Consumers Vs. Workers In The Currency Debate

The debate over what to do about Chinese government currency manipulation often hinges on whether you're being talked to as a consumer or a worker. Most likely, you're both--or were, or are planning to be--and you know that if you want to boost your standard of living, you have to either buy cheaper or earn more. (Or, you might be talked to, as Stephen Roach has done in a recent editorial, as an investor [1], which most people just tune right out. We'll get back to that.)

For a long time, the US' official trade policy has been that Americans' should primarily look to boost their standard of living through buying cheaper. For a long time, that seemed mostly fine.

Though in talking about the Chinese government's currency practices yesterday, my colleague Dave Johnson pointed out that they were only a piece of a larger industrial strategy [2]. The goal of that strategy isn't to pointlessly antagonize anyone, it's to increase employment as fast and as much as possible, and keep increasing it, so that the Chinese people will feel like it's possible to get ahead in life through the job market and will remain relatively content.

Because China's government is willing to buy a lot of US debt to keep its currency low [3] in comparison to the dollar, because average Americans have been happy getting such low prices and the investor class has been enjoying the returns of offshoring, it's been hard to maintain ongoing concern over the fact that jobs have been leaving for China at an amazing rate [4].

The job issue was papered over by the credit bubble [5], but the public no longer has the kind of spending power necessary to reinflate it. Our jobs left, the banks won't lend us anymore money, and all that spending didn't go to building new industries to employ Americans.

Despite rumblings to the contrary, the Chinese government wants to hold firm [6], both because they're committed to having a high-employment economy and because they don't want the value of their dollar-denominated assets to drop [7] by in value by as much as $480 billion by letting their currency float freely against the dollar.

On the one hand, it's often said that as a significant debtor, the US doesn't have much leverage. But the US government isn't me staring hopelessly at my Sallie Mae balance, it's still, amazingly, one of the more stable purveyors of liquid assets in the world. If the Chinese government were to retaliate by rapidly selling off their $800 billion and change in Treasury debt [8], the likeliest outcome is a market panic that would crash the worth of their remaining holdings before they could unwind them, and they'd have a hard time finding a ready alternative outlet for all that idle investment capital, anyway.

They can't outright put the torch to our economy without burning down their own. They're invested in us. They'd have to back away fairly slowly. Though if they did so, because our economy is so import dependent [3], there probably would be a downward adjustment in consumer purchasing power that the US government would need to offset by becoming as committed to expanding employment as the Chinese government is.

Within China though, this also means their government isn't investing in their own wages and purchasing power [9]. On the bright side for them, there are no short-term circumstances where Chinese workers end up staggering around with a debt hangover from a low-wage, cheap consumer credit economy (the bubbles, they always get you, like with champagne) and left with a government that doesn't give a damn if they have a job or not.

And we're right back at the main problem, which is that the sober, responsible, conventional wisdom consensus on economic policy in the US has been for a long time that no one needs to worry about whether Americans have jobs, only about whether they can buy cheap things.

Someone like Stephen Roach, one of these people who treat economics like a modern theory of the Divine Right of Kings, thinks that a problem created by currency hoarding needs to be solved by more currency hoarding in the form of increasing the savings rate. His recent Financial Times op-ed on the currency imbalance [1] is as good an example as any of the panicked response to any hints that something might be done to fix things:

... With China and its so-called manipulated currency having accounted for fully 39 per cent of the US trade deficit in 2008-09, Washington maintains that American workers can only benefit if it gets tough with Beijing.

However appealing this argument may seem, it is premised on bad economics. In 2008-09, the US had trade deficits with more than 90 countries. [Note: The trade imbalance with China accounts for over 80% of our non-oil trade deficit [10]. The US buys a lot of oil.] That means it has a multilateral trade deficit. Yet aided and abetted by some of America¹s most renowned economists, Washington now advocates a bilateral fix either a sharp revaluation of the renminbi or broad-based tariffs on Chinese imports.

... The US would be far better served if it faced up to why it is confronted with a massive multilateral trade deficit. America¹s core economic problem is saving, not China. In 2009, the broadest measure of domestic US saving the net national saving rate ­ fell to a record low of -2.5 per cent of national income.

... Currency, or relative price, adjustments between any two nations are not a panacea for structural imbalances in the global economy. What is needed, instead, is a shift in the mix of global saving. Specifically, America needs deficit reduction and an increase in personal saving, while China needs to stimulate internal private consumption. ...

Right now, under current conditions, what Roach is basically asking for here is for the US to go deeper into recession in order to satisfy his model of what an economy should look like.

Though the worst thing Roach does here isn't to skip right over the fact that contractionary spending practices would make the recession worse [11], throw more people out of work, and further depress wages. It's that he doesn't care, and doesn't want his readers to care, that stagnating wages [12] hidden by a credit bubble that covered the resulting insolvency [13] are the whole reason we're in this mess right now.

They've asked us to be happy for years that we can get t-shirts for $1 off at a discount store and put it on our credit cards. This was supposed to make up for the fact that we didn't get that $1 an hour raise we should have gotten several years in a row to make up for the rising prices of housing, transportation, education, health care and wholesome food. This was supposed to make up for the fact that jobs started disappearing left and right, taking opportunities to climb out of poverty with them.

The American public has been talked to as consumers for a long time. But we all know that the money to spend has to come from somewhere and we're willing to work to earn it. Our policymakers need to create an environment where we can get good work, and they need the courage to ignore the comforting drone of those who say we should do nothing and let things run their course.

People have bills to pay, and our creditors don't really care if our personal insolvency is helping out the economy's natural swing towards parsimony. We need jobs in this country, and we need political leaders willing to think about our needs as workers at least as much as they think of our needs as consumers.