Floating Exchange Rates are Neither Manipulation nor a Tax
Mark Thoma’s Snow Falls Silent in China links to an interesting article from Edmund Andrews. As John Tamny steals Mark’s title (“Snows Falls on China”), he writes:
A frequently cited anecdote about England’s economic decline in the ’70s is the irony of countless Rolls Royces moving through the streets of London. At the time, savings and investment were so heavily taxed that it made more sense to consume. Investment income was taxed at 98 percent, so while fancy autos sold very well, job-creating businesses were starved for capital. The English experience is particularly relevant given Treasury Secretary John Snow’s tour through China last week in which he “extolled the virtues of the average Chinese buying ‘more stuff.’” … Not only would a 40 percent upward manipulation of the yuan be deflationary, it would also do nothing to change the real value of goods that the Chinese ship to our shores. Money is merely an easy medium that allows people to exchange their surpluses. Snow’s currency plan for China would only serve to decrease that nation’s economic growth, while the prices of Chinese goods here would eventually adjust to the very currency manipulations that Snow decries. Regardless of the yuan’s value vis-a-vis the dollar, Americans will continue to avail themselves of goods that are not in their economic interest to make.
Where to begin? Has Tamny figured out that those buying luxury cars in the U.S. are spending their tax cuts provided by Bush’s fiscal irresponsibility, which has reduced our national savings? Has he figured out that saving and investment as a share of GDP in China is quite high?
I guess I missed the part about Secretary Snow advocating tax increases in China. All I seem to recall is that the Treasury Secretary had been advocating floating – or market-determined- exchange rates. And I beg to differ with Mr. Tamny as to whether the relative price of goods would change if the yuan were allowed to appreciate. Now I love to Bush bash with the best of them, but on this one – I’m defending Sec. Snow’s call for a floating yuan.
Tamny also shows he has no clue what Lord Keynes wrote:
As opposed to the Keynesian notion that parsimony subtracts from economic growth, in fact it stimulates economies by virtue of capital being made available to entrepreneurs eager to create the innovations that continue to improve living conditions, and which do so irrespective of country borders.
Keynes may have advocating short-term stimulus in times of weak aggregate demand, but he would disagree with Tamny’s colleague as to the need of permanent fiscal stimulus.