Monday, July 11, 2011

Currency Manipulation in Favor of U.S. Consumers

From a WSJ article today "China Boosts Lead in Global Exports" about China's exports setting several new records in June: 

"China's critics, including members of the U.S. Congress, say an undervalued currency unfairly helps Chinese exporters." 

Don Boudreaux responds on Cafe Hayek:

"Overwhelmingly, the beneficiaries are non-Chinese consumers (including Americans) of China’s subsidized exports. In contrast, the people unfairly burdened are exclusively Chinese citizens – both as consumers forced to pay higher prices at home, and as taxpayers forced to fund Beijing’s practice of purchasing U.S. dollars in order to depress the price of the yuan against the dollar.

It is, in fact, obscenely unfair for Beijing to oblige the Chinese people to hand over chunks of their wealth to Americans, even the poorest of whom is far richer than is the typical man or woman in China."

MP: The chart above helps to show how American consumers have benefited from China's "unfair" currency policy by comparing the overall increase in prices (CPI: All items) since 1998 to the price increases for clothing and toys, which are both mentioned in the  WSJ article as examples of China's export dominance in labor-intensive products.  While overall prices in the U.S. have increased since 1998 by 39%, clothing prices have fallen by almost 10% and toy prices have fallen by more than 50%.  That means that in real terms, clothing is about 49% cheaper now than in 1998 and toys are cheaper by almost 90%. 

We can of course thank China's low wages in part for the dramatic decreases in real prices for clothing and toys purchased in the U.S., but we can also thank the Chinese government for manipulating its currency in favor of American consumers, and we should be grateful for the billions of dollars saved by Americans over the last decade from that manipulation.   

30 Comments:

At 7/11/2011 6:08 PM, Blogger Methinks said...

Makes me wish I could eat toys.

Seriously, though, I remember I used to go to Piece Goods, choose patterns and fabric and sew my own clothes. It was cheaper than buying clothes. Clothing is like Kleenex now.

 
At 7/11/2011 6:13 PM, Blogger Benjamin said...

Interesting.

On the other hand, I can buy a dozen eggs for $1 at a dollar store. Last night I watched a "The Honeymooners" rerun, and Ralph Cramden said that eggs cost 79 cents. That was 1952.

My guess is that clothing and toys would have become cheaper even if produced in the USA.

The Far East nation model--export businesses supported by collaborative nationalist-mercantilist government--seems to power Asian economies rapidly upwards.

The Far East nations are not following any of the basic precepts of Western economists, yet are prospering. They also run strong money supply growth.

Makes you wonder if there is more than one way to skin a cat.

 
At 7/11/2011 7:23 PM, Blogger Craig said...

My guess is that clothing and toys would have become cheaper even if produced in the USA.

Yes, they would have if our own government hadn't embarked on a program of monetary inflation some 60 years ago. If the dollar had simply held its purchasing power, the effects of capital growth would have improved production efficiency to the point that prices for American goods would have fallen instead of rising.

It's stylish these days to pooh-pooh those who wish we still had a manufacturing-based economy. But the transition to services isn't an inevitable result of increasing wealth -- it's the inevitable result of an inflationary policy that makes American prices and wages higher than our competitors.

 
At 7/11/2011 8:07 PM, OpenID American Delight said...

How dare you give me a new way of looking at things, sir!

 
At 7/11/2011 8:44 PM, Blogger arbitrage789 said...

Of course consumers benefit.

Then there's also the question of the extent to which interest rates on various Treasury debt instruments are lower as a result of Chinese purchases.

Members of labor unions here in the U.S., however, are not helped by the cheap imports.

 
At 7/11/2011 9:30 PM, Blogger Bbswede said...

Do Americans really, in fact, benefit?
As consumers (a one-dimensional and condescending term for people, IMO) the case can be made, but does a flood of cheap, Chinese crap really make us better off as a nation?

 
At 7/11/2011 10:20 PM, Blogger W.C. Varones said...

Oh, goody! More cheap Chinese crap purchased on credit!

Reminds me of the Parable of the Plastic Duck Junkie.

 
At 7/12/2011 2:16 AM, Blogger James said...

Does Free Trade Give Consumers Lower Prices?

Free trade has impacts on prices of things other than cheap drywall etc from China. Have you checked American grown grain prices lately? Opening up new markets creates higher demand for those products exported. Higher demand leads to higher prices. As a result American consumers pay higher prices for domestic consumption of the goods exported. In order to stimulate export growth the dollar is being devalued. A devalued dollar means that American consumers pay higher prices for all imported goods. Have you checked the price of a gallon of gasoline lately? Part of that price increase is the result of trying to increase trade with a cheap dollar. This is yet another downside of free trade advocates fail to acknowledge.

It is not obvious that free trade nets out to lower prices for consumers. Prices of domestic goods go down all the time. How do we know that the price declines shown here are due to free trade and when considered with increased prices from free trade do Americans see any net advantage from free trade even if job loses are not considered?

 
At 7/12/2011 3:09 AM, Blogger Ron H. said...

James,

Both grain and gasoline are globally traded commodities, subject to worldwide supply and demand which affects their global price, which is roughly the same for anyone in the world who buys them anywhere in the world.

High worldwide demand for both grain and gasoline have caused the prices of both to rise.

A depreciating dollar also results in a higher price for both of these commodities.

The artificially created demand for ethanol in this country also helps ensures higher worldwide prices for grain.

Why would you blame higher grain prices on increased worldwide demand, but blame higher gasoline prices on devaluation of the dollar?

As you point out, a lower valued dollar causes increases in import prices; The exact effect you have continually called for, with tariffs on imports.

This, as well as the higher demand for exports, should help American workers, but you are still complaining. It seems you are not satisfied with ANY result.

What is it you really want, James?

 
At 7/12/2011 3:21 AM, Blogger Ron H. said...

"Do Americans really, in fact, benefit...as consumers...[from] a flood of cheap, Chinese crap?"

Yes, we do, as you point out. And keep in mind, that there is only a "flood of cheap, Chinese crap", because we, as consumers, demand it.

We, as individuals, are also workers, stockholders, taxpayers, patients, and every other role discussed on econ blogs.

"As a nation" has no mean meaning in this context.

 
At 7/12/2011 3:35 AM, Blogger PeakTrader said...

James says: "Higher demand leads to higher prices."

Where did that higher demand come from? Much of it came from free trade.

Higher demand causes higher prices, but higher prices also causes supply to increase.

The result is higher living standards.

 
At 7/12/2011 8:55 AM, Blogger juandos said...

"But the transition to services isn't an inevitable result of increasing wealth -- it's the inevitable result of an inflationary policy that makes American prices and wages higher than our competitors"...

Well Craig don't forget the costs of federal government over reach in manufacturing domestically...

 
At 7/12/2011 9:15 AM, Blogger morganovich said...

free trade also causes increased supply which causes prices to drop.

arguing that free trade increases prices is ludicrous.

there is ZERO evidence to support that.

do you have any idea what gas would cost in the US if we could not import oil?

 
At 7/12/2011 9:47 AM, Blogger niknaknoo said...

I think you'll find the quality of the goods (and the welfare of the chickens Ben) has gone way down.

 
At 7/12/2011 10:09 AM, Blogger morganovich said...

nik-

that's an excellent point.

to make a valid comparison, you'd need to price vs organic eggs.

funny how these inflation quality adjustments always assume everyhting only gets better.

 
At 7/12/2011 10:24 AM, Blogger Buddy R Pacifico said...

James asks "Does Free Trade Give Consumers Lower Prices?"

Yes James, it does BUT the better question is: what kind of a trade relationship does the U.S. have with China?

Basically, the U.S. is free of trade barriers, with about 4% tariffs on about 4% of goods that might enter the U.S. There is no bureaucracy that creates non-tarriff barriers such as vague certification standards on foreign goods. The U.S. vigorously enforces property rights of both domestic and foreign owners. Federal and local officials in the U.S. do not demand joint ventures, and majority ownership in the venture, for foreign companies to do business in America.

The Chinese do not offer the same circumstance to U.S. producers in Red China. Some, including Don Boudreaux, have no problem with this and state Free Trade can be "unilateral". Unilateral is not a trade relationship and so is not Free Trade, but rather an assortment of grand concessions to the authorities in Red China. Concessions that grant great harm to U.S. producers, that would otherwise compete in a Free Trade relationship.

BTW, why do some libertarians not acknowledge nor fight for intellecutal property rights?

 
At 7/12/2011 11:55 AM, Blogger Ron H. said...

"Unilateral is not a trade relationship and so is not Free Trade, but rather an assortment of grand concessions to the authorities in Red China. Concessions that grant great harm to U.S. producers, that would otherwise compete in a Free Trade relationship."

What grand concessions are those, Buddy? Is buying things at lower prices a concession? I'm not aware of any agreement to do so, but it seems like a good idea to buy as cheaply as possible. I think we all shop for low prices.

I know I personally, haven't agreed to buy anything at a particular price from anyone, although my own government has forced me to buy some things, such as special light bulbs, shower heads, and perhaps soon, health insurance. That's for sure not free market.

I's also not clear how buyers in one particular country being unable to buy from US producers is greatly harming those producers. Surely there must be other customers for their goods and services.

 
At 7/12/2011 12:13 PM, Blogger Ron H. said...

Buddy: "Yes James, it does BUT the better question is: what kind of a trade relationship does the U.S. have with China?"

How can the subject of trade relations between governments be more important than the agreements between individuals?

Governments, as agents of their respective citizens, should work to benefit those citizens. the Chinese government is clearly not doing this.

Would you suggest that the US government retaliate by harming its citizens also?

 
At 7/12/2011 12:46 PM, Blogger Methinks said...

funny how these inflation quality adjustments always assume everyhting only gets better.


That's because this is actually true. It says that the price of goods relative to their quality is lower.

If the price of a good were lower, but the quality were even lower still, people simply wouldn't buy as much.

Technology is a prime example of vastly increased quality and much lower price. Even shoddily constructed clothing and cheap toys are much better quality relative to price.

 
At 7/12/2011 3:16 PM, Blogger morganovich said...

"If the price of a good were lower, but the quality were even lower still, people simply wouldn't buy as much. "

i think you're missing the point here.

the point is that if you compare 1957 eggs with 2011 eggs, you need to keep quality constant. those eggs are not anything like the ones at costco now.

a blender used to last your whole life. my grandmother's still works. buy one at bed bath and beyond, and it's shot in 3 years. it's not a valid comparison. you'd need to compre it to one of the $300 ones at willaim sonoma.


you have to be very careful that you are comparing like to like, somehting the BLS is notoriously bad about.

they call a new blender better because it has 8 speeds instead of 7, but never take out value because it now has a cheap motor and plastic parts as opposed to grandma's that could power a lawnmower and lasts 40 years because it was built like a studebaker.

try and find the kinds of crystal you used to be able to buy.

or try comparing a jcrew sweater from the 80's (i still have several) with a new one that falls apart in a year.

lots of products get worse.

that may be because people didn't care and wanted to pay less, but that does not make the products better in terms of quality adjustments.

 
At 7/12/2011 4:12 PM, Blogger Methinks said...

Morganovich,

or try comparing a jcrew sweater from the 80's (i still have several) with a new one that falls apart in a year.

Yes, I have skirts from the 80's. Interestingly, I'm the same size I was then, and those skirts are a size 6. When I buy the same brand today, they are a size 2. Damn, we're fat.

Maybe it's because you're a man that you don't notice how quickly fashion changes! Nobody wants bulletproof clothing anymore. People want cheap, trendy clothing which they will abandon when the fashion changes the following year (which, btw, is a big deal since being dressed fashionably has value). What I'm trying to say is that the drop in quality is clearly compensated for by the drop in price and the ability to buy more fashionable, up-to-date clothing. It's the democratization of fashion.

I have Oscar de la Renta dresses that are classics and are built to last. But, even they've gotten cheaper. The price increases of even quality goods have not kept up with inflation.

I immigrated from the Soviet Union (where we had a shortage of nasty, badly made, expensive junk) in 1976. I have no idea what your grandma's blender was like and I'd never seen a blender until I got to the Unites States. I now have a Vitamix. That parts are plastic and rubber, but the motor is 2hp and It'll outlive me.

 
At 7/12/2011 7:43 PM, Blogger morganovich said...

methinks-

i agree that consumer preferences tend to change and that the trend is toward cheaper, more disposable clothes (a la H+M).

when you are looking at quality adjustments to CPI, you need to take the lower quality into account, and that never seems to happen.

to hear the BLS tell it, every product gets better every year.

they tell us that a 2011 ford explorer is 2% better than a 2010 (as though that is not wildly subjective) and then tale 2% off the price of the 2011 before calculating the annual inflation.

it seem to me that if they are going to do that (and i think it's a ridiculous idea as its totally non objective and arbitrary) then they ought to look at a gap short made with cheaper cotton and say it's 3% less durable, so it's 3% more expensive.

oscar de la renta has not gotten cheaper, they have just released lower end lines. their high end is as expensive as ever, just like armani and brioni.

sure, you can now buy an emporio armani suit for $1500, but it's still going to be $5k for the real deal. and even then, the suits are not as high a quality as they were. hand stitching is a thing of the past. thinks once made by italian artisans are now piece cut in viet nam on machines and snet to italy for amcine assembly so they can carry a "made in italy" label.

i mean, look at donna karen. dkny is trash. so is virtually everyhting calvin klein makes. i have to have shirts made now because pretty much no one makes a quality i find acceptable.

i'm not really buying this "the clothes are just as good" argument. hugo boss, trash. all but the best vesace, same. the low end like gap has become wear 3 times and toss it garbage (and that's what they use in CPI).

you will always be able to buy very high end stuff so long as there is demand, but it'll cost you.

i can tell you from my own wardrobe that armani today is not even the quality their vestemetia line was 15 years ago.

take a hard look at the oscar. compare the old to the new. i'd be interested if you really think they are equivalent quality upon close examination.

if so, then he is one of the few brands that have maintained standards.

 
At 7/12/2011 10:46 PM, Blogger Methinks said...

Morganovich,

I didn't realize Oscar de la Renta had a lower end line. Carolina Herrera has one, but it's intolerable. I don't have data, but I don't think either of their high end lines have kept up with inflation. The price hasn't changed much over the years. Not changing the price for a many years is another way of being cheaper in real terms.

Prada from 15 years ago will outlast us all. Today it's trash. That's true. I think my Oscars and Carolinas are as well made - but that may be an issue of the specific target market. Donna Karan's line was poorly made (crappy seem finishes, fabric not on the grain - blech) in 1986 and it still is. Hermes is still unrivaled (that will change if LVMH ever gets its paws on it).

Which brings me back to the point I made earlier - yes, Gap, Loft, etc. are all much more poorly constructed and use cheaper fabric. But, you pay pennies and toss instead of taking all the time and effort to take care of clothing. You rotate your clothing more frequently and you don't have to be as careful with it. People value that - and that's a subjective value that also doesn't show up in the BLS statistics.

I understand your point too. But, statistics are limited that way - a lot of what we value does not show up in them.

My husband and I buy plenty of throw-away clothing and the important pieces we pay up for. But, we are glad that we no longer have to spend a fortune to clothe ourselves. When I first moved to the United States in the 1970's, it was cheaper to make my own clothes than to buy them. Everything else came from hand-me-downs or yard sales. That is no longer the case. At the time, I would have preferred the more cheaply made new and more fashionable clothes to the faded and out of date used clothing.

 
At 7/12/2011 11:28 PM, Blogger Buddy R Pacifico said...

This comment has been removed by the author.

 
At 7/12/2011 11:31 PM, Blogger Buddy R Pacifico said...

Ron H asks "What grand concessions are those, Buddy?"

Ron those concessions are among what what I stated that the U.S. does not have and exists with China: lack of property right enforcement; non-tariff barriers such as rolling certification standards on U.S. products; national and local communist party enterprises being forced joint venture partners with U.S. companies.

Does the harm imposed on U.S. producers, their shareholders and employees not rise to your personal concern? Do you then grant the concessions I listed above (and others) to the Red Chinese authorities?

I suggest that Chinese Exports _= U.S. Imports and Chinese Imports - U.S. Exports until a Free Trade agreement is agreed to with China

 
At 7/13/2011 3:52 AM, Blogger Ron H. said...

Buddy: "Ron those concessions are among what what I stated that the U.S. does not have and exists with China: lack of property right enforcement; non-tariff barriers such as rolling certification standards on U.S. products; national and local communist party enterprises being forced joint venture partners with U.S. companies."

These are things that harm the Chinese people, and make it difficult for US producers to do business with Chinese companies. Besides having a much larger world market for US goods than just China, if these conditions were harming them, I suspect that those producers wouldn't do business in China.

So no, I don't see any particular harm to US producers. I don't see how not providing a larger market causes harm. the same accusation of harm could be leveled at any country that can't or won't increase its imports of US goods, for any reason.

More important than government restrictions may be the income levels of the Chinese people. No matter how open Chinese markets, there is a limit to how much people can spend on US exports. I expect that level to increase as China becomes more prosperous, or as the Fed continues to destroy the USD so that US exports become very cheap.

"Does the harm imposed on U.S. producers, their shareholders and employees not rise to your personal concern? Do you then grant the concessions I listed above (and others) to the Red Chinese authorities?"

It seems odd to speak of granting concessions to Red Chinese authorities, as neither you nor I nor anyone else is in a position to grant anything to, or require anything of, the Chinese authorities.

"I suggest that Chinese Exports _= U.S. Imports and Chinese Imports - U.S. Exports until a Free Trade agreement is agreed to with China"

So you are recommending that the US government should force US consumers to buy less or pay more, as a means of punishing Chinese authorities? How bizarre.

If they shoot a hole in their end of the boat, do you think the correct responce is to shoot a hole in our end to spite them?

Is it only China that you see as a problem? Is it the 'Red' part in 'Red Chinese authorities' that causes you trouble?

 
At 7/13/2011 8:16 AM, Blogger morganovich said...

"People value that - and that's a subjective value that also doesn't show up in the BLS statistics."

i'm not sure you are looking at this the right way.

people many value variety, but that is already covered in the number of shirts they own. a utility function is no the same as a price level.

my point is that for any given piece of clothing, if the quality has dropped, the quality adjustments should show it, and they never do.

you NEED more shirts to get as much wear as you used to from fewer. you may like having more cheaper ones, but, you may be like me and hate it. there is no way to add that sort of selective preference into an aggregate like cpi in a valid way. frankly, i'm against these sorts of hedonic quality adjustments at all. they are just subjective bias. but, if the BLS is going to do them, they have to do them both ways.

btw, the DK black label stuff is till nice. i have about the greatest sweater ever from them.

regarding oscar and hermes etc - it may be that they are the same price because there were never really any productivity gains there. it was always hand made, an that sort of labor has not kept pace with inflation, so perhaps they are a special case. i do not think that they are broadly representative though.

it's fine to value more choice, but that is a completely different issue (utility function) than the price level.

to get an accurate sense of price level, you HAVE to compare like to like. a steak has to be a steak. add hormones and antibiotics to it, and it's less valuable. to compare a 1960 steak to today, you need to shop at whole foods. a shirt has to be a shirt of like quality. to take a gap t from 20 years ago and compare it to today is just not valid. it's not the same shirt at all.

there is no way to factor in the relative utility of having one short that lasts 100 wearings vs 2 that last 50. it turns the whole exercise into an assumptions based subjective mess.

that's why we need to get rid of theses adjustments altogether.

the geometric weighting in CPI is worse. it makes the superficially plausible argument that we consume more of things that go down in price and fewer of those that go up. but this assumed all price causality is one way. many things go up in price BECAUSE demand goes up. when the atkins diet became popular, pasta plummeted in price. (we made money shorting some companies) far from stimulating demand, this was a function of demand dropping. over-weighting pasta in the assumed consumption basket gave you a wildly inaccurate result.

most price movement in the US comes from demand shifts, not scarcity.

the reason price rises is more demand many times as frequently than reduced supply. this makes the whole set of BLS assumptions drive CPI in the wrong direction.

the numbers they kick out at present are perilously close to gibberish.

the whole issue was politically motivated. look at what they are mooting now: change CPI to chain weighted CPI to lower reported inflation so that SS and medicare costs increase less.

this is just why they did it last time.

it's a stealth cut in benefits with horrendous side effects for the economy as a whole.

 
At 7/13/2011 8:18 AM, Blogger morganovich said...

"Does the harm imposed on U.S. producers, their shareholders and employees not rise to your personal concern?"

sure. it would be better if china was more open to trade.

but what is it you propose to do?

impose punitive tariffs and punish us consumers?

all tariffs have a deadweight loss for the imposing country.

our best policy is free trade no mater what our partners do.

punching yourself in the face is never the way to get even with someone who has just punched themselves.

 
At 7/13/2011 2:55 PM, Blogger Methinks said...

you may like having more cheaper ones, but, you may be like me and hate it.

How can you tell me that I'm not looking at this the "right" way when I've already acknowledged what you say above to be true. Simple price statistics won't capture subjective things like "quality".

But, the market kind of does. Producers can sell the cheaper goods and make a lot of money. There doesn't seem to be much of a market for more more expensive, durable clothes.
So, it seems the market doesn't value durability as much as you do. whatever they're getting in exchange for more expensive fabrics and more durable clothes at higher prices they seem to value. You appear to be in the minority.

a steak has to be a steak. add hormones and antibiotics to it, and it's less valuable.

Not to the person who could not afford steak before and can now. When you pay a price, you pay it for something you value. A steak is meaningless unless people value it. So, if you value more steak and don't care about antibiotics and hormones, you perceive that you're getting more value (increased weight of steak) for the dollars you spend. You think the steak is less valuable because you don't like the additives. The steak is worthless to a vegetarian like me :)


the numbers they kick out at present are perilously close to gibberish.

I agree. There's a lot they don't capture and a lot that really can't be captured.

But we do know this - lower income people have access to stuff they like to buy. You and I (picky rich people) can always pay up for the quality we want. The poor don't have that option and it's good, IMO, that more people can afford things they want - even if they don't live up to your standards.

BTW...Lulu Lemon has these t-shirts that my husband lives in. It's this new fabric called "modal". Really nice. Our Loro Piana sweaters will outlast us all.

 
At 7/13/2011 4:42 PM, Blogger VangelV said...

On the other hand, I can buy a dozen eggs for $1 at a dollar store. Last night I watched a "The Honeymooners" rerun, and Ralph Cramden said that eggs cost 79 cents. That was 1952.

You can thank capital investment for that. Most US egg producers today use automated lines that require less than a handful of people per shift to operate 24/7. That compares with little automation in 1952. The problem for making toys and clothes is that automation is not possible because you have short run batches with too much variation for an automated process to be useful.

 

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