No More Playing With Money

If you’re looking for the personification of the Washington economic establishment, you could do a lot worse than Fred Bergsten. National Security Council economics deputy under Henry Kissinger (at age 27), then head of the international desk and the monetary portfolio in Jimmy Carter’s Treasury Department, and from 1981 through last year the founding director of the Peterson Institute for International Economics, Bergsten has been a forceful advocate for what used to be called the Washington Consensus: an unflagging belief in the virtues of free trade and fiscal discipline.

This Thursday, he delivers what looks to be at least a semi-valedictory at the Peterson Institute, the annual Stavros Niarchos lecture. Rather than celebrate the virtues of free trade—a topic he says (in an advanced text of his speech) that he considered and then rejected—he devotes his talk instead to an analysis of the devastating effect that currency manipulation has had on the American and other economies, and proposes a range of counter-measures that both proponents and victims (industrial workers, for instance) of the Washington Consensus can only welcome.

More than 20 nations, most importantly China, depress the value of their currency through their purchase of dollars, Bergsten begins, cheapening the cost of their exports and decimating the economies of nations like Brazil and the United States whose manufacturers can’t compete against such low-priced goods. The U.S., he estimates, has suffered between 1 million and 5 million job losses as a result of such currency manipulation. Eliminating the effects of such manipulation, he continues, would stimulate the economy as much as the Obama stimulus package and the Fed’s quantitative easing “taken together.” In other words, it would be a whale of a stimulus—increasing GDP growth by about 1 percent annually, he calculates, for the next several years.

In the world Bergsten sketches, the temptations for nations to lower the value of their currency are everywhere—the more so because most governments are under pressure to avoid further fiscal stimulus due to their debt burdens. (One could argue that no one has done more to give undue weight to those burdens than the man after whom the Peterson Institute is named, but I’ll pick that fight another day.) Even if China is now letting its currency rise a bit, we can’t count on such appreciations to continue, particularly since the export-dependent Chinese economy is clearly weakening.

Like a number of other leading economists, Bergsten sees the trade imbalances of the last decade as having inflated the bubble that then burst. (As Martin Wolf of the Financial Times has noted, the sick men of Europe—Spain, Portugal, Italy, Greece—were all over the map fiscally, some with balanced budgets, some with unbalanced ones, but all ran major trade deficits.) The problem, Bergsten argues, is the international monetary system itself, which is prey to destabilizing gaming absent the kind of global hegemon that the U.S. used to be and that China is not yet becoming, if it ever does. The long-term solution he proposes is to gradually dethrone the dollar as the world’s reserve currency, and create in its stead an amalgam of the dollar, the euro, and the Chinese currency, if and when China allows it to be bought and sold as other currencies are.

But that’s for then, and Bergsten rightly argues that the American economy badly needs a fix for now. To that end, he calls for changes in the rules of the International Monetary Fund that would allow nations that are victims of currency manipulation to counteract the damaging action by counter-purchasing the currency of the nation that is devaluing its money by purchasing the victimized nation’s bank notes. Since that won’t work with China’s nonconvertible currency, Bergsten also proposes taxing the foreign exchange reserves of nations whom the IMF determines have violated its rules. He further suggests the World Trade Organization change its rules so that a nation’s currency undervaluation can trigger tariffs from the nations with which it trades. He calls on the Obama administration to push to change the rules, noting that the E.U., Brazil, Russia, and India would likely favor such changes. But he also calls on the administration to proceed unilaterally—in the spirit of Mitt Romney (whom Bergsten has the good sense not to mention by name), who vowed he’d declare China a currency manipulator and slap tariffs on its goods on day one of his presidency.

One of Bergsten’s underlying concerns, he makes clear, is that currency manipulation undercuts public support for the trade regime in which he believes. It weakens American manufacturing and our ability to sell to other nations. Of course, the same critique can be leveled at the trade regime itself, which may be the single largest factor in depressing the wages of American workers. America’s plunge into the global marketplace—a marketplace it largely created—with no plan whatever for replacing the well-paying manufacturing jobs that corporate offshoring destroyed, would have been a national calamity even if China had let its currency rise to its true value. Be that as it may, with wages rising in China and sinking in the U.S., the role that currency manipulation now plays in giving China a cost advantage is growing and will continue to grow. And whether one shares Bergsten’s support for free trade or rejects it, his analysis of the costs of international monetary gamesmanship and his proposals for how to counter it bring some very good ideas into the center of the economic establishment’s deliberations. A Pittsburgh steelworker might well have had many of these ideas 30 years ago, but tomorrow, when Bergsten speaks, they’ll have an elegant establishment imprimatur.                     

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