Two Comments on the Yuan Revaluation
Dean Baker does a nice job of explaining why a significant yuan revaluation will increase our net exports to China – at least a little. Dean’s implicit assumption is that the nominal revaluation will lead to an increase in the relative price of Chinese goods, which seems valid given the very modest inflation rates in both nations. I have only two quibbles with Dean’s discussion:
The process of raising the price of imported goods to people in the U.S. through an increase in the value of foreign currencies (which also makes our exports cheaper to other countries) is the only way to get our trade deficit down, other than a recession … The people who whine about how the budget deficit is causing the trade deficit (apart from any possible impacts on the value of the dollar) are proclaiming their ignorance.
If you are thinking that Dean left off trade protection (the first quibble), maybe Robert Mundell might help rescue Dean’s claim – assuming we eventually move to a freely floating yuan. Mundell might tell the trade protectionists that tariffs on Chinese imports would be offset by a yuan devaluation so that our exports to China would decline as much as the tariffs reduced our imports from China.
But this Mundell line of thinking leads me to my second quibble as I have been whining about the U.S. budget deficit. To say the U.S. fiscal stimulus does not impact the trade deficit apart from possible impacts on the value of the dollar is akin to saying an outside shift in the demand for a good does not induce more production apart from possible impacts on the price of that good. But again – I’m assuming a freely floating exchange rate.
Alas, I had to also read Michael Darda who clearly has never read the General Theory by Lord Keynes:
Even if we accept this assertion (which is false), the Keynesian cure is worse than the supposed labor market disease. The neo-Keynesian elixir typically is a combination of higher tax rates on the entrepreneurial class (the rich), higher tariffs, and a devalued dollar. Africa and Latin America, which have binged on this advice for three decades, show exactly what the effects have been: no growth, dire poverty, disease, and desperation.
I consider myself a Keynesian but I’m not advocating trade protection or a larger government. I’m also an advocate of letting the market determine the value of currencies. If Mr. Darda wants to bash the Schumer-Graham bill, he might be delighted than many Keynesian economists are also suggesting that this proposal is bad policy.
But it seems that the real purposes of his NRO oped are to: (1) tell us that the labor market is doing just fine; and (2) to advocate a return to the gold standard. On the first, the key passages are:
Labor compensation is growing above a 7 percent annual rate while aggregate hours worked are rising … The chain-weighted capital-to-labor ratio, the raw fuel for productivity and income growth, has reached record levels and continues to grow at a two-digit pace, well above historical norms. Those arguing that the labor market is weak insist the unemployment rate has dropped due to a declining labor force participation rate. They also argue that low-end wages are not keeping up with inflation. Even if we accept this assertion (which is false) … The employment participation rate – the fraction of the population in the labor force – only is 0.8 percent below its average from 1992-2000, which was biased upward due to dot-com overhiring. Since 2004, the participation rate has averaged 66 percent while the unemployment rate has dropped to 5 percent from 5.7 percent. Non-farm payrolls have expanded by more than 3.2 million during this period. This completely refutes the nonsensical claim that a mass exodus from the labor force has been the primary driver of the recent fall in the employment rate. Since 2001, the growth rate of real wages of non-supervisory production workers, a group under pressure in the global economy, is about 0.9 percent above the rate of inflation (using the non-core PCE deflator). This is about 75 percent of the average from 1992-2000 and more than three times the average from 1971-2000.
Notice that he begins this spin by looking at the growth of nominal compensation as opposed to the change in real wages. It is true that real wages rose during 2001, but real wages as of June 2005 were actually below what they were as of December 2001. His statement about non-farm payroll employment is simply wrong, but he does get it right when he says the employment to population ratio is lower than it was when Bush took office. As far as his comment about the capital to labor ratio, it strikes me as either incorrect of incomprehensible.
Alas, the National Review had another opportunity to make a clear case for free trade but let the writer drift onto another topic – where the writer wrote more of NRO’s patented nonsense. So let me close by thanking Dean Baker for both sticking to the topic and writing sensibly.