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Currency Policy: A Matter of Life or Death

Posted By Terry Miller On March 18, 2010 @ 4:00 pm In Economics | Comments Disabled

The execution last week of a senior economics official in the North Korean government over a botched currency reform reminds us of that no parody of repressive government can fully capture the backwardness and evil of the North Korean regime. If any good can come of such a perversion of morality, it might be in a reminder to economists that their policy prescriptions can be matters of life or death, if not for themselves then most assuredly for the citizens of their countries.

Recent calls by Paul Krugman and others to clamp down on Chinese currency manipulation are vivid examples of politically-motivated and ideologically driven policy prescriptions that would, if implemented, make a significant, if not life and death, difference for some Americans, reducing the prosperity of most while pampering a few politically-connected special interests.

We need to step back and consider the actual impacts of China’s policy to maintain the value of its currency at an artificially low level. The main ones are:

1. American consumers get a subsidy from the Chinese government because Chinese imports to America are artificially cheap.

2. Chinese consumers pay a higher cost for things they buy from the rest of the world.

3. China exports more than it otherwise would, but its increased market share comes at the expense of other developing countries like Vietnam and Mexico that have similar types of manufacturing capabilities and roughly equivalent cost structures. If China revalued its currency and Chinese prices rose, we might buy less from China and more from other countries, but its highly unlikely that we would import much less in total.

It’s hard to see from those impacts why America should have much interest at all in changing China’s currency regime. On balance, we’re benefiting from it. It may be distorting the market, but the costs of distortion fall primarily on other developing countries and the Chinese themselves.

The advocates for change most often assert that China’s currency manipulation costs Americans jobs. There is little evidence to back such claims. The truth is that U.S. and Chinese manufacturing interests are widely divergent, and there are few areas of direct competition.

Why then, the calls for urgent action, even legislation, to address the issue? One must look away from economics to politics: the desire of some to curry favor with organized labor, the appeal of demagoguery and chauvinism in tough times, and the search for scapegoats by a leadership whose own policies are failing to address the needs and concerns of most Americans.

Thankfully, we won’t be executing our economic policy-makers for their failures. But we shouldn’t console ourselves that bad policy prescriptions do no harm.


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