The Democrats are making a stand on currency manipulation — and it's a really good idea

It's down to the wire, but Democrats appear to finally be getting serious about making sure the Trans-Pacific Partnership deal — a massive trade pact between the U.S. and 11 other Pacific Rim nations — is worker-friendly. And if it isn't, it may not happen at all.

At issue is what's called trade promotion authority — or "fast track" authority — which would give the president the ability to negotiate trade deals with other countries with some minimal criteria from Congress. Then the deal would be approved or rejected by the legislature in a simple up-or-down vote.

On Wednesday, Nancy Pelosi, the leader of the Democrats in the House, threw her weight behind an alternative version of fast track authority that comes with more serious strings: It would create an advisory board to ensure the White House has met certain criteria in the TPP deal, including labor and environmental protections.

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But most importantly, the Democrats' alternative would require the TPP to include rules against currency manipulation by the member countries.

Currency manipulation is when governments engage in policies that drive down the value of their currency relative to other currencies. And lately, "other currencies" has usually meant the U.S. dollar. This makes our exports more expensive, and their imports cheaper, which drives up the U.S. trade deficit.

In practical terms, this means that demand, which could be staying in the U.S. economy and creating jobs, is instead leaving to create jobs in other countries' economies. At the moment, the trade deficit is somewhere in the vicinity of $500 billion, which amounts to about 3 percent of the economy just getting sucked up into the ether every year. That costs American jobs. But because the jobs lost are disproportionately in exporting industries like manufacturing — and because a high-value dollar helps low-wage employers, like Walmart, that have invested in low-cost foreign supply chains — the trade deficit also drives down wages, speeding up the "hourglass" effect, in which our economy produces lots of high-paying and low-paying jobs, but fewer and fewer middle-income jobs.

The latest work on the U.S. trade deficit, by Fred Bergsten and Joseph Gagnon, suggests currency manipulation could account for anywhere between $200 billion to $500 billion of the trade deficit — a little less than half, to nearly all of it.

With those numbers, the Economic Policy Institute (EPI) projected that eliminating currency manipulation could create anywhere from 2.3 million to 5.8 million American jobs. In February of 2014, EPI estimated that job creation would close one-third to three-fourths of the hole blown in the American economy by the 2008 collapse. (It might close it even further now, given the strong job growth we saw in the past year.) Furthermore, those job gains would be spread across every state and they would reduce the federal budget deficit, since the government would need to borrow less to make up the lost demand. In fact, in terms of impact on the economy, the importance of the trade deficit swamps the federal government's budget deficit.

Economists who support putting currency manipulation rules in the TPP also think there's a pretty simple definition that teases out the manipulation from other legitimate policies that also happen to affect currency values. "That is the use of domestic government or government-controlled resources to buy assets denominated in foreign currencies," said Robert Scott, an economist with EPI. "If you look at the foreign currency holdings of the Federal Reserve, they're trivial — a few tens of billions of dollars. Officially, in the Japanese central bank, they're about $1.4 trillion. So that's a bright line."

For example, when the U.S. Federal Reserve engaged in quantitative easing to try to boost the economy, it mainly did it by buying up assets denominated in our own currency. That would pass muster under this definition, even though the policy did put downward pressure on the U.S. dollar. Had the Fed done it by buying up assets in foreign currencies, that would've been another matter.

Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, has also endorsed this approach, and pointed to Bergsten's suggestion that the line be drawn at holding enough assets in a foreign currency to cover one year's worth of external liabilities, and no more. The idea is that foreign governments would need to divest holdings to get below that threshold, and if they got above it again, certain penalties would hit: taxes, fines, cancelation of certain trade privileges, or even allowing reciprocal currency intervention by other countries.

For the moment, about 20 countries, including China, have been buying up assets in foreign currencies at a rate of about $1 trillion per year, using their central banks and other institutions like government-controlled wealth and pension funds.

Administration officials and other observers seem pretty sure that demanding rules on currency manipulation would kill the TPP. But the deal is probably among the last opportunities to set the rules of the road for international trade; China isn't part of the TPP discussions, but the deal will definitely set the terrain for future negotiations. So risking the whole deal to force a reckoning on currency manipulation, as well as other protections for workers, makes sense — especially given that powerful corporations will make out like bandits under the TPP's likely expansion of intellectual property law.

Along with Pelosi, other top Democrats in the House and Senate — including Sens. Harry Reid and Chuck Schumer — are on record opposing the current approach to the TPP and fast track authority. That not only puts them at odds with mainstream Republicans, but with a massive lobbying blitz by the Obama administration as well.

The White House's preferred version of fast track authority has made it through several committees, but it still needs its final vote in both the House and the Senate. With a fair number of Tea Party Republicans also in revolt, the White House and its GOP allies will need all the votes they can muster.

If Pelosi and the other Democrats hold firm, they could yet force a set of reformed fast track and TPP agreements on their terms.