Competitive Devaluations Could Be Good for Individual Countries and for the World Economy.

“Currency depreciation in the 1930s is almost universally dismissed or condemned. This paper advances a different interpretation of these policies. It documents first that depreciation benefited the initiating countries. It shows next that there can be no presumption that depreciation was beggar-thy-neighbor. While empirical analysis indicates that the foreign repercussions of individual devaluations were in fact negative, it does not imply that competitive devaluations taken by a group of countries were without mutual benefit. To the contrary, similar policies, had they been even more widely adopted and coordinated internationally, would have hastened recovery from the Great Depression.”

This quote is from Barry Eichengreen and Jeffrey Sachs, “Exchange Rates and Economic Recovery in the 1930s”, The Journal of Economic History, December 1985.


My comments: 1. The countries that exited the Gold Standard first got the strongest and most rapid economic recovery, while late floaters like France or Switzerland paid a heavy price in the form of a lengthier bout of depression and unemployment. Today the problem is to exit from the "Bretton Woods 2" regime of partly fixed exchange rates.

2. What we call “currency wars” or “chaos” can be seen as a simple “tâtonnement” of the governments towards and equilibrium vector of exchange rate prices. It is due to the fact that nobody knows exactly in advance the precise (and fluctuating) equilibrium price of the national currency, and especially not the other governments.

It follows that, while many economists claim that currency wars are a zero sum game (what one country gains another must loose) they nevertheless have a real utility: the production of new information about what the adequate equilibrium exchange rates should be. It is a positive sum game and a process of discovery, as useful as competition in other markets. Planners everywhere generally consider competition to be a pure waste. But they are wrong as the collapse of planned economies demonstrated.

Roubini on Currency War

"The first salvos in this war came in the form foreign-exchange intervention. To diversify away from US dollar assets while maintaining its effective dollar peg, China started to buy Japanese yen and South Korean won, hurting their competitiveness. So the Japanese started to intervene to weaken the yen.
This intervention upset the EU, as it has put upward pressure on the euro at a time when the European Central Bank has placed interest rates on hold while the Bank of Japan (BoJ) and the US Federal Reserve are easing monetary policy further. The euro’s rise will soon cause massive pain to the PIIGS, whose recessions will deepen, causing their sovereign risk to rise. The Europeans have thus already started verbal currency intervention and may soon be forced to make it formal."

Read the paper, here.

Job Search and Unemployment

Edward Glaeser explains the work of the new Nobel Laureates and its source in George Stigler’s economics of information here.

Factory Farming Is Extremely Inefficient

“It takes seven calories of food input into an animal to produce one calorie of food output.”

And the farm subsidy structure exacerbates the factory farm problem: it encourages farmers to feed corn to cows, a food that they’re not naturally able to digest.

Read the BigThink interview of Jonathan Safran Foer here .

More (Labor) Taxes, Less Work

Here is Greg Mankiw’s calculus.

Immigrants Boost US Employment and Production

According to a new study by Giovanni Peri for the San Francisco Fed:

"The effects of immigration on the total output and income of the U.S. economy can be studied by comparing output per worker and employment in states that have had large immigrant inflows with data from states that have few new foreign-born workers. Statistical analysis of state-level data shows that immigrants expand the economy's productive capacity by stimulating investment and promoting specialization. This produces efficiency gains and boosts income per worker. At the same time, evidence is scant that immigrants diminish the employment opportunities of U.S.-born workers."

Here is the article in the FRBSF newsletter.

Stelzer, Euromess, and "Eurosud"

All over Europe officials are doing the same thing over and over again and expecting different results, writes Irwin Stelzer in the Wall Street Journal.

Greece led the peripheral countries in piling up debts that it had little hope of ever repaying. Non-peripheral countries, most notably Britain and France, joined in the fun. Then, given that national cupboards are bare, the Euroland authorities stepped in with a cunning plan to handle excessive debt: borrow more to repay the previous wild borrowing. The Irish government thus will drive its deficit to 32% of GDP to bail out banks hit by the inability of property developers to repay excessive borrowings.

The current chosen path combines austerity with borrowing by Euroland as a whole. The borrowing in effect transfers the debts of the broke countries to Germany’s balance sheet, while austerity concentrates the burden of repayment on the current recipients of government outlays – public-sector workers, benefit recipients, and private sector contractors for whom the government is a major customer. And it lets the creditors, who made the excessive loans in the first place, off the hook.

However, “history suggests that austerity without loose monetary policy can be self-defeating. Never mind: Eurocrats will pay any price to avoid the humiliation of restructuring and unleashing inflation worries in Germany. So a combination of austerity and tighter credit is in store …”

"Euroland politicians think they can (1) fight markets, (2) inflict infinite pain on voters in democratic countries, and (3) whip the profligate into line. They can do none of these" because markets set the borrowing rates and voters turn out politicians who push them too far.

Sensibly, Stelzer advocates a currency depreciation, large enough to restore competitiveness of the peripheral countries (and maybe of the others also I would argue) to avoid debt “restructuring” and a heavy dose of inflation. But the currency he has in mind would be a newly created “Eurosud”, the result of partitioning the eurozone into two smaller areas.

That would prove, in my opinion, doubly illusory. First a new currency limited to the countries of southern Europe would not constitute an optimal currency area any more than the current eurozone, and the Eurosud "one size fits all" monetary policy would thus not prove adequate for anyone of the member countries. And second, it would raise all the problems of creating a new currency in the middle of a confidence crisis, a daunting task, much harder than a simple return to national currencies (for which national monetary institutions and central bank are still in place) that would soon have to be repeated later, when each country would have to turn back to its own former national currency. It would be much better to proceed directly to that second stage now, especially because the euro is again gaining strength relative to the dollar, losing all the benefits of its beginning of the year depreciation to more reasonable levels.

And meanwhile, interest differential between peripheral countries and Germany keep growing, reflecting the increasing risk of their government bonds.