CARDIFF GARCIA, HOST:
The other day, Stacey and I were talking about the first Batman movie with Christian Bale, "Batman Begins," and how Bruce Wayne had a bunch of other simple, straightforward options for fighting crime in Gotham City that did not involve becoming, like, this weirdo ninja vigilante with a ludicrous tank car and some climbing gear.
STACEY VANEK SMITH, HOST:
Right? I mean, Bruce Wayne had this massive generational wealth. He could have made these, like, very basic, straightforward investments in the city that would have helped fight crime. He could have funded a jobs program. He could have built homeless shelters and better bridges and roads. He could have run for office himself if he wanted to change things directly.
GARCIA: So many options.
VANEK SMITH: So many options.
GARCIA: And instead he made the bizarre choice to fight crime at night while dressed like a grotesque mammal whose cave poop makes for good fertilizer.
VANEK SMITH: Great fertilizer, actually.
VANEK SMITH: Great fertilizer.
GARCIA: And one of the themes of the sequels was that Gotham's criminals responded by becoming increasingly crazy themselves, leading to a more and more destructive equilibrium for everybody.
(SOUNDBITE OF FILM, "BATMAN BEGINS")
GARY OLDMAN: (As Jim Gordon) What about escalation?
CHRISTIAN BALE: (As Batman) Escalation?
OLDMAN: (As Jim Gordon) We start carrying semi-automatics, they buy automatics. We start wearing Kevlar, they buy armor-piercing rounds.
BALE: (As Batman) Yeah.
OLDMAN: (As Jim Gordon) And you're wearing a mask, jumping off rooftops.
GARCIA: Yeah, escalation, Stacey. I got to...
VANEK SMITH: (Laughter).
GARCIA: I think I need a glass of water.
VANEK SMITH: Where's a Bat-Signal when you need one? And this in a lot of ways is what a trade war is like. Just like Gotham had a problem with crime, the United States did have some legitimate beef with other countries like China, which in the past have tilted the playing field in their favor when it comes to trade.
But tariffs can be a really destructive way to respond. They raise prices of things we buy. They invite retaliation from other countries. And they distort the economy in a bunch of different ways. After the U.S. imposed tariffs on China, China responded by imposing retaliatory tariffs on the U.S. and by making it harder for American companies to do business in China.
GARCIA: That's escalation.
VANEK SMITH: (Laughter).
GARCIA: Look; it's too late to prevent the start of a trade war with China. And unless one side calls it off, there's no telling how far it's going to go or how much damage it's going to cause. But we have been wondering. Was there a strategy, at least an option, a simple, straightforward strategy that could have fixed at least some of the initial conditions that led to a trade war in the first place so that a trade war would never have even been considered? And ideally, a strategy that might even help us avoid new trade wars.
VANEK SMITH: Actually, there was. There is. Welcome to THE INDICATOR, where every day we tell you a short story about the economy. I'm Stacey Vanek Smith.
GARCIA: And I'm Cardiff Garcia. It might be too late to avoid the trade wars of the present, but today on the show we tell you about this remarkably simple strategy for possibly avoiding the trade wars of the future.
(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")
GARCIA: Back in the 2000s, a bunch of countries that the United States trades with were doing this one thing, this thing that made it easier for their companies to sell their goods to America and harder for American companies to sell their goods abroad. It's called currency manipulation. And back then, China was doing more of it than any other country.
VANEK SMITH: And here is how currency manipulation worked. China would buy U.S. dollars in huge amounts on the global currency market, and this would have the effect of pushing up the value of the dollar against the Chinese currency, the yuan. And because the dollar was then stronger, it meant that Americans could buy more Chinese goods for a dollar. The U.S. started to import more toys and clothes and TVs and toothbrushes and, you know, pretty much everything else from China.
GARCIA: And on the flip side, a stronger U.S. dollar also meant that the United States would export less to China because that's also what it means for the U.S. dollar to become stronger. American goods have become more expensive for Chinese people, who therefore just don't buy as much. And remember; it was not just China that was manipulating its currency. Other countries were doing the same thing.
VANEK SMITH: And all of this currency manipulation was a big reason that the U.S. was buying so much more stuff from the rest of the world than it was selling to the rest of the world. In other words, the U.S. was running a trade deficit. And in the 2000s, that deficit got a lot bigger.
GARCIA: This had a couple of big consequences. First, it just changed the landscape of the U.S. economy. So American consumers got to buy cheaper Chinese goods, and so did American companies that use Chinese parts to make their own products. But other American companies, especially in the manufacturing sector, just could not compete with these cheaper Chinese goods. And in some communities, a lot of factory workers lost their jobs.
VANEK SMITH: The bigger trade deficit also had a second major consequence, one that people often forget about. Remember; the way China manipulated its currency was by buying U.S. dollars. But it's not like China would just stick these dollars in a vault somewhere, right? China had to buy something with the dollars, something that was priced in dollars. Joe Gagnion (ph), a senior economist at the Peterson Institute, explains what China and the other currency-manipulating countries ended up buying.
JOE GAGNON: There were a lot of foreign governments buying not only U.S. Treasurys but also U.S. agency securities and mortgage-backed securities and other, you know, assets in the U.S. And that was basically keeping interest rates in the U.S. low and encouraging the housing bubble. Basically, it was making it easier for people to borrow to buy houses because China and other countries' governments were buying up those mortgages.
GARCIA: In other words, the second big consequence of the U.S. trade deficit back in the 2000s was that it made the housing bubble worse, which of course contributed to that huge financial crash in 2008. So what could the U.S. have done back then to offset these effects, to offset the trade deficit, and is it something that the U.S. can do now? Because the U.S. still does have a trade deficit. Joe says actually, yeah, there might have been.
VANEK SMITH: The answer is so simple Joe thinks it's kind of amazing that policymakers never seriously considered it before. And it's this - the U.S. can reduce its trade deficit just by doing what currency manipulators were doing to us but in reverse. It can go into the currency market and buy up other currencies. That would make the U.S. dollar cheaper so American companies could sell more of their goods abroad for a lower price.
GAGNON: There'd be nothing wrong with buying more. And we could buy a lot more if we wanted to to counteract other countries' manipulation.
GARCIA: And how would that exactly work? Like, who specifically would be in charge of buying the foreign currencies? Would it be the Federal Reserve, or would it be the Treasury Department? How would it be implemented?
GAGNON: Well, it could actually go either way because both those institutions already have a small amount of reserves, and they both have the authority to buy more.
VANEK SMITH: Just like other countries have bought the U.S. dollar to make the U.S. dollar stronger, the U.S. could buy other countries' currency to make the U.S. dollar weaker.
GARCIA: Joe adds that by the way, this would not make the U.S. itself a currency manipulator the way China was back in the 2000s because currency manipulation according to Joe's criteria is when you weaken your own currency so much that you end up running a big trade surplus. But in the case of the United States both back in the 2000s and right now, we're only talking about reducing the trade deficit, and only then to the point where the United States imports and exports roughly the same amount.
And Joe argues that getting rid of the trade deficit in the U.S. should happen slowly because doing it all at once would just be really disruptive. But it's an idea that would help solve a big economic imbalance that continues to exist between the United States and the rest of the world. And the idea's so simple that it's kind of curious that it had not been considered before the 2000s.
GAGNON: We had been in this mode of never thinking about this as an option for decades. And so it sort of didn't really occur to us until maybe too late.
GARCIA: Aren't you annoyed by that? Like, aren't you annoyed that it took so long to recognize it?
GAGNON: Well, it did for me, too. So I just was a little bit earlier than some, but - and I don't think it's quite swept the profession yet. But I think we all had this view that it just wasn't how we thought of the world economy monetary system as working.
GARCIA: The U.S. trade deficit is one of the excuses used by President Trump and others for starting a trade war now. So if Joe's idea were to be implemented, it would attack the problem at its source so that the temptation of an escalating and destructive trade war just wouldn't be there in the first place. And then maybe things wouldn't get to the point where geopolitics sounds like these two guys in "The Dark Knight" sitting in a downtown holding cell.
(SOUNDBITE OF FILM, "THE DARK KNIGHT")
BALE: (As Batman) Then why do you want to kill me?
HEATH LEDGER: (As Joker, laughter) I don't want to kill you. What would I do without you, go back to ripping off mob dealers? No. No. No. No, you - you complete me.
VANEK SMITH: Maybe those two in another context, in another world would have just been running the city peacefully together.
VANEK SMITH: It would've been like the mayor...
GARCIA: Like mayor and deputy mayor, you know?
VANEK SMITH: Yeah. Yeah, just, like, fixing potholes. I mean, the comic book would have been less exciting, but living in Gotham - way less traumatizing. Maybe the Penguin's, like, the transportation secretary. Poison Ivy could be in charge of Parks.
(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")
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