Currency Imbalances: China’s Problem or Ours?

Leading economists gathered at an EPI event today [1]to discuss our trade deficit and labor problems caused by our imbalance with China. The conversation centered around how this imbalance can be solved by compelling China to appreciate its currency. Leo Gerard, the President of the United Steelworkers, did address domestic strategies to approach these problems, however, the central perspective of the panel appeared to view structural imbalances as a bilateral problem to be addressed through foreign policy.

I would broaden the conversation to consider this problem a historically multilateral problem of currency coordination, exacerbated by the neoliberal model of development. I would also highlight what our role could be in addressing these long-standing issues in both foreign and domestic policy. The dollar has fallen significantly since the recession began however, there are different domestic strategies we should pursue to address our structural trade deficit and lack of competitiveness. To address the international issues underlying these imbalances going forward, a new Bretton Woods, particularly the establishment of an International Clearing Union should be reconsidered alongside reconsideration of the neoliberal model of growth and development. View D’Arista’s proposal here [2].

Domestically, Treasury should change its mandate from defending a strong dollar policy by proxy through our international relations if we're concerned about the trade balance. It’s key to note that pushing for importing developing countries to appreciate their relative currencies serves several domestic dysfunctions; we can pursue expansionary monetary policy, run a trade deficit and do so without depreciating the value of our currency and eroding wealth. We don’t have a strong dollar policy domestically so we are pushing it internationally. That’s a problem because the development model we’ve pushed abroad incentivizes developing nations to undervalue their currencies. So, regarding the root causes of "currency manipulation" we have to dismantle the export-led growth development model (alongside the capital account liberalization model) which means admitting import substitution industrialization, industrial strategy, and other means to control capital and trade flows are appropriate strategies to pursue for all countries. We can't have our cake and eat it too. There are only a few policy options for open developing economies, and controlling their exchange rate is a last ditch effort when they are WTO compliant and compliant to a number of other liberalization conditions embodied in bilateral and multilateral trade agreements, IMF/World Bank loans, etc. China's a bruiser, and not like all developing countries but we're hardly a small developing economy either.

What we can do to help our trade balance besides continue to let the dollar fall is institute an almost prohibitive consumption tax on luxury foreign goods here which would also raise public revenue. We would have to condone other countries’ use of similar tools as well so as to avoid provoking our trade partners but again, this would be compatible with our disavowal of the neoliberal model of growth and development.

Since giving developing countries autonomy over their policies is important, the best we can do for our labor concerns in manufacturing in the US, is to develop an appropriate industrial strategy, like other industrialized nations. This should entail investing in high value-added sectors and phasing out production in sections in which we have lost any competitive advantage, including light manufacturing. This wouldn't be pretty but sufficient training, placement and competition management would smooth the creative destruction. Spending as much as the leading OECD nations on R&D (including primary education) would require cuts elsewhere, presumably from the most bloated line items in our budget; military in the short-run and health care in the long-run. According to the Organisation for Economic Co-operation and Development, Main Science and Technology Indicators 2009 [3] the US government expenditure on R&D as a percent of GDP is just over 0.4% while Japan’s is roughly 0.7% and Germany’s roughly double ours at 0.8%. As our private investment in R&D lags Japan’s, we have significant room for government support to catch up to our competitors in high-value added goods. However, we also have significant room to adjust this spending since we currently allocate 5.6% of GDP to the Defense Department.

This strategy runs in a different direction from labor’s stance on domestic spending priorities to benefit labor. Their push seems to seek as little creative destruction as possible and to my mind is shortsighted environmentally. A resource intensive industrial strategy promoting infrastructure spending is not the best primary route to growth and efficiency, especially for such a large country. Yes, we should be refitting our major cities to be more efficient and sustainable and reinforcing the major arteries of mass transit between them but this spending is unlikely to impact GDP in the long-run through anything but a temporary Keynesian multiplier effect (until we run up against a budget constraint and have to terminate the projects). The efficiency gains from improved internal transportation will help bring foreign goods to our internal markets and will keep the labor force employed but it’s unclear how it will promote domestic consumption of domestic goods without a comprehensive industrial strategy. Thus, environmental remediation and other service-oriented, labor intensive work would be better targets for automatic stabilizing job creation programs. See the Levy Institute’s work on this here [4]. In the long-run, we must invest in education and research and development as well as develop a comprehensive industrial policy plan if we want to produce goods for either domestic or foreign consumption.

And then there's always the global workers' movement to set a floor on wages and labor standards. That's key. Still, I'm an underconsumptionist at heart and believe fighting for obsolete jobs is not a sustainable strategy in the long-run, unless we want to start destroying machines. Growth in credit markets with financial deregulation, historically low interest rates and a bubble in housing, creating home equity withdrawals, led to increased consumption but generally, production of consumption goods needs to contract not expand as these other conditions disappear. Thus, the labor movement should be focusing on promoting sustainable industrial policy paired with keeping structural unemployment on the radar of politicians regardless of the cycle since monetary policy and other supply-side solutions cannot always ensure full-employment. See Randall Wray’s proposal for a full-employment program here [5].

So, the answer, to the question what should the US do to address this imbalance, is to create a domestic strategy for growth with more equitable distribution. Since the 1970s we’ve shaped the global economy to benefit our multinational corporations and financial institutions. These gains haven’t been well distributed to labor, but we haven’t had a proper domestic industrial strategy to temper this de facto industrial strategy. This is key going forward. The questions remain, where will labor stand and how do we diffuse the control of multinational corporations and financial institutions from shaping US policy both foreign and domestic? Certainly fighting corporate determination over policy is a start. Follow this debate, sign this petition [6], and don’t be fooled with quick fix solutions. We need to make radical changes ourselves to get us out of the hole we are in.