May 01, 2015
Actually, I don’t know that he is, but he would be if he were consistent. Earlier in the week, he complained that I thought there should be rules on currency manipulation in the Trans-Pacific Partnership (TPP). The gist of his argument is that if another country wants to deliberately under-value its currency, so that we can buy their exports at a lower price, our response should be “thank you very much.” In effect the currency manipulator is subsidizing our consumption.
This is of course true and the same logic applies to export subsidies. If Japan, Australia, or some other country wants to provide a 20 percent subsidy on exports of cars, computers, or other goods and services, then they are making those items cheaper for U.S. consumers. Worstall would presumably want us to say “thank you very much” and leave it at that.
But those dunderheads negotiating the TPP are banning export subsidies. They will make it a trade violation if Australia wants to subsidize our consumers. I assume Worstall is very angry about this.
There are two points here. First there is a small one about optimal allocations in the economists’ perfect world of full employment. Even though U.S. consumers may benefit in this world from the stupidity of other countries subsidizing our consumption through their export subsidies, this is not an optimal allocation. In principle, the world economy would be larger if governments did not subsidize exports and instead let the market make allocations. Note, this argument applies with equal force to currency values that are deliberately set below market rates by governments seeking trade advantages.
The other more important point is that we’re typically not living in the economists’ perfect world of full employment, and certainly have not been there lately. In a context of an economy that is below full employment, both an export subsidy and under-valued currency have the effect of increasing the U.S. trade deficit and reducing U.S. employment. (There appears to be some serious confusion on trade and jobs by Worstall and his friends. If foreigners use the dollars they get from their exports to buy U.S. government bonds, shares or U.S. stock, or real estate, it does not create jobs in the United States, except for the small number of people involved in the sale of financial assets.)
Anyhow, in the world where we live there can be, and is now, a very direct link between the trade deficit and jobs. If we run a larger trade deficit, neither Worstall nor his friends have some magic formula that can fill the gap in demand that would be created. This is why it is important to have rules in the TPP on currency values. We simply have no mechanism for replacing the demand we are losing through a $500 billion plus annual trade deficit.
Addendum:
I see Tim has responded. I think I see the problem. Tim seems to believe the economy is always at full employment so that lack of demand is not a problem. If the economy were always at full employment, he would of course be right. There is no obvious reason we shouldn’t be happy if other countries are willing to subsidize our consumption. (There may still be some issues about market power and potential monopolization, but we can skip those for now.)
However in the world I live, the economy is often nowhere near full employment. This means that anything that reduces demand (like a larger trade deficit due to a rise in the value of the dollar) reduce output and employment. We can offset this loss of jobs and output through larger government budget deficits, but as a practical matter, we don’t. This is why I am concerned about an over-valued currency, but if I thought unemployment wasn’t a problem, I’d be with Tim.
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