Logic Disappears When 'Manufacturing' and the 'Dollar' Are Discussed
AP Photo/Tony Dejak, File
Logic Disappears When 'Manufacturing' and the 'Dollar' Are Discussed
AP Photo/Tony Dejak, File
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“Because a strong dollar lowers the price of imports and raises the price of exports, it gives foreign companies an advantage over American competitors and can drag down U.S. employment.” Those are the words of Noam Scheiber, a business writer for the New York Times. The 19th century political economist Frederic Bastiat would have had some fun with Scheiber’s confidently stated, but untrue assertion.

The idea that nirvana would follow Treasury devaluing the dollar is a tad simplistic, and blind to the unseen that Bastiat always urged economic thinkers to keep top of mind. Maybe Scheiber just faced a hard deadline.

Needless to say, the sentence quoted above contradicts itself. It does simply because the only closed economy is the world economy. All production is a consequence of global cooperation. This is true for the prosaic pencil, and it’s even truer for more advanced manufactured goods. Translated, voluminous imported inputs are required by American manufacturers to produce actual products.

To use but one example, the most “American” of American-made cars is the Jeep Cherokee. Yet roughly 30 percent of the parts that go into the final product come from overseas. Seheiber’s analysis ignored the global nature of production that applies to all corporations, not just those headquartered in the U.S. For example, some of the most “American” cars in the world are Hondas. Get it?

Which means that if a strong dollar “lowers the price of imports,” by definition it lowers the cost of producing American exports. Conversely, a “weak dollar” logically raises the cost of export production. Money is a veil. To believe fiddling with its value will enhance competitiveness is rather naïve. A shrinking currency logically exchanges for fewer market goods, which means the cost of production when Treasury devalues the dollar logically rises. And it doesn’t stop there.

Scheiber ignored the “unseen,” or the second, third, and fourth order effects of devaluation. It’s not just that the cost of imported inputs would rise as his very own analysis makes plain. Scheiber is also forgetting that Americans are paid in dollars. If the focus is devaluation of the unit, it’s only logical that workers will clamor for more dollars in return for their toil.

Most important of all, Scheiber ignores the investor; the investor easily the most important factor when it comes to enhancing global competitiveness. Investors, when they put money to work, are buying future returns in – you guessed it – dollars. Devaluation logically drives down the value of any future returns. Call it a tax on investment.

This cannot be stressed enough when it’s remembered that while devaluation logically does nothing to enhance export competitiveness, investment most certainly enhances it. Investment is all about increasing the productivity of workers and production processes so that exponentially more valuable market goods and services can be produced for exponentially less. To offer up but one of countless examples, the original flat-screen televisions cost north of $25,000. Nowadays, much better ones can be had for a few hundred.

Investment is what boosts global competitiveness, not devaluation. Devaluation is yet again a tax on the capital commitments that precede falling prices.

From there, Scheiber makes the odd assertion that at the “simplest level” the “trade deficit represents a kind of leakage from the U.S. economy.” Except that it doesn’t. Not at all. An economy is not a machine; rather it’s a collection of individuals. Applied to Scheiber, he runs a “trade surplus” with the New York Times. Scheiber’s mistaken analysis of the dollar and “trade deficits” aside, one presumes that the Times’ trade “deficit” with Scheiber doesn’t represent “leakage.”

Conversely, Scheiber runs “trade deficits” with his favorite restaurants, clothiers, grocery stores, and every other purveyor of market goods that he exchanges his Times salary for. Translated, “trade deficits” are the reward for production, not leakage.

Scheiber claims the U.S. “takes on debt” to pay for these deficits. No. Readers can rest assured that there’s no banker or middleman offering to finance what isn’t real. And rest assured that trade deficits aren’t real. Indeed, by its very name trade balances. My “deficits” in trade with my own favorite good and service providers are balanced with the surpluses I run with my own employers.

What Scheiber thinks are “deficits” or “debt” for the U.S. are nothing of the sort. They’re just a sign that the “trade deficit” is a wholly bogus measure. To see why, consider the why behind the deficits that aren’t. Stated simply, some of the world’s greatest and surely most valuable companies are headquartered in the U.S. Since they are, copious amounts of investment from around the world migrates to the U.S. As Americans we “export” shares in the world’s greatest companies, and with some of the proceeds we hoover up a great deal of the world’s production.

Translated for those a bit slow on the uptake, our gargantuan consumption of global plenty is a consequence of skillful creation of enormous value. The “deficit” that has Scheiber turned upside down quite simply isn’t. It’s just a signal that export of shares doesn’t count in the measure of what shouldn’t be measured, but the import of shoes, socks and television does.

Needless to say, there’s nothing to the notion that devaluation is the path to prosperity. Quite the opposite, really. And trade “deficits” don’t exist despite what reporters like Noam Scheiber and former presidents like Donald Trump tell you. Trade isn’t war as Bastiat long explained, it’s a sign of progress for it enabling the specialization so crucial to growth. Scheiber is surely bright, but dollar and trade policy plainly aren’t areas of specialization for him.

John Tamny is editor of RealClearMarkets, Vice President at FreedomWorks, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). His next book, set for release in March of 2021, is titled When Politicians Panicked: The New Coronavirus, Expert Opinion, and a Tragic Lapse of Reason. Other books by Tamny include They're Both Wrong: A Policy Guide for America's Frustrated Independent Thinkers, The End of Work, about the exciting growth of jobs more and more of us love, Who Needs the Fed? and Popular Economics. He can be reached at jtamny@realclearmarkets.com.  

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