Bastard orphan, son of a whore and currency manipulator!

Draft

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One of my favorite pet peeves is over how mere words and phrases take on a life of their own, which far overshadows their original meaning.

I want to relate this source of pervasive confusion to essentialism, perhaps the most destructive, unwitting philosophical tendency in the popular culture, which dare not speak its own name.  But I have not yet got the wording right, in part because I am amateur at these issues. I am working on it.

Apparently, international economists need now to drop everything they are doing to have a semantical debate about whether Germany (or anybody else) is a “currency manipulator”. Dunh, DUNH, DUNNNNNNH!

In this post I am going to try again to explain why that whole discussion is entirely beside the point. The argument I raise here is not the least novel, but is instead a channeling of the conventional consensus view on this issue. It is just that once people get distracted by the siren call of essences they occasionally lose their faculties, including memory.  Highlighting that bit is my attempt at value add here.

In my view, this one bad habit explains most of the confusion around macro over the past ten years, not just as relates to trade but more generally.  Here, I focus on the example of currency manipulator, not because that example is particularly important, but more because it exemplifies the broader essentialist confusion.

OK, so imagine Germany were in a position to offer Americans the standard 3 series BMW at $5,000 a car.  This offer might reflect that Germany had been bestowed a Start-Trek-like replicator that could produce Beemers for free, leaving the owners of BMW stock a $5000 profit on each 3 series sold in America.  Or it might reflect that Germany had somehow manipulated the euro so low that BMW could meet its domestic costs (pretend they are overwhelmingly domestic) and still make an acceptable return at $5,000 a car sold in the US market.

Now imagine that there were an American politician charged with making a judgment call about whether it was acceptable to allow in German cars at that price. Suspend disbelief just for a moment, and assume – wildly – that this politician were motivated by an abstraction called the interest of the United States. I know, crazy, right?  But economics arguments require assumptions.

This politician would have to consider a lot of things to decide if accepting those Beemers at $5k a pop was in the interest of the United States.  Among the things he would take into account, trimming the list brutally in the interest of time, might be: whether there are near substitutes for Beemers produced in the US, whether the US was in liquidity trap, whether accepting low-price foreign autos might have distributional consequences that are intolerable, and whether threatening Germany with protection might encourage Germany to do something in the US interest, like, say, respect American claims to intellectual property.

Hell, I would even add to the list that the axiomatic take on what drives consumer satisfaction is totally unscientific and that the whole optimization question is irrelevant. But let’s leave that last one aside.

The range of considerations relevant here is extremely broad and I doubt that there is a technical, morally-neutral answer to the question.  But the pertinent point for our purposes here is that it is by no means necessarily – or even probably — the case that the answer depends on the source of Germany’s ability to offer the US Beemers at $5k.

Accordingly, the semantical debate about whether or not Germany was a “currency manipulator” would be irrelevant to determining the interest of the United States in this matter.  Either the standard case for the benefits of trade applies here, in which case we welcome the BMWs, or there is one of several possible complications bearing on the situation and it does not.

This is a really basic point that is being overlooked in the currently-popular discussion over trade between the US and Germany. The most obvious cause of it would seem to be amnesia over things that people already fully know – or at least believe. But I would relate it also to essentialism.

To underscore this point, I would like to speculate on the origins of the concept of “currency manipulator.”  Despite what you might think, based on the current rhetoric, this concept does not arise out of a conviction that the standard argument for the gains from trade is somehow overturned if the source of low-priced imports is currency policy.

No. The idea of currency manipulator was invented by people who do not accept the standard argument for the gains from trade – perhaps correctly – and on mercantilist grounds fear protection from the other country.

To wit, out of a desire to gain access to foreign markets, both sides in a trade relationship agree to an armistice among trade warriors, in which each side agrees not to levy protection.  And to determine whether protection is happening, one or both sides put in place a series of tests, one of which might be whether the other is “manipulating” their currency.

The key point here is that the idea of currency manipulation arises out of a rejection, not acceptance, of the standard argument for the gains from trade. The whole concept is itself inherently protectionist, in the sense that it arises out of a mercantilist, rather than classical, take on the role of trade.

And so if we claim to accept the standard logic of the gains from trade, as I am inclined to do, then whether or not Germany is a currency manipulator is actually irrelevant.  So spare us the free but fair trade BS, please.

To me, this point is really obvious. I don’t think it is particularly controversial, but more something people forget, because they get captured by the word or the essence rather than to the situation that the word is meant to describe.

In my view, this is a pervasive source of confusion in macro discussion. And I think this confusion is a much bigger deal than its implications for trade policy, because the consequences of the confusion extend far beyond trade. I hope to have something somewhat coherent on this later. I have already tried a few times, but not yet even to my own satisfaction.