Currency Manipulation Is Not Free Trade

I didn’t want to let this paper by Robert E. Scott from the progressive Economic Policy Institute go by without comment. I’ve made no secret of my belief many of the United State’s economic woes can be dated to China’s effectgively pegging the yuan to the dollar in the early 1990s and Dr. Scott’s article documents the costs that the actions of China and other countries that have engaged in currency manipulation have had on us. As he points out the currency manipulation practice not only by China but by Denmark, Hong Kong, South Korea, Malaysia, Singapore, Switzerland, Taiwan, and Japan have increased our trade deficit beyond what it would otherwise have been and cost us a significant number of manufacturing jobs:

Overall, reducing U.S. goods trade deficits would create between 891,500 and 2,337,300 jobs in manufacturing (38.8 percent to 40.3 percent of jobs gained across industries), representing the largest jobs gain of any major industry. Within manufacturing, the largest gains would occur in durable goods, specifically “machinery, except electrical,” with 170,500 to 353,900 jobs gained (respectively, 7.4 percent and 6.1 percent of total jobs gained). Jobs gained in non-electrical machinery would increase total employment by 14.4 percent to 29.8 percent in that sector. Other manufacturing industries with large gains would include transportation equipment (164,100 to 352,400 jobs), computer and electronic parts (127,600 to 338,000 jobs), fabricated metal products (104,200 jobs to 251,800 jobs), and miscellaneous manufactured commodities (99,400 to 243,300 jobs).

Major job winners outside of manufacturing include agriculture, forestry, and fisheries (246,800 to 486,100 jobs); health care and social assistance (167,900 to 430,600 jobs); administrative and support industries (166,700 to 413,900 jobs); professional, scientific, and technical services (140,300 to 357,100 jobs); and accommodation and food services (142,500 to 358,600 jobs).

It could be retorted that the out-sized purchases of dollars by various other countries is the price that the U. S. pays for the dollar being the world’s reserve currency. That could well be true but

  1. All of the countries listed above with the possible exception of Switzerland (the Swiss have a tendency not to be participants in international accords) have engaged in trade in dollars in violation of commitments they’ve made.
  2. It’s not enough to point out that the dollar is the reserve currency. Critics of the analysis have an obligation to quantify the net costs to us incurred by the dollar being a reserve currency and IMO the individuals and companies that benefit from that should be taxed by that amount and the proceeds used to support wage subsidies, apprenticeship programs, and other policies that would foster job creation here.

6 comments… add one

  • ...

    I think I’d rather have a robust economy that benefits a wide swath of people than have reserve currency status that harms lots of people. But at a guess, a small number of people are benefiting a whole lot from the current setup, and will buy all the necessary politicians needed to keep the status quo.

  • I think I’d rather have a robust economy that benefits a wide swath of people than have reserve currency status that harms lots of people.

    Yeah, that’s what I think, too.

    I’d go even farther. I’d rather have a “walled garden” within which just about everybody is prosperous than a free global market in which most people are poor or struggling and a very few are incredibly rich. Clearly, I’m in the minority.

  • Red Barchetta

    “I think I’d rather have a robust economy…”

    A dubious assumption. Whatever the real number of jobs lost, and I suspect its overstated by Mr Scott, a number of manufacturing jobs lost and robust economy are not the same. Because……..

    “.. that benefits a wide swath of people than have reserve currency status that harms lots of people. But at a guess, a small number of people are benefiting a whole lot from the current setup,”

    Is simply not demonstrable. Far, far more consumer/workers benefit from low cost imports than consumer/workers are harmed by lost jobs. Its not even close.

    That doesn’t argue that currency manipulation is “right” or “OK.” Just that it would be better to argue on the basis of pure fairness that currency manipulation should not allowed by a sovereign to be an element of comparative advantage. But since I don’t see any pigs flying right now…………….

    And since we can’t really control China, or other creditor countries, we would be left with a devaluation. If you had loaned money to your bank, money market fund etc, how you like it if you woke up and discovered your payback had been reduced by 15%?

  • Ben Wolf

    I question how much longer China’s peg will continue. While it gives them a competitive advantage in terms of trade it also limits their discretion in domestic policy. In effect the U.S. is allowed to impose budgetary constraints based on how much Chinese stuff we buy.

  • And since we can’t really control China, or other creditor countries, we would be left with a devaluation.

    True but we can control ourselves. There are all sorts of measures we could put in place, some of which are outlined in the article itself.

  • Red Barchetta

    Here is an example of the two sides of the coin I always harp on. Hennessey from the CBO:

    “CBO’s most important conclusions are that this proposal would:
    •likely result in 500,000 fewer workers, with a range of roughly 0 to 1 million fewer;
    •increase wages for about 16.5 million workers who now have wages between $7.25/hour and $10.10, as well as for some others who now have wages a bit above $10.10.

    I think CBO’s analysis is improving the minimum wage debate. President Obama and his allies have been selling this proposal as a free lunch, a policy that will raise pay for some with no costs for anyone: “Give America a raise.” Proponents of raising the minimum wage now must contend with a reputable nonpartisan analysis that the proposal has costs as well as benefits.”

    As just a crude cut, if hours worked are equal then 500,000 fewer workers @$10 is $50MM in lost wages. 16MM workers with an extra $3 in their pocket (really?? after taxes??) is roughly $50MM in wages transferred from (where??) to these workers. And this makes no accounting for the loss of skills development for those unemployed.

    Plenty of advocates for the group getting increased wages; none for those losing their jobs.

    Caring for the poor my ass.

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