Why we don’t need a currency war, more Fed easing or additional stimulus
Great, great stuff from economic analyst Ed Yardeni, busting some myths and taking names:
1. The U.S. will prosper if the yuan appreciates. The number one urban legend today, in my opinion, is that if the Chinese stopped manipulating their currency and let it appreciate by say 20%, then the U.S. trade deficit would shrink and employment would rebound at a faster pace in the U.S. Didn’t the Chinese do that recently without the expected positive impact on the U.S.? Yes indeed. From mid-2005 through mid-2008, they let the yuan appreciate by 20%. It was then pegged again until it was allowed to move a bit higher in recent days. (See Fig. 26 in our China briefing book linked below.) America’s trade deficit with China was $248.8bn during the 12 months through July of this year. The Chinese simply manufacture lots of merchandise that the U.S. no longer produces because labor costs are too high in the U.S. The standard of living of U.S. consumers has improved as a consequence of cheaper imports. If the ones from China were made more expensive through currency appreciation or tariffs, the goods would be made in and imported from other low wage countries rather than made in the USA again. Besides, among the weakest sectors in the U.S. labor markets are construction and local governments. They have home-grown problems that have nothing to do with China. Productivity gains in sectors with high labor costs have cost some Americans their jobs, while they have boosted the real pay of those who remain employed.
Me: Indeed, a new study out indicates that offshoring (and immigration) has not cost America jobs.
2. The Fed must continue to ease. Another Fed-inspired legend is that since the federal funds rate is down to zero, it means the Fed can’t do anything more to stimulate the economy. There is some bizarre chatter among Fed officials that based on the Taylor Rule, the federal funds rate should be negative! Indeed, FRBNY President William Dudley recently touted the idea that another $500bn in quantitative easing would be equivalent to lowering the federal funds rate by 50-75bps. The problem is that near-zero interest rates are depressing the interest income of many Americans. Americans may also understand that the only real beneficiary of such low interest rates is the U.S. federal government. So, the Fed is enabling the fiscal excesses of Congress. Eventually, such excesses must lead to higher taxes and higher inflation. In other words, Washington’s irrationally stimulative monetary and fiscal policies are getting offset by depressed rational expectations.
Me: Low rates create more bubbles as investors search for high yields. The stage is not being set for strong, sustainable economic growth. But the lack of sound fiscal policy is pushing the Fed to act.
3. More fiscal stimulus is necessary. Keynesians continue to promote the fiction that government spending can create jobs through the fiscal multiplier effect. A significant portion of the 2009 fiscal stimulus program was directed at protecting the jobs of state and local public employees. Now that the stimulus is wearing off, they are losing their jobs anyway. The problem is that many of them are retiring early with huge pension benefits, making it impossible for state and local governments to hire more workers. The notion that the stimulus program wasn’t enough and that more deficit-financed government spending is required is nutty. What about more government spending on infrastructure? Congress regularly passes bills that purport to do that, yet the money never seems to show up as new roads, bridges, tunnels, and train tracks.
Me: States need to restructure, and the their fiscal woes are forcing them to take action. Washington should focus on tax and budget reform ASAP.