March 20, 2004

Devaluing devaluation

While I'm at it, might as well take a quick swipe at another economics canard I've heard floated about lately. Devaluing the dollar will not help American producers. In fact, it would prove quite the little catastrophe. Three reasons:

1. US manufacturing industries simply don't have a lot of unused capacity waiting to be filled. They wouldn't be able to export a whole lot more stuff, they'd simply find that the stuff they did export would become a whole lot cheaper. Profits would plummet. Bad.

2. A lot of stuff we import simply can't be made in the US, including a lot of high tech equipment, key components, and capital goods. Prices rise. Bad.

3. Oftentimes, as Japan did in the 1980s, foreign competitors will simply lower the prices to remain competitive, and then make up for the profit loss by taking advantage of the exchange rate. More bad!

The doomsday scenario, of course, is that a devalued dollar leads to higher import prices, which leads to inflation, which in turn causes the Fed to raise interest rates, which in turn attracts foreign investors, which in turn pushes UP the value of the dollar, exacerbating the trade deficit. That's a raunchy downward spiral.

Also, the problem with manufacturing is not weak domestic demand either, as our favorite marxists over at EPI explain. This doesn't really relate to the above, but it's another myth that gets bandied about, most recently by the Congressional Budget Office. Tsk, tsk.
-- Brad Plumer 11:13 PM || ||