Chinese behaviour. But this would almost certainly be a violation of the rules of the World Trade Organisation. A trade war would be very dangerous. Insisting that China stop purchasing the liabilities of other countries so long as it operates tight controls on capital inflows is, instead, direct and proportionate and, above all, moves the world towards market opening.

Some fear that a cessation of Chinese purchases of US government bonds would lead to a collapse. Nothing is less likely, given the massive financial surpluses of the private sectors of the world and the continuing role of the dollar. If it weakened the dollar, however, that would be helpful, not damaging.

Me: In addition, China is losing big US multinationals and the GOP, both key members of the old free-trade lobby. This will be a major US political issues next year with unemployment continuing to stay an elevated levels.