Felix Salmon says “US workers are massively overpaid compared to their equally-productive and well-educated counterparts in countries all over the world” which is a rather mean way of saying that our country runs a trade deficit. What to do about it?
There are a number of ways that the discrepancy can be narrowed: wages in countries from Slovenia to South Africa could go up; US wages can go down; or the dollar can simply depreciate. Which is a lot easier than nominal or even real wage cuts.
If you’re anything like me, your wages are denominated in dollars, so if the value of a dollar declines your real wages decline. Currency depreciation isn’t an alternative to real wage cuts, it’s a mechanism by which real wages can be cut. Of course on the level of rhetoric “we need to defend manufacturing in this country and make China stop its unfair currency manipulation” is a tough stand the voters will love whereas “we need lower real wages in this country” will get you booed off the stage, but these are closely related concepts.
But there are differences. One of the most important ones is that not only are Americans’ wages denominated in dollars but so are our debts. If you make me swallow a wage cut via a cut in my nominal salary, then my mortgage debt relative to income will balloon. But if my real wage declines via a depreciation in the value of the dollar, then the cost of my mortgage debt stays even. Given that we’re currently facing massive household debt loads, this is a much better path to take.
Then on the other hand we have people who've decided that the one true progressive pro-worker position is to insist that wages don’t matter and economic performance can't be measured.
Hence, why the Euro is flawed. Stay in and brutally cut wages and risk political instability, or get out and risk financial armageddon. Damned if you do, damned if you don’t.
“If you're anything like me, your wages are denominated in dollars, so if the value of a dollar declines your real wages decline.”
This is true I suppose if you earn wages in America and live in Paris, but for a person living and earning wages paid in US dollars in Washington DC the relative value of the greenback to the euro, british pound, etc is an interesting, and almost irrelevant data point.
I mean, a 6 pack of Coronas two nights ago cost me $10.49. If for whatever reason EURUSD were to rise to $2….what is the cost to me? I’d find the difference if I bought wine from France, but I dont. I drink wine from California and Oregon (mostly Pinot Noir, btw).
We need to learn to love a weaker dollar.
Well, the first order effect of dollar devaluation is to reduce real wages proportionally to imports in the consumption bundle. But higher-order effects are similar to monetary or fiscal expansion, but operate by moving the current account (rest-of-world balance) toward surplus, rather than by moving the private or public sector balances toward deficit. That boosts employment, and there is a very well documented negative relationship between unemployment and both average real wages and wage inequality. Using a devaluation to move closer to full employment is real-wage-increasing for most workers, which means that the income/debt ratio rises even more than your analysis in this post describes.
Silly Matthew. If the dollar falls, then banks are losing money on those debts denominated in dollars. If your wages fall in nominal and real terms but the dollar stays up, then you get to bear all the pain! I think this is basically the thinking that is driving this process. Of course the problem with the Euro is that places like Ireland don’t even have a choice anymore.
This is also true. The reason it doesn’t work even better is that the evidence strongly suggests that trade deficits are not corrected by currency adjustments nearly as easily as the math would indicate. There is a lot of debate/disagreement on this topic, though and also lots of argument about whether A follows B or B follows A type of stuff looking at the statistical data.
You’re buying wine from California? Then you’re overpaying.
The only real money is gold! No country ever prospered from debasing it’s currency! Bernanke’s is printing us into Zimbabwe!
Thought I’d get a bit of the hysteria out of the way.
Heh, perhaps. But even if I am its not because of the value of the US Dollar to the Japanese Yen, Euro, or any other country’s currency.
Inflation does this too…
Does anyone think that the filthy rich people of America, the billionaires, who’s fortunes are probably mostly in dollars, will allow the value of a dollar to decline?
They’re screaming right now about inflation that does not exist.
Alternatively, do you really think that it would be a good thing to decimate the value of the Baby Boomer’s retirement funds just as they are beginning to retire, and give up the jobs that the recent college grads NEED desperately?
My hubby is trying to decide whether to retire now, or next year, and he keeps thinking that it’s safer to stay working and socking the money into his retirement accounts, ’cause, ya never know…
Or let the euro depreciate. Germans are the issue.
I think you’re confusing actual price inflation with the declining value of the dollar. If the consumer price index were to start rising significantly, that would reflect a drop in the value of funds in a savings or investment account in this country.
But if you have savings on deposit in America to be used in the US economy you are not materially harmed by the relative value of the dollar to the Euro, until you go to Europe or buy European imports of some kind.
So, as I said previously, learn to love wine from Oregon its delicious.
If you’re buying wine for more than twelve or fifteen dollars a bottle, you’re overpaying.
If you live in California and buy wine from Europe, then you’re underpaying because you’re not paying the cost of burning all the fuel to ship the wine from halfway around the world when there’s just as good wine being made an hour’s drive away.
If you’re buying Yellowtail, I have no reason to talk to you.
Looser money and lower dollars are generally quite good for the stock market. The trade-off you’re thinking of does not exist.
I just have two words for you: oil.
Well, the Germans are the biggest issue, but they are joined in their pigheadedness by the Finns, Austrians, Dutch, and even Poles.
Exactly. There is a shift in prices in your preferred consumption basket. So, at the margin, you’ll probably start drinking American wine or beer or cheese etc. The price of cheap crap from China would likely go up as well, but since the part exported from China is often a small percentage of the cost, you probably wouldn’t notice the difference for a lot of things.
who’s fortunes are probably mostly in dollars
By “probably” you must mean “are not.”
You would have to be insane to hold billions of dollars in assets in cash. No one does that.
This is a common response meant to highlight the “benefits” or at least the not so awful effect of inflation but your little example here shows how wrong it is. It is true that to the degree that both your income and debts are fixed or at least very sticky then devaluation or inflation will not impact you very much, but only if you are not spending money on anything else except servicing your debt. If you are spending any portion of your sticky income on actual cash purchases of goods and services then you get screwed.
People who really benefit are those with incomes from capital gains and dividends or business income and those with fixed debt.
People who get only partially screwed are wage earners with fixed debt.
People who get the screwed the most are low fixed debt or floating rate debt wage earners.
That is not a bracketing that ought to appeal to progressives. Furthermore the idea that inflation will necessarily lead to more and better domestic jobs through increased demand has just not been borne out over the last 30 years. Real wages are stagnant and eroding.
As pointed out above, real wages are usually measured relative to inflation. If you devalue the dollar relative to a basket of international currencies without allowing significant inflation, you wouldn’t generally have any noticible depreciation in real wages or real debt, since most spending and debt is domestic. I think Felix Salmon was essentially correct that depreciating a currency internationally is an alternative to real wage decreases. In fact, it should lead to rising real wages as exports rise and the economy stregnthens. It will have a negative effect on people having international vacations and people purchasing lots of specialized imports, but that is a small, wealthy segment of the economy.
I think he means dollar denominated assets, not piles of cash.
Public choice is the issue IMO. Politicians in the core have no incentive to do loosen ECB monetary policy. Bailouts are already unpopular, why add inflation to that.
Matt’s just confusing currency depreciation with inflation here, right?
Please explain Switzerland. Lowest formal education levels in the developed world, curency far above PPP rates, filthy rich and a huge current account surplus.
Poland is not even on the euro. How does that work?
I’m a little surprised he isn’t making a better distinction about how spending power will fall. Imports after all are a relatively small part of US consumption, so that is certainly worth noting, especially since it bolsters his argument. He is right though that is better than a wage cut or deflation.
Isn’t Switzerland’s wealth almost entirely a result of its status as a tax haven?
I’m pretty sure Poland has been involved in plans for future bailout mechanisms etc. and they share Germany’s preferences. But no, they are not yet represented on the ECB.
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