Here’s a letter to a long-time correspondent.
Rick:
Thanks for sharing John Tamny’s piece on the dollar. Tamny is right that Trump is wrong to insist that Americans would “make a helluva a lot more money with a weaker dollar.” This claim by Trump is one of countless that reveals the president’s ignorance of basic economics. Here’s how I explain the flaw in this Trumpian ‘reasoning.’
When I was a kid, my elementary school – Immaculate Conception School – held semi-annual fairs. At these fairs we students bought tickets that we then exchanged for food, trinkets, and game-playing offered for sale at the fair’s many booths. Of course, some items cost more than others. A stuffed bear might be priced at, say, 30 tickets, popcorn at 3 tickets, and a pencil with the school logo at 1 ticket.
To purchase anything at the fair, we needed those tickets; we couldn’t spend dollars directly at any of the fair’s booths. And so using currency (dollars) that we brought from home, each of us students bought as many or as few tickets as we pleased (or, rather, as many tickets as our parents allowed us to buy). Tickets in hand, we then entered the fairgrounds to spend them on whatever goodies caught our fancies.
The purpose of these fairs, obviously, was to raise money for the school. I’m sure that the school’s principal, Sister Quentin, wished to raise as much money as possible.
But suppose that Sister Quentin reasoned like Pres. Trump: the school (so goes the supposition) raises more revenue the greater the quantity of things students buy at the fair; students will buy a greater quantity of things at the fair the lower is the price – the official value – of the tickets used to buy things at the fair; therefore, the official value of these tickets should be set very low to encourage students to buy lots of them.
Sister Quentin triumphantly concludes that by keeping the price of tickets especially low – that is, by devaluing the tickets – the school ensures that the volume of fair sales will be especially high and the school thereby enriched.
The flaw in Sister Quentin’s devaluation scheme is obvious: if the price of tickets is set below a level that enables the school to cover its costs of acquiring the goods and services sold at the fair, the school loses money. While Sister Quentin’s undervaluation of the tickets will indeed increase the quantity of things sold at the fair (as long as prices expressed in tickets do not rise), it results in the school transferring economic value to the fair’s customers rather than the school getting net economic value from those customers.
If the official value of the dollar is pushed below its market value, we Americans will be made poorer, not richer – a reality that is impervious to Trump’s obstinate economic ignorance.
Sincerely,
Don
