May 18, 2015
As a general rule, when someone tries to tell you an economic issue is more complicated than it seems, they are trying to mislead you. This doesn’t mean there are not occasionally some complex issues in economics, but these are much rarer than the experts want you to believe. After all, who would pay economists salaries well into the six figures if their work was as simple as washing dishes?
This should be kept in mind by anyone reading Robert Samuelson’s column telling readers not to worry about an over-valued dollar leading to a large trade deficit and costing us millions of jobs. This piece includes the memorable lines:
“To be clear: China’s currency manipulation has been real and harmful to U.S.-based firms and workers. By a variety of estimates, Chinese exports have probably cost 2 million or more American jobs since 2000. I have been a critic of the currency manipulation in the past and still am. In an ideal world, we would have moved energetically to eliminate it. But (surprise!) we do not live in an ideal world and, for many reasons, it’s less important now than it once was.
“For starters, recall that trade-induced job losses are not (and never have been) the United States’ main employment problem. Domestic developments dominate the U.S. labor market, for good and ill. The U.S. economy now supports about 150 million jobs; 2 million is a small share of that.”
Hey, 2 million jobs, no big deal! Wait, weren’t we supposed to think the 20,000 jobs at stake with the Keystone Pipeline are a big deal? So now losing a hundred times (2 million is 100 times 20,000) as many jobs because of an over-valued currency is not a big deal? And of course Samuelson’s number is just an estimate of the jobs lost to China. Other countries also prop up the dollar against their currency, likely raising the total to 3-4 million.
To make the point as simple as possible, if we had something close to balanced trade, instead of a trade deficit of more than $500 billion a year (@ 3 percent of GDP), we would be close to full employment. This would mean that employers would be paying workers more and giving better benefits because that would be the only way they could get and keep workers. But hey, what’s the big deal?
Let’s get to Samuelson’s effort to complicate matters so we don’t think crazy thoughts like, hey maybe we should address currency values so that we can have full employment.
Samuelson tells us:
“As I’ve argued before, Americans’ confusion about trade relates to the dollar’s role as the main international currency. We assume that U.S. trade deficits prove that we are victimized by other countries’ “unfair” practices. It’s more complicated. Dollars traded on currency markets respond to supply and demand. Demand for dollars to pay for imports or global investment tends to raise the dollar’s price: its exchange rate. A higher dollar then makes U.S. exports more expensive and U.S. imports cheaper. The “overvalued” dollar and resulting trade deficits reflect this process as well as manipulation. The deficits have been continuous since 1976 — well before China’s entry into world markets.
“A strong dollar benefits the global economy and punishes U.S. manufacturers. From this nasty dilemma, there’s no easy exit.”
See, it’s so complicated there is nothing that can be done.
Okay, let’s get back to the real world and go through everything in Samuelson’s argument that is wrong. First, the dollar is the main international currency. It is not the only international currency. This is important because it implies some unique dollar curse. There isn’t. The euro, the British Pound, the Japanese yen, and even the Swiss Franc are also used as international currencies. If investors thought the dollar was getting out of line with the value of these other currencies they would quickly dump their dollars and move into one or more of the other currencies.
This matters because the issue is not one of the dollar soaring because it is the reserve currency, it is one of the rich country currencies rising together against the currencies of developing countries. And this is a problem that has an easy and simple explanation, the botched bailout from the East Asian financial crisis in 1997.
Until 1997, capital flowed from rich countries to poor countries as is supposed to happen according to intro econ textbooks everywhere. This flow was reversed as a result of the harsh conditions imposed by the I.M.F., at the insistence of the Clinton Treasury Department, on the countries of the region. In the wake of the bailout, every developing country that was in a position to do so began to accumulate massive amounts of foreign exchange so that they would never have to be in the same position as the East Asian countries in dealing with the I.M.F. This meant keeping the value of their currency down against the dollar so that they could run large trade surpluses.
In short, the problem was not that the U.S. dollar was the major reserve currency, the problem is that inept management of the world financial system led developing countries to reverse the normal direction of capital flows so that capital has been flowing from poor countries to rich countries. This is a development of the post-1997 era, the U.S. trade deficits prior to 1997 were relatively small with the exception of a few years in the mid-1980s when the dollar was over-valued relative to the currencies of our major trading partners in Europe and Japan.
The trade deficit is central here, because no one has a serious story of how we fill a demand gap of 3 percentage points of GDP. In the late 1990s we filled the gap with a stock bubble. In the last decade we filled it with a housing bubble. We could fill it with large government deficits (say 4-5 percent of GDP or $760-$900 billion a year in today’s economy), but that is not feasible politically.
No one has another story for filling this demand gap they can tell with a straight face. So, if someone like Samuelson tells us not to worry about the trade deficit, they are telling us not to worry about a labor market that is so weak that the rich continue to get all the gains from growth and real wages remain stagnant.
It is amazing that many of the same people who don’t give a damn about workers going decades without a pay increase will talk about raising the Social Security payroll tax by 1-2 percentage points as though it is the end of the world. They want to get the public hysterical about a 1-2 percentage point reduction in their after-tax income, but insist that losing 30-40 percent of their before-tax income due to a weak labor market is no big deal (the cumulative effect of 30-years of upward redistribution).
This might seem like a very simple contradiction, but Samuelson will no doubt tell us how it is complicated.
One last point, Samuelson raises the prospect of the Smoot-Hawley tariff in the depression, which undoubtedly did prompt retaliation and reduce trade, although its impact on the economy is hugely overstated in many accounts. It is worth noting that competitive devaluations do not at all have the same effect. They redistribute trade but do not reduce it. So if the concern is that we end up going through battles where the United States, Europe, China, and whoever else continually lower their currency for competitive advantage, we need not worry about a Smoot-Hawley world where trade contracts. It doesn’t fit this picture.
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