Trump’s Defective Economics By Mary Anastasia O’Grady
http://www.wsj.com/articles/trumps-defective-economics-1439764789
The candidate is promoting currency devaluation—he should ask Argentina and Brazil how that worked out.
“They’re killing us. Now they’re going to take more jobs . . . I mean it’s ridiculous,” the presidential hopeful told Fox News the day after China let its currency slip a measly 2% against the dollar. The yuan subsequently lost another 1%.
Japan is also run by a band of Asian Einsteins, according to Mr. Trump. Prime Minister Shinzo Abe “is a great leader,” who is “cutting the hell out of their currency, cutting, cutting, cutting.” As a result, Mr. Trump explained, “they’re back. Japan is back.”
The fast-talking Wharton alumnus didn’t say what he would do as president when trading partners announce that their currencies are to be marked down in relation to the dollar. But he suggested that devaluation is making China and Japan wealthier and more competitive and the U.S. poorer. China does it, in his view, because “they have no fear of us.”
It’s not clear if a Trump Treasury would seek to restore U.S. economic vitality by weakening the dollar more than the next guy weakens his currency. Or if as president he would simply work to raise U.S. tariffs on imports from countries that devalue. Either way it would be bad news for Americans. It also would damage the Americas if his flawed monetary views were adopted by the region.
Mr. Trump may be impressed by devaluation as a policy tool because Mexico—whose politicians in his eyes are among the cleverest and most “cunning”—practiced it for many years. Yet slashing the value of currency to achieve prosperity is preposterous, as generations of Latin Americans, not only Mexicans, can attest. If “competitive devaluation” worked, Argentina would be the national equivalent of Donald Trump. That means very, very rich, in case you somehow missed the Donald’s constant assertion about his net worth.
Brazil has a similar history. It began to cultivate middle-income earners only after it pegged its currency to the dollar in 1994 to halt hyperinflation. Brazil abandoned the peg in 1999 but that didn’t make the Brazilian economy more globally competitive. Quite the opposite occurred, because devaluation acts as a form of protectionism. When the Brazilian real weakens, Brazilians lose purchasing power and can no longer afford high-tariff imports. They’re forced to buy lower-quality goods from inefficient Brazilian industries.
In 2002 Argentina dumped its dollar peg and tried to match Brazil with a mega-devaluation of its own rather than liberalize trade and labor markets to improve competitiveness. Today Argentina is an economic train wreck with double-digit inflation.
The Brazilian real subsequently stabilized and then strengthened against a weak dollar. That gave farmers purchasing power. They mechanized their operations using imported equipment and then exported their soy crop. Investors also rushed to Brazil for the oil boom, which pushed up the currency, making the country richer.
Brazil might have used the period of high commodity prices to introduce structural reforms aimed at improving competitiveness further. Instead it moaned about the strength of the real even as it sucked in capital under the double-digit interest rates it was using to try to contain inflation, which remained a threat because of loose fiscal policy.
If China allows the yuan to fall significantly against the dollar, it will have short-term consequences for its trading partners in Latin America. Brazil, Chile, Colombia and Peru have all benefited from China’s demand for their agriculture, forestry, fishing and mining output, and other commodities. In the short run the weaker yuan will make their products more expensive in dollar terms.
But the terms of trade do not change. Seven loaves of bread still equal one bottle of wine whether you are earning shekels, pesos or quetzales. Countries may be tempted to chase the yuan downward to preserve market share. But by cutting the value of workers’ paychecks, a central bank merely shifts the cost of an uncompetitive economy onto the backs of wage earners and savers and raises uncertainty.
China says it wants to move toward making the yuan an international currency. Delinking from the dollar is supposedly a first step. But far more important would be fully opening the capital account so that the yuan is freely convertible. That’s not happening because it is likely to trigger an uncontrollable capital flight and exacerbate the slowdown in growth. You can’t blame China for wanting to delink from the unstable dollar. But the Chinese economy is suffering from central planning and the resulting misallocation of resources. A devalued yuan won’t fix that.
As for Mr. Trump, he was more likable when his campaign was limited to “fantastic,” “tremendous” and “terrific” ideas. Now that he’s getting into detail, he’s not nearly as charming.
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