When I was a kid, my elementary school — Immaculate Conception School (ICS), in Marrero, LA — held two fund-raising fairs each year, one in the Fall, the other in the Spring. At these fairs, we kids bought tickets that we could exchange for various toys, trinkets, and food sold at the fair. Of course, some items cost more tickets than did other items. A big stuffed panda bear might have been priced at, say, 50 tickets, a hot dog at three tickets, and a pencil sporting the school logo at one ticket.
Using dollars, each of us students could buy as many or as few tickets as we pleased (or, more accurately, as many tickets as our parents could afford or would allow us to buy).
Why we weren’t allowed to purchase the items directly with our U.S. currency, rather than having to first exchange our dollars for ICS tickets, I don’t know. But dems’ da facts.
Suppose that ICS (my school) had undervalued its tickets. Say, if the ‘correct’ (by whatever calculus) price of each ICS ticket was $1.00, suppose my school sold each ticket for $0.75.
Undervaluing its currency in this way surely would have resulted in more sales at the fairs. A twenty-five percent discount on toys, trinkets, and hot dogs and popcorn is a darned attractive deal for kids.
Would ICS have benefitted itself by such undervaluation of its medium of exchange? Some of its employees would have benefitted — the fairs, for example, would have required more clerks and food preparers to handle the larger demand. But it’s clear that undervaluing these tickets would have cost ICS on net. Instead of raising money for its operations, ICS would have lost money. It would have subsidized its students’ consumption of toys, trinkets, and junk food. Undervalued tickets would have enabled its customers (us students) to acquire valuable goods and food at prices below ICS’s cost of supplying these goods and food.
I’m certain that no student (including me) would have complained about undervalued fair tickets. Such undervaluation would have been to our benefit.
But the school principal — who we can imagine was the architect of this self-destructive scheme — would have realized, upon coming to his or her senses, that artificially stimulating the school’s exports of toys, trinkets, and food on fair days, was no path to long-run and widespread prosperity for ICS.
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This ought to be interesting watching the ‘make-work’ bias rear its ugly head.
The tickets may have been undervalued compared to everywhere else, but you assume that the school would not have been able to attain goods and labor at a discount. Catholic charities, particularly schools attached to parishes (though I do not know if your school was, in fact, attached to a parish at the time) are able to use these discounts to raise money quite successfully, due to individuals willing to take a loss for the organization.
Of course, I don’t think that’s the point of your post…
Was ICS trying to get a pencil factory up and running? I wonder to what degree the facts of your school limit the wider applicability of your metaphor
I think part of the appeal of undervaluation for countries is that, as you alluded to, it does act as a subsidy for producers (and consumers as well, obviously) – but unlike subsidies targeted by the political process, it still subsidizes the emergence of a domestic industrial base that bears some resemblance to what consumers demand. A subsidy through currency is an across-the-board subsidy in that sense. I’m obviously not a fan of deliberate currency undervaluation, but given sufficient barriers to entry and a lack of adequate domestic demand (which is in turn a function of the lack of a domestic industrial base) I think the relative efficiency of an across the board subsidy like currency undervaluation is what makes these schemes attractive.
Now, if ICS was trying to start up a pencil, hot dog, and panda factory – and the potential investors in the factories couldn’t come up with the start up costs necessary for challenging the pencil, hot dog, and panda producers in the wider Marrero economy, and ICS citizens remained poor because they couldn’t produce anything competitively, and ICS had the resources and borrowing constraints available that allowed them to cover the initial costs to push ICS producers into a higher equlibrium, then we might have a metaphor worth arguing about.
But as it stands, the ICS example is basically that selling tickets at a loss is a bad fundraising strategy, right? But currency undervaluation isn’t a fundraising strategy – it’s a way of subsidizing costs for an emerging community of producers. Are there any producers in ICS? When the fair closes, none of the clerks or food preparers continue to operate as clerks and food preparers. It seems to be apples and oranges – and the only point seems to be “if you give away money you lose money”. In the real world, the point is that the money is given away to produce fixed capital – fixed capital that doesn’t exist and isn’t even a goal in your metaphor.
>>I think part of the appeal of undervaluation for countries is that, as you alluded to, it does act as a subsidy for producers (and consumers as well, obviously)<<
Wrong! A deliberate currency devaluation cannot do both: there's no free lunch. To devalue a currency against another currency, a country has to introduce new money into its economy. The new money introduced is inflationary and does not benefit the domestic consumers or those who would import.
It does act as a subsidy for producer exporters and a tax on importers. Not only that but it has the same effect in other markets where the two country’s goods and services compete. This is in a situation where the devalued currency is not allowed to find an international value. You are right about not benefiting domestic consumers but some particular countries don’t seem to care.
They don’t have to introduce new money into the economy – they could just buy and sit on dollar reserves (like China is doing). But you’re right – higher import prices can introduce inflation. So? How does that make the analysis wrong? If anything inflation encourages more investment in physical capital because people don’t want to hold currency.
Nobody argued there was a free lunch, LCJ. And notice I didn’t even advocate the policy personally – I just think there’s a little more to it than selling fair tickets at a loss.
Look, it’s okay to be wrong every now and then. But when you are wrong, it would help your standing if you stop defending the position where you were wrong. You wrote the following: “…it does act as a subsidy for producers (and consumers as well, obviously)”. Not only was this not obvious, it was incorrect. That’s it.
>>Nobody argued there was a free lunch, LCJ.<<
You didn't have to because, indirectly, you made the case that there was a free lunch to be had. If currecy manipulation could offer net benefits to both consumers and producers, and this were so obvious, what country wouldn’t adopt currency mainpulation as its policy?
How is artificially cutting the costs of goods not a subsidy for consumers on those goods??? To quote Don “I’m certain that no student (including me) would have complained about undervalued fair tickets. Such undervaluation would have been to our benefit.”
Re: “You didn’t have to because, indirectly, you made the case that there was a free lunch to be had.”
Where did I indirectly make that case?!?!?!?!
Re: “If currecy manipulation could offer net benefits to both consumers and producers, and this were so obvious, what country wouldn’t adopt currency mainpulation as its policy?”
I never argued that it could offer net benefits, LCJ. All I said was that the example Don gave misses a lot of the motivation for currency manipulation, because most of this justification is that it jump starts physical investment in an emerging industrial base. That doesn’t mean it offers net benefits, but that does mean that it’s attractive if a regime places a special priority on artificially speeding up the development of that industrial base. You’re the only one that’s been talking about net benefits.
Thanks for this post. It’s clear that there are no real advantages that a state can gain from depreciating its particular fiat currency in relation to the fiat currency of other states. The one that depreciates at a faster rate effectively sends a gift to the others that depreciate at a slower rate (or not at all). But–and this is the most unfortunate aspect of the problem–this sentence says it all: “Some of its employees would have benefitted — the fairs, for example, would have required more clerks and food preparers to handle the larger demand.” Certain economic/political elites in the state that depreciates at a faster rate gain relative to others in that state, and due to arguments Prof. Buchanon and Prof. Tullock provide in their great works, this is the incentive that leads the state to continue its depreciation, at the expense of the vast majority of its other citizens.It’s so lame when one recognizes that they’re not in the chosen group and are actually in the exploited group. And that they have no real effective way to combat it.
Doesn’t this ignore the effect of demand? Reducing ticket prices reduces the profit on each item sold, but the increase in demand could be such that overall profits increase.
Why couldn’t the hot-dog and panda producers do that themselves? The possible reasons are: 1) they’re dumb and don’t know their own markets, or 2) selling at that price would result in losses.
If they sold their products at the price where the undervalued currency would put them, they would not only lose money, but would also have that loss magnified by the increased demand.
In the school carnival all of the “firms” (booths) are owned by the issuer of the currency. Presumably they don’t have the authority to set their own prices. Isn’t the same thing true of Chinese firms? Aren’t they state-owned or somehow controlled by the state?
You actually see this a lot with modern video game consoles. The PS3 and Xbox 360 cost half of their laucnh price now, but are still losing overall when compared to the Nintendo Wii. Price cuts like that produce a brief bump, but provide no long term benefits
Usually, fairs and carnivals use tickets as currency for a couple of good reasons. 1) To eliminate the need for cash management. Otherwise each booth would need to be stocked with enough cash and coins and to make change. 2) To reduce stealing. Booths at such fairs are staffed with volunteers, usually parents, who may or may not pocket a few extra dollars. Sure, they could pocket some tickets or toys, but that’s not nearly as tempting as cash.
Your two reasons are indeed the real reasons fairs use the ticket process instead of the money, but can I add a third?
3). Printing tickets in anything other than one denomination is expensive and awkward, and everyone understands that, so in fact it is easier for the independent vendors and booth operators to round up and actually make more money on the inflated price than they would if they were selling from a permanent shop.
Nothing mysterious about it.
Good comment. I agree. And to think, on some of the smaller items, a price of even one ticket is probably an enormous markup.
Something else I’ve noticed about carnivals is that the game booths accept cash while the rides accept tickets. I find that interesting. Perhaps the carnival operators are more concerned about ride operators stealing cash or maybe the game operators get a cut of their haul in such a way that they’re less likely to steal. Or maybe it’s just a matter that the ride operators are more likely to have their cash aprons pick pocketed as they’re primary concern needs to be on safety.
I would like to add a possible 4th reason.
4)This may require some empirical justification, but, spending patterns are different when you buy massive stacks of tickets vs your own cash.
a. More is spent on buying tickets because tickets come in bundles. If fairs and carnivals are rare enough, risk aversion (i.e. that they do not want to lose out in terms of enjoyment) would incentivise buying more tickets than they would otherwise save. (This kind of attitude about not wanting to lose out is called Kiasu in Singapore)
b. Since tickets are usable only within the fair, there is no incentive to save. Ticket consumption therefore increases and
c. people are less sensitive to inflated prices as shown in terms of tickets.
I agree. You get those effects as well.
Oh…. so that explains why China is having such a hard time economically compared to us. I get it now.
I think Don was referring to the U.S. as the Chinese are encouraged by their government to buy up as much gold as they can.
Currency manipulation (not allowed to float in foreign markets) in the real world is a tax on the producers of the other countries “competing” against the currency manipulator. It is also a tax for the foreign producer on goods and services that it tries to sell in all markets where the manipulator also sells. I urge all readers to go to page 27 at http://www.uscc.gov/annual_report/2008/annual_r… where a short narrative begins on China’s currency manipulation; if you care for critical thinking.
Nice link. It’ amazing to me how these people rail against the failings of communism and yet see no issue with our failing economy, China’s booming economy and the fact that we are moving capitol to produce things cheaply in a communist nation.
It requires me to pull my Greider quote;
” The great multinationals are unwilling to face the moral and economic contradictions of their own behavior – producing in low-wage dictatorships and selling to high-wage democracies. Indeed, the striking quality about global enterprises is how easily free-market capitalism puts aside its supposed values in order to do business. The conditions of human freedom do not matter to them so long as the market demand is robust. The absence of freedom, if anything, lends order and efficiency to their operations.”
William Greider, journalist and author
Our political system = democracy, our economic system = socialism
China’s political system = dictatorship, China’s economic system = capitalism.
It is the economic system that decides the fate of the economy and thus there is no issue with US failure and China’s boom.
According to your equation China should be a huge contributor to Mr. Boudreaux’s Cleansed by Capitalism series. Maybe you can submit some notable contributions and were the U.S. entries just made up?
Muirgeo said:
“It’ amazing to me how these people rail against the failings of communism and yet see no issue with our failing economy, China’s booming economy and the fact that we are moving capitol to produce things cheaply in a communist nation.”
I explained why there is no issue.
If you have some constructive comment to make, I’ll gladly engage in a productive discussion.
>>Nice link. It’ amazing to me how these people rail against the failings of communism and yet see no issue with our failing economy, China’s booming economy and the fact that we are moving capitol to produce things cheaply in a communist nation. <<
Define failing. Or, in your twisted mind, is that the same as contracting? And why is the consumption (real GDP) contracting, muirgenius? Also, and here's the big one, muirgenius, describe ALL capital flows between the United States and China. Dazzle us. Go!
The US government tries to devalue the dollar by printing a lot of them. The Chinese respond by doing exactly the same thing with the renminbi, so the exchange rate remains unchanged. Why are the Chinese the bad guys?
You have obviously not read how China keeps it currency value defined within its borders and this is one way it keeps out the exports of other trading countries. Read the report and then state your opinion.
1. You are not me, therefore you do not know what I read and what I didn’t read.
2. Please explain, who gave you the power to tell me when to state my opinion.
RE: Pt. #1 – I was stating my opinion.
RE: Pt. #2 – I should have said PLEASE read then report, I’m sorry.
What a joke! As if the USCC is capable of critical thought. Have you looked at the ‘about page’ of this organization?
The report was amazingly thorough and was stunning to read and learn about our relationship with China based on the findings of a distinguished panel with vast experience in business, education and diplomacy. The report was a result of many hearings and travel in the far east. What specifically are you referring to? What did you learn that upset the assumptions you had – your having to look at trade in a more comprehensive way?
From the USCC ‘about page’:
The whole purpose of this organization is to be hostile to trade and to view China as an adversary. No small wonder, then, that they’d give ‘critical thought’ to any kind of exchange that takes place between people residing in either country.
>>What did you learn that upset the assumptions you had – your having to look at trade in a more comprehensive way?<<
Thinking about trade as an economist does is the most comprehensive way since economists look at it from a microeconomics standpoint, having weighed all the costs and benefits both short and long term. Sit down one afternoon and read Russ Roberts The Choice and then come back and tell me that he didn’t look at trade comprehensive enough!
“Hostile to trade”? I think that the more appropriate response is criticism of specific trade practices. Maybe you object to the conclusions on page 42 of the report. They state “China continues to violate its WTO commitment to avoid trade distorting measures”. Further, “Over the past year China has adopted a battery of new laws and policies that may restrict foreign access to China’s markets and protect and assist domestic producers”.As suggested by Mr. Boudreau and yourself I will read The Choice because I firmly believe in free trade and tearing down the tariff and non-tariff barriers that stand in its way.
No. But that’s the beside the point. The issue in the debate over tariffs is not benefits to the mercantilist state but harms to the free trading state. The undervaluation could harm both. That’s the point. A tariff is a remedy to the harm suffered by the free trading state, not a remedy to the harm the mercantilist state does itself.
The undervaluation presumably draws customers away from other fairs. It does cost the ICS relative to what the ICS could have earned without the undervaluation, but the ICS pays this price to gain market share. If the undervaluation is sustainable, it draws investment toward the ICS, because other producers are not competitive. That’s the mercantilist theory anyway.Within a freer state, one decentralized organization cannot sustain this discounting of its produce, because its factors of production will not accept the lower yields. Its employees will abandon it to join other organizations for example.
It loses money from consumers but gains money from investors. Consumers in the free trading state gain. Investors don’t really gain, because profit margins aren’t necessarily higher in the mercantilist state, compared with profit margins that would exist without the mercantilism; however, investors invest less in the non-mercantilist state, because its producers are not competitive.
No. That’s the wrong analogy. The mercantilist state subsidizes consumers in the free trading state at the expense of its own consumers. It suppresses its own citizens’ right to demand consumption in order to attract investment.
What is the “cost” of labor? Is it the cost of a laborer’s subsistence? Is that all? Subsistence is the cost of a slave, not the cost of a free laborer.
Sure. It is. If the ICS gives you tickets for hotdogs for nothing indefinitely, you might just decide to retire. Why bother with all of this tedious education? Are you supposed to labor for your daily bread?The problem is that the ICS won’t give you hotdogs for nothing indefinitely. You can believe that they will, but they won’t.
Will he? Did Kim Il-sung come to this realization? Has his son Kim Jong-il come to the realization? Maybe the North Korean dictators haven’t learned to play the market card yet, allowing just enough market organization to increase their own prosperity, but if they decide to play it tomorrow, do they necessarily free their slaves?Suppose North Korea allows some market organization, but instead of “fixing exchange rates”, it imposes a direct tax on labor, like the payroll tax in the U.S. It uses the revenue from this tax to buy dollars, and it uses the dollars to buy entitlement to U.S. tax revenue.Since the Korean statesmen continually buy dollars with their currency, they put downward pressure on the value of their currency relative to the dollar. How does this tax differ from fixing the exchange rate?When the North Korean statesmen have all the entitlement to U.S. tax revenue they want, they stop buying dollars with their own tax revenue, but they don’t lift the tax on their own subjects. Now, they’re collecting tax revenue from their own subjects and from U.S. citizens as well.What’s not to like about this picture, if you’re a North Korean statesman? When are these guys gonna wake up and get with the program?
You seem to assume the North Koreans can just corner the market rather rapidly, then when they release the controls the market will not adapt, giving them virtual monopolies in industries they formerly subsidized.
I would argue that a country having just deal with rearranging it’s economy away from a subsidized product would have far more mobility in the products it produces and would make the shift back faster than the original shift.
No. I only assume that North Korean statesmen can seize produce within North Korea and sell it at a discount, using the revenue to purchase entitlement to rents imposed elsewhere. I don’t assume that they ever corner any market, except the market for coercive force within their own borders, but they might take market share from other producers of particular goods for a while or even indefinitely.North Korean statesmen need not improve the circumstances of other North Koreans, or improve North Koreans’ total output or total consumption, for the statesmen to benefit from this strategy. I suppose the statesmen benefit only themselves, and they might not even benefit themselves. They might only believe a faulty, mercantilist ideology.Moving backward along a development trajectory presumably is easier than moving forward, but economic development is not so simple. At some point, the necessary move is not backward, because the backward move is toward obsolete products. The more rapidly economic development occurs, the less valuable backtracking becomes, and the rate of development increases continually.The U.S. once manufactured many televisions and now manufactures none, but U.S. factors have no backward path toward television manufacture, because the televisions they once produced are obsolete. We never manufactured flat-screen televisions at all. We never manufactured HD TVs. The markets we once supplied no longer exist. We might as well go back to manufacturing wagon wheels.We could lose automobile manufacture too, and if we lose it before a major technological shift, toward electric cars for example, reorganizing it will be little easier than starting completely over. For this reason, the free trade theory essentially assumes that backtracking is not necessary. I hope that’s true.
As an electrical engineer, I think you are basically shooting form the hip on assertions of the capabilities of American manufacturing and the idea of an inability to backtrack. In most cases the products being built in America are far more complicated and profitable than Chinese TV’s.
The Chinese “advantage,” is more likely to leave China with trillions of rapidly worthless greenbacks, and Americans with products that make our lives easier and more enjoyable.
I haven’t asserted anything about the capabilities of American manufacturing. I only state that backtracking is not always an option. I’ve argued this case from your side and used the same backtracking argument, so I understand it.To be clear, I’m a free trader myself, as well as a non-interventionist and a unilateral disarmer. I’ve said as much several times in this forum. I debated competitively in school, and we didn’t get to choose our side. We were assigned a side before each debate. It’s good training. I’m now playing devil’s advocate.Products built in the free trading state would be more advanced, in the sense that their market developed later, but a market for these more advanced products doesn’t necessarily survive when a mercantilist state stops subsidizing. Consumers in the free trading state then pay more for the previously subsidized goods and may no longer consume the more advanced goods. That’s the theory anyway.Maybe the free trading state’s lost markets reappear at some point in the future, when productivity increases enough to make the subsidies superfluous, but that’s the long run, when we’re all dead.Reorganization within the free trading state is not simply a matter of backtracking. The free trading state is now somewhere along a developmental trajectory “ahead of” the mercantilist state, but the mercantilist state is not somewhere along the same trajectory at an earlier point. Development doesn’t work that way.Information valuable in the past depreciates and can depreciate all the way to zero value. Wagon wheel making skills aren’t just less valuable than they were a century ago. They’re totally worthless.By the time the free trading state wants to backtrack, earlier points along its developmental trajectory are no longer marketable at all. It must reorganize to produce goods it has never produced before. I’m not suggesting that we all starve to death when the subsidies cease, but reorganizing is not simply a matter of backtracking.I agree that China’s greenbacks will be worth less, but what does that say about our greenbacks? It’s our currency after all. I buy everything in this currency, not only imports.We have the products making our lives easier and more enjoyable as long as we have the subsidized products, but when the subsidies stop, we don’t have the same mix of products. The leading edge of this developmental trajectory is not sustainable.Again, it’s the same argument that Mises and Hayek use to explain the business cycle when interest rates are artificially low.
Wouldn’t the price of a hot dog rise to perhaps 4 tickets? Why would a vendor keep selling it for 3?
Why assume that the vendor is free to raise his price? May you charge any price you choose for your hot dogs? Why not a million tickets?
1. I assume that Don’s story is an analogy to China keeping it’s currency pegged to the dollar. If so, the question then is: Are the Chinese free to raise their prices? The answer: Yes.
2. Asking milion tickets per hot dog translates directly into revenue = 0. That is the reason why not charge that price.
1. I assume the same thing, but how do you know that the Chinese are free to raise their prices or how free they are to raise them?And which Chinese are we discussing? May a skilled Chinese laborer move to the U.S. and offer his services to a U.S. producer of comparable goods? Is the Chinese laborer free to raise his price this way, or is this liberty forcibly constrained? Doesn’t he need a visa from the U.S. State department, not to mention some permit from the Chinese state, not to mention a work permit or a green card? Aren’t these permits strictly limited?What other forcible constraints on pricing power are you glossing over? The migration constraints exist, and I can discuss them, because they’re widely known. Should I simply assume that no other constraints exist? Do Communist Party dictatorships operate model free markets? Liberal Constitutional Democracies in North America certainly don’t.2. So how do you know that 4 tickets doesn’t eliminate or at least lower revenue?If pegging China’s currency to the dollar has no effect on demand for Chinese goods, because Chinese merchants raise prices to compensate, why does China bother? Why don’t Chinese monetary authorities ignore the exchange rate, allowing it to fluctuate? Why give away yuan for nothing (sell at a discount to the market) if this policy has no effect on foreign exchange and only inflates the price of Chinese goods?The very fact that the rate does not fluctuate casts doubt on your assumption of the freedom of Chinese factors of production to raise prices as you suggest.
1. I’m not sure I understand what does immigration of Chinese to the US have to do with their ability to raise prices of their products.
2. How do I know that it doesn’t eliminate or lower their revenue – I don’t. But I know they won’t sell at a loss.
China doesn’t give away yuan for nothing. It costs them nothing to create it and they exchange it for about $0.15. If you had such an ability, would you use it?
They take a loss on each item, but they make up for it in volume.
The principal not only devalues the tickets, but counters it by charging more tickets per item. And he does this year after year to ensure that nobody saves their tickets for future sales.
After year after year of ticket inflation, people decide they’ve had enough of it and attempt transactions in currency other than tickets. The principal bans that practice. People then decide to avoid the fair altogether and simply go to other fairs. The principal then forms a coercive fair monopoly. So people then decide they don’t need to go to fairs at all. The principal then extends the coercive monopoly to include ALL transactions. The people then find that they cannot eat or live without using the principal’s tickets.
Generation after generation people become accustomed to it. Then when someone points out that successful economic life needn’t employ the principal’s tickets at all (and would likely be better without it), that someone is labelled as a conspiracy nut.
Consumers won’t avoid this fair. The people who want out of this fair are the merchants. Are they free to leave? That’s the question.Successful economic life must employ the tickets, because the tickets are legal tender. Credit exclusively in other currency is not possible, because the exclusive obligations are not enforced. They aren’t proper obligations at all. On the other hand, everyone has obligations in the tickets, because the obligations are imposed by fiat.In other words, all money is chartal money. The metalist alternative doesn’t really exist at all. It’s a fairy tale.As usual, I don’t defend anything here. I only observe the world around me.
If this fair were a permanent scenario, then we might expect the development of a black market.
“The people who want out of this fair are the merchants.”
You’re right. I was modifying the model to my earlier post where ticket devaluation was accompanied by more tickets charged per item (like monetary inflation).
“Successful economic life must employ the tickets, because the tickets are legal tender.”
That was my point, but thanks for reiterating.
Some communities offer “local currency”, sold and accepted only in that community to encourage people to “buy locally”. This scrip is offered at a discount, say 5%. You buy $100.00 worth for $95.00, and the merchant exchanges $100.00 worth of scrip for $95.00. This is an automatic 5% discount on all goods purchased with the scrip. Does the same dynamic apply here, and is the size of the discount/undervaluation germane?
Using China as an example, we see this with the Economist’s Big Mac currency index no?
The one thing that seems to be certain is that for China (or some other country) to peg their currency so that it is undervalued, they MUST be willing to hold the overvalued paper that comes in… The second that they decide that they don’t want the overvalued paper, the currency peg begins to disappear.
1. Labor is a product. If a laborer may not sell his product to particular customers, only because of some restraint of trade erected by states, then markets are not free. Other restraints of trade exist. I discuss restraints on migration only because they are widely known and already widely discussed. They are widely known and discussed, because they are popular on this side of the border.Large numbers of people in this country want trade restrained in this way, even if the restraints are self-destructive. Others benefit from the restraints. The whole idea that we’re lovers of free trade here is laughably incredible.2. No. They won’t sell at a “loss”, if “no loss” means they aren’t starving, but that’s beside the point. Not starving does not imply the pricing freedom you suggest.China does give away yuan for nothing. You’re simply mistaken there. We’ll accept six yuan for a dollar, but they offer us seven. That’s just not how markets operate. It’s not a market transaction. The extra yuan is a gift.Or if you want to say that statesmen are market participants, then it’s a price they’re paying for some mercantilist satisfaction, but if statesmen are market participants, then why does anyone in this forum complain about the Fed? Can’t the Fed create as much money as it wants and lend it for any price it wants? Why is that a problem for anyone in the U.S. or anyone else?I don’t have such an ability, because I don’t issue legal tender, because I can’t force people to accept particular terms of trade, because I’m not a statesman. A fiat monetary authority with a monopoly over legal tender is not just another trader in a “free market economy”. The idea is absurd.So people are not simply free to raise prices to counter exchange rate manipulations and interest rate manipulations and other acts of a fiat monetary authority, and a fixed exchange rate can be a mercantilist tactic equivalent to the tax policy described above, so it can affect capital organization to the detriment of a free trading state if the subsidies are not permanent, especially if the mercantilist state may suppress the consumption of a lot more labor. That’s the point. Maybe the theory isn’t true, but it’s not false simply because people may raise their prices.Also, the Chinese state does not create its legal tender for nothing. Maintaining a monopoly on coercive force is not cheap. If it were so easy, I’d be mafia boss myself.
“I never argued that it could offer net benefits, LCJ. ”
Ok, but, you made this statement before that:
“I think part of the appeal of undervaluation for countries is that, as you alluded to, it does act as a subsidy for producers (and consumers as well, obviously)”
Um, if it benefits producers and consumers, I’d say that counts as a net benefit. And btw, you imply there is a free lunch when you say that undervaluation subsidizes both producers and consumers.
http://cafehayek.com/2009/10/i-was-wrong.html
Seems appropriate to post here.
It subsidizes producers of the country’s goods and consumers of the country’s goods but it doesn’t help producers of imports and consumers of imports. How is it a “free lunch” just because both producers and consumers enjoy a benefit? Any benefit and any cost is going to be passed on to consumers, and therefore affect both consumers and producers. It says zero about the net cost or benefit.
I talked plainly about the subsidy itself, which is obviously a cost, and the recipients of the subsidy, which obviously enjoy a benefit. I didn’t suggest anything about which of those is greater, and since I did say “I’m obviously not a fan of deliberate currency undervaluation”, I think you can guess where I would come down on that net benefit question. All I said with respect to the net effect is (1.) that a currency evaluation is more efficient than direct subsidies, and (2.) the metaphor doesn’t address the primary motivation at all, and (3.) I did hint that maybe there are “multiple equilibria” situations where it could be justified in the regime’s eyes – if not from the perspective of an objective economist.
Not to mention the fact that I’m usually the one here who’s always concerned about persistent global imbalances – another reason why nothing I’ve said should be interpreted as me suggesting there is a net benefit or that it’s a free lunch.
“It subsidizes producers of the country’s goods and consumers of the country’s goods but it doesn’t help producers of imports and consumers of imports.”
Ohhhhh, you didn’t make that clear now did you? Forgive LCJ and I for not realizing that when you said “producers… and consumers” you were really saying “some producers… and consumers.”
“I’m usually the one here who’s always concerned about persistent global imbalances”
Exactly what is a “trade imbalance”? I don’t think they exist, but I’d like your take.
RE: “Forgive LCJ and I for not realizing that when you said “producers… and consumers” you were really saying “some producers… and consumers.”"
How would an undervalued currency help consumers of imports??? I think everyone on here is at a level where I don’t have to spoon-feed that to you, and if anyone is confused they are usually mature enough to ask.
RE: “Exactly what is a “trade imbalance”? I don’t think they exist, but I’d like your take.”
Persistent trade deficits have been labeled “global imbalances”. I don’t know what a trade imbalance is. I suppose you could call a trade deficit a trade imbalance, but it doesn’t make much sense – you balance goods with money.
“How would an undervalued currency help consumers of imports??? I think everyone on here is at a level where I don’t have to spoon-feed that to you, and if anyone is confused they are usually mature enough to ask.”
Let’s try this again. See the statement above?
You said this earlier:
“I think part of the appeal of undervaluation for countries is that, as you alluded to, it does act as a subsidy for producers (and consumers as well, obviously)”
If you can’t see that these statements contradict one another then you’re are either disingenuous or intellectually goofy.
I admit that you later clarified your statement by saying consumers of this country or producers of that country blah blah whatever–but your first statement:
“I think part of the appeal of undervaluation for countries is that, as you alluded to, it does act as a subsidy for producers (and consumers as well, obviously)”
cannot be right. Spoon feed on that smart guy.
And ok, so, what’s a global imbalance?
RE: “” it does act as a subsidy for producers (and consumers as well, obviously)”
If you can’t see that these statements contradict one another then you’re are either disingenuous or intellectually goofy.”
How do they contradict each other? When you cut a tax the benefit is shared by producers and consumers. When you raise a tax the cost is shared by producers and consumers. Where’s the contradiction, Matt? Who’s being disingenuous or goofy?
RE: “And ok, so, what’s a global imbalance?”
I defined it in the first sentence of the last paragraph of the comment you just responded to.
The two statements contradict each other because in the first statement you said that undervaluation “does act as a subsidy for producers (and consumers as well, obviously).” In your other statement you said “How would an undervalued currency help consumers of imports???” See, when you said that undervaluation acts as a subsidy to consumers, and then you say, gee, how does it help consumers of imports… that is a contradiction.
And I still don’t know what a global imbalance is. Or a trade deficit. When I trade with someone, it’s just that–trade. There’s no “imbalance”. So if trade is balanced with money, as you said, what is a global imbalance?
RE: “See, when you said that undervaluation acts as a subsidy to consumers, and then you say, gee, how does it help consumers of imports… that is a contradiction. “Since we were talking about the production and consumption of a specific country’s goods it seemed implicit that we were talking about consumers of those goods. Apparently you needed it spelled out for you (several times at this point). You didn’t nitpick to Don when he discussed the gross benefits to both consumers and producers without specifying that he meant the consumers and producers of ICS fair products. Why are you getting so worked up about it when I use the exact same implicit language that Don did? Could it be that you just have a bone to pick? None of these comments of yours have addressed any fundamental points of mine – in fact we’ve clarified that we agree on the only fundamental point you brought up.RE: “And I still don’t know what a global imbalance is. Or a trade deficit. When I trade with someone, it’s just that–trade.”A trade deficit is a country’s exports of goods and services minus it’s imports. You invented the term “trade imbalance”. I wasn’t sure what that meant. People talk about the “trade balance”, which again is exports minus imports.
Martin,
1. If I manufacture a shirt in China and export it to the US, how am I not free to charge whatever the market will bear?
2. Fixed exchange rate is, from pricing perspective, identical to the Chinese not having their own currency at all. It is as if the Chinese quote all prices in 1/7 of a US dollar.
If something costs $4 to make, they will sell it for more than $4. If it can be sold only for $4 or less, they will stop making it.
What am I missing?
You’re right. I made no assumptions about to which consumers/producers you were referring, and took your “producers and consumers” comment to mean all producers and consumers. Which, is what you said, but my apologies for not realizing that you were talking about whichever specific consumers/producers you needed to be talking about in order to make what you said correct.
And for the fourth time, what is a global imbalance? or a trade deficit? You said you’re the one here worried about global imbalances, about which you said: “Persistent trade deficits have been labeled “global imbalances”. And then you said “I suppose you could call a trade deficit a trade imbalance, but it doesn’t make much sense – you balance goods with money.”
Why are you worried about a persistent trade deficit if, AS YOU SAID, one balances goods with money? There is no deficit. And there is no imbalance.
As I said above: “A trade deficit is a country’s exports of goods and services minus it’s imports.”
Global imbalances are generally understood to be persistent trade deficits (that definition is admittedly less formal than the definition of “trade deficit”).
RE: “There is no deficit. And there is no imbalance.”
There is a goods and services deficit and there is an imbalance of net exports.
Re: “Why are you worried about a persistent trade deficit if, AS YOU SAID, one balances goods with money? ”
Because persistent deficits carry with them the risk of a swift, violent, currency correction. If they gradually adjust it’s not as worrisome.
1. I don’t know the answer in general, but I do know that you’re subject to a monetary authority setting the exchange rate. Why would I assume that you’re ideally free in every other sense? I’m not ideally free on this side of the border, and my state is nominally “liberal” and “democratic”. Yours is a Communist Party dictatorship. The assumption of some ideal freedom seems absurd on its face.What the market will bear is a product of many forcible constraints. Markets existed in the Soviet Union too. Markets always exist in some sense. The issue is the forcible constraints born by market participants.
What is the market clearing price of a ticket out of Auschwitz? I suppose this question has an answer, but the answer has nothing to do with “free market economics”. If it does, then every economy is a “free market economy”.2. I can’t agree with you here. Again, this system seems roughly equivalent to taxing Chinese factors of production and using the tax revenue to bid the exchange rate down to the fixed level. Would this tax be identical to the Chinese not having their own currency?What does something cost to make? Again, is the “cost” of labor simply the cost of avoiding starvation, or does “cost” mean something else?You’re missing the restraints of trade that you aren’t discussing. You’re assuming that one Chinese merchant’s ability to negotiate a price with one U.S. merchant is the only “freedom” that matters. In reality, countless forces affect the price these two traders negotiate, and these forces aren’t necessarily what the liberal traditional calls “proper”.
“There is a goods and services deficit and there is an imbalance of net exports.”
Don’t worry about it. That money’ll come back as investment. Sans capital controls and a loathing of foreign investment, et al, we wouldn’t have to worry so much about currency fluctuations…
It does seem appropriate. Don’t feel too bad about it, LCJ -we all make mistakes sometimes
Nobody will hold it against you.
I made a big one on the cash for clunkers post and I learned something from it – there’s always a silver lining.