Why progressive economists can mislead activists, and why they should stop...

[Jehu Eaves]

There is a post at Beat the Press from Dean Baker, who is a decent enough economist to embrace the idea of shorter working time; but who, despite this point in his favor, nevertheless brings such defective reasoning to his analysis that it makes me cringe:

The Falling Dollar and Developing country Exports | Thursday, 11 November 2010 05:44

The Washington Post notes that the Fed’s new round of quantitative easing will:

“harm exports from developing countries. That’s because steps to lower U.S. interest rates and put money into the economy have the effect of making other countries’ currencies more expensive.”

If world imbalances are going to be addressed, then developing country exports must be hurt. In economic
theory, rich countries like the United States are supposed to have trade surpluses. This means that they export capital developing countries. The logic of this pattern of trade is that capital commands a higher
rate of return in fast growing developing countries in which it is relatively scarce.

There were in fact substantial flows of capital from rich countries to poor countries prior to the East Asian
financial crisis in 1997. However, the harsh treatment of countries in the region by the I.M.F. led developing countries throughout the world to focus on accumulating vast amounts of reserves in order to avoid ever being in the same situation. This meant that developing countries had to run export surpluses with the United States and other wealthy countries.

In effect, the I.M.F, under the guidance of the Rubin-Summers Treasury Department, put in place a dysfunctional system that would inevitably explode. The effort to re-balance trade is about reversing those policies.

It should have occurred to Baker that if an idea appears on the pages of the Washington Post, it probably is wrong. The Post makes the argument that quantitative easing will hurt exports from developing countries.

How?

As dollars flood the American economy, interest rates will fall, and capital will go looking for someplace with a better return — like China or Brazil — forcing their currencies to appreciate.

If we understand Baker in this post, he is agreeing with the Washington Post, and making the argument that exports from the developing countries must fall in order to “re-balance” the world economy — i.e., reduce the US trade deficit. Rich countries, says Baker, are supposed to have exports surpluses, not poor countries.

So why is it now the other way around?

Why does China export to the United States more than it imports from the United States? Baker’s answer to this is that China exports so that it can accumulate sufficient dollars to protect it from a financial crisis like the one that hit Asia in 1997.

As Baker alludes, the developing world was hit with a series of financial crises over the decade and a half prior to the Asian Crisis of 1997, because of the US decision to turn these less developed countries into low wage export platforms for American companies seeking to import back into the US. The crisis even dumped Japan into a permanent depression in 1989. This was the exports of capital he refers to.

So, the “dysfunctional” trade imbalances that Baker says resulted from the Asia Crisis actually created the Asia Crisis in the first place. Moreover, despite these rolling financial crises, the US deficit has continued to grow without pause.

But, that doesn’t fit into the story progressive economists want to tell. They want a story that blames China for the US trade deficit and the loss of manufacturing jobs. So, despite their own evidence that the US export of capital is the cause of the US trade imbalance, they need a story that makes Chinese exports the problem.

The only problem with this reasoning is that China’s exports have little or nothing to do with the exchange rate between the dollar and the yuan. The US imports from China are increasing even though its currency has been appreciating against the dollar. It imports from Germany even as the euro is rising against the dollar. And, the Japanese yen has risen from 380 yen per dollar to 80 yen per dollar over the last 40 years, but the US still imports from Japan.

The reason why this is happening — and will continue to happen despite US quantitative easing — is twofold. First, the US owns the world reserve currency, which allows it to depreciate its currency at will, while paying no cost for this depreciation in terms of reduced consumption from imports. Second, the US dollar is a worthless piece of paper, which can be generated in whatever quantities are needed by Washington to buy whatever its wants.

In effect, the US profits by depreciating its currency because it pays nothing for the exports of other countries. And, the more currency it prints, the more it profits by this depreciation.

Quantitative easing will not result in more US exports, nor in the repatriation of US industry back to the US. Instead, it will force other countries to ship even more output to the US at the expense of the consumption of their own citizens.

When progressive economists apply the fallacies of economics to concrete problems they risk misdirecting activists time and attention to blind alleys. In this case, activists would draw the conclusion that it is China, not the US that is responsible for the off-shoring of US jobs.

In fact, off-shoring is a deliberate Washington strategy to reducing labor costs and destroy domestic unions. Quantitative easing is just the latest weapon in that arsenal.