Chinese Currency Manipulation

Both political parties have been demonizing China for our economic woes, but it does not make much sense anymore. Wonkblog:

1) What you’re saying when you say you want to put an end to global currency manipulation is that you want a weaker dollar. That’s what currency manipulation is: An effort by other countries to artificially strengthen the dollar in order to make their currency — and thus their exports — comparatively cheaper. But if we want to weaken our dollar, we could just, you know, weaken the dollar.
2) China is not the world’s worst currency manipulator, or even particularly close to it. Singapore is worse than China. Taiwan is worse than China. These days, Switzerland and Japan are arguably worse than China. ...Here’s a list...
3) China is getting much better. They’ve allowed their currency to rise substantially in recent years. ...China’s ”current account peaked at 10.7 percent of GDP in 2007. This year, it looks like it’ll only be 2 percent.” It seems a bit weird to intensify the pressure on China, and to try and publicly humiliate them, at the exact moment when they’re doing what we’ve been asking them to do. As economist Nicholas Lardy told NPR, ”there was a very good case for the [U.S.] to take action against China five years ago, but not now.”
4) Calling someone a “currency manipulator” doesn’t trigger some magical process that leads to them no longer manipulating their currency. On its own, its nothing but an international insult. But if you follow through, then it’s a first step towards slapping tariffs on Chinese goods. But then China can begin slapping retaliatory tariffs on our goods....

The 'weak' renminbi was a significant drag on the United States for at least a decade, but in 2007 when Chinese currency manipulation was a serious drag on the US economy, globalization was relatively popular and The World Is Flat was a NYT bestseller. Krugman adds:

Since [2007], two big things have happened: relatively high inflation in China, and some appreciation of the renminbi against the dollar. As a result, the real exchange rate of China against the United States (based on consumer prices), has appreciated significantly:

At the same time. China’s surplus has come way down:

So this is an odd time to be making confrontation over China’s currency a centerpiece of your economic policy — unless, of course, it’s just bluster aimed at making voters think you’re tough.

As China's exchange rate has risen, its current account (trade) surplus has dropped, and it has been sending less savings abroad. 

Note that Krugman mislabeled his first graph the "China/US real exchange rate."  It is a graph of the value of the Chinese currency, so it should be labeled the "Chinese real exchange rate vs. US$".  The "China/US" rate would be the value of the US dollar because that is in the denominator, but Krugman isn't thinking of it as a fraction, but as something like a hyphenated word.

Currency Union, "Welfare", and Inequality

 The US is much more of a welfare state than Europe is in some ways.  For example, one reason the US works as a monetary union, but Europe does not is because the US constantly bails out Mississippi and Missouri as Derek Thompson explains:

The euro zone has Greece. The United States has Mississippi. Or Missouri.

The difference between the U.S. and Europe is that when the Greek economy "pulls a Mississippi" (or perhaps I should say, when Mississippi "pulls a Greece"), the EU and the U.S. have 180-degree opposite reactions. Over here, we calmly write checks to Mississippi in the form of Medicaid and unemployment insurance, no questions asked. Europe has no comparable "Peripheraid" for its weak peripheral states. Instead, it has chaos.

Michael Cembalest, the JP Morgan analyst and author of the my favorite new chart about monetary unions -- it's not a crowded field, admittedly -- passes along another clever graph which shows fiscal transfers (don't worry, that's just another word for money) between the rich California-Connecticut-Illinois-New Jersey-New York quintuple and poorer states like Tennessee. If similar, seamless transfers existed in the EU, the rich north would have to send to Portugal and Greece at least an additional 30 cents for every dollar they paid in taxes, year after year after year.

When you hear commentators say, "the euro zone must begin to transition toward a fiscal union," what they are saying, in human-speak, is that the Europe needs to be more like the United States, with balanced budget laws for its individual members and seamless fiscal transfers from the rich countries to the poor, to protect the indigent, old, and sick, no matter where they reside.

The Germans call this sort of thing "a permanent bailout." We just call it "Missouri."

 This is why the US actually has less inequality than Europe does as a whole.  We transfer money from rich states to poor states.  Europe transfers much more money from rich to poor individuals within their states, but they have very few transfers from rich states to poor states and that makes Europe much more unequal than the US.  Moneybox:

One very interesting point that James Galbraith makes in his newish book Inequality and Instability is that if instead of looking at Finland then Spain then Germany then Greece all as separate countries but instead look at "Europe" as an integrated marketplace with perfect capital mobility and legal labor mobility then it's even more unequal than the United States:

And when you do that, when you take what had been isolated labor market situations and bring them into direct interaction with each other, you have to measure the inequality on the new basis, on the new foundation. And nobody had done that. And what we found was that in fact when you do that, European inequality, taking into account the differences that exist between, let’s say, Germany and Poland or between Norway and Portugal, is actually larger in wages than it is in the United States.

Galbraith melds this into a policy argument that will be very controversial, but I think it would be helpful for people with all different kinds of political perspectives to just consider this isolated fact more clearly. Further analytic issues fall out of it quite clearly. Europe the collection of separate low-inequality places has generally high taxes and generally high levels of income redistribution. But Europe the collective has extremely low taxes and almost no income redistribution.

Below is a map from The Economist of what states subsidize what other states.  The map would be much more dramatic if it had county detail.  For example, I think I remember reading that San Francisco alone subsidizes about what the entire state of Kentucky absorbs.   New Mexico, Mississippi and West Virginia have all gotten well over 10% of their annual state incomes from subsidies coming from the green states over the decades.  Puerto Rico has been getting the most: almost 15% of its income from net federal transfer payments.  That may be why they do not want to revolt against 'taxation without representation'.  


The European Union is an unwieldy currency union because it is surprisingly heterogeneous and that is because it has little political union and almost no fiscal transfers.  Derek Thompson

Compared across more than 100 factors measured by the World Economic Forum Global Competitiveness Report, from corruption to deficits, JP Morgan analyst Michael Cembalest calculates that the major countries on the euro are more different from each other than basically every random grab bag of nations there is, including: the make-believe reconstituted Ottoman Empire; all the English speaking Eastern and Southern African countries; and all countries on Earth at the 5th parallel north.

And here is your tweetable fact: A monetary union might make more sense for every nation starting with the letter "M" than it does for the euro zone.

If you find yourself wondering, as I did, how the 50 states within the U.S. would compare across this measure of dispersion, remember that the nice thing about the United States is that baked into the first word of our name is not only a monetary union (i.e.: we all use dollars) but also a fiscal union. If Mississippi has a bad year (or decade, or century), Washington doesn't debate whether we should force the state to raise taxes or cut spending to become more competitive. We just keep paying it Medicaid, which is basically a transfer from rich Americans to poor Americans, many of whom live in Mississippi.

Neverending Trade Deficits OK?

Moneybox:

according to assentially all sources, Australia has always run a large balance of payments deficit except for one flukey year in the early '70s. At various times different politicians and investors have proclaimed this unsustainable, but it's always been sustained. And it keeps on being sustained even though Australia is currently undergoing a boom of primary commodities exports to China. What's more, despite this never ending trade deficit Australia decided about 20 years ago to stop having recessions which is pretty enviable.

So what's going on?

Two things, I think. One is that Australia is a very respectable country with a stable liberal democracy just like the United States or Germany or Japan. But the other is that Australia has a very fast-growing population. It's growing substantially faster than the American population, to say nothing of Japan or the major European countries. And if you're thinking about savings and investment in the broadest and most generic sense, that's exactly where you want to invest. A country where you can say with confidence that 20 years in the future the same political framework will be in place and there will be much more overall demand for land and goods and services due to the growing population. So because Australia is such a fundamentally sound investment opportunity, it gets to run a trade deficit. And it will always get to run a trade deficit until either it decides to sharply curtail immigration and population growth, or until India's political system strikes rich foreigners as more credible and stable.

Foreigners are willing to lend Australia money (invest in Australia) because it can credibly pay the money back partly due to the growing economy which is growing partly due to its growing population.  One of the only other rich countries that has a stable economy and a growing population is the US and we also have had a current account deficit for decades.  

American Exceptionalism

Will Oremus lists some things that are unusual about America at Slate:

As we celebrate the 236^th anniversary of America’s independence, it’s a good time to reflect on all the things that make the United States the greatest country in the world. Like, for instance … well … hmm.

We’re billed as the land of the free, but we’re actually 47^th in press freedom according to Reporters Without Borders, behind Botswana and El Salvador. We’re 10^th in economic freedom, according to the Heritage Foundation—not bad, but not quite on the level of Canada or Mauritius. We’re 51^st in math and science education, according to the World Economic Forum. We spend by far the most on health care, but can’t crack the top 20 in life expectancy. And while we remain the richest country in terms of gross domestic product, we’re anywhere from sixth to 19^th in per-capita income, depending on how you count. (Plus, no one expects us to hold off China for long when it comes to GDP.)

So what do we lead the world in? If you believe Will McAvoy, the news anchor on Aaron Sorkin’s [fictional HBO series] The Newsroom, the United States is tops in just three things: "number of incarcerated citizens per capita, number of adults who believe angels are real, and defense spending." ...

But come on—don’t we lead the world in anything we can be proud of? Indeed, we do! To celebrate July 4, here is a list of some rather obvious, some surprising, and some genuinely inspiring achievements that put the “exceptional” in “American exceptionalism."

...Legal immigrants. A whopping 35.5 million as of 2005. Our immigration system may be broken, but it’s not as broken as a lot of other countries’ immigration systems.

Generosity. What American decline? The United States jumped from fifth place to first in the U.K.-based Charity Aid Foundation’s latest World Giving Index, which grades countries on three metrics: volunteering, helping strangers, and donating money.

Patriotism. Even if the facts don't always bear us out, we’re still convinced that our country is tops. In a World Values Survey, 77 percent of Americans reported being "very proud of their nationality," more than any other country polled. Well, technically, we were tied for first with Ireland. And the survey in question is from the 1990s. But how else could you explain all those people still singing along with Lee Greenwood every Fourth of July?

Media. We have the most newspapers, radios, television broadcast stations, and hours of television watched per day. Oops, maybe that last one isn’t so inspiring. But hey, it’s a holiday. Go ahead and enjoy the fireworks on your boob tube. In the land of the 47^th-most-free, no one’s going to stop you.

Unfortuntately most of the other items on Will's list are wrong or misleading because they are simply due to the fact that the US has the largest GDP.  For example, the title of Will's article celebrates the fact that the US is the number one in cheese production, but that isn't per-capita and so it is just due to the fact that the US has more people who can afford cheese than any other country.  The US is nowhere near the top in per-capita cheese. Greeks eat over twice as much per capita as Americans and the US isn't even one of the top ten cheese exporters. France is the big cheese there.   And the US is not the most obese.  We are near the top, and the heaviest big country, but there are a few small Pacific-island countries that are even heavier, possibly in part due to their history of regular famines which killed off anyone without fat genes.  

Running a country is different from running a company.

Henry Ford wanted his workers to be able to afford his cars.  But he only sold perhaps less than one percent of his cars to his own workers.  How much of America's production is sold to America's workers?  About 87%.  Only about 13% of US GDP is exported.  And we import about 16% of GDP (meaning that foreigners lend us about 3% of GDP per year to buy more of their stuff).   

One of the ironies of globalization is that very little production is actually traded internationally.  This is mainly because people mostly buy services and real estate which rarely can be outsourced to another country.  In the future, if the global economy continues to become more service-sector oriented, we may trade even less of our production. 

People often think that 'everything is made in China', but that is because of the availability heuristic: images that are readily available when you think about a subject are emphasized more than their actual importance and Americans really do import most of our consumer goods.  But we spend most of our money on real estate, health care, education, restaurants, police protection, etc.    And America exports almost as much stuff as we import, but the kinds of goods that we export are not consumer goods.  We export airplanes, military hardware, and capital goods that foreign businesses buy.  That means that foreign business owners may think of the US as an exporting juggernaut because they picture all the things that they buy from the US, but foreign consumers (most people) do not buy much American production except for cultural goods like movies and music. 

Optimal Currency Area

Some optimal currency area theory and applications on my macro blog.

Manufacturing wages and Inequality

Perhaps the increase in inequality is partly due to the decline in manufacturing.  If manufacturing pays better and it hires fewer people, then that alone will increase inequality.  Plus, the opportunity cost of service-sector work declines as the local manufacturing jobs dry up.  The opportunity cost of being a barber in a small town in Texas was manufacturing before they closed down the factory and now the barbers get lower wages both because their opportunity cost has declined and because their customers have lower wages too. 
Moneybox:

Susan Helper, Timothy Krueger, and Howard Wial forcefully make the case for manufacturing in a Brookings paper (PDF) where one subject of interest is the seeming existence of a wage premium in the manufacturing sector. At different skill levels, manufacturerers pay more:

What I wonder when people point this out is what they think follows from this. Here's one though. In India, a very large segment of the workforce is doing extremely low wage work in the agricultural sector. And agricultural productivity is limited by the availability of land. So insofar as you're able to subsidize the creation of manufacturing work, not only do the people who get the manufacturing jobs earn higher wages—the residual agricultural population earns higher wages too. This off the farm aspect to industrialization has historically been a huge driver of prosperity and I think it's crucially important for political leaders in developing countries to think about it.