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Home Publications Blogs Beat the Press The NYT Times Has Problems With Arithmetic, Economics and Editorializing

The NYT Times Has Problems With Arithmetic, Economics and Editorializing

Tuesday, 09 November 2010 21:42

In introductory economics students learn that in a system of floating exchange rates (like the one we have), trade deficits and surpluses are eliminated through changes in the exchange rate. That is the point of the float. This means that if a country has a trade deficit, like the United States, then we should expect its currency to fall.

This means that when countries that complain about the U.S. trade deficit complain about the decline in the value of the dollar, as the NYT claims is the case with Germany, China, and Brazil, these countries are saying that they don't understand economics. In this case, the news is that major economic powers are being governed by people who don't know economics.

This would be like countries promoting their exports and then complaining that foreigners were buying up their output. If these countries want the United States to reduce its trade deficit then they want the dollar to fall. There is no other plausible mechanism to reduce a trade deficit. In the article the drop in the dollar is described as the "easy way out." It should also have been described as the "only way out."

The article also notes complaints from other countries that the low interest rates resulting from the Fed policies may lead to bubbles in their economies. Insofar as this is true, these countries are in fact complaining about their own poor economic management. Low interest rates, like low food and energy prices, should promote growth, not impede it. If countries consider low interest rates harmful to growth, it suggests that they have a poorly structured economy.

This article also refers to the United States' "addiction to debt." This sort of bizarre criticism (it is not supported by anything) belongs on the opinion pages, not in a news article.

Comments (9)Add Comment
Easy Way Out
written by James, November 09, 2010 11:36
During the late 1990s when Rubin and Clinton adopting a high-dollar, i used to be able to buy a lot of nice electronics at very good price. Also, imports from France and Italy. Now, no more. When I traveled back then, I could buy a lot of duty-free stuff overseas with a nice conversion rate.

So, dropping the dollar value is easy way out?

Cannot wait to think or see what is a hard-way?
written by Vince, November 09, 2010 11:55
There was something very similar a couple days ago. Probably based on the same statements by leaders.


Its says "Countries like China, Brazil and Germany have warned that the unilateral move devalues an already-weak dollar, and could set off a destabilizing flow of funds into emerging economies that will inflate their own currencies and make their exports more expensive."

I told someone that was a bit like saying "I'm warning you, if you do that you might get exactly what you want."
written by a, November 10, 2010 4:18
"Low interest rates... should promote growth, not impede it."

Worked really well for the U.S., didn't it?
written by charles, November 10, 2010 6:48
"In this case, the news is that major economic powers are being governed by people who don't know economics."

Is that "news" ? Sounds like common knowledge to me.
Germany is governed by corporations
written by Paul, November 10, 2010 9:23
Like BMW, Daimler, Siemens, etc., who must sell much of their production in the U.S. in order to be profitable. Germany's politicians are simply repeating what their corporate masters tell them to say.

Sound familiar?
written by Adam's Myth, November 10, 2010 10:04
>>> drop in the dollar is described as the "easy way out." It should also have been described as the "only way out."
Fix the headline
written by Ann Thrope, November 11, 2010 1:03
It's the NY Times, not the NYT Times!
written by Eric Titus, November 12, 2010 10:04
The point these companies are trying to make, I get the impression, is that decreasing the value of the dollar a) reduces the trade deficit in non-constructive ways and b) has other negative side effects.
Regarding a. Devaluing the dollar will certainly reduce the trade defecit, as this post suggests, but this does not mean that it is the only way to do this, or even the most desirable way. Consider that a tariff on all imports would reduce the trade defecit, mostly by decreasing the amount of products being sold in the US. And this currency devaluation may well have a similar effect--reducing the deficit by harming companies that export to the US, while benefitting US exporters to a lesser degree.

Countries that talk about the trade defecit are not complaining about it. They are benefitting through exports! A positive interpretation might be that they are saying that the US should try to increase its competitiveness rather just limiting devaluing imports from other countries.
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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.