Now Chuck Schumer is just toying with China

Matt Yglesias presented a graph showing that since 2005 the Chinese yuan has appreciated about 30% against the dollar. He added this comment:

That’s the nominal exchange rate. In real terms, the yuan is appreciating faster than that because Chinese have more inflation than the United States. This doesn’t mean there’s no problem here, but it should be acknowledged that the problem is getting less serious with every passing day.

If only it were true. There really isn’t any “problem” at all, but the perception is that the yuan is getting increasingly undervalued. Back in 2005, Chuck Schumer said the yuan was 27.5% undervalued, and he demanded a revaluation. China has more than complied with this request; the yuan has increased by nearly 30% in nominal terms and more than 50% in real terms. So is Chuck Schumer happy now? Not quite. He now insists the yuan is 32.5% undervalued, and demands another massive revaluation. All this despite the fact that the previous revaluation didn’t reduce the deficit by 1 cent; indeed the deficit got bigger.

Remember the high school bully that would pick on the nerdy kid? You know, the one that would promise to stop beating him up if he just did what the bully wanted. Then when the victim complied, the bully would just issue more demands, and keep picking on the poor boy. That’s Chuck Schumer.

I wonder if we’ll ever learn. We kept pressuring countries like Japan, Germany and Switzerland to appreciate their currencies. And then their currencies do appreciate very sharply. But the current account surpluses remain very large, because currency appreciation doesn’t address the root cause of those surpluses. Now we are engaged in the same fruitless quest with China. What a waste of time.

Off topic, But Christopher Mahoney just sent me a report from Goldman Sachs, which endorsed NGDP targeting.  Unfortunately, it’s proprietary information, so I can’t link to the report (which is excellent.)   But perhaps they’ll allow me to quote one passage:

A Different Interpretation of the Dual Mandate

While a shift to a nominal GDP level target would clearly be a big decision for the Fed, it would be quite consistent with the dual mandate to pursue maximum employment and low inflation. After all, nominal GDP is equal to the price level multiplied by real GDP, and real GDP in turn is very closely related to employment via “Okun’s law.” So there is a lot of common ground between a nominal GDP level target and a standard Taylor rule in which the desired stance of monetary policy depends on the deviations of inflation and unemployment from their target rates.

But a nominal GDP level target differs from a standard Taylor rule in two key respects:

1. Targeting the price level, not the rate of change.

In a nominal GDP level target, prices enter as a level, while in the standard Taylor rule they enter as a rate of change. There is a long literature on the relative merits and drawbacks of price level vs. inflation targeting, but many studies find that a level target is preferable. The key advantage of a price level target is that it reduces uncertainty about the future price level because the central bank commits to making up for past inflation under- and overshoots. This implies that households and businesses should rationally expect higher inflation following a period of economic weakness and sub-trend inflation. This should push down real interest rates and boost economic activity during times of weak growth.

2. A bigger weight on output/employment.

A nominal GDP level target increases the relative importance of output or employment. Under the standard Taylor rule, a decline in real GDP by 3% percentage points would call for the same monetary policy adjustment as a decline in inflation by 1 percentage point. But under a nominal GDP level target, a decline in real GDP by 3% would call for the same monetary policy adjustment as a decline in the price level (relative to trend) by as much as 3%. This is likely to mean greater responsiveness to output or employment relative to prices while the nominal GDP level target is in place.

Is such a shift desirable? At least currently, we believe the answer is yes because continued weakness in output and employment would increase the risk that part of the increase in unemployment will eventually turn structural. Fed Chairman Bernanke essentially made this case in his remarks at the 2011 Jackson Hole Symposium: “Normally, monetary or fiscal policies aimed primarily at promoting a faster pace of economic recovery in the near term would not be expected to significantly affect the longer-term performance of the economy. However, current circumstances may be an exception to that standard view.” If growth is faster in the near term, this will not only have a near-term but also a longer-term benefit by reducing the risk that unemployed workers become unemployable. This justifies putting more weight on the output and employment part of the dual mandate than under normal circumstances.

I don’t know if the Goldman Sachs endorsement will gain us any converts among the more populist right-wing internet Austrians, but nothing else has worked.

The report was written by Jan Hatzius and Sven Jari Stehn


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54 Responses to “Now Chuck Schumer is just toying with China”

  1. Gravatar of Bob Murphy Bob Murphy
    15. October 2011 at 16:11

    Scott wrote:

    I don’t know if the Goldman Sachs endorsement will gain us any converts among the more populist right-wing internet Austrians, but nothing else has worked.

    Eh, no. You’d be better off getting Janet Reno to be your spokesperson.

  2. Gravatar of ssumner ssumner
    15. October 2011 at 16:23

    Bob, I thought so, especially after that cute cartoon character pointed out that The Ben Bernank was merely a puppet of The Goldman Sachs.

  3. Gravatar of Marcelo Marcelo
    15. October 2011 at 16:32

    Scott,

    What is the source of the current account surpluses? Is that you think these governments stop purchasing US financial assets? How do we get other countries to buy more of our stuff? I had understood currency appreciation as a way of doing this.

    Also, the more endorsements the better. I think its an important step, and may increase legitimacy among more conventional news sources

  4. Gravatar of John John
    15. October 2011 at 16:47

    Scott,

    I’d get behind your cause if you suggested targeting nominal gross private product (NGPP). I still think trying to steer an economy is bad, but since we are where we are, I think it would be better to at least target private sector output. Including government spending and counting it as output throws GDP measures off the trail of economic health.

    P.S. All my posts come from Mises-Rothbard economics. Just because you don’t know their framework doesn’t mean my arguments aren’t Austrian. Have Bob Murphy make us both a test and I’ll bet $1000 I’ll beat you.

  5. Gravatar of John John
    15. October 2011 at 16:51

    I wonder why no economists ever mention that countries with undervalued currencies and/or countries that subsidize export industries are basically giving us gifts at the expense of their citizens. Does anyone have any idea why economists are so biased that they don’t mention this? After all, people work so that they can consume, they don’t consume so that they can work (most people anyway).

  6. Gravatar of Indy Indy
    15. October 2011 at 17:01

    Might it also be true that the degree of further exchange rate adjustment/relaxation-of-PBoC-intervention that is necessary has increased over the last 6 years due to other factors?

    A relevant excerpt from Michael Pettis’ post of 04-Feb-2011:

    His first argument, that if the currency mattered to the trade balance, a rising RMB after 2005 should have caused an increase in the growth rate of US exports to China, is broadly correct only if the wage-productivity growth differential, real interest rates, and credit growth were constant. But they weren’t. This is the problem with looking at individual factors within an economy without having an overall model that shows the relationship between different factors.

    Remember that an undervalued currency creates upward pressure on the trade surplus because it reduces the real value of household income while subsidizing production in the tradable goods sector. This causes production to grow faster than consumption (which is normally constrained by the level of household income), forcing the balance to be exported.

    But the wage/productivity growth differential and very low interest rates do the same thing. By constraining the growth of real household income and subsidizing production, they too increase the gap between what is produced and what is consumed.

    It’s not just the currency

    So raising the value of the currency would only have resulted in a positive impact on trade rebalancing – by reversing the flow of wealth from households to producers of tradable goods – if real interest rates and credit growth had stayed constant and workers wages had kept pace with productivity growth.

    In fact they moved in the wrong direction after 2005 – making Chinese products more, not less, competitive. As with Japan after the Plaza Accord, policies aimed at unwinding the employment effect of currency appreciation more than compensated for the appreciation.

    In other words, the exchange rate appreciation after 2005 may very well have caused a narrowing of the trade balance between the two countries, but the widening differential between wages and productivity and, more importantly, the reduction in real interest rates and the forced expansion of credit would have had the opposite effect.

    So while it is true that China’s trade surplus increased after the RMB started revaluing in 2005, this doesn’t mean the currency appreciation had no impact. The positive impact of the currency appreciation on the trade balance was simply overwhelmed by the widening impact of reduced real interest rates, credit expansion, and the widening wage-productivity differential. There is a big difference between saying that the RMB exchange rate is not the only thing that matters to the US trade account and saying that the RMB exchange rate doesn’t matter at all. The former statement is almost certainly true, while the latter statement violates both common sense and nearly all historic precedent.

  7. Gravatar of dwb dwb
    15. October 2011 at 17:07

    the yuan rate should be set on the free market. period. the fact that it isn’t, that Wen says the Yuan will be stabilized to protect exporters, tells you what you need to know right there. capitalism only works if the playing field is level, and everyone abides the rules. China needs to focus on internal demand, not exports. do i think that higher yuan will bring jobs to the US? the effect is greatly exaggerated and hyped. but, they do buy a lot of our commodities (coal) and agriculture exports like wheat and soy. unfortunately, this kind of political pressure seems necessary to prod them to float the yuan – which is in everyone’s best interest. and unfortunately, threats are only meaningful if they are carried out from time to time.

  8. Gravatar of John John
    15. October 2011 at 17:46

    dwb,

    There’s no cheating in economics and capitalism for whoever follows it regardless of what others are doing. The fact that the Chinese are not setting their currency on the free market penalizes the people who use their currency.

  9. Gravatar of John John
    15. October 2011 at 17:46

    capitalism works* for…

  10. Gravatar of JimP JimP
    15. October 2011 at 18:15

    http://www.businessinsider.com/goldman-advises-the-fed-to-go-nominal-gdp-targeting-2011-10

    The Hatzius paper is posted on this popular stock market website. Maybe it will get some publicity.

  11. Gravatar of Morgan Warstler Morgan Warstler
    15. October 2011 at 18:55

    To figure this shit out, it is simplest to ask, what if everybody used one currency?

    If we did, China would be making, saving and loaning dollars.

    Chuck Schumer is a racist, he only like helpless minorities.

    Note: Matty often yammers on about being willing to help all the oppressed around the world, not just our own, and we know he’s just yammering because he constantly advocates we take advantage of our dollar printing even if it fucks the little yellow people.

  12. Gravatar of John John
    15. October 2011 at 20:08

    Morgan,

    That was an awesome comment. Save it as one of your greatest hits. Solid simple money analysis leads you to the right conclusion. This has nothing to do with Econ and everything to do with xenophobia.

  13. Gravatar of StatsGuy StatsGuy
    16. October 2011 at 00:04

    Scott, what probably began as a trade deficit due to deliberate currency suppression has become quite structural – the supply chain infrastructure now favors manufacturing in China for many industries, even leaving wages aside. Strategic Trade Theory 1, Adam Smith 0.

    But who can blame China? It’s payback for the US/British pressure to implement “free trade” during the Opium wars, when our notion of free trade involved forcing China to let monopolistic trading companies with state granted charters and subsidized by large naval fleets import huge quantities of Opium. Yah, well, karma is a …. (for us)

    That said, you know quite well the simple argument you lay forth is deceptive – the relative value of the Yuan depends on the nominal exchange rate, inflation in each currency, and _productivity_ in each economy. If Chinese productivity outpaces US productivity growth, the Yuan can continue to appreciate even while it remains undervalued (and, indeed, the undervaluation gets worse). I do not know whether this is or is not the case, but the argument you lay out is misleading. I expect that the gap has closed in the last 5 years, but that it’s still around 15%-20% or so – regardless, the response by the US should be the same (NGDP target, deal with the inflation, and let the Chinese dump dollars as a reserve currency.) Having said that, the neoclassical comparative statics trade approach is so vastly insufficient it boggles the mind. Once a manufacturing base is lost, it can take decades or more to return – the notions of self-regenerating capital stock, endogenous growth, learning by doing, and strategic trade theory do not get much credit among neoliberal economists who are very pleased with their “counterintuitive” theories. I will note that the vast majority of the non-economist US population is even more suspicious of free trade than of fiat currency. The neoliberal economic response has been “just wait, short term pain but long term gain”. AKA, “adjustment costs”. The US population is calling BS to that… And though you don’t put much credit in surveys due to wording effect, I hazard that the following result is from a fairly worded question and is probably very robust:

    NBC News/Wall Street Journal Poll conducted by the polling organizations of Peter Hart (D) and Bill McInturff (R). Nov. 11-15, 2010. N=1,000 adults nationwide. Margin of error ± 3.1.

    .

    “In general, do you think that free trade between the United States and foreign countries has helped the United States, has hurt the United States, or has not made much of a difference either way?”

    .

    Helped

    Hurt

    Not much
    difference

    Unsure

    % % % %
    11/11-15/10

    23 47 23 7

    That said, why attack the legislation? If you are a neoliberal (on trade), which I take it you are, then your opinion should be that Chuck’s bill really hurts us (more than the Chinese) and only if the Chinese refuse to let the Yuan float. However, if Chuck’s bill induces the Chinese to let the currency float, then it helps everyone, including China, right? Your position on the Yuan exchange rate is not consistent with the rest of your views, unless you feel that govt. intervention is good for China but bad for the US.

    For my part, I think that an NGDP target combined with simple reciprocal trade action and basic product safety regulation (no cadmium in kids toys, for example) is usually enough. US political pressure is better applied to enforce intellectual property enforcement (especially in places like Hong Kong, where the refrain “our population is poor” is a load of …).

  14. Gravatar of Morgan Warstler Morgan Warstler
    16. October 2011 at 01:17

    “The simple fact is that the portfolio at midyear was positioned for what we call a “New Normal” developed world economy – 2.0 percent real growth and 2 percent inflation,” Gross said.

    That’s all changed, of course. Gross said PIMCO’s internal growth forecast for developed economies “is now zero percent over the coming several quarters and the portfolio more accurately reflects this posture.”

    http://www.reuters.com/article/2011/10/16/us-pimco-gross-apology-idUSTRE79F01Y20111016

    —-

    Bill Gross is now betting on:

    “mortgage-backed securities in September, albeit by using leverage, on the likelihood the Federal Reserve’s reinvestment program in those securities will boost prices significantly.

    Gross increased mortgage debt to 38 percent of assets in September, from 32 percent in August, as the U.S. central bank announced last month that it “will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.”

    Investors should not be betting on the Fed, they should be betting on the economy.

  15. Gravatar of Wadolowski Wadolowski
    16. October 2011 at 02:13

    Yes. It’s high time for a nuclear blast.

    http://delong.typepad.com/sdj/2011/10/the-two-leading-investment-banks-goldman-sachs-and-morgan-staneley-join-the-99.html

    5, 8, 10 trillion. It doesn’t matter, it’s just an instrument not a target.

    You’ve got to know what your target is. And that isn’t the size of balance shit. You want 2% inflation, you got it. Anybody happy now?

  16. Gravatar of Chuck Schumer and the China Currency Bill | China News Center Chuck Schumer and the China Currency Bill | China News Center
    16. October 2011 at 03:33

    […] is their research of a simple problem. As Scott Sumner points out, China has already revalued the yuan: There unequivocally isn’t any “problem” during all, though a notice is that a yuan is […]

  17. Gravatar of Ken Ken
    16. October 2011 at 04:35

    Scott,

    Do you have a favorite post on the root cause of the surplus?

  18. Gravatar of ssumner ssumner
    16. October 2011 at 05:36

    Marcelo, By definition the current account surplus is national saving minus national investment. There are a million reasons why a country might save more than it invests. Fiscal policy is one important reason.

    John, The problem with targeting private sector NGDP is that during wartime the economy would overheat.

    You said;

    “Does anyone have any idea why economists are so biased that they don’t mention this?”

    This is the standard view of economists, as far as I can tell. It’s what is taught in the textbooks.

    Indy, I see the same facts, and interpret them differently. To me this means the exchange rate isn’t the issue, it’s all the other structural factors that push countries toward surpluses.

    dwb, You said;

    “the yuan rate should be set on the free market. period. the fact that it isn’t, that Wen says the Yuan will be stabilized to protect exporters, tells you what you need to know right there. capitalism only works if the playing field is level, and everyone abides the rules.”

    Actually, capitalism works best when the playing field isn’t level. That’s because countries don’t “compete.” The sports metaphor is wrong. They cooperate. Chinese imports actually help us. The more we import the more it helps us. There can never be a free market in money when the Fed and PBOC have 100% monopolies on the supply of money, so I don’t even know what you mean by free market. If China wasn’t pegging the exchange rate, they’d still have a huge surplus.

    JimP, Thanks for the link.

    Morgan, You said;

    “To figure this shit out, it is simplest to ask, what if everybody used one currency?

    If we did, China would be making, saving and loaning dollars.”

    Excellent point! China would still have a huge surplus, even with the same currency as us.

    Statsguy, You said;

    “Scott, what probably began as a trade deficit due to deliberate currency suppression has become quite structural – the supply chain infrastructure now favors manufacturing in China for many industries, even leaving wages aside. Strategic Trade Theory 1, Adam Smith 0.”

    Not so fast. Low wage jobs are rapidly leaving China for Vietnam, India and Bangladesh.
    Adam Smith 1. S.T.T. 0

    I don’t agree with the rest of your post, as I have no idea what you mean by “undervalued currency.” Lots of countries have much bigger CA surpluses than China (per capita) are their currencies also undervalued? How about the huge Swiss surplus, is its currency undervalued? One definition of undervalued is where the black market rate is far higher than the current administered rate. I don’t think that’s true of China. Also, see Morgan’s excellent comment.

    I’m a neoliberal if that means opposing tariffs. But you seem to think neoliberals should favor tariffs on Chinese goods, unless I misread your comment.

    Average people (and even non-economist intellectuals) have never understood comparative advantage. Not in Ricardo’s day, and not today. The average person thinks our unemployment is due to imports, even though we were at full employment in 2007, when our trade surplus was much bigger!

    If we relied on STT we’d focus on exporting big jets, Apple iPads, and Hollywood films, not sneakers and toys. Come to think of it, that is what we export.

    The real question to ask “average people” is whether they’d support the sort of fiscal policy that would be required to make our trade deficit disappear. That might mean a massive forced saving program, a la Singapore.

    Morgan, If Gross is wrong in his predictions, why should they be presented for us to read? Doesn’t that just show the EMH is true?

    Wadolowski, Excellent point, Those who favor a 2% inflation target should be happy now–AD is right where they want it.

    Ken, Yes, I do, but I don’t know how to find my old posts–there are so many. I’ll see if I can find it.

  19. Gravatar of ssumner ssumner
    16. October 2011 at 05:47

    Ken, This is my best post, but it isn’t easy:

    https://www.themoneyillusion.com/?p=7001

    This is also very relevant, and a bit easier:

    https://www.themoneyillusion.com/?p=7601

  20. Gravatar of TC TC
    16. October 2011 at 06:21

    Hatzius does MMT like analysis very frequently. He understands how money works on a very deep level.

    He’s a long time proponent of Wynne Godley – who’s associated with MMT. He uses Godley’s stock/flow consistent models frequently.

    http://pragcap.com/jan-hatzius-does-mmt

    Hitting NGDP targets can be accomplished many ways.

  21. Gravatar of ssumner ssumner
    16. October 2011 at 06:43

    TC, I’m confused. I thought MMTers believed the Fed wasn’t even able to target NGDP. They thought fiscal policy was the key. Is that right?

  22. Gravatar of Andy Harless Andy Harless
    16. October 2011 at 06:55

    I think other commenters have already mentioned this, but it bears emphasis: the equilibrium exchange rate is a moving target, because productivity growth is much faster in China than in the US. Even if we already had balanced trade, we should expect the yuan to appreciate fairly rapidly to offset the changing productivity differential. If Senator Schumer says the yuan is 27.5% undervalued, the implication is not that it needs to appreciate by exactly 27.5% over a certain period of time but that it needs to appreciate by 27.5% more than it would otherwise appreciate due to the shifting productivity differential. If the rate of appreciation is slower than the rate of change in the productivity differential, then there is nothing inconsistent about Senator Schumer’s increasing of his demands.

  23. Gravatar of Morgan Warstler Morgan Warstler
    16. October 2011 at 07:24

    Scott, the argument is for you to make:

    We need a Fed policy hint, hint that makes it not possible to bet on what the Fed will do.

    Gross is reading political tea leaves and leaves other concerned he has inside track on Fed thinking.

  24. Gravatar of StatsGuy StatsGuy
    16. October 2011 at 08:25

    Scott:

    “If we relied on STT we’d focus on exporting big jets, Apple iPads, and Hollywood films, not sneakers and toys. Come to think of it, that is what we export.”

    We import apple iPads. iPhones. More or less every consumer electronic product in existence. Here’s an interesting comment from a former Intel CEO.

    http://www.technologyreview.com/computing/38344/

    The image of China as a poor, backwater economy cranking out sneakers using cheap labor, and paying wages that Americans wouldn’t accept anyway, is a bit dated. I know people in the venture capital community who want to manufacture in the US, and they CAN’T. It’s not just cost anymore – it’s supply chain, time to market, and skilled labor.

    S.T.T. 2 Adam Smith 1

    ——-

    “Not so fast. Low wage jobs are rapidly leaving China for Vietnam, India and Bangladesh.
    Adam Smith 1. S.T.T. 0”

    Thank you, that proves my point. LOW wages jobs are leaving China, and being replaces with HIGH wage manufacturing jobs requiring greater skills and supply chain infrastructure, which were acquired largely due to the presence of the manufacturing infrastructure (a great deal of technology development occurs as an externality, especially incremental development). FoxxConn is still in Shenzen, and is bigger than ever.

    S.T.T. 3 Adam Smith 1

    —————

    A lively black market would not be expected given the severity of capital controls. I’d submit two pieces of evidence:

    1) The Yuan routinely pegs the upper end of the trading range established by central authority. If the currencies were balanced, one would expect it to bounce around within the full range.

    2) The government continues to sterilize upward pressure on the Yuan by amassing ever-larger currency reserves (now 3.2 billion, THROUGH a massive recession). Impressive, eh?

    In any case, you seem to believe that China is allowing the Yuan to rise because of US pressure – hardly. China is allowing the Yuan to rise because it’s becoming one of the few ways they have to contain the inflation rate, and because they are facing massive pressures on core commodities (18% food inflation, and in an economy where people spend a much higher share of their incomes on food!).

    You write:

    “But you seem to think neoliberals should favor tariffs on Chinese goods, unless I misread your comment.”

    Oh no – let’s think about a suppressed currency (in which a country accumulates massive foreign reserves that are EXPECTED to lose value in the near future). Such a policy is similar to an export subsidy. [Which, it is…] Comparative statics says we in the US should say “thank you for the subsidized credit and cheap goods!”, particularly if we don’t believe in endogenous growth and strategic trade theory.

    A good neoliberal should feel sorry for the Chinese, whose government is forcing them to subsidize US consumption. A REALLY good neoliberal, who understands game theory, might also think that a credible threat of massive retaliation to force the Chinese administration to let the currency float might be beneficial if the threat induces optimal behavior. If the threat works, then Chinese consumers benefit a lot, US consumers lose a bit, and the world economy is overall better off due to less deadweight loss.

    I think the Chicago School has brought brilliant insights into the monetary discussion – particularly the game theory and long run dynamics – but the comparative statics models they have deployed in trade have failed dramatically to capture the dynamic nature of structural trade and investment.

    The primary observation of inconsistency in your position is this: As a neoliberal, you should be against Chinese fixing the exchange rate. You should also be against Chuck’s bill, unless it so happens that it WORKS – which is to say, that it induces a game theoretic response from the Chinese that in the end yields an outcome that is better for everyone (removes deadweight losses).

  25. Gravatar of StatsGuy StatsGuy
    16. October 2011 at 08:36

    @ Morgan

    “To figure this shit out, it is simplest to ask, what if everybody used one currency?

    If we did, China would be making, saving and loaning dollars.”

    Good question, backwards answer as usual. Try this:

    Chinese FIRMS (and, eventually, labor) would be making, saving, and spending the global currency. NOT THE GOVERNMENT. Because the government CONTROLS THE EXCHANGE RATE, it’s extracting the profits from manufacturers and forcing public savings, AND it’s using public savings to provide subsidized credit to US consumers.

    Without the exchange rate, FIRMS (and eventually labor) would spend more of the money on consumption, and production costs would rise relative to US costs.

    The Chinese system is pure mercantilism, and it’s worked marvelously well. Just as mercantilism worked “well” for the US in the 1800 and early 1900s.

  26. Gravatar of StatsGuy StatsGuy
    16. October 2011 at 08:38

    correction, 3.2 trillion in currency reserves

    [How come Morgan can cuss like a drunk sailor but I get dinged if I include a second link in a post?]

  27. Gravatar of Richard W Richard W
    16. October 2011 at 08:56

    I think this issue is polluted the same way so much economics nowadays is polluted through moralising. Why a country with a current account surplus should be anymore virtuous than one with a deficit is a puzzle. For example, German policymakers are utterly convinced that their current account surplus is due to German virtue. The EZ peripheral nations should do all the adjusting and become like Germany. Except if they do then become like Germany then Germany can no longer be Germany. Strangely enough the current account surplus due to virtue did not exist before the advent of the euro. In fact, it was a CA deficit.

    http://eurowatch.blogspot.com/2010/08/on-shoulders-of-giants-how-spain-is.html

    I think that the domestic policies suppressing consumption demand and overt and covert policies subsidising production are more important than the nominal exchange rate. Although, one can’t rule out the nominal exchange rate as a factor, I think the other factors are more important. For example, with the advent of the euro Germany followed policies to suppress wage growth and the CA surplus grew. However, a euro that jettisoned the euro-periphery would appreciate vis-a-vis the USD by around 30%. Therefore, the euro debt crisis is suppressing global demand at the same time as some countries are operating in that suppressed demand world with a de facto undervalued exchange rate. If the undervaluation was removed what would that do to the CA surplus? Therefore, exchange rates do still matter.

    You ask if the CHF is undervalued. Clearly it is undervalued to where the market wanted to take it. Hence, the SNB intervention to prevent the appreciation. They specifically mentioned in the lead up to the intervention the harm that the appreciation was doing to exporters profitability. The market wants to go to fair value and the SNB wants to peg at an exchange rate below where the market wants to go.

    Tariffs and protectionism are never the answer. The US should follow policies to increase the US savings rate. Moreover, anyone worried about the US CA deficit should support US policies that depreciate the USD vis-a-vis the rest of the world.

  28. Gravatar of MikeDC MikeDC
    16. October 2011 at 09:45

    “In general, do you think that free trade between the United States and foreign countries has helped the United States, has hurt the United States, or has not made much of a difference either way?”

    Polls never bother to ask whether we support free trade amongst ourselves, but given the huge number of restrictions we place on trading amongst ourselves it’s hardly surprising we support even more on trade with foreigners.

    For most people, it’s all about moralizing.

  29. Gravatar of Philo Philo
    16. October 2011 at 11:19

    “China would still have a huge surplus, even with the same currency as us.” I wonder how you know this; I also wonder whether it is true; most fundamentally, I wonder what the sentence means. There are many alternative universes in which China and the U.S. have a common currency: does China have a huge surplus in *all of them*? in the one most similar to the actual universe? in all or most of those most similar to the actual universe? (And what is the measure of similarity?)

    Back to the actual world: I suppose the U.S. has a current account deficit, as it has had through most of its history, because it attracts and has attracted a lot of foreign investment. But I would think the same would be true of China today; why does it not attract enough foreign investment to give it a current account deficit? Are its political institutions viewed so negatively by foreigners; or is the Chinese government directly preventing foreign investment?

  30. Gravatar of Benjamin Cole Benjamin Cole
    16. October 2011 at 12:39

    OT–

    Recently, a “Market Monetarism” page was created on Wikipedia.

    Incredibly, some people are trying to get Wikipedia to delist the page!

    I can’t imagine such suppression is ethically or intellectually correct or desirable. I advise all market monetarists, or anybody who enjoys freedom of expression, to go and defend the page. You don’t have to be a market monetarist to want such views to be aired.

    I wonder what galaxy-class anus would actually try to suppress a “Market Monetarism” page?

  31. Gravatar of Leigh Caldwell Leigh Caldwell
    16. October 2011 at 15:36

    Do you think that the Fed is not as independent in reality as it is notionally?

    Compare with the 1970s – one might imagine that the Fed knew then that inflation was too high, but it did not feel able to exert its full power to tighten monetary conditions and fix the problem. Doing so would inflict too much pain on too many people. Only when Volcker had political backing from Reagan to be able to sharply raise interest rates was the Fed able to do so. Even with that backing, I hear that the Fed building in Washington was blockaded by irate farmers who were severely hurt by 20% interest rates.

    That exercise was, I think, broadly regarded as a success. And ever since, the Fed has had implicit permission from the public to raise interest rates when it saw fit, despite the pain that it would cause for some people.

    Thus, the Fed is independent when it wants to tighten monetary policy. It is seen as technocratic, as an austere schoolmaster who knows what’s best for us. But perhaps this independence is asymmetrical. The Fed is free to tighten at its discretion, but not to ease policy to the same extent?

    Most economists (not all, of course) seem to agree that policy needs to be looser now. Or maybe that’s just the blogs I read. But loosening would still hurt a large constituency of people, at least in the short term. And perhaps the Fed does not feel it has been granted the “informal independence” it would need to make more radical changes to policy in that direction.

    Maybe just as it did in 1980-81, the Fed needs political leadership now to grant it permission in the public’s eyes to take its policy sharply further in the direction that it knows is needed. Perhaps any time policy appears to be going much further than it has before, the Fed feels it needs political cover (it is debatable whether an easier policy would really be going “further” than before, but it would be seen that way by many).

    On the other hand, my understanding of the early 80s tightening may be oversimplified or plain wrong. What do you think?

  32. Gravatar of Leigh Caldwell Leigh Caldwell
    16. October 2011 at 15:58

    Incidentally, I came by today to post the Brad Delong link, but I see Wadolowski has already done so.

    However, I also just happened to see this, about potential changes to the Bank of Canada’s inflation-targeting mandate:

    http://www.theglobeandmail.com/report-on-business/economy/bank-of-canada-to-get-marching-orders-to-look-beyond-inflation-targeting/article2202846/

  33. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    16. October 2011 at 16:35

    ‘I know people in the venture capital community who want to manufacture in the US, and they CAN’T. It’s not just cost anymore – it’s supply chain, time to market, and skilled labor.’

    Then why do we have other people operating factories here?

  34. Gravatar of JTapp JTapp
    16. October 2011 at 16:41

    In his new book, Dean Baker says that if the dollar/reminbi rate is a problem, then the Fed should just adopt a target and print money until it hits it or until China blinks. I think that’s a darn good idea, that would be a specific price level target.

  35. Gravatar of StatsGuy StatsGuy
    16. October 2011 at 17:57

    “Then why do we have other people operating factories here?”

    Different industries – the US supply chain for aerospace is largely intact, partly due to the scale of the operation, but also largely due to national defense policy and military purchasing.

    The US continues to see strong manufacturing (and supply chain infrastructure) in autos/tractors/machinery. Also chemicals, drilling/mining equipment, biotech/pharma.

    Manufacturing in the US has indeed been leading the “recovery” (and no doubt the dollar’s decline played a large role), but it’s been concentrated in sectors where the US still retained large bases – less so in core venture capital sectors.

  36. Gravatar of StatsGuy StatsGuy
    16. October 2011 at 18:14

    @JTapp

    We’ve been harping on that point for years, and I’m guessing that Scott basically agrees with your point. Note this thread:

    https://www.themoneyillusion.com/?p=2719

    Note also that hitting an NGDP target when another country is subsidizing target sectors has costs. Among them, it shifts economy activity in the US into alternative sectors; subsidized credit from China (forcing Chinese poor to pay for our McMansions) increases domestic malinvestment in the FIRE sectors, for example – finance, insurance, real estate – as well as service sectors. The S.T.T. argument is that in the long run, these sectors are less dynamic and drive slower growth.

    But leaving aside structural issues, the other question is whether the _FED_ blinks first! If China fights the US target through currency manipulation and reserve accumulation, this increases the magnitude of Fed action required to hit its target, and increases side effects (like carry trades – see the 2009 discussion). It also forces the Fed to absorb more political pressure as carry trades cause the NGDP target to manifest largely through commodity inflation (at least until commodity inflation squeezes the margins of Chinese firms to the point that profits are negative).

    In short, a committed Fed WILL WIN, but the costs are high relative to the optimal economic trajectory.

  37. Gravatar of Doc Merlin Doc Merlin
    17. October 2011 at 04:04

    @ Benjamin Cole
    ‘I wonder what galaxy-class anus would actually try to suppress a “Market Monetarism” page?’

    A typical Wikipedia editor. Some of the higher up editors try to delist everything cool. They managed to delist bitcoin twice.

  38. Gravatar of Ken Hirsh Ken Hirsh
    17. October 2011 at 06:14

    Scott,

    You have to start charging me for this free education! Much appreciated.

    Ken

  39. Gravatar of Scott Sumner Scott Sumner
    17. October 2011 at 06:20

    Andy, But the same argument applies to bullies. If a bully demands today’s lunch money, and nothing more, then the next day he can change his mind, because the poor kid has more lunch money in his pocket. Money that wasn’t there the previous day. More seriously, if you were going to defend Schumer, he’d have to had said to the Chinese “You must peg your exchange rate according to the Balassa-Samuelson Theorem.” But he doesn’t because studies show they are already approximately doing so. If one is going to implicitly invoke the Balassa-Samuelson effect, one must go all the way.

    As we’ve seen with Switzerland, raising the exchange rate doesn’t remove current account surpluses, because it doesn’t address the root problem. Schumer should have demanded the Chinese save less, and all the East Asian and Nordics save less, for that matter. But of course the East Asians and Nordics are the countries that have the right economic model. So that would look silly. It’s our low saving model that needs to be changed.

    One final point. We weren’t in a liquidity trap in 2005, so I presume even Krugman would have disagreed with Schumer. Krugman has thrown in his lot with out and out xenophobic protectionists, which will be an embarrassment when we exit the liquidity trap. Hopefully he’ll swing back to free trade at that point.

    Morgan, We need a predictable Fed policy.

    Statsguy: You said;

    “”If we relied on STT we’d focus on exporting big jets, Apple iPads, and Hollywood films, not sneakers and toys. Come to think of it, that is what we export.”
    We import apple iPads. iPhones. More or less every consumer electronic product in existence.”

    Wrong, we export the high value-added part of iPads, and import the low value added manufacturing that STT says is less lucrative.

    Isn’t your second point on China a complete 180 from what you said in your previous post? You said it’s hard to enter and exit manufacturing industries. Now you seem to indicate it’s easy, that manufacturing quickly flows around the globe seeking comparative advantage.

    BTW, It’s great news that China is quickly moving up market into our industries, because the word “our” includes the Chinese. We are all human beings, it means world poverty is falling fast.

    You said;

    “A lively black market would not be expected given the severity of capital controls.”

    Actually, there was a black market last time I looked, at roughly the market exchange rate.

    You said;

    “2) The government continues to sterilize upward pressure on the Yuan by amassing ever-larger currency reserves (now 3.2 billion, THROUGH a massive recession). Impressive, eh?”

    That just means China’s a high saving country, which is the root cause of their CA surplus–it has no bearing on whether the yuan is at equilibrium.

    You said;

    “In any case, you seem to believe that China is allowing the Yuan to rise because of US pressure – hardly. China is allowing the Yuan to rise because it’s becoming one of the few ways they have to contain the inflation rate, and because they are facing massive pressures on core commodities (18% food inflation, and in an economy where people spend a much higher share of their incomes on food!).”

    I agree, and have called that policy appropriate.

    You said;

    “Oh no – let’s think about a suppressed currency (in which a country accumulates massive foreign reserves that are EXPECTED to lose value in the near future). Such a policy is similar to an export subsidy.”

    Actually, it’s nothing like an export subsidy. A true export subsidy increases imports. China’s policy does not.

    I don’t know enough about China to estimate their optimal government saving rate, given the demographic time bomb they face and the lack of a funded social security system, so I’m not about to lecture them for saving too much. And the issue of what assets they purchase has nothing to do with the CA surplus.

    I’m trying to fix the link problem, by raising the limit to three–but alas, I must wait for others, as I’m computer illiterate.

    Morgan: stop swearing.

    More to come. . .

  40. Gravatar of Mark Mark
    17. October 2011 at 06:36

    You’ve repeatedly referenced the 2005 Schumer quote as if nothing has happened between 2005 and 2011.

    I really haven’t followed closely, but I would imagine 6 years of incredible productivity gains in China with terrible gains in the U.S. would only widen that differential.

  41. Gravatar of Scott Sumner Scott Sumner
    17. October 2011 at 06:40

    Statsguy, BTW, I’m not a fan of STT. Hong Kong uses good old Chicago comparative statics laissez-faire. And it’s much richer than China–indeed richer than just about any country on earth.

    Richard, I mostly agree. But the Swiss central bank is part of the “market” so the rate is at equilibrium.

    MikeDc, Good point.

    Philo, The surplus is primarily due to their high saving rate, which would probably exist even if they used the dollar. The do attract investment, but also invest a lot in the US.

    Ben, That’s good to see. Thanks for the info.

    Leigh, Thanks for the Canadian link. I was just contacted by someone in Canada about possibly testifying for NGDP targeting.

    You may be right about the politics of the Fed. Keep in mind that most economists seemed to oppose QE2 (in polls), so I wouldn’t assume that most favor easy money. I’d like to think economists who blog are better informed, although of course that might be self-serving on my part.

    JTapp, Yes, and better yet a NGDP target. China will surely blink, as they don’t want high inflation.

    Statsguy, I strongly disagree. Monetary policy keeping NGDP growing at 5% does not create bubbles, it reduces them. The problems in the FIRE sectors are due to bad regulation, not monetary policy. Our actually monetary policy made the bubble much worse than NGDP targeting would have.

    Thanks Ken, That’s what those annoying ads are for–so I can get a tiny bit of money for all my work (but still sub-minimum wage.)

  42. Gravatar of ssumner ssumner
    17. October 2011 at 07:04

    Mark, See my reply to Andy Harless above.

  43. Gravatar of StatsGuy StatsGuy
    17. October 2011 at 08:57

    ssumner:

    I don’t believe I ever said “our” industries. The only use of the “our” was in reference to “our McMansions” which are being subsidized by relatively poor Chinese.

    “The problems in the FIRE sectors are due to bad regulation”

    I agree – glad to see you agree we need better regulation in the FIRE sectors. However, that wasn’t really the point. Historically, the FIRE sectors have yielded slower productivity gains than manufacturing sectors. Even during the peak IT investment years, FIRE was slower than manufacturing.

    http://www.newyorkfed.org/research/current_issues/ci7-6/images/Chart1.gif

    Extend this to 2011, and FIRE fares much worse. I will hazard to say this, then: in the presence of monetary action to push NGDP higher, the risk of malinvestment in the FIRE sector is greater without strict regulation, and in the long term, having such a large portion of the economy dedicated to FIRE is costly. We’re paying the cost right now, as we’ve seen massive layoffs in the FIRE sector, and much of the productivity/wealth gains are now known to be illusory.

    You write:

    “You said it’s hard to enter and exit manufacturing industries. Now you seem to indicate it’s easy, that manufacturing quickly flows around the globe seeking comparative advantage.”

    Cheap low-skill manufacturing is easy to enter, and moves rapidly around the globe. (Garment manufacturing is a case in point.) These industries are generally not considered strategic, and the US has been deliberately phasing out garment assembly since the 1950s and 1960s, in spite of MASSIVE union activity. Shenzen’s IT manufacturing infrastructure is more durable, and is moving upscale.

    But you continue to give examples of a China that operates only in low-skill-labor manufacturing. This is simply not the case anymore.

    And so you cite Hong Kong… again… The Switzerland of the late 20th century. We should ALL be the world’s wealth havens! That way, everyone can host two banks (UBS/CreditSuisse) that jointly hold assets equal to 600% of the host country’s GDP. (Well, at least it’s not Singapore.) Flint Michigan can be the Monaco of the Great Lakes.

    Not that any of this really matters… Chuck’s bill isn’t going anywhere, it’s all bluster and pandering, and in 2 or 3 more years this entire issue will be moot due to the Renmibi inflation rate. By 2015 or earlier, we’ll be asking how China can stop the run on the Renmibi without crippling growth, and the great question test be how/whether China was able to improve the quality of growth.

    And, fundamentally, the US does need to increase it’s savings rate, and will see its share of global commodities consumption plummet UNLESS the rest of the world falls into chaos.

    I should get a T-shirt printed. “I’m feeling very zero-sum today.”

  44. Gravatar of TC TC
    17. October 2011 at 11:40

    Nice comments Statsguy – in fact they are awesome.

    “A good neoliberal should feel sorry for the Chinese, whose government is forcing them to subsidize US consumption. A REALLY good neoliberal, who understands game theory, might also think that a credible threat of massive retaliation to force the Chinese administration to let the currency float might be beneficial if the threat induces optimal behavior. If the threat works, then Chinese consumers benefit a lot, US consumers lose a bit, and the world economy is overall better off due to less deadweight loss.”

    This is very good stuff. They forced their citizens to consume less to steal manufacturing from the U.S. Stealing this manufacturing gives them know-how which allows them to move up to the next level of manufacturing.

    How can we be truly unhappy this? It slightly impoverished the U.S. to greatly benefit China. This policy lifted hundreds of millions of people out of something close to stone age standards of living.

    This is a very complex topic. Would the increase in the Yuan to fair value levels be a net good for China – considering they would lose millions of jobs?

    Then, as a nation, is it fair to allow it continue to hurt our citizens? I am sure that it does hurt our lower and middle classes.

    http://traderscrucible.com/2011/10/12/yuan-non-appreciation-strip-mining-the-middle-class-and-were-poorer/

    You should comment over at TradersCrucible. I doubt you’d agree with MMT very much, but then you might be surprised at the level of comments there.

    I am lucky to have truly smart people over at my blog.

  45. Gravatar of Aggressive NGDP Targeting gets us Recession levels of Unemployment! « The Traders Crucible Aggressive NGDP Targeting gets us Recession levels of Unemployment! « The Traders Crucible
    18. October 2011 at 05:54

    […] Hatzuis about NGDP targeting shows just how bad monetary policy is at getting unemployment down.  Scott Sumner is cheering this.   So is Matt […]

  46. Gravatar of Peter D Peter D
    18. October 2011 at 06:35

    “TC, I’m confused. I thought MMTers believed the Fed wasn’t even able to target NGDP. They thought fiscal policy was the key. Is that right?”

    I think MMTers would say that what you think is monetary policy in NGDP targeting is fiscal policy in disguise in that it alters the non-govt sector’s net financial assets. MMT cares a ton about non-govt sector’s net financial assets.

  47. Gravatar of dwb dwb
    18. October 2011 at 13:24

    on a less serious note, if you have not seen this on manufacturing jobs moving back to CA from China its pretty funny.

    http://www.thedailyshow.com/watch/thu-april-22-2010/wham-o-moves-to-america

  48. Gravatar of ssumner ssumner
    18. October 2011 at 17:56

    Statsguy, By “better” regulation of FIRE, I mean abolish FDIC, too big to fail, FHA, Fannie and Freddie, mortgage interest deduction, etc. Also ban sub-prime mortgages with federally insured funds (assuming FDIC doesn’t get abolished.)

    I don’t trust any productivity numbers for finance, as there’s no way to know how productive they are in the allocation of capital.

    You said;

    “We’re paying the cost right now,”

    No, we are paying the cost for bad monetary policy, not an inefficient FIRE sector.

    Switzerland’s wealth is due to manufacturing exports, not banking.

    Flint has problems that will not be solved by either STT or free trade. It’s local governance issues.

    TC, I think people looking at China miss the big picture. China’s success has little to do with what their government does. Indeed the government-dominated sectors are the least efficient. Rather it’s what they used to do, but stopped doing, which is preventing private enterprise. China has massive comparative advantages which would have allowed even faster growth under laissez-faire. The role of the government in promoting a surplus has little or nothing to do with China’s fast growth. If they got out of the way (as in Zhejiang province), they would have grown even faster.

    America’s poor are helped by the low prices at WalMart, and it doesn’t cost one job–the Fed’s the one driving up the unemployment rate.

    Peter, Well call it what you want, but if it doesn’t boost the budget deficit, most people wouldn’t call it fiscal stimulus. But I don’t really care about terminology, as long as people understand what I am talking about.

    dwb, Thanks, That’s great.

  49. Gravatar of Peter D Peter D
    19. October 2011 at 04:58

    “but if it doesn’t boost the budget deficit, most people wouldn’t call it fiscal stimulus.”

    It kinda would, backdoor. The Fed has to purchase assets at premium for the NGDP targeting to work. The premium is a de facto hit to its capital, at least at the time of purchase. The Fed, of course, has infinite capital as part of the consolidated govt sector and in case it suffers big losses on its asset purchases, it can be recapitalized by the Treasury, which would involve increasing budget deficit. The fact that NGDP targeting might boost asset prices and the Fed might not take any losses or even turn a profit hardly matters, since the same could be true of fiscal stimuli due to multiplier effects. Basically, the only difference between injecting NFAs via fiscal stimulus and via Fed asset purchases is the political one.

  50. Gravatar of TC TC
    19. October 2011 at 08:54

    Scott,

    Perhaps you should ask Jan Hatzius what he find so attractive the sector balances approach that’s at the heart of MMT. If he’s evaluating NGDP targeting, he almost certainly knows of your non-stop advocacy of it. You can reach out to him yourself easily, and he’d be glad to hear from you.

    Ask him why he writes many of his economic notes using sector balances and MMT style reasoning.

    There is nothing I can write that will change your mind.

    Maybe a few notes with him will make it more clear why he uses this apparently extremely stupid approach to thinking about economies and growth frequently in his work for Goldman Sachs.

  51. Gravatar of Peter D Peter D
    21. October 2011 at 10:24

    If the distinction between fiscal and monetary operation is simply by which sector of the govt is performing them, then it is a pretty meaningless distinction. The real distinction should be whether the operations change the net worth of the non-govt sector. When you realize that, you understand that the debate between NGDP targeting and fiscal stimulus is still a debate on which form of govt spending is more efficient.

  52. Gravatar of Scott Sumner Scott Sumner
    29. October 2011 at 05:49

    Peter, You are wrong, the Fed has earned large profits during virtually every year of its existence, at least during the fiat money period. Monetary stimulus reduces the debt, it doesn’t increase it.

    TC, I’m not sure where you are going with this. Are you saying Hatzius has disproved MMT? Are you claiming he’s showed the MMTers are wrong in claiming the Fed can’t boost NGDP, and that fiscal stimulus is needed?

  53. Gravatar of OhMy OhMy
    2. November 2011 at 12:41

    SSumner,

    The Fed can boost NGDP if it does fiscal policy, MMT has been saying this all along. It is just better, far more efficiently, done by the Treasury. The Fed will have a very limited success if it wants to limit itself to what is legal.

    Assets swaps won’t boost NGDP, it is like believing that swapping savings accounts into checking accounts thoughout the country will boost NGDP.

  54. Gravatar of Scott Sumner Scott Sumner
    5. November 2011 at 12:58

    OhMy, The Fed’s targeted inflation at 2% for decades using asset swaps–the Treasury’s played no role. They could just as easily target inflation at 22%.

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