Dean Baker’s Dollar Claims

April 15, 2008

Dean Baker is a supposedly left U.S. economist, co-director of the Center for Economic and Policy Research and writer of an American Prospect blog and at the TPM Cafe.

Yesterday he had a column about the value of the U.S. dollar in the Guardian:

Declaring class war

America’s two highest-ranking economic officials, Federal Reserve Board chairman Ben Bernanke and Treasury secretary Henry Paulson, effectively declared class war last weekend. While they did not use this term, that is the implication of their stated policy of propping up the dollar.

…
A high dollar makes goods produced in other countries cheaper for people in the US. If the dollar rises by 20% against the currencies of our trading partners, then all the goods that we import from other countries are approximately 20% cheaper for people in the US. In this way, an increase in the value of the dollar by 20% has roughly the same impact on imports as if the US government had a policy of paying a subsidy on imports equal to 20% of the sale price.

The first graph about "propping up the dollar" is nonsense. At the G7 meeting last weekend, the communique made some noise about the "sharp swings in major currencies". Bernanke and Paulson repeated their standard claim of a "strong dollar policy".

But that claim is always made and the actual policy both implement has the effect of lowering the dollar’s value. They continuesly hammer China to let the Renmimbi rise, which it does, and keep interest rates lower than they are in other countries, which has the the effect of lessening the dollar value.

Since 2002 the U.S. Dollar index has fallen over 30%. If Baker were right, that move should have created more domestic manufacturing, more blue collar jobs, less imports and higher exports.

But all of that hasn’t really happend. Certainly not to the extend as in Baker’s simplistic example above.

While U.S. exports have somewhat increased during that last two years, imports have increased even more as the lower dollar led to a significant price rise in oil and gas and food stuff.

There are more counter-examples. While the Euro has steadily increased, Germany posts one export record after the other and unemployment there is decreasing. How does this fit into Baker’s model?

Baker also claims a higher dollar is better for the rich than for the poor, i.e. it is "class war". But if a worker has to pay 20% of his income to get to work and to eat, a lower dollar will hurt him more than someone who has a high income and doesn’t have to care about gas prices.

Baker has written some very simplistic stuff here and the numbers simply don’t support him.

The reasons for a decline in U.S. manufacturing are not the dollar value, but structural policy issues. Those can not be cured by low dollar.

A decreasing dollar value creates inflation. That really hurts the poor and is real "class war."

Posted by b on April 15, 2008 at 17:42 UTC | Permalink

Comments

It wasn’t so much the lower class as the middle class: we were printing dollars to allow the middle class to afford mortgages on overpriced real estate, since home ownership is one of the defining characteristics of the middle class.
Now it turns out that we have overprinted around $1 trillion, and these losses have to be made good. At whose expense? The lower classes have little left to pick over, the rich have enough tax shelters and overseas accounts.
That leaves – you guessed it – America’s great milk cow, the middle class.

Posted by: ralphieboy | Apr 15 2008 19:06 utc | 1

Posted by: Uncle $cam | Apr 15 2008 20:11 utc | 2

I’m not sure I agree with your last point, b – A decreasing dollar value creates inflation. That really hurts the poor and is real “class war.”
Unexpected inflation transfers wealth from lenders to borrowers who can pay strong dollar loans back with cheaper, weaker dollars. Since the poor are, sort of by definition, net borrowers as they have got less to lend out this is a net transfer to the poor. Though, to the extent that the US can pay off it’s debts to foreigners in dollars worth less, it is also a transfer from China, Japan and the Gulf to US taxpayers as a whole. One can argue who is poorer in that scenario.
Once the inflation is priced into higher interest rates this transfer effect is gone.
The real issue for the poor, US or China, inflation or no, is whether they have the power to increase their real wages, ie. whether their wage is rising faster or slower than inflation, whatever it happens to be. That is a question of organisation among other things.
Just my morning 2c.

Posted by: PeeDee | Apr 15 2008 21:37 utc | 3

Professionologists, that is, professionals who study ‘professionals’ as a class, and
the behavior of their various speciations and cohort dynamics, within the aggregate
subset of all professionals, as both a coherent population and individuated ecology,
have reported on economists, or “economic scientists”, as a group experiencing the
most radically morphing and hybridizing transformation, of any professional species.
What was once a monolithic old-growth cadre, speaking an arcane special-language,
almost a religious sect, whose prognostications and perambulations were of no real
interest to anyone other than themselves, have been logged off, clear cut, leaving
broad slashed stump farms as home to an entirely new species, a sycophantic fungal
parasite, pack rat and a gaming organizer, small, furry, myopic animal intent only
on chasing alpha seeds shed by a few remaining old growth, as they slowly die off.
What makes this new subspecies interesting to professionologists is their inate
and chameleon-like ability to appear to be scientists, even occasionally scurrying up on the sheared-off stumps to chirp and burble bubblegum philosophy
replete with cries across the frog pond of, “marshall, marshall” or “galbraith,
galbraith”, “keynes, keynes” and “friedman, freidman”, with the occasional low,
stentorian, “böhm-bawerk, böhm-bawerk,” found mostly in lowlands of eastern EU.
Professionologists note, however, that unlike their old-growth predecessors, this
new parasitic species has no known useful attributes, and because of their habits
of spawning parasitic ponzis, cooked books, and general deficit expansion schemes,
the “neo market economists” are considered an agricultural pest to be eradicated.
President George Bush has “called up” another $250,000,000 to study the problem.

Posted by: Terrence Micheals | Apr 16 2008 1:22 utc | 4

PeeDee:
I’m not sure I agree with your last point, b – A decreasing dollar value creates inflation. That really hurts the poor and is real “class war.”
A lower dollar means foreign currencies are higher. That means goods that those appreciated foreign currencies buy become cheaper. This in turn raises demand. As demand goes up prices go up. Those that have to compete for those same goods with a lower dollar pay more. For example oil prices hit $114 a barrel today. So US consumers pay more for gas, more for food and more for heating the Mcmansion. A lot more than the difference they might some day see from the devaluation of the forgein debt. There is no transfer of wealth from China, Japan and the Gulf to US taxpayers as a whole unless they actually pay off the debt with those cheaper dollars. How can there be? when the debt is actually increasing.
In fact the transfer of US wealth is in the opposite direction in the form of increasing interest payments servicing that debt to the foreign governemts that lend the money. How you can argue that Joe six pack is benefitting in any way is beyond me. He still has to pay off that debt no matter if it is devalued or not on top of those higher prices.
The real issue for the poor, US or China, inflation or no, is whether they have the power to increase their real wages
They obviously don’t have the power, just ask the truckers. Unions have been devastated. Historically, significant transfers of wealth to the poor have occured via union organization or rebellion. In today’s anti union and patriotic US environment I’d say the changes are from nil to zero in the short term at least. They are still counting on government welfare to save them. That’s why the government is sending them checks this spring. The same government that helped create the existing crisis.

Posted by: Sam | Apr 16 2008 1:43 utc | 5

As someone posted, that great lecture by Dr. Michael Hudson
http://www.kpfa.org/archives/index.php?arch=19173
shows how our monetary policies of deficits and inflation have been a tremendous free ride for the U.S. Now, the party’s over. A weaker dollar will in fact lead to a resurgence of U.S. manufacturing. It will be painful, but necessary and healthy. Americans need to learn to work again. Ouch.

Posted by: dacorilitter | Apr 16 2008 4:01 utc | 6

daccorl,
problem is, those good old days of well-paid jobs for semiliterate, undereducated American workers are long gone.
If America wants to recover lost jobs in manufacturing, those workers will have to be well trained, someting that requires a sound basic education. There’s the real *ouch*.
In the meantime, they will stay at home, cleaning their guns, reading their Bibles and being bitter…

Posted by: ralphieboy | Apr 16 2008 6:42 utc | 7

Here’s some more class war:

Hedge fund managers, those masters of a secretive, sometimes volatile financial universe, are making money on a scale that once seemed unimaginable, even in Wall Street’s rarefied realms.
…
Their unprecedented and growing affluence underscores the gaping inequality between the millions of Americans facing stagnating wages and rising home foreclosures and an agile financial elite that seems to thrive in good times and bad. Such profits may also prompt more calls for regulation of the industry.
…
Since 1913, the United States witnessed only one other year of such unequal wealth distribution — 1928, the year before the stock market crashed, according to Jared Bernstein, a senior fellow at the Economic Policy Institute in Washington. Such inequality is likely to impede an economic recovery, he said.

Wall Street Winners Get Billion-Dollar Paydays
I don’t think those fellas will be too worried about filling up their gas tank or the price of a T-bone.

Posted by: Sam | Apr 16 2008 10:46 utc | 8

Thanks Terrence Micheals. Why I like this place.

Posted by: beq | Apr 16 2008 11:27 utc | 9

ditto what beq said. that was an excruciatingly good post terrence.

Posted by: Anonymous | Apr 16 2008 15:25 utc | 10

Dollar falls on weak data, hits record low vs euro

NEW YORK, April 16 (Reuters) – The euro vaulted to a lifetime peak against the dollar on Wednesday as record high euro zone inflation and a sharp slide in U.S. home construction highlighted the divergent growth paths of the two economies.
The euro rose to $1.5977, according to Reuters data, its strongest since its 1999 launch, as data showing a record 3.6 percent advance in euro zone prices last month suggested the European Central Bank won’t cut interest rates soon.
The outlook for the Federal Reserve was quite different, especially after reports showed a sharp slide in U.S. March housing starts and unexpectedly low consumer price inflation.
“Relative inflation rates and their policy implications is the theme of the day and is leading the euro charge toward $1.60,” said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut.
The Fed has already cut benchmark U.S. rates 3 percentage points since September and is widely expected to cut them again, to at least 2 percent, in late April.
Meanwhile, euro zone interest rates have been at 4 percent for more than a year.
The euro last traded at $1.5965, up 1.1 percent from late Tuesday, while sterling rose 0.6 percent to $1.9747 GBP=>.

And Dean Baker says the U.S. is trying to make the dollar stronger?
Strategists at CitiFX wrote in a note to clients that the euro’s break to a new record high may signal sustained dollar weakness across the board.

Posted by: b | Apr 16 2008 17:40 utc | 11

The US economy will be saved:

There is also general agreement that Hudgens volunteered for the “team-building exercise,” that he lay on his back with his head downhill, and that co-workers knelt on either side of him, pinning the young sales rep down while their supervisor poured water from a gallon jug over his nose and mouth.
And it’s widely acknowledged that the supervisor, Joshua Christopherson, then told the assembled sales team, whose numbers had been lagging: “You saw how hard Chad fought for air right there. I want you to go back inside and fight that hard to make ales.”

Team-Building or Torture? Court Will Decide
We will waterboard our way to success. We expect future sales to increase dramatically.

Posted by: Sam | Apr 17 2008 14:46 utc | 12

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