Which Is Better, Weak Currency Or Strong?
/The field of economics is characterized by many brilliant insights about human behavior, combined with almost as many preposterous fallacies that somehow get widespread acceptance. Like the idea that the way to improve a sluggish economy is to have the government borrow huge sums of money and waste it on unproductive projects -- how could anyone actually believe that? (OK, it helps that the government puts out fake data that value wasteful projects as fully equal to productive projects. But I digress.)
Right up there with that one is the idea that currency devaluation improves a country's economic position relative to others. Suppose I put the issue this way: Should the goal of a country's economic policy be to enrich the people of the country or to impoverish them? Put in those terms, I would hope that most everyone would agree that the goal should be to enrich the people, and certainly not to impoverish them. If a country that imports 20% of its consumption from other currency areas has its currency appreciate 10% relative to the other currencies, then its people just got 2% richer; and if its currency depreciates 10%, then its people just got 2% poorer. Obviously currency appreciation is better. What's so complicated about that to understand?
And yet we all know that in the 1930s world governments engaged in successive currency devaluations to try to improve the economic standing of their own country relative to others. You may have thought that that era had passed. No, it's back. Today seemingly every major currency area is engaged in a game to drive its currency down -- Europe, Japan, China. The ECB has just launched a big "QE" program, and suddenly the euro has had rather a dramatic decline against the dollar over the last several weeks. And the big question is, should the U.S. be following suit?
Of course, the usual economic fallacists are popping up to advocate for competitive devaluation by the U.S. As always, the leader is Official Manhattan Contrarian Worst Economics Writer Paul Krugman, with a column on March 13:
Who wins from this market move [of the declining euro]? Europe: a weaker euro makes European industry more competitive against rivals, boosting both exports and firms that compete with imports, and the effect is to mitigate the euroslump. Who loses? We do, as our industry loses competitiveness, not just in European markets, but in countries where our exports compete with theirs. America has been experiencing a modest manufacturing revival in recent years, but that revival will be cut short if the dollar stays this high for long. In effect, then, Europe is managing to export some of its stagnation to the rest of us.
Well, of course certain export industries benefit from a declining currency, but obviously they are a minority of any economy and the people as a whole are hurt.
In the category of people who can usually be counted on not to fall for fallacies, we have Megan McArdle of Bloomberg News, who also comes out (on March 12) for the benefits of a weaker currency. Megan sees the positive of a weak currency in "export[ing] more than we import" because of the "importance of work" to our lives. Huh? There's no inconsistency between a hard currency and full employment. In fact, it doesn't take much looking at world economies to figure out that the most successful ones have consistently strong currencies and really low unemployment. Switzerland -- now there's a strong currency! Sure the exporters complain every time the currency goes up, but somehow they always figure out that they still have a comparative advantage in something. The unemployment rate has ranged between 2.9% and 3.5% over the past year. Or Singapore. There the unemployment rate is barely 2% and you have to pay about $80,000 per year to hire a hotel maid.
And then there are the economies where the currency is not just declining, but collapsing. Russia and Venezuela come to mind. Do they really represent models to emulate?