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In my February 14th, 2007, column for the Pittsburgh Tribune-Review, I celebrated a strong dollar [2]. You can read my column beneath the fold.
Reaping a strong dollar’s benefits
Are Americans harmed by undervalued foreign currencies? Misinformed pundits and opportunistic politicians say so.
Their argument is simple:
The lower the value of a foreign currency — say, the Japanese yen — the greater the number of yen that can be bought for one dollar. The greater the number of yen that can be bought for one dollar, the greater is Americans’ ability to buy imports from Japan.
If yesterday one dollar bought 100 yen, and today one dollar buys 120 yen, each dollar today buys 20 percent more Japanese goods than it bought yesterday. The greater is Americans’ ability to buy imports from Japan, the lower is the demand for products made in America. The lower is the demand for products made in America, the fewer the jobs in America.
Therefore, a foreign currency whose value is “too low” destroys American jobs. To avoid this “hollowing out” of the American economy, Uncle Sam should “punish” foreign governments in order to force them to raise the value of their currencies. Q.E.D. — quite easily done.
Like all economic myths, this one is built on a kernel of truth. It is true that as the value of a foreign currency falls against the dollar, Americans can afford to buy more foreign-made products — and foreigners can afford to buy fewer American-made products. Put differently, a fall in the value of foreign currencies causes the volume of U.S. imports to rise and the volume U.S. exports to fall. And one typical consequence is a larger U.S. trade deficit.
But the inferences that protectionists draw from this truthful kernel are nearly all mistaken.
To begin to see the problems with the protectionists’ argument, it helps to understand that whenever a foreign currency falls in value against the dollar, the dollar necessarily rises in value against that currency. So when the value of the yen or the Euro falls against the dollar, Americans become richer: Each dollar buys more Japanese cars or French wine or German chemicals.
And what’s wrong with being richer? Nothing. Nothing at all.
Protectionists, of course, disagree. They point to the reduced demand for the outputs of some American firms. “See! America is harmed!” they squeal.
Such squealing misses the point profoundly.
The higher the value of the dollar, the greater is Americans’ purchasing power. In real terms, we don’t have to work as hard to satisfy our needs. This effect is the very same one that we achieve when we improve our education or when technology improves.
Consider a technological improvement — say, Cyrus McCormick’s invention of the mechanical reaper. This device reduced the number of workers required to bring in a harvest. In other words, one worker’s daily work effort with the reaper produced more consumable output than did the same amount of work effort prior to the reaper.
McCormick’s reaper raised the purchasing power of American workers: same effort, more output. Of course, in doing so it “destroyed” some agricultural jobs. Many workers who were once required to harvest crops were released from that necessity; their time, effort and creativity were freed up to produce other goods and services that, without the reaper, would have been too costly to produce.
Now a techno-phobe might still oppose the reaper. He might insist that grueling work builds better character in people; in his view, the reaper — by making harvesting less backbreaking and time-consuming — promotes frivolous, debilitating material wealth. A different techo-phobe might argue that even if the reaper’s long-run consequences are good, the short-run job losses are too high a price to pay.
Most of us reject such arguments against technological advances that improve workers’ productivity. We correctly understand that people who advance these arguments are irrationally fearful of change, so fearful that they would sacrifice human betterment in order to freeze society into a stand-still state.
The very same good judgment that leads us to applaud advances in technology should also lead us to applaud high purchasing power of the dollar: Both enable American workers to consume more from a given amount of work effort.
It is true that there are differences between increases in a currency’s value and technological improvements. Most notably, currencies today typically are issued by government-owned central banks that can monkey with the supply of currencies in order to change artificially the value of one currency against another. In my next column I will explore these bank operations in some detail.
But at the end of the day, when we examine the reasons for — and consequences of — government intervention to manipulate currency values, we’ll find that the best course of action is to applaud a high and rising purchasing power of the dollar just as joyfully as we applaud technological improvements.