Dethrone the Dollar, Bring Back the Jobs

August 28th, 2014 at 8:07 am

Over at the NYT. Since one can only jam so much into an oped, allow me to elaborate and embellish a bit.

First, a few relevant links. Along with the Austin piece (behind a paywall), which built what I found to be a pretty airtight model of what’s going on, the China-based economist Michael Pettis has been plumbing these waters at great depth. I found his book on international imbalances to be an awfully strong argument. Joe Gagnon is also a very important thinker in this field; his work, sometimes with Fred Bergsten, is essential for understanding the scope of the problem.

Then, as part of our full employment project, two authors–Dean Baker and Sue Houseman–argued convincingly that it’s going to be a) hard to get to full employment, and b) rebuild our manufacturing sector, if we don’t take on this extremely persistent problem of imbalanced trade.

Next, a political economy point: Someone is going to yell “protectionism” at an argument that suggests intervening in currency markets. To which I say, “Ha!” I’m the free trader here. I think the value of the dollar should be set in markets, not by policy decisions made either here or in Asia, Europe, or anywhere else. To the extent that the argument calls for currency rules, it is in the interest of pushing market outcomes, i.e., not allowing others to manage their currencies–or, in the broader argument, their savings/consumption balances–such that we end up with demand-zapping trade deficits.

Finally, how specifically would one go about dethroning King Dollar? There are four ideas out there on this:

legislation such as that introduced by Sen. Levin a few years ago that gives the US gov’t the right to treat currency management as a violation of international trading rules, leading to offsetting tariffs.

taxing foreign holdings of United States Treasuries, raising the price of currency management.

–my favorite: institute reciprocity into the process of currency management: if a country wants to buy our Treasuries, we must be able to buy theirs.

–elevate and support an international reserve currency, like the IMF’s SDR.

I like option three, as my hunch is that its threat effect might go a long way toward ameliorating the problem without excessive intervention.

I realize that it’s a big deal to suggest we dethrone the currency king and I don’t make the case lightly. But read at least some of the literature above extent of global imbalances and the damage they’re doing both here and abroad and you may well agree.


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11 comments in reply to "Dethrone the Dollar, Bring Back the Jobs"

  1. Robert Buttons says:

    King dollar may hurt exports, but it is allowing our citizens to consume much more than they produce (viz imports are cheap, making for our better lifestyle). Cheapening the currency will decrease our standard of living and cause a mad rush of reserve holdings to flood back onto our shores. Secondly, a weaker dollar may not necessarily lead to an export economy, Japan has actually an increased trade deficit since weakening the Yen:

    • smith says:

      a) It is not a goal of the United States to enable it’s citizens to buy more stuff they don’t need temporarily at cheaper prices. It is a goal to make sure that 3 to 5% of those seeking work are not condemned to long term unemployment, underemployment and alienation from work place. The larger effect however is on everyone who suffers wage stagnation if not actual decline and widening inequality, due to absence of full employment caused in part by currency manipulation.
      b) It may actually damage other countries to rely on an export based economy. Japan, Korea, and now especially China’s reliance on export driven growth does not enrich it’s own citizens. Japan’s stagnation might not be tolerated as easily if corporate profits weren’t bolstered by trade. The Japan game is also fostering cultural norms that discourage openness to foreign products vs. outright currency manipulation. Germany too is content to let worker’s wages stagnate while profits rely on exports. To walk the walk though, one would have to explain at least the top ten,
      Except for obvious oil inflows, they are not all obvious.
      c) Correlation is not causation. Is there really a causal link between Japan’s currency decline and the trade deficit. which one actually leads?

      • Robert Buttons says:

        It’s economics, not physics, correlation is all we have. But I find it funny that correlation always equals causation when it fits one pre-conceived notions.

        I don’t believe your model of cheap currency = more jobs, but assuming you are correct, how would it help to fix a 5% unemployment problem by ensuring that EVERYONE’S paycheck can’t buy any of the goods we want.

        And BTW, commodity money would certainly solve all the problems of foreign exchange.

        • smith says:

          1) Fortunately there are lots of experiments in economics from which to tease out causation from correlation. Admittedly these are natural experiments in that subjects of treatment are not randomly assigned. Nevertheless, one can observe developed countries under various levels of austerity and draw conclusions. The most classic case is the expansion of federal spending in the 1930’s to counteract depression. When the brakes were later applied, it caused a great downturn (1937) that almost short circuited recovery.

          2) The second question is merely a math question. If everyone paid more for goods they might buy less. But of course domestic industry would expand because a) their goods would be more competitive with imports, and b) their goods could be exported at cheaper prices thereby increasing demand. The expansion employs previously unemployed people, 95% who were always employed purchase a little less.

          3) Commodity money would not halt currency manipulation, it is up the owner of a currency to define the exchange rate pegged to a commodity. Devaluations are more stark than free floating rates, so the effect is more transparent. Trade imbalances existed with and without foreign exchange pegged to gold.

          • mike smitka says:

            Point 2 implies full employment, does it not? – most trade models implicitly assume all resources are utilized. Or to put it in macro S-I balance terms (cf. Pettis) if we increase our national savings [which a shift in net trade flows implies], that’s not necessarily good news.

            As important, there’s not much there there. Trade is a pretty small slice of the US economy, moreso if you exclude commodities. Manufacturing is a small slice as well. Now the auto industry has done really well the past couple years, including exports (think BMW in South Carolina). The end result? Employment has gone from 1.6% to 1.9% of total employment, but half of that is retail, so the gain from the manufacturing side is 0.15%. It’s better than nothing if it works, but such gains aren’t going to be in themselves sufficient. Oh, and reviving a manufacturing industry isn’t going to happen overnight, either.

            Finally, while the yen depreciated substantially, the trend for some years has been an appreciation of the Chinese yuan. Is it strong enough today? Under which criterion? Controlled capital markets may be, but if you look to Japan ca. 1980, freeing them allows domestic savers to diversify their assets beyond bank accounts, shadow market lending and domestic real estate. They quite rationally would rush to buy almost any foreign asset – and those who did so early would see nice capital gains, as the yuan would appreciate, validating such a move (and implying overshooting…). We have to be careful what we wish for!

            PS Kudos to Bloomberg for encouraging this discussion.

    • dwb says:

      “Cheapening the currency will decrease our standard of living”

      sigh… most (as in about 85%) if the stuff people buy is “Made in America.” Think about the Big Stuff you spend money on. In terms of services like medical care, housing, almost all of it is American Made Even for autos, 75% is Made in America. Sure, the toys we import from China may be cheap, but Wal Mart’s cost of land, construction, labor, management (finance, and accounting) and other U.S. costs mean that the cost of a toy made in China is mostly the cost of U.S. employees.

      See here for a useful summary.

      Moreover, with deleveraging in the US still going on, higher wages would be a net good thing.

  2. Jill SH says:

    I remember hearing a rumor, about 12 years ago, that Saddam Hussein, late of Iraq, had been making noises about trading his oil in euros rather than dollars. The implication was that the Cheney administration was alarmed by this potential loss of USDollar hegemony in oil markets; this was another factor in the impulse for the Iraq war.

    You being much closer to government circles: is there any truth to that rumor? Would it have mattered?

  3. Zachary Weber says:

    If you want to increase employment just reduce domestic taxes. Excess imports of real goods and services allow us to lower the tax burden to keep domestic prices stable. If other countries want dollars as savings vehicles, let them have it. What Japan and China have given us in real terms far exceeds even the war reparations required from Germany after WW1. Wanting a trade surplus just is crazy. Why would we want to compete to try and give things away when we can get more domestically. No, just lower taxes, by having a payroll tax holiday and get the deficit higher, it needs to be maintained at a way hire rate then it currently it. Estimates are roughly 10 billion dollars a day higher for the current taxes that we have. Your just creating more social destruction if you reduce the trade deficit without lowering taxes or putting more money into circulation. Foreign savings are not in domestic circulation, and to reduce them is not going help in real terms. I feel like every one is taking crazy, this is basic economics folks. We are not under a fixed exchange system, why do we keep apply those standards to flouting exchange rate currency?

  4. dwb says:

    You forgot the most important #1 way to dethrone the dollar: Monetary policy. Higher inflation (not too much above 2.5%) is both an incremental tax on Treasury holdings and will force foreign govts to either accept the risk of importing inflation from the US or adjusting their currencies. Let them decide how to manage this risk. Since about 2/3 of the foreign trade imbalance is oil, it puts pressure on foreign oil producers to hedge with non-dollars (like the EUR) and promotes other reserve currencies. It also has the side effect of being a tax on oil consumption by making it more expensive in dollars, and will promote energy efficiency. Of course, the fact that it’s a tax on oil consumption is where the major opposition comes from in the first place.

  5. hcc says:

    This article, while correct in essence, assumes passive or rational foreign countries who will not respond to any action or proposal highlighted here.

    Ridicule or dismissal about insufficient proof would deployed be at the beginning, to cause as much academic uncertainty and confusion as possible. And in the rare case policies does seem to waver in this direction, expect retaliation or retribution-like sabotage may be in play, to stop this from happening at all costs.

    Countries who have been export oriented cannot afford the status quo to change. They’re looking at 30% unemployment and real possible “regime change” if this is allowed to occur. Thus the “irrational” part of the equation needs to be considered. We’re talking about possible declaration of war, type of belligerence.

    Thus, to weigh the cost of doing this action to fix this “injustice”, once must also consider the possible loss due to economic and or actual warfare. Sometimes, paying a small ransom to keep the peace is the better trade for all parties involved — USA pays the job-loss ransom; the foreign countries pay the “standard of living” ransom; and the world keeps revolving, peacefully.