In winter 2016, near the peak of Bernie Sanders’ bid for the Democratic presidential nomination, a new line became popular among the nation’s policy elite: Bernie Sanders is the enemy of the world’s poor. Their argument was that Sanders, by pushing trade policies to help US workers, specifically manufacturing workers, risked undermining the well-being of the world’s poor because exporting manufactured goods to the United States and other wealthy countries is their path out of poverty. The role model was China, which by exporting has largely eliminated extreme poverty and drastically reduced poverty among its population. Sanders and his supporters would block the rest of the developing world from following the same course.

This line, in its Sanders-bashing permutation, appeared early on in Vox, the millennial-oriented media upstart, and was quickly picked up elsewhere. After all, it was pretty irresistible. The ally of the downtrodden and enemy of the rich was pushing policies that would condemn much of the world to poverty.

The story made a nice contribution to preserving the status quo, but it was less valuable if you respect honesty in public debate. The problem in the logic of this argument should be apparent to anyone who has taken an introductory economics course. It assumes that the basic problem of manufacturing workers in the developing world is the need for someone who will buy their stuff. If people in the United States don’t buy it, then the workers will be out on the street and growth in the developing world will grind to a halt.

In this story, the problem is that we don’t have enough people in the world to buy stuff. In other words, there is a shortage of demand. But is it really true that no one else in the world would buy the stuff produced by manufacturing workers in the developing world if they couldn’t sell it to consumers in the United States? Suppose people in the developing world bought the stuff they produced raising their living standards by
raising their own consumption.

That is how the economics is supposed to work. In the standard theory, general shortages of demand are not a problem. Economists have traditionally assumed that economies tended toward full employment. The basic economic constraint was a lack of supply. The problem was that we couldn’t produce enough goods and services, not that we were producing too much and couldn’t find anyone to buy them. In fact, this is why all the standard models used to analyze trade agreements like the Trans-Pacific Partnership assume trade doesn’t affect total employment. Economies adjust so that shortages of demand are not a problem.

In this standard story (and the Sanders critics are people who care about textbook economics), capital flows from slow-growing rich countries, where it is relatively plentiful and so gets a low rate of return, to fast-growing poor countries, where it is scarce and gets a high rate of return.

So the United States, Japan, and the European Union should be running large trade surpluses, which is what an outflow of capital means. Rich countries like ours should be lending money to developing countries, providing them with the means to build up their capital stock and infrastructure while they use their own resources to meet their people’s basic needs.

–Dean Baker
Rigged — Read it for free!