Christopher Pang
End of the reserve currency
Last week saw leaders of the world economy unable to resolve the differences in the monetary policies of the G20. China was accused of undervaluing the yuan and U.S. were blamed for low interest rates and flooding the markets with money. Japan’s intervention in the foreign currency market on 15th September 2010 was another item on the agenda. IMF tried to act as intermediary for these countries but failed in pushing global central bankers into cooperative monetary policies.
The U.S. is right on Chinese manipulation of their currency but fail to understand that by undervaluing the yuan, the Chinese are in fact subsidizing Americans’ consumption. In fact if the Chinese yuan is left to the market, it would probably have appreciated a lot more than miserly 2% to 3% against the dollar since “floating”.
Americans complained that the Chinese are taking away their jobs with their cheap exports. Given that employment rate is generally seen as an indicator of the health of the economy, it is necessary that politicians try to paint a picture of how effective their policies were in creating jobs or saving jobs so they can gain popularity votes. During periods of high unemployment usually result in social unrest, revolts or riots, which is probably a reason why unemployment benefits was introduced. It is also much easier for the Congress to blame the Chinese for the loss of jobs than on their fiscal and monetary irresponsibility over the last 20 years.
Free trade or fair trade?
The mainstream economist’s solution to cheap Chinese exports is tariffs on Chinese exports to America so that local industries are protected. The overwhelming majority that passed the Bill to impose tariffs on Chinese goods has demonstrated the level of economic idiocy of these congressmen. Instead of free trade, Americans want fair trade. It is not free trade that hurt the American economy, but their inability to compete based on both productivity and prices. Using automobile industry as an example where an average American automobile worker earns about 20 USD per hour and competition among global automobile companies have resulted in manufacturing costs declining because of the demand for cheap cars. It is almost mathematically impossible to breakeven if a similar car was manufactured in USA.
Mises once said “The real bosses, in the capitalist system of market economy, are the consumers.” Imagine what it would have cost to manufacture the same Chinese/Indian manufactured product in USA, with the high taxations, minimum wages, union costs, compliance costs and Medicare. The automobile in the above scenario would almost certainly cost three times more. The cost of living would skyrocket for the average American with the passing of the Bill.
How is paying more for a product fairer on the part of the consumer? How is not having a choice to buy at lower prices fair to the consumer? How is it fair consumers have to sacrifice to support inefficient local firms? The idea that local firms have to be protected so that employment can remain high in order to boost domestic consumption is as fallacious as it can get. The fact that there are more consumers than workers suggests the naivety of such an argument because everyone, young and old, employed or unemployed has to sacrifice and experience a decline in living standards so that the employed can enjoy a higher living standard.
Policy recommendations
It is true that the Chinese should let the yuan appreciate but not for the jobs that the Americans believe will return to America. As Adam Smith once said “Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.” The Chinese has to be able to enjoy the fruits of their labour instead of accumulating trade surplus and exchanging it for dollars.
By letting the yuan appreciate, the Chinese would then be able to enjoy a higher standard of living with higher real wages. This would increase their domestic consumption as purchasing power increases, not just for the average worker but for every individual Chinese consumer. This is also another reason why their housing bubble is generated. As their purchasing power declines daily because of their government’s stubbornness to float it and the low interest rates, the Chinese has to find assets which can store or appreciate in value higher than inflation.
When a person spends recklessly with his credit card, the right thing to do is to repay the debt obligation. Unfortunately what America is doing is using another credit card to pay the credit card bill. Kicking the can down the road with accumulation of more debt instead of frugality will only lead to economic destruction. The longer this misguided policy carries on, the more painful the correction necessary to undo this. The end of prosperity measured by paper money is near.
“People favor discrimination and privileges because they do not realize that they themselves are consumers and as such must foot the bill. In the case of protectionism, for example, they believe that only the foreigners against whom import duties discriminated are hurt. It is true that the foreigners are hurt, but not they alone; the consumers who must pay higher prices suffer with them.” – Ludwig Von Mises
“Imagine what it would have cost to manufacture the same Chinese/Indian manufactured product in USA, with the high taxations, minimum wages, union costs, compliance costs and Medicare. The automobile in the above scenario would almost certainly cost three times more. The cost of living would skyrocket for the average American with the passing of the Bill.”
The absolute cost of manufacturing something doesn’t matter. It is the comparative advantage that does. Taxes in the US are not much higher than in India or China.
Please note that most Americans buy cars manufactured in the US even if a large percentage of the cars are manufactured by non-American companies. The primary countries of origin for imported cars are Japan, South Korea and Mexico, not exactly places with low wages. Also, automobile workers in these places are unionized and well-paid. Oh, Japan’s income tax rates are comparable to the US’s and they have a ‘socialist’ healthcare system. Ditto for South Korea.
Funny how things turn on their heads when you look at the details.