Dear Conservatives: Devaluation Weakens Us, Imports Strengthen Us
I first read about “imported inputs” in a Wall Street Journal editorial published sometime in the late 1990s. It’s a near certainty that the editors of the world’s most important editorial page had written about them before, but it was around then that this most elementary of concepts registered with me.
The editorial page was correcting a fallacious economic narrative that lives to this day: it says currency devaluation (in our case, devaluation of the dollar) results in greater competiveness for American producers. The editorial reminded readers that nearly every “American” good or service produced is the happy consequence of global cooperation. Translated, “imported inputs” from around the world very much factor into the production of what’s American. If currency policy accents devaluation, the costs of producing stateside go up. American producers gain nothing from devaluation. Actually less than nothing as readers will soon see. But for now, the obvious should be stated. Currency devaluation doesn’t confer a competitive advantage on producers in the devaluing country simply because the devaluation itself logically raises the cost of making things in the first place.
The problem is that as previously mentioned, what is fallacious lives on. Worse is that it’s being given life at the very editorial page that used to dismiss what’s so easy to discredit. Andy Puzder (former Carl’s Jr. CEO) and Jon Hartley (an economics writer in New York) are the latest to promote the devaluation fallacy on the Wall Street Journal’s editorial page. In an opinion piece that they co-authored the week before last, Puzder and Hartley argued in favor of the Fed reducing interest rates “to weaken the U.S. dollar and encourage greater exports.” Numerous mistakes can be found in just those nine words.
For one, the dollar’s exchange value has never been part of the Fed’s portfolio. Despite this historical truth, one that any Fed official will readily confirm, it’s become accepted wisdom among conservatives that the Fed controls the value of the dollar through its fund rate. Except that it doesn’t.
Furthermore, there’s no obvious correlation between rising rates and dollar strength as is. Figure that the Fed aggressively hiked rates in the 1970s, only for the dollar to plummet against nearly every major foreign currency, oil, gold, and seemingly everything else.
And while the Fed raised its funds rate quite a lot in 1979-80, there similarly was no direct correlation. Paul Volcker began his rate hiking process in 1979, and the dollar plummeted. It certainly strengthened in early 1980 amid rising rates, but only after Ronald Reagan won the 1980 New Hampshire primary. Reagan ran on revitalizing the dollar through a commodity definition, and presidents generally get the dollar they want.
Useful here is that the Fed was mostly in rate cutting mode in the ‘80s and ‘90s, yet the value of the dollar versus foreign currencies, oil and gold increased during both decades. If we ignore that the dollar’s exchange rate once again isn’t part of the Fed’s portfolio, there’s very little correlation between rising rates and dollar strength contrary to what Puzder and Hartley imagine.
Ok, so Puzder and Hartley believe that a strong dollar weakens exports for it rendering them more expensive. Up front, the modern story of Japan easily belies what is already easy to disprove. In the case of Japan, the yen crushed the dollar in the ‘70s and ‘80s alongside surging Japanese exports into the U.S. Importantly, what transpired shouldn’t surprise anyone who is familiar with what causes prices to fall.
Specifically, investment is the biggest – by far – driver of falling prices, and the fact that it is rejects the argument made my Puzder and Hartley about a falling dollar enhancing U.S. competitiveness around the world. Logic dictates that a falling dollar would weaken American industry and hamper its ability to compete when it’s remembered that when investors invest, they’re buying future returns in dollars. But if the policy is in favor of dollar weakness a la Puzder and Hartley, investment is discouraged through the tax that is devaluation. Investment in productivity enhancements that enable the creation of more and more at costs that plummet is what bolsters American competitiveness the most, yet Puzder and Hartley are seeking the very devaluation that would tax it.
Sadly, they aim to justify what is easy to dismiss based on their belief that a strong dollar causes a decline in “export growth.” Oh well, it once again doesn’t, but since they think it does they write that “exports have essentially stagnated” since 2018. They believe this has limited GDP the “past three quarters” to “a strong 2.9%” growth rate, as opposed to 3.2% had “real exports grown at a 3% annualized rate.” Missed by the commentators is that their number crunching merely reveals how worthless is GDP when it comes to divining the strength of the U.S. economy.
Indeed, it should be stated clearly that both Hartley and Puzder are big cheerleaders for the Trump economy. About their excitement, it’s not unreasonable to say they have a point. While Trump’s policies on trade have been mindless, while the tax cut he signed was vastly overstated as an instigator of growth given how little it reduced tax rates for those most capable of investing (the rich), and while Trump wildly overstates (as do Puzder and Hartley) the role of the Fed when it comes to U.S. economic health, his economic policies have for the most part accented shrinking the government’s role in the economy. U.S. equity markets have responded positively to this truth.
All of the above matters mainly because it could be argued that the biggest export during Trump’s presidency has been shares in U.S. companies. The only problem is that the export of shares in the most valuable companies in the world doesn’t count in what shouldn’t be measured to begin with (the so-called trade balance), but the import of shoes, socks and t-shirts is counted. Translated, Puzder and Hartley unwittingly lament what is a wildly bullish (the export of U.S. shares that increases the mythical “trade deficit”) signal solely because it limits GDP growth. Their op-ed strongly suggests they would trade true prosperity for a better GDP print….
Puzder and Hartley make an argument that’s aggressively contradicting of Puzder and Hartley only for them to contradict themselves again. Oddly focused on exports when importing is the sole purpose of economic activity, they contradict themselves when they assert that “the rest of the world fell into a serious slowdown” as “U.S. growth accelerated.” So without getting into their suspect basis for arguing that the rest of the world is suffering “a serious slowdown” amid accelerating growth stateside (funny, I thought they said the Fed had centrally planned a U.S. slowdown…..), the reality is that the aforementioned slowdown would explain falling exports much more than a “strong dollar”; the latter basically a non sequitur in this discussion. After that, if the rest of the world were in a serious slowdown, this would show up in collapsing U.S. equity prices reflecting smaller markets for U.S. producers. "The only closed economy is the world economy" is a tautology, but it's one plainly lost on Puzder and Hartley.
Funny about it all is that in addition to fearing a “strong dollar,” Puzder and Hartley also fear a “tightening of the money supply.” They needn’t worry. Money’s sole purpose is to facilitate the exchange of consumable goods (trade), or the exchange of economic resources now (investment) in return for eventual claims on consumable goods in the future. Translated, the Fed couldn’t limit money supply even if it wanted to. So-called “money supply” is production determined. Where there’s production, money is abundant. Where there isn’t, money is scarce. To read Puzder and Hartley uncritically, one would think the only difference between Greenwich and Bridgeport is that the Fed supplied one with dollars, and not the other. No. If you’re productive, “money supply” will always find you.
Ultimately Puzder and Hartley have their hearts in the right place about desiring prosperity, but somehow they missed the memo from the 20th century about how central planning never correlates with growth. This is a problem because their op-ed is ultimately a throwback to an era when central planning was the rule in much of the world, and “serious slowdown” was the persistent norm. So while they write that “the Fed should reduce rates” to “encourage future economic growth,” they’re ascribing a role to the central bank that it can’t possibly fulfill.
Notable about the day of Hartley and Puzder’s op-ed is that they weren’t the only thinkers promoting an export focused, mercantilist view of the world on the Holy Grail of editorial pages. Historian Arthur Herman published a piece just above Puzder’s and Hartley’s meant to discredit the “Moscow-Beijing-Tehran Axis.” It seems they want to “get” us. Basic economics tells us not to be as worried as Herman is.
The historian claims “All three use energy to bend other countries to their will.” Except that what Herman describes is a logical impossibility. As an historian, Herman should know that with any market good, there’s no accounting for its final destination. The previous truth explains why the 1973 Arab “oil embargo” was wholly symbolic. Looked at modernly, the U.S. could be 100% bereft of oil, at war with and embargoed by every oil-producing nation on earth, yet Americans would still consume oil produced elsewhere as though it had bubbled up in the Permian Basin.
Herman laughably adds that “All three recognize that the U.S. is a crucial obstacle to their success.” Oh yes, that’s why Chinese businesses work feverishly to meet the needs of the American people. Underlying it all is a desire to hurt us economically which would…be economic suicide for the Chinese. Somewhere along the way conservatives forgot that imports always and everywhere improve us when it’s remembered that the division of labor frees us to focus on the work that most elevates us. In short, if the Chinese really wanted to hurt us as Herman so naively asserts, they would do everything possible to limit Chinese exports to the United States.
Conservatives would be wise to re-acquaint themselves with the basic economic truths that are much more likely to animate their rhetoric when the Democrats are in control. There are many, but with brevity in mind it should be said that devaluation, mercantilism and central planning by central bankers definitely don’t work. And since Republicans won’t control the White House forever, it’s probably a good idea for conservatives to start exercising their free market rhetoric ahead of the day when a Democrat takes over. Until then, it’s worth reminding conservatives that devaluation weakens us while imports strenghthen us. Free markets work. They really do.