Matt Stannard writes:

A former top Federal Reserve policy adviser, and the president of the Federal Reserve Bank of Minneapolis, have stunned the banking world by calling for public banks and the breakup of big banks.

Andrew Levin is surely one of the most (formerly) high-ranking monetary policy advisors to call for publicly-owned banks, in this case calling for the Fed’s 12 regional outposts to be made government entities rather than privately-owned banks.At the beginning of this week, he called “for the Fed’s 12 regional outposts to be made government entities, rather than owned, as they have been since their inception more than a century ago, by the banks they regulate.”

And Minneapolis Fed President Neel Kashkari used to be the “bailout czar” in Washington, “charged with overseeing the Troubled Asset Relief Program during the financial crisis,” according to Jordan Weissmann, senior business and economics correspondent for Slate. In other words, Kashkari helped design TARP and other programs to save the big banks he now wants to break up.

Consciousness of banking as a public utility seems to underlie not only the two gentlemen’s policy ideas, but the media as well. The Reuters reporters who wrote on Levin’s call for public regional fed banks pointed out in their piece that “the U.S. central bank is the world’s only major central bank that is not fully public.”And actually, Kashkari’s call for “turning large banks into public utilities by forcing them to hold so much capital that they virtually can’t fail” is an offhanded call for banking in the public interest.

And beyond just calling for publicly-owned regional banks, it’s pretty significant that Andrew Levin released his recommendations through Fed Up–a grassroots organization dedicated to radical changes in the Federal Reserve. High-ranking officials, and even consultants, hooking up with real economic justice groups seems to be the spirit of the times.

Both Kashkari and Levin are rebutting Federal Reserve chair Janet Yellen’s stock arguments that “regulators already have the tools they need,” and, of course, Yellen is nowhere near the concept that banks ought to be publicly owned–even some banks, even really important ones. Levin has a history of harping on Yellen, telling her last September not to raise interest rates.

As Weissmann concludes: “We now have a former politician with establishment credentials who has ascended to a somewhat influential position within the Federal Reserve basically running a campaign to chop banks down to size—or at least make them dull, safe, and certainly less profitable.”

Kashkari is soliciting public opinion, by the way.

James Surowiecki writes:  From the crumbling bridges of California to the overflowing sewage drains of Houston and the rusting railroad tracks in the Northeast Corridor, decaying infrastructure is all around us, and the consequences are so familiar that we barely notice them—like urban traffic congestion, slow-moving trains, and flights that are often disrupted, thanks to an outdated air-traffic-control system. The costs are significant, once you reckon wasted time, lost productivity, poor public-health outcomes, and increased carbon emissions.

Infrastructure was once at the heart of American public policy. Today, we spend significantly less, as a share of G.D.P., on infrastructure than we did fifty years ago—less, even, than fifteen years ago. The U.S. makes no net investment in public infrastructure. Yet polls show that infrastructure spending is popular with a majority of voters across the income spectrum. Historically, it enjoyed bipartisan support from politicians, too. If it’s so popular, why doesn’t it happen?

One clear reason is politics. While both parties remain rhetorically committed to infrastructure spending, in practice Republicans have been less willing to support it, especially when it goes toward things like public transit. This is partly because of the nature of the Republican base: public transit is hardly a priority for suburban and rural voters in the South and in much of the West. But ideology has played a key role as well.

Over the years, the process of getting infrastructure projects approved has become riddled with what political scientists call “veto points.” There are more environmental regulations and more requirements for community input. There are often multiple governing bodies for new projects, each of which has to give its approval. Many of these veto points were put in place for good reason. But they make it harder to undertake big projects. In 2010, Chris Christie was able to cancel a new tunnel under the Hudson River more or less single-handed, even though more than a billion dollars had already been spent on it.

Even more egregious than the lack of new investment is our failure to maintain existing infrastructure. You have to spend more on maintenance as infrastructure ages, but we’ve been spending slightly less than we once did. The results are easy to see. In 2013, the Federal Transit Administration estimated that there’s an eighty-six-billion-dollar backlog in deferred maintenance on the nation’s rail and bus lines. The American Society of Civil Engineers, which gives America’s over-all infrastructure a grade of D-plus, has said that we would need to spend $3.6 trillion by 2020 to bring it up to snuff.

Again, there are political reasons that maintenance gets scanted. It’s handled mainly by state and local communities, which, because many of them can’t run fiscal deficits, operate under budgetary pressures. Term limits mean that a politician who cuts maintenance spending may not be around when things go wrong. There’s also what Erie calls the “edifice complex”: what politician doesn’t like opening something new and having a nice press op at the ribbon-cutting? But no one ever writes articles saying, “Region’s highways are still about as good as they were last year.”

Only when things get really bad willt infrastructure issues get public attention. This is the heart of our problem: infrastructure policy has become a matter of lurching from crisis to crisis, solving problems after the fact rather than preventing them from happening.

Congress tapped the Central Bank for monies this year, but that deal was a one off.  Infrastructure is usually financed by loans in the form of government bonds which are repaid by tolls, and other measures.  Jobs are created.  Structures made whole again.  Obama had a chance to do this in 2008 and did not.  Hard to know whether the next President will take up the important task.

A new report on the state of whistleblower protection in some of the world’s richest countries has found that Germany ranks alongside Argentina, Brazil, India, Indonesia, Italy, Mexico, Russia, Saudi Arabia and Turkey as one of the countries that does the least to ensure that whistleblowers can speak out without fear of retribution.

The report, which was co-authored by researchers from Australian NGO Blueprint for Free Speech, Transparency International Australia, Griffith University and Melbourne University, compares G20 countries’ legal frameworks with the commitments they signed up to in the G20’s 2013-14 Anti-Corruption Action Plan, where they agreed:

to ensure that those reporting on corruption, including journalists, can exercise their function without fear of any harassment or threat or of private or government legal action for reporting in good faith

The report found that, while there had been real improvement over the past decade, serious shortcomings remained in the legal systems of most G20 countries – and those shortcomings affected most of the areas potential whistleblowers would be concerned about. Provisions for whistleblowers to remain anonymous when using internal channels to express their concerns were identified as a particular weakness across the G20, as were the rules around disclosure to third parties – including, where appropriate, the media.

The provision of independent bodies and mechanisms to deal with whistleblower complaints and to report on how legal protections were being used were also seen as poor across the countries surveyed. In addition, the authors note that where regulations exist, they tend to apply to the public sector only – governments have been much less active in ensuring that private sector whistleblowers can speak out in confidence.

Some G20 countries, like the UK and Canada, explicitly exclude military and intelligence personnel from their ‘whistleblower’ definition and all the protections in law that derive from that (the report calls this “a glaring gap”). Others, like the United States, have a legislative framework that is well rated – and in theory extends to its intelligence agencies – but in practice apply very different rules, and extreme anti-whistleblower measures, when classified information is involved.

Germany’s poor score in the report might come as a surprise to some, given the country’s renowned worker representation laws and positive reaction to Edward Snowden’s revelations.

The case was brought by Brigitte Heinisch, a nurse who brought the systematic mistreatment of elderly patients to the attention of the healthcare company she worked for. When appeals to management proved ineffective, Heinisch brought legal action against her employers and wrote a leaflet to explain what was happening in the case. The European Court ruled that the public interest in Heinisch’s disclosures outweighed her employers’ right to protect their business reputation and that her summary dismissal had been “disproportionately severe.” She was later awarded compensation by a German court.

In fact, the German legal code only offers limited protection for public officials who are reporting suspicions of corruption – and this came only after a change of the law in 2009. Germany’s employment courts offer limited redress to those who report wrongdoing in good faith, but there remains a strong bias against anonymous reporting and public disclosure. None of the legislative proposals made since the 2011 judgment have attracted the support necessary to secure a change in the law.

Camila Villa Durand writes:  Brazil is confronting a triple crisis: a severe economic downturn, a corruption scandal that has ensnared the commanding heights of the economy and politics, and a government crisis that may soon culminate in the impeachment of President Dilma Rousseff. Regardless of whether Rousseff is removed from power, the key issue raised by the impeachment threat – her management of fiscal policy – underscores the need to overhaul Brazil’s economic institutions.

In 2014, facing re-election, Rousseff stepped up the practice of running overdrafts in public commercial banks in order to pay for social programs.

In 2015, however, the federal accounting tribunal (TCU) rejected her accounts and accused Rousseff of committing fiscal irregularities. After the TCU decision, she decided to “pay” off these “loans” in December 2015.

It is crucial to rethink Brazilian institutions, notably the central-bank’s relationship with the government.

Technically, a significant part of the repayment of this “borrowed” money came from the distribution of central-bank gains. But what gains? The accounting rules applied to the Central Bank of Brazil (BCB) allow for bi-annual transfers of gains (and losses) to the Treasury, which include unrealized profits. Currently, one of the most important sources is the accounting valuation of foreign-exchange reserves on the BCB’s balance sheet.

Brazil has more than $355 billion in reserves. A 2008 law created a procedure called “foreign exchange equalization,” similar to a swap. The BCB transmits to the Treasury the carrying cost of foreign-exchange reserves (the difference between their profitability, including changes in exchange rates, and the average funding cost) and the result of the currency swaps carried out in the domestic market (which are settled in local money)..

But such a massive distribution of a central bank’s gains can generate potential conflicts with its mission. A monetary authority is supposed to manage the money supply effectively, not generate gains. The BCB’s increasing gains, based on unrealized profits, risk seriously undermining its autonomy.

That autonomy is not based on law. The BCB’s governors have no fixed-term mandate and are supposed to follow the provisions of the National Monetary Council, a politically appointed body. But, since the adoption of inflation targeting in 1999, a certain degree of operational autonomy has been crucial to maintaining the credibility of monetary policy.

So what happened after the BCB transferred its unrealized profits to the Treasury? The government’s “repayment” of its “loans” caused liquidity to grow, forcing the BCB to intervene to meet its key interest-rate target. But open-market operations can be conducted only with Treasury securities: Brazil’s Fiscal Responsibility Law prohibits the BCB from issuing its own.

Even if the Treasury had issued R$40 billion in bonds within a week of the “settlement” of Rousseff’s “loans,” the government could legally have decided not to issue new securities, after all, blocking the proper functioning of monetary policy.

The only institutional answer, formulated recently by Finance Minister Nelson Barbosa, has been to introduce the possibility of central-bank remuneration of bank reserves.

The crucial reform is to permit the BCB to issue its own securities.

Central bank bonds are a critical tool – especially for emerging countries – for managing the domestic monetary effects of huge amounts of foreign assets, particularly with respect to liquidity. Such instruments can ensure the central bank’s autonomy in managing money, while stimulating the development of the local bond market.

Brazil has an opportunity to restructure its key economic institutions, by combining the creation of new monetary tools with an overhaul of the relationship between the BCB and the Treasury. 

Why is the US President meeting with the head of the Federal Reserve Bank?   What does this say about the Fed’s political independence?

Two expedited, closed meetings in a row accompanied by a meeting with the president and vice president in between, which the White House, itself, associated with these closed-door meetings, that is so rare it required special White House defense as to what would not be happening in the president’s meeting between these two sessions.

The first meeting was nominally to talk about setting interest rates, which the FOMC will be meeting to consider again later this month, having just postponed their scheduled increase in March.

The fact that it is a bank supervisory matter makes it sound like a particular concern, not a general discussion about supervisory policy. Something is the matter somewhere that requires an immediate meeting right after another immediate meeting … behind closed doors.

This all comes very close to sounding like some bank somewhere is in trouble, and the trouble is big enough to call a special meeting of the very august board of governors right after they just had a special meeting.

Why so many last-minute meetings behind closed doors and with the president and vice president at a time when all major central bank heads in the world will be meeting with finance ministers in Washington, DC. Here are some hot issues going on this same week.

Has a recession already begun as the  Atlanta Fed revises US GDP down again.

The president’s meeting with the Fed and the Fed’s two meetings were all called right after the Atlanta Federal Reserve Bank revised the revisions of its previous revisements to say the US economy now looks like it will report in for the first quarter at 0.1% growth.

The last number is within a rounding error of going negative and is less then the margin of error for their data. It was only back in February that the Fed anticipated a cruising speed of 2% growth for GDP in the first quarter. They have revised that number down almost every week.

Of course, the fact that the Fed and the President called an unscheduled, closed-door meeting to include the VP does not mean there is any connection between the events.  The independence of the Fed is at stake.  Who has imagined, since 2008, that the US Fed is independent?

The President has been acting outside the bounds of propriety in the last month.  He endorsed the highly unpopular head of the Democratic party in her re-election race.  The head, Debbie Wasserman Schulz has twisted the party mechanisms to favor Mrs. Clinton.  The President then went on national television and climbed the Chinese wall separating his executive office from the FBI and other agnecies investigating Mrs. Clinton’s use not only of an email system located on the Clinton Foundation server, but a server that also hosted the emails of Mrs. Clinton’s husband and daughter. Unseemly at the very least.  Not an investigation about which the President should have any comments at all.  What is the President up to?

April 12 marks Equal Pay Day—symbolizing how far into the year women have to work on average before their earnings catch up with what men earned in the previous year. Women in the U.S. are still typically paid just79 cents for every dollar earned by men, despite the fact that the Equal Pay Act was enacted in 1963.

Big data professionals who crunch numbers for banks, accounting firms and even top-of-the-popularity lists like Google and Apple point out that women simply can’t do the ‘ask’ as well we men.  Companies are urged to hold training sessions at educational institutions, teaching women how to better assess their worth and then make more realistic and higher salary and benefit demands.  It is in companies’ interest because they want to diversify their wok force and add more women, and these sessions will improve their brand.

Here is where we are today.  While you have probably heard the 79 cents statistic before, there are a whole host of other, equally worrying numbers surrounding the pay gap and the plight of working women in the U.S. that might not be so familiar.

For example, the gender pay gap grows considerably with age, with women ages 55-64 earning just 76% of what their male peers are paid.

According to the 2016 American Association of University Women (AAUW)report, ‘The Simple Truth about the Gender Pay Gap,” race also plays a major role in the pay gap. In 2014, Hispanic and Latina women earned just 54% of what white men earned, American Indian and Alaska Native women just 59% and African American women 63%. White women, by comparison, earned 78% of white men’s earnings.

This has a major impact on women’s ability to pay off student debt. Four years after graduation, one study found that women working full-time had on average paid off 33% of their student loan debt, compared to men working full-time, who had paid off 44% of theirs. But African American and Hispanic women working full-time had been able to pay off less than 10% of their debt—much less than other women.

The pay gap also varies by state. According to American Community Survey (ACS) data, in 2014, the pay gap between year-round, full-time workers was smallest in Washington, D.C., where women were paid 90% of what men earned, and widest in Louisiana, where women earned 65% of what men earned.

There is also a stark difference between the earnings of mothers and fathers—while we mark Equal Pay Day in April for all women, if we were to compare the pay of parents, moms’ equal pay day would take place in early June, as it would take them nearly six extra months to earn what fathers earn in just one year. While working mothers earn less than childless women on average, men who become fathers actually earn more and are more likely to be hired than childless men.

Earnings also vary considerably between different fields, with women in financial management, for example, earning on average just 67% of what their male peers are paid. Traditionally female-dominated fields are often worse paid and less respected than those dominated by men. When women move into male-dominated occupations however, research suggests that rather than solving the problem, those fields tend to become less respected and lower paid as a result.

Contrary to one common argument, the pay gap cannot simply be explained by “women’s life choices.”  The report revealed that just one year after graduation, when many people have yet to think about starting a family, women working full time were paid, on average, just 82% of what their male peers earned.

Daniel Gros writes:  Central banks throughout the developed world have been overwhelmed by the fear of deflation. They shouldn’t be: The fear is unfounded, and the obsession with it is damaging.

Japan is a poster child for the fear. In 2013, decades of (gently) falling prices prompted the Bank of Japan to embark on an unprecedented monetary offensive. But while headline inflation increased for a while, the factors driving that increase – a competitive depreciation of the yen and a tax increase – did not last long. Now, the country is slipping back into near-deflation – a point that panicked headlines underscore.

Contrary to the impression created by media reports, the Japanese economy is far from moribund. Unemployment has virtually disappeared; the employment rate continues to reach new highs; and disposable income per capita is rising steadily. In fact, even during Japan’s so-called “lost decades,” per capita income grew by as much as it did in the United States and Europe, and the employment rate rose, suggesting that deflation may not be quite as nefarious as central bankers seem to believe.

In the US and Europe, there is also little sign of an economic calamity resulting from central banks’ failure to reach their inflation targets. Growth remains solid, if not spectacular, and employment is rising.

Central banks are focused on consumer prices, which is the wrong target.

Instead, central banks should focus on the rate of revenue increase, measured in nominal GDP growth; that is, after all, what matters for highly indebted governments and enterprises. By this measure, there is no deflation:

Moreover, nominal GDP growth exceeds the long-term interest rate. When, as is usually the case, the long-term interest rate is higher than the GDP growth rate, the wealthy may accumulate wealth faster than the rest of the economy.

One might expect this evidence to compel central bankers to rethink their current concerns about deflation.

Nominal interest rates are at zero, while the broadest price indices are increasing, albeit gently. Given that financing conditions are so favorable, it is not surprising that domestic demand has remained robust, allowing unemployment to return to pre-crisis lows almost everywhere.

The eurozone is the only large developed economy where unemployment remains substantial, and thus the only economy where the case could be made for a downside risk of deflation.

The only reason why unemployment remains high in the eurozone is that the labor-force participation rate has continued to increase throughout the recession; and, indeed, employment is returning to pre-crisis levels. This is the exact opposite of what the deflation hawks warn about.

The evidence is clear. Developed-economy central banks should overcome their irrational fear of a deflationary spiral, and stop trying desperately to stimulate demand. Otherwise, they will find themselves with massively expanded balance sheets, and very little to show for it.

Shadow Banking in the US SUmmarized   Prior to the 2008 financial crisis, the Federal Reserve had an important role – to solely act as a “lender of last resort” to traditional commercial banks. But during the crisis, the financial support was extended to many non-banking firms like money market mutual funds, the commercial paper market, mortgage-backed securities market and the tri-party repo market. Besides the extensive lending, non-commercial banks (also known as shadow banks) like Bear Stearns and Lehman Brothers were first to fail, triggering one of the worst financial crises across the world.

The US accounted for the largest shadow-banking sector, with $14.2 trillion in 2014.

Economist Paul McCulley, in his 2007 speech at the Annual Financial Symposium hosted by the Kansas City Federal Reserve Bank in Jackson Hole, Wyoming, coined the term “shadow bank.” Traditional commercial banks have been the driving force for creating liquidity in the economy. They accept the illiquid liabilities of both nonfinancial and financial entities for their own liquid liabilities and have access to the emergency funding of the Federal Reserve.

The shadow banking system, in contrast, introduced activities that generated liquidity through capital markets without public guarantees and provided access to the central bank as the “lender of last resort.” Unlike traditional commercial banks, shadow banks are unregulated and not subject to the traditional banking regulation system. This means that they cannot borrow in an emergency from the Federal Reserve, unlike traditional banks.

Investment banks, structured investment vehicles, hedge funds, non-bank financial institutions, money market funds, mutual funds and exchange-traded funds are all a part of the shadow banking system and are not required to maintain any reserves or emergency capital. “No regulations” in a “regulated environment” could be the biggest worry of the shadow banking system. Often beyond the control of regulators and monetary policy, shadow-banking activities can resort to risky lending. According to the New York Fed, shadow banks have “increased the fragility of the entire financial system.” While the total of non-bank financial intermediaries decreased immediately after the 2008 financial crisis, the number of shadow banks have picked up in recent years.

The vulnerabilities of the traditional banking system to the unregulated risks undertaken by the shadow banking system continue to threaten the financial system in 2016. According to the Financial Stability Board’s Global Shadow Banking Monitoring Report 2015, the United States accounted for the largest shadow-banking sector, with $14.2 trillion in 2014. With more than 80 percent of shadow banking activities residing in the advanced economies of North America, Asia and northern Europe, shadow banking could be one of the biggest threats to the current financial system. The report identifies the difficulty in assessing the amount of risk involved due to the lack of detailed data. The Financial Stability Board, an international board that monitors the global financial system, said the shadow-banking sector posed a huge risk of $36 trillion across 26 jurisdictions across the world in 2014.

Introduced in 2010, the Dodd-Frank financial regulations have been strict in reforming the “traditional part” of the banking system, but the regulations of shadow banks remain neglected. Along with many other rules, the big banks must maintain higher capital requirements and adhere to annual stress tests conducted by the Federal Reserve. But the tightening of commercial banks through banking regulations has encouraged a shift toward shadow banking.

In 2016, while traditional banks face the strict regulations of Dodd-Frank and Basel III (capital restrictions imposed on banks by the Bank for International Settlements to restore financial stability), shadow banks remain largely unmonitored and deeply entwined with the financial system. Federal Reserve Gov. Daniel Tarullo said in a speech in November 2015 that there is a possible risk in the financial stability “from activities mostly or completely outside the ambit of prudentially regulated firms.” He added, “Shadow banking is not a single, identifiable ‘system,’ but a constantly changing and largely unrelated set of intermediation activities pursued by very different types of financial market actors. Indeed, the very rigor of post-crisis reforms to prudential regulation may create new opportunities for such activities.” While traditional commercial banks may have benefitted from the Dodd-Frank law, large sections related to shadow banking remain largely neglected.

Democratic presidential hopeful Hillary Clinton has vowed to strengthen the Volcker Rule (a rule that prohibits an insured depository institution from engaging in proprietary trading) by “closing the loopholes that allow banks to make speculative gambles with taxpayer-backed deposits.”

She also has called for a new risk fee to be imposed on the nation’s largest banks. But while the Volcker Rule tries to separate banking activities from proprietary trading, interestingly, it excludes this distinction for non-banking financial companies. Hence, shadow banks continue to operate unregulated, without being subjected to any such prohibition under the Volcker Rule.

In order to address the issue of shadow banks, many politicians have been pushing for the restoration of the Glass-Steagall Act. Prior to the Great Depression in the 1930s, commercial banks were blamed for getting very speculative and greedy, since they were not only investing their assets, but also buying new issues for resale to the public. This led to a collapse of the banking system, which slowly became irresponsible and chaotic. One of the functional reforms that came in the form of banking regulations was called the Glass-Steagall Act, and it clearly outlined the objective of the banks.

The proposal was to limit their activities by separating commercial and investment bank functions. The underlying belief of the Glass-Steagall Banking Act of 1933 was that it would reduce risk and create a healthier financial system. Under the Glass-Steagall Act, institutions were given a year to decide whether they would specialize in commercial or investment banking. This Depression-era law was in place for 60 years until Congress and President Bill Clinton repealed it in 1999 under the Gramm-Leach-Bliley Act.

The elimination of the Glass-Steagall Act under the Clinton administration happened after many banks lobbied to remove the restrictions imposed by the act. Supporters of Gramm-Leach-Bliley believed that Glass-Steagall had worked post-Depression and it was time to remove certain restrictions on banks. President Clinton agreed that the act was “no longer appropriate to the economy in which we live. It worked pretty well for the industrial economy … But the world is very different.”

The repeal allowed banking activities to combine with non-banking activities. Glass-Steagall had helped in creating a safety net for commercial banks and allowed the central bank to act as a lender of last resort to commercial banks. But the repeal of Glass-Steagall blurred the distinctive lines between regulated banking functions and shadow banking functions.

During a policy address on January 5, 2016, Sen. Bernie Sanders said, “Shadow banks did gamble recklessly, but where did that money come from? It came from the federally insured bank deposits of big commercial banks – something that would have been banned under the Glass-Steagall Act.” The Glass-Steagall Act has taken center stage in many 2016 presidential debates with Sen. Bernie Sanders and former Maryland Gov. Martin O’Malley supporting the “21st Century Glass-Steagall Act,” an updated version of the 1933 law, which aims to reduce the likelihood of future crises by clearly separating traditional banking activities like savings and checking from riskier, non-banking activities like insurance, swaps dealing, and hedge fund and private equity activities.

Estimating the size of shadow banking is difficult to quantify for the simple reason that many of the entities do not report to any government regulators and therefore remain outside the purview of lawmakers. The growing size of shadow banks remains a threat to the financial system as long as they are unregulated. The matter worsenswith the integration of commercial and investment banking activities as financial holding companies actively facilitate the growth of shadow banks.

In 2016, even with strict regulations under the Dodd-Frank Act, shadow banks remain highly leveraged (promising higher returns but with outsized risk) and wholly unregulated. More control of this unregulated section of the financial system is necessary to achieve accountability and transparency in the banking system. Addressing the issue of shadow banks will not only curb the risk associated with these unregulated banks, but also it will tackle the ongoing problem of financial institutions being “too big to fail.”

We need to create manufacturing jobs in the US, but are anti-trade policies the answer?

Kenneth Rogoff writes:   The rise of anti-trade populism in the 2016 US election campaign portends a dangerous retreat from the United States’ role in world affairs. In the name of reducing US inequality, presidential candidates in both parties would stymie the aspirations of hundreds of millions of desperately poor people in the developing world to join the middle class. If the political appeal of anti-trade policies proves durable, it will mark a historic turning point in global economic affairs, one that bodes ill for the future of American leadership.

Republican presidential candidate Donald Trump has proposed slapping a 45% tax on Chinese imports into the US, a plan that appeals to many Americans who believe that China is getting rich from unfair trade practices. But, for all its extraordinary success in recent decades, China remains a developing country where a significant share of the population live at a level of poverty that would be unimaginable by Western standards.

Consider China’s new five-year plan, which aims to lift 55 million people above the poverty line by 2020.  China’s poverty problem is hardly the world’s worst. India and Africa both have populations roughly comparable to China’s 1.4 billion people, with significantly smaller shares having reached the middle class.

Sanders hammers his opponent Hillary Clinton for her support of earlier trade deals such as the 1992 North America Free Trade Agreement (NAFTA). Yet that agreement forced Mexico to lower its tariffs on US goods far more than it forced the US to reduce its already low tariffs on Mexican goods.

The TPP does have its flaws, particularly in its overshoot on protection of intellectual property rights. But the idea that the deal will be a huge job killer for the US is highly debatable, and something does need to be done to make it easier to sell high-tech goods to the developing world, including China, without fear that such goods will be instantly cloned. A failure to ratify the TPP would almost certainly condemn tens of millions of people in the developing world to continued poverty.

The right remedy to reduce inequality within the US is not to walk away from free trade, but to introduce a better tax system, one that is simpler and more progressive. Ideally, there would be a shift from income taxation to a progressive consumption tax (the simplest example being a flat tax with a very high exemption). The US also desperately needs deep structural reform of its education system, clearing obstacles to introducing technology and competition.

Indeed, new technologies offer the prospect of making it far easier to retrain and retool workers of all ages.

Do pro-deficit progressives realize that the burden of any future debt crises (or financial-repression measures) are likely to fall disproportionately on poor and middle-income citizens, as they have in the past?

Anyone who portrays the US as a huge loser from the global economic status quo needs to gain some perspective on the matter. I have little doubt that a century from now, Americans’ consumption-centric lifestyle will no longer be viewed as something to envy and emulate, and the country’s failure to implement a carbon tax will be viewed as a massive failure. With under 5% of the world’s population, the US accounts for a vastly disproportionate share of carbon-dioxide emissions and other pollution, with much of the blame falling on America’s middle class.

But the idea that trade fuels inequality is a very parochial perspective, and protectionists who shroud themselves in a moralistic inequality narrative are deeply hypocritical. As far as trade is concerned, the current US presidential campaign is an embarrassment of substance, not just of personality.