NPR told listeners yesterday (caught me traveling) that the world will have to take bitter medicine to eliminate global imbalances. The only problem is that their analysis makes no sense. It tells listeners that the U.S. trade deficit is the result of high budget deficits, which pushed up interest rates, therefore leading to a high dollar (YES, they got that one right!), and therefore a high trade deficit. As BTP readers know, the high dollar leads to high trade deficits because it makes imports cheap for people in the U.S. and makes our exports expensive for people living in foreign countries. The problem with this simple story is that the over-valuation of the dollar has no relationship whatsoever to our budget deficit. The dollar begin to rise in the late 90s, when bubble Bob Rubin touted the strong dollar policy. This led to a rapid rise in our trade deficit, even as the budget shifted from deficits to a large surplus. The dollar actually fell from its 2000 peaks in this decade, even as the budget deficit expanded. It is very hard to tell a story today that the dollar is being held up by high interest rates in the U.S..It is quite obviously being held up by deliberate government policy of China and other countries, who are openly buying dollars with their foreign exchange earnings. They are not rushing into dollars because they think high interest rates make them a great investment. Finally, the pain crew at NPR insist that the adjustment to a lower dollar will mean great pain in the form of unemployment in both the U.S. and our trading partners. Let's try a "why?" here. In the U.S. they tell us the unemployment will come from lower budget deficits. Lower deficits will produce unemployment, other things equal, but we should be seeing increased employment from an improved trade balance. What are they talking about. NPR tells us that China and Germany will have to live with higher unemployment because of reduced exports to the U.S. Why? They can offset this lost demand with increased government stimulus, as China is doing right now. So, if NPR likes unemployment so much, maybe we should give them some.
--Dean Baker
