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Econ 101 for Washington Post Reporters

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Wednesday, 10 November 2010 05:44

One would hope that reporters who cover economic issues for the Washington Post know a little economics. Unfortunately, this does not seem to be the case. Therefore, BTP will provide a free economics tutorial for the Post's economic reporters.

The Post told readers today that:

"world leaders share the overall aims of bringing trade flows into better balance and curtailing recent clashes over currency values."

The whole piece in fact shows the opposite. In a system of floating exchange rates the mechanism for correcting trade imbalances is a change in currency values. Countries with trade surpluses are supposed to see the value of their currency rise. Countries with trade deficits are supposed to see the value of their currency fall.

When a country's currency falls in value, imports become more expensive meaning that they will import less. Its exports become cheaper for people in other countries, causing foreigners to buy more of their exports. This will reduce its trade deficit. The opposite holds for a country's whose currency rises in value.

This is really simple. If you want to see trade imbalances corrected, then you want to see the value of the currency fall for countries with large deficits like the United States. This is just like if you want the school fire put out, you want the firefighters to spray water on it.

On the other hand, if you don't want the firefighters to use water, then you really don't want the fire extinguished. In the same vein, all the officials cited in this article who complain about the decline in the value of the dollar obviously do not want the trade imbalances corrected. It is that simple, at least for folks who learned intro econ.

There is another interesting sidebar for the economically literate. The article tells us:

"Some developing countries took aim at the Fed move in part because it could weaken the dollar, making their own currencies relatively more expensive, hurting their exports and fueling inflation."

This is a non sequitur. If the dollar falls in value, then imports from the United States will be cheaper for developing countries. This will lower inflation, other things equal. In addition, reduced exports from these countries will also reduce domestic demand and employment, which will also put downward pressure on inflation. If developing countries actually make the claims attributed to them in this article then the news is that their officials have no better grasp of economics than a Washington Post reporter.

Comments (9)Add Comment
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written by jerry, November 10, 2010 6:45
They want a "strong dollar" simply because anything strong is good. They want balanced trade since things that are balanced are good. The fact that the goals conflict is irrelevant. It's no different than wanting to extend tax cuts while making a big deal of the deficit or complaining about inflation and unemployment.
Free Floating Exchange Rates are Unidentified Flying Objects - UFOs
written by izzatzo, November 10, 2010 6:58
A trade deficit/surplus condition mirrors the same shortage/surplus condition seen on a standard supply-demand curve diagram.

Moving from a trade balance equilibrium position with no trade deficit or surplus, a higher dollar value reflects a trade deficit with a lower price for import goods consumed and a higher price for export goods sold.

To clear the market with "free floating exchange rates", the higher dollar falls the same way price would in any "free" market subject to effective competition, to eliminate the surplus of imported goods and corresponding shortage of exported goods.

While MSM journalists can't understand a trade deficit/surplus condition, they have no trouble at all "understanding" ordinary supply and demand curves in "free" markets.

As stenographer sock puppets for big business, journalists see "free markets" everywhere, which always work to clear shortages and surpluses when made free of government intervention - except when convenient - as with trade surpluses and deficits.

If trade deficits/surpluses are subjected to "free floating exchange rates" to clear the market, this could constitute "competition", a subject so foreign to the tiny minds of MSM journalists they go bersek and report it as UFOs - Unidentified Flying Objects that must be shot down immediately by centralized command and control forces. To hell with free markets.
"a system of floating exchange rates" - WTF?
written by Paul, November 10, 2010 8:16
China's yuan does not float; it is pegged to the dollar and has been for decades. Other emerging market countries peg their currencies to the yuan to prevent China from undercutting their costs of production.

Ergo, when the U.S. dollar falls in value, all these countries import inflation in the form of higher commodity prices, most importantly oil. So naturally they are whining.
...
written by Kevin, November 10, 2010 8:35
Not to mention that state governments are shrinking from the recession and will do so even more if they don't get countercyclical support. I guess that's more evidence of big government.
...
written by Mark, November 10, 2010 9:34
The trade/currency relationship between China and the US has been going on for decades. I'm quite sure there has been many conversations on the highest level with China telling the US that China will maintain it's hard peg to the dollar and the US responding with "of course, China is not a stupid or foolish nation."

If China floated the yuan, their holdings of US debt/currency would lose value hard and fast. US govt., Wall St, the Fed's printing presses all buying up the yuan would cause the yuan to increase in value very quickly destroying the value of China's US debt holding in the blink of an eye. Of course, on the US side this wouldn't be called manipulation
another way to increase exports
written by wellbasically, November 10, 2010 9:51
If US companies wanted to increase exports there is another way. They could simply lower the prices of their products.

Of course their labor expenses wouldn't change, so they would go bankrupt.

Instead, get the Fed to undermine your workers' wages and salaries by devaluing the currency, and then your product can be cheaper.

Way to go friends of the working man!
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written by zinc, November 11, 2010 4:48
It is a modern tragedy that the so called "economists" were unable to see the import bubble forming through the smoke and mirrors of the "fwee twade" dogma. Yes, the text book "fwee market", if it existed, would long ago have increased the value of the Yuan, Euro, and Yen, but it didn't because there is no such thing as "fwee twade" outside the classroom.

The ridiculous excess dollar holdings of the mercantilist nations is a consequence of the FX fix. Who do we suppose printed all those dollars they are holding ? The USG printed them, trying to keep the dollar from appreciating.

The "economists" have ignored this paradox for decades in their rush to promote the dogma of "fwee twade". The Federal Reserve blew up the US economy in it's efforts to sustain US employment and income through credit expansion paper over the drain of middle class wealth in the US. Economics is politics, not science. Even if there are basic economic tenets that are true, politics has the power to say they aren't. Until the smoking gun in the form of the economic mushroom cloud appears. Like now.

The Europeans killed each other for centuries in the name of mercantilism. That is why Germany is such a master at the game. The only way to avoid a future war is to implement a domestic industrial policy and manage imports into the US. The race to the bottom of the competitive currency devaluation game is as wrong headed for the US as the "fwee twade" dogma.

The stabilization of the US should be equally important to our trading partners as it is to us. We are all feeding at the same trough, the US middle class.
Low Wages = Higher Living Standards!
written by NewsFromAnnArbor, November 11, 2010 8:35
Dean,

These are the same people who have been claiming for the last 30 years that lower wages = higher living standards for workers (actually, low wages = higher living standards for CEO's). Surprise, surprise, they get it wrong again.
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written by resumes online, November 12, 2010 2:40
well, i'm like totally sure that some new objects will be so much more in use over here as well

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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