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A Reply to Critics

I’ll try my best to address the criticisms – both here in the comments section at Café Hayek and in the comments section at EconTalk – that have been raised in response to my recent EconTalk podcast with Russ – the podcast focusing on China’s currency policy.

Some strands of the discussion must be separated.  First is the strand that complains of China’s alleged undervaluation of the yuan as being simply a specific instance of Chinese protectionism.  In this strand, commenters point out that Chinese subsidization of that country’s exports hurts America by taking away American jobs.

A second strand – one more substantial than the first – is the claim that Chinese currency intervention screws up price signals (including interest-rates) in the U.S., thus hurting Americans.

A third strand questions my argument that the Chinese currency really isn’t undervalued.

About the first strand: that country A subsidizes some of its industries to make them more ‘competitive’ with industries in country B – and, therefore, that country A’s policies cause job losses in these country-B industries – is a common complaint registered in discussions of international trade.  Russ and I have addressed it many times here at Café Hayek, as have many other economists over the ages addressed it in many different places, contexts, and manners.

The loss of specific jobs is not a problem with trade.  All trade causes some specific job losses; specific job losses are forever a part of the process of creative destruction that necessarily is fueled by dynamic, entrepreneurial capitalism.  That some of these specific job losses can be – and, indeed, are – caused not by any ‘natural’ comparative advantage enjoyed by foreign producers but instead result from favors that these producers receive from their countries’ governments is irrelevant to the home market.  The person who loses his job because foreign rival A gained a ‘natural’ comparative advantage is no less distraught than is the person who loses his job because foreign rival B gained an comparative advantage only by being the recipient of government favors.

From the perspective of the domestic economy as a whole, foreign subsidization of imports into the domestic economy should be celebrated no less than are, say, developments of new product offerings or of new techniques of production.

The second strand has more fiber to it.  Being part of a global economy, monetary manipulation by foreign governments can harm the domestic economy.  China’s monetary policy – if it is indeed too loose – distorts relative prices (including interest rates), and these distortions can work their way through not only China’s economy but, also, through economies around the globe.

The question is: what to do about it?  Unfortunately, we live in a world of monetary nationalism.  As a rule, each government claims, and exercises, the right to be the monopoly supplier of its own money.  (Governments on the euro are, of course, an exception to this rule – just as one might say that the governments of Alabama, Colorado, New Jersey, Virginia, and other U.S. states are an exception to this rule.)

If we grant the principle that each government should have the authority to carry out discretionary monetary policy, what is the basis for concluding that the national government in Beijing keeps its currency undervalued?

The Fed chooses to increase or decrease the supply of dollars as it sees fit, and it uses a variety of tools to do so.  The Fed is no independent, outside intervener in the dollar market: it is the source of dollars and ultimate controller of the supply of dollars.  Likewise with the Chinese government and its currency.  The details in China differ from those in the U.S. – with respect to the relation of the People’s Bank of China (PBOC) to the government in Beijing; to the particular reasons that motivate the PBOC to increase or decrease the supply of its currency, and to the particular tools that it employs to carry out its chosen policies.

But at the end of the day these details are just that: details, the goriness of which might fascinate pedants but which inevitably clouds the vision and warps the judgment of people whose ultimate concern is the big picture.

We ordinary Americans have little to no ability to corral “our” own central bank.  But we can at least complain about it (or praise it, as the case may be).  As far as the policies of non-American central banks, I believe the best – and most realistic – policy for Americans is to take that policy as a fact of nature, much as we take as natural the fact that, say, the French are especially good vintners, or that bananas don’t grow well anywhere in the lower 48 states.

If U.S. government policy toward foreign governments could (1) be trusted to be exercised ‘scientifically’ (rather than politically), and (2) have a respectably good prospect of pressuring foreign governments into following policies that are better for the overall, long-run global economy, then a case could be made to have Uncle Sam, say, threaten Beijing with trade sanctions if Beijing continues to act in ways that are less than ideal from a global perspective.

But I have no such trust, and, therefore, believe that the best that we Americans can practically do is to jawbone Uncle Sam into pursuing a policy of unilateral free trade regardless of what other governments are up to.  The wealth gains to us of such a policy of unilateral free trade will almost surely be so great as to swamp whatever negative effects we Americans might suffer because of misguided policies practiced by other governments.

My reply to the third strand ought by now be predictable (if not universally accepted!).  Whether my speculation (expressed in the podcast) is correct or not about why Beijing is pursuing the exchange-rate policy it is pursuing, the policy it is pursuing is what it is.  From our perspective – from the perspective of non-Chinese – in this world of monetary nationalism and discretionary monetary policy, the value of any other government’s currency is what it is.  Just how that value is achieved is not of any great relevance.