The president has identified reducing inequality as the "defining challenge of our time." While inequality is a complicated problem, it won't be solved without raising wages of middle-class Americans, creating more jobs and reducing unemployment. To do that, we need to increase sales of goods and services made in the United States, which means expanding exports, reducing imports and shrinking our trade deficit.
Currency manipulation, by about 20 countries (mostly in Asia), is the single most important cause of our trade deficit. These nations have been exploiting our markets and stealing U.S. jobs for over a decade. Currency manipulation can be eliminated by administrative actions, but it takes the political will to get tough with some of our allies, and with China.
As President Barack Obama explained last month, reducing inequality will require a number of new policies. These include strengthening collective bargaining, raising the minimum wage and improving our social safety net, especially Social Security. And the Affordable Care Act has already increased economic security by providing health care for millions. But the most important cause of growing inequality remains extremely high levels of unemployment, and low levels of labor force participation. The unemployment rate was 10.2 percent in December if missing workers are included.
Sustained low unemployment would deliver much higher levels of wage growth to workers in the bottom and middle of the income distribution. When unemployment falls, wages rise much faster at the bottom and middle of the income distribution than at the top. Thus, reducing unemployment will directly improve income inequality.
Turning to trade, jobs and wages, countries like China manipulate their currencies by purchasing large amounts of foreign assets such as U.S. treasury bills to artificially depress the value of their currencies, strictly for commercial gain. This acts like a subsidy to all Chinese exports, and a tax on U.S. exports to China, and to other countries where we compete with China. This has led to growing trade deficits and massive job loss. Multinationals have invested heavily in China to take advantage of currency subsidies and other unfair trade policies, eliminating nearly 3 million U.S. jobs since 2001 and driving down wages for working Americans.
Currency manipulation has poured subsidies into the coffers of U.S. multinationals, driving up stock prices, profits, and the income of wealthy families. Meanwhile, the Great Recession, which has caused sustained unemployment, and offshoring have driven down the wages of working and middle-class Americans, relative to those at the top. So, globalization has been win-win for the wealthy and lose-lose for working Americans.
There are several possible solutions for currency manipulation, but the simplest is to fight fire with fire. Treasury has the authority to buy foreign currencies. Treasury should offset any and all efforts to manipulate currencies by the top offending countries such as China, Hong Kong, South Korea and Singapore.
Ending currency manipulation can reduce U.S. trade deficits by $200 billion to $500 billion, increasing production of U.S. goods and services and boosting Gross Domestic Product by 2 percent to 5 percent over the next two to three years.
This would create at least 2 million to 5 million new jobs, reducing the unemployment rate by 0.5 to 1.0 percentage points, or more. And this will bring real wage growth to millions of low- and middle-income working Americans, reducing inequality.
Obama can create jobs and reduce inequality by ending currency manipulation undertaken for commercial gain.
Robert E. Scott is director of trade and manufacturing policy research at the Economic Policy Institute.