August 6, 2012 · 0 Comments
Source: Beat the Press
By Dean Baker:
The NYT ran a lengthy story on the possibilities of manufacturing electronics in the United States. Near the end of the piece it discusses divisions in the Obama administration on measures to try to bring more manufacturing back to the United States.
On the one hand, it notes the view of Ron Bloom, who had been the president’s senior advisor on manufacturing policy, that the U.S. should take steps to push down the value of the dollar in order to make manufacturing in the United States more competitive. It then contrasts this view with that of Lawrence H. Summers, formerly the top economic adviser to Obama. The piece tells readers:
“along with many economists, Mr. Summers argued that an overly aggressive trade stance could hurt manufacturing — by, for instance, pushing up the price of imported steel used by carmakers — and over time, drive companies away. “
Actually, standard economic theory would argue that a lower valued dollar is exactly the mechanism through which the trade deficit should be brought down. In a system of floating exchange rates, the excess supply of currency on world markets from a deficit country like the United States is supposed to bring down the value of its currency. This makes its goods more competitive in world markets, reducing the size of its trade deficit.
The expected drop in the value of the currency is not taking place today with the dollar because a number of countries are buying up large amounts of dollars in order to prop up its value against their own currencies. By keeping the dollar over-valued they are able to sustain their trade surpluses with the United States.
It is worth noting that by definition, if the United States has a large trade deficit then the country has large negative national savings. This means that by supporting a policy that leads to a large trade deficit, Summers was arguing for either large budget deficits and/or large negative private savings, as we saw at the peak of the housing bubble. Perhaps Mr. Summers does not understand the implications of his position, but there is no logical way around it.
It is also worth noting that the over-valued dollar policy supported by Summers acts to redistribute income from workers who are exposed to international competition, like manufacturing workers, to workers who are largely protected from international competition, like doctors, lawyers and other highly educated professionals. In other words, it can be seen as one of the policies that redistributes money from the 99 percent to the one percent.