Panama rentals
News | Economy | Culture | Opinion | Lifestyle | Nature
Noticias | Opiniones | Alternativa con Miguel Antonio Bernal
Archive | Unclassified Ads | Home
Volume 17, Number 5
May 4, 2011
Learn Spanish Online with Habla Ya's Skype Spanish Lessons


economy

Also in this section:
May Day 2011
Tabasara hydroelectric project talks break down
Colombian court decision sets back Panama-Colombia electric hookup
Job creation the old economic textbook way: reducing the value of the dollar
IMF regional outlook: Watch out for overheating (PDF)
Foreign Direct Investment in Latin America and the Caribbean (PDF)
Fishing for a living where others want to do battle
Teachers march to the Presidencia, stage symbolic strike


Many things that used to be in a Business & Economy Briefs feature of the website have now migrated to our constantly updated Facebook page

Job creation the old economic textbook way
Reducing the value of the dollar
by Dean Baker

In the wake of the recession brought on by the collapse of the housing bubble many people have called for a new economics. There are certainly grounds for arguing that we need a new economics, but the bigger problem is that economists will not even adhere to the old economics, or at least not when it runs against the accepted thinking in political circles.

This is perhaps most obvious in the response by economists, or lack thereof, to the large US trade deficit. In a system of floating exchange rates, the adjustment to a large and persistent trade deficit is supposed to be a decline in the value of the currency. That is 100 percent economic orthodoxy.

Economists ridicule the people who worry about jobs being lost to imports by telling them that new jobs will be created in other sectors of the economy. There is some logic to this story, but an essential part of the picture is supposed to be a decline in the value of the dollar.

Suppose the United States starts buying $100 billion of imported manufactured goods each year that replace $100 billion worth of goods that had formerly been produced domestically. The story is supposed to be that this means that we have increased the supply of dollars on international currency markets by $100 billion a year, while not increasing the demand at all. With a greater supply of dollars and no change in the demand, the price of the dollar will fall measured in foreign currencies.

A lower-priced dollar makes US exports cheaper for people living in other countries, leading to an increase in exports. A lower-valued dollar also makes imports from other countries more expensive, leading us to import less. If we export more and import less, net exports will rise, creating jobs and moving trade back toward balance. That is the textbook story and the reason that good free traders don't worry when we lose jobs to imports.

However, what happens when the dollar is not allowed to fall? In the last decade many countries, most notably China, have explicitly pegged their currency to the dollar. They do this by buying dollars on international currency markets when their trade surplus (our trade deficit) leads to an excess supply of dollars. In effect, the action of these governments are preventing the normal adjustment process that would bring trade back toward balance and keep the US economy close to full employment.

Without this adjustment process, the "free trade" crew has no real argument. It is entirely plausible that increased imports will lead to higher unemployment since the adjustment mechanism that is supposed to bring the economy back to full employment is not working. This is all straight traditional economics textbook stuff.

Now it is possible to have other channels to fill the gap, but these are by no means automatic. For example, we could have the government run big budget deficits, creating demand either by increased spending or lower taxes. However there is no guarantee that the government will take this route, especially when the deficit hawks rule Washington.

The other possibility is that the Fed will lower interest rates and thereby stimulate demand. This is a mixed blessing even in the best of times. Investment is only modestly responsive to lower interest rates. By far, lower interest rates will have their largest impact on consumption. When this low interest rate channel works, it means that people will borrow lots of money to buy things, and in that way fill the gap in demand created by the trade deficit. This leaves us with heavily indebted households who have nothing saved for retirement; sound familiar?

Of course when the federal funds rate is already at zero, as is the case now, this low interest rate route for boosting demand will not work at all. In principle, the Fed could take more dramatic steps, like its quantitative easing policy, but there is little appetite in Washington for pushing these extraordinary measures very far.

This brings us back to the exchange rates. Mainstream economists, who believe their own economics, should be yelling about the over-valued dollar and demanding action to bring the dollar down to a level more consistent with balanced trade. However, economists have been largely silent on the issue.

We get a lot of feeble comments about how China should raise the value of its currency against the dollar, but China is a big country and they don't want to do this, so too bad. Of course the United States is not in fact the most helpless country in the world, especially when it comes to lowering the value of the dollar in international currency markets.

Joe Gagnon and Gary Hufbauer, both of the 100 percent mainstream Peterson Institute for International Economics, developed a very simple proposal that will put serious pressure on China to reduce its holdings of dollars. They call for taxing China's dollar holdings at a 20 percent annual rate. This can be done in a way that is 100 percent legal under US trade agreements and has no obvious negative side effects.

The question this proposal should raise is why don't all economists support the Gagnon-Hufbauer proposal or some comparable measure. The over-valued dollar is a major obstacle to restoring a normal economic balance with near full employment levels of output. This is an issue where all mainstream economists should pretty much agree.

Of course there are powerful interest groups that don't necessarily want to see the dollar fall. Goldman Sachs, J.P. Morgan and other banks are probably happy to have their dollars go further in buying up Chinese assets. Similarly, Wal-Mart and other major retailers probably are not anxious to see the prices of the goods they import increase by large amounts. And Pfizer, Apple, and Time-Warner would probably be worried that if we anger the Chinese government over its currency policy it might be less anxious to protect their patent and copyright claims.

If this were a case argued on the economics - the mainstream economics that everyone learns as undergrads and grad students - the economics profession should be lined up solidly behind Gagnon and Hufbauer. However, the interests of those with money and power seem to be on the other side and that's where we find most economists.

So, the story here is that we may or may not need a new economics, but first and foremost we need honest economists. We don't seem to have many right now and it is not clear how a new economics would change this fact.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of False Profits: Recovering from the Bubble Economy. He also has a blog, Beat the Press, where he discusses the media's coverage of economic issues.








Also in this section:
May Day 2011
Tabasara hydroelectric project talks break down
Colombian court decision sets back Panama-Colombia electric hookup
Job creation the old economic textbook way: reducing the value of the dollar
IMF regional outlook: Watch out for overheating (PDF)
Foreign Direct Investment in Latin America and the Caribbean (PDF)
Fishing for a living where others want to do battle
Teachers march to the Presidencia, stage symbolic strike




Panama Vacations
Tankless Water Heaters --- http://www.eztankless.com/
Make the Executive Hotel your headquarters in Panama City
Find the boat of your dreams through Evermarine





© 2011 by Eric Jackson
All Rights Reserved - Todos Derechos Reservados
Individual contributors retain the rights to their articles or photos

email: editor@thepanamanews.com or

e_l_jackson_malo@yahoo.com

phone: (507) 6-632-6343

Mailing address:
Eric Jackson
att'n The Panama News
Apartado 0831-00927 Estafeta Paitilla
Panamá, República de Panamá