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The president can end currency manipulation with the stroke of a pen, halving the U.S. trade deficit and creating millions of jobs


Reposted from Working Economics, the Economic Policy Institute Blog


The president can end currency manipulation with the stroke of a pen, halving the U.S. trade deficit and creating millions of jobs

Robert E. Scott | February 14, 2013 | Working Economics


Five years after the start of the great recession nearly nine million jobs are still needed to return to full employment.  And as the Administration lays the groundwork for its second term, job creation should be goal number one.  Under existing authority, the President can execute one simple policy that would create 2.2 to 4.7 million jobs over the next three years:  End currency manipulation by a handful of countries, especially China.  This policy would boost GDP, reduce unemployment and, in budgetary terms cost nothing. It would, in fact, substantially reduce the federal deficit.  No other policy could achieve this jobs trifecta.

Over the past fifteen years rising trade deficits have devastated U.S. manufacturing employment. Since April 1998, the United States has lost 5.7 million manufacturing jobs, nearly a third of manufacturing employment and most of those job losses were due to the growing U.S. trade deficit.  Although half a million manufacturing jobs have been added since 2009, a full manufacturing recovery requires greatly increasing exports relative to imports.  While exports support domestic job creation, imports (and growing trade deficits) eliminate domestic jobs.  Although the overall U.S. trade deficit declined slightly last year, the trade deficit in manufactured products increased by $44.7 billion in 2012.  This growing manufacturing trade deficit is a threat to manufacturing employment and the overall recovery.

Currency manipulation, which distorts trade flows by artificially lowering the cost of imports to the U.S. and raising the cost of U.S. exports, is the single most important cause of these growing trade deficits. Halting global currency manipulation by making it illegal for China and other currency manipulators to purchase U.S. Treasury bills and other government assets is the best way to reduce the U.S. trade deficit, create jobs, and rebuild the economy.

China, Denmark, Hong Kong, Korea, Malaysia, Singapore, Switzerland, and Taiwan are the most significant currency manipulators, and Japan is also a threat as it has recently announced its intent to intervene. In the case of China, the largest and most important manipulator, the president has the authority to end China’s currency manipulation with the stroke of a pen under the Emergency Economic Powers Act (Bergsten and Gagnon 2012, 18).  He should announce his intention to restrict or ban Chinese purchases of U.S. Treasury bills and other U.S. assets if China does not substantially revalue and cease all currency intervention in the near future, and the president should issue such orders if China fails to respond.  If China is unable to purchase U.S. assets, it will no longer be able to manipulate its currency, which will rise with demand for Chinese goods and assets.  Treasury and the Federal Reserve have the authority and resources to offset efforts by the other manipulators to suppress their currencies, and they should begin to do so, working in coordination with our trading partners, especially those in Europe and others in the G-20 that have been injured by currency manipulation.

A new EPI report has shown that eliminating currency manipulation by trading partners could reduce the U.S. trade deficit by between $190 billion and $400 billion and support the creation of between 2.2 million and 4.7 million U.S. jobs over the next three years. This could reduce the U.S. unemployment rate by between 1.0 and 2.1 percentage points, increase U.S. GDP by between $225 billion and $474 billion (a rise of between 1.4 percent and 3.1 percent), and reduce the U.S. federal budget deficit by between $78.8 billion and $165.8 billion per year (deficit reduction of 20.4 percent to 42.9 percent).

The Obama administration has dramatically increased trade enforcement in the past four years by filing a number of successful complaints against China, both here in the United States and at the World Trade Organization. However, much more needs to be done to eliminate unfair trade practices, especially currency manipulation. The administration’s four years of pursuing quiet negotiations has achieved only mild success.

With the U.S. and European economies headed into a downturn in 2013, it is essential to rebalance global trade. Reducing imports to the U.S. relative to exports offers the best hope for creating millions of U.S. jobs and stimulating GDP—at no cost to the government.  Time is short for the President to put in place policies that will end the jobs crisis that threatens to become his economic legacy. Ending currency manipulation is the place to start and now is the time to do it.



8 Responses to “The president can end currency manipulation with the stroke of a pen, halving the U.S. trade deficit and creating millions of jobs”

  1. maggie says:

    The nut and bolts of currency manipulation says that it is not a unilateral do it yourself operation, so a “pretty please don’t manipulate currency” request to China and others would seem hypocritical and laughable at best. There must be a seller of the Treasury bills and other assets after all. If the credit rating agencies - the ones that rated all that mortgage toxic waste AAA - gave the U.S. debt a lousy rating, why would the likes of China even care about the risk or the interest rate or anything, when the motive is all about propping up their export market at the expense of others? Looks like the pricing of risk by interest rate breaks down here. Pay the interest on the debt to Grandma’s savings account, not some foreign entity.

  2. Joe Brooks says:

    Incredibly, [but not so incredible to someone who does a little research on who supports Mitch McConnell] I saw McConnell on TV in the last day or so explaining that economic policies should never be undertaken to reduce the budget deficits that State, Local and the Federal Governments suffer.

    Generating increased revenue for governments or citizens should never be a consideration in Federal economic policies, according to McConnell.

    We are now hearing openly that our “leaders” simply do not even try to promote American prosperity, or even want the country to survive.

  3. W. Raymond Mills says:

    “He should announce his intention to restrict or ban Chinese purchases of U.S. Treasury bills and other U.S. assets if China does not” -

    This is a stupid suggestion. Threats are usually stupid. If you want to do something, go do it. The Communist elite are hyper sensitive to the possibility that outsiders will exert any control over China - based on their bitter past experience. Threats to those guys will backfire. I am also opposed to trying to pressure China to change its policy on currency intervention, for the same reason. Do what needs to be done without threats or requests for a specific action by china.

    What is done about China must be done in the context of a reasonable deviation from past experience based on a reasonable argument in support of balanced trade with China treated like all other nations similarly situated.

  4. Tom T says:

    Raymond, you are right about this. The Chinese did not ask our permission to engage in currency manipulation on a country scale and we should not ask their opinion on our response. Threats will not work with the Chinese. They see that type of activity as weakness to be exploited.

    We need our government to act in our national interests on this issue, not on the globalist’s interests.

    Trade should be viewed like a driver’s license. It is not a right of other countries to have market access, but a privilege. That privilege has been abused with currency manipulation and other strategic moves by the country of China.

    I wish all the best for average Chinese people, but the ability of the Chinese government to capture all of that wealth (dollars) and not having it a part of a free market means the game is rigged. Our losses (deficits) should be ample evidence of this to anyone studying the issue.

  5. Will Wilkin says:

    Robert Scott in this article focuses on some very essential problems and goals in the American economy, but proposes strategies indirect and historically proven to be futile.

    Starting with what is right in this article, the loss of American manufacturing jobs and capabilities is fundamental to our economic decline. Mr. Scott is also correct to focus on the huge trade deficits that have persisted and grown for over 35 years, leading to equally huge jobs deficits. This is no mere recession nor recovery, it is a historic dismantling of American industrial ecosystem that, if not reversed, is taking us into a long-term loss of prosperity and competitiveness that will be more and more difficult to escape over time.

    The cycles of “jobless recoveries” has gone around a few times already, with unemployment at the recovery heights higher than at recession lows of decades past. According to John Williams at Shadow Stats, the real unemployment rate in the USA is around 23%:

    We are now in a DEPRESSION that will not be reversed through more of the same bipartisan policies and trends that have governed America for the past 4 decades, continued full-speed by the Obama administration. These ruinous policies center around the mania for “free trade” and “federal deficit reduction,” both of which benefit the top 1% who have grown rich through international labor arbitrage of globalization and through decreasing proportion of tax burden and decreasing public investments in infrastructure and education and technology development.

    By contrast, war industry spending by the US government is over 40% of total global military spending, more than next 14 countries combined. The military sector shows how the internationalist orientation of national level politicians neatly overlaps with the super-rich investors, giving the politicians a global stage and feelings of importance and power, while enriching the private owners of those industries whose products contribute nothing to the standard of living of Americans beyond the spending power of the wages of their employees. This is a complement to the internationalist perspective behind the “free trade” policies benefitting the same global corporations that fund our election campaigns and that staff our regulatory and other appointed government positions, and that offer retired Congressmen lucrative golden handshakes through lobbying, consulting and speaking jobs on behalf of these corporations. The prosperity and quality of life of the American people is nowhere to be found in any of these arrangements.

    The unpatriotic, international orientation of the super-rich is most directly reflected in their corporate governance that, through bipartisan “free trade” policies, enjoys unhindered access to the American consumer market without any requirement to invest in American jobs or infrastructure. As the USA sinks deeper into historic decline, with the consequent mass structural unemployment and impoverishment of tens of millions of Americans, and the loss of industrial ecosystem on which competitiveness and future wealth-creation depend, the 1% and their corporations are confident they will “make it up abroad.” And as the stock market, corporate profits, wealth accumulation and skewed income distribution all show, they are right.

    Turning to what is wrong with the article above, history has shown that currency revaluations are only a brief and fragile solution doomed to long-term failure. In his book “Currency Wars,” James Rickards describes how Nixon in 1971, in his New Economic Policy, implemented, among other things, a 10% surcharge on all imports and an end to the convertibility of dollars to gold. These measures amounted to a de facto devaluation of the dollar and a broad tariff that combined to approximately 15-20% devaluation of the dollar, depending on which currency was exchanged. In the resulting months of negotiations with major trading partners, the 10% import surcharge would only be lifted after other major trading partners increased the value of their currency an average of about 10% relative to the dollar.

    The policy was immensely popular at home, with stocks rising in hopes of increased exports of autos, steel, aircraft and other American-made goods. But within 2 years the USA entered its worst recession since WW2, with high unemployment, crashing stock market, high inflation and shrinking GDP. According to Rickards, “The lesson that a nation cannot devalue its way to prosperity eluded Nixon, [Treasury Secretary] Connally, [Presidential aide] Peterson and the stock market in late 1971, as it had their predecessors during the Great Depression.”

    As I have argued here previously, American decline is not primarily due to any manipulation of currencies or other political creations such as taxes or tariffs, but rather a deeper loss of competitiveness. This story really began with the end of the post-WW2 [short] American Century, which itself was based on the destruction of competing industrial economies in WW2. With the exception of Pearl Harbor, that war never touched American industrial plant or infrastructure even as it completely destroyed that of Europe and Japan. But in less than 3 decades, those economic competitors rebuilt, and in some ways had leapfrogged America by building the newest world-class facilities to compete with existing and older American plant. The competitive field grew even more crowded with the collapse of the [nominally] communist economies that opened up literally billions of additional workers eager to improve their condition through employment by global corporations. The state-corporate partnerships of Europe and Japan contrasted with the growing laissez-faire approach of the USA, adding to the attractiveness of investing abroad rather than in the USA. The low starting point of the standard of living in the former communist countries (and China, still nominally such) was a parallel attraction to investment due to low wages and weak regulation of labor and environment. All this resulted in the transfer and growth of manufacturing in those countries, to the loss of the USA. Employment and wealth creation follow investment, something America’s “free trade” policies do not require of the corporations that flood our consumer markets.

    I disagree with Mr. Scott and the others who clamor for solutions amounting to currency revaluations and tariffs. These are short-term and indirect quantitative solutions to long-term qualitative problems. The most direct and viable solution to our trade deficits is Balanced Trade legislation that uses Import Certificates to limit the value of imports to the value of our exports. This would not require a trade war or a currency war, it would be legal under WTO rules. Article XII of the General Agreement on Tariff and Trade (GATT 1994), annexed to the Agreement Establishing the World Trade Organization entered into on April 15, 1994, permits any member country to restrict the quantity or value of imports in order to safeguard the external financial position and the balance of payments of the member country. By diverting the $5—700 billion annual trade deficits to consumption of American-made goods and services, the stimulus to American industry would directly create over 4 million jobs, and millions more multiplier-effect jobs. Equally important, this growth of American industrial activity would rebuild our larger industrial ecosystem that is more than the sum of its parts -it is an environment in which innovation and productive capacity are encouraged and supported, essential to our long-term prosperity and competitiveness. The 3-4% rise in GDP and tax base this would effect, and the decreased need for social safety net, would go a long way in resolving the fiscal crises of the states and municipalities, and make it much easier to rebuild our infrastructure and public-private cooperation in technology and science and education, all necessary to rebuild genuine long-term competitiveness and quality of life.

    Although real solutions will be politically difficult so long as America’s coin-operated government is elected through global corporations financing billion-dollar Presidential campaigns and multi-million dollar Congressional races, we have to take hope in the huge reserve of power that lies in the self-interest and patriotism of the American people. Although the mainstream media reflect the dominant economic views handed down by the global corporations and their think tanks and politicians, all the propaganda in the world has not convinced the American people that these free trade and austerity policies are working. It is only a matter of time until alternative views become popular. Let us hope that war with China and other blame-the-foreigners explanations do not bring about a disastrous militarist and fascist-style solution, but rather we can hope and fight for solutions that make use of the tremendous new latitude for public investments and full employment that a combination of Modern Monetary Theory [which I highly recommend studying] and Balanced Trade laws could bring.

    • Tom T. says:

      Will, I think you are right about all of this. I am sorry I didn’t get back to you on your Modern Monetary Theory post as I have been a bit busy. MMT is good at explaining much of what is happening or can happen. One thing we must remember is that even with MMT, the basic underlying rules can be changed by those who are in control of the rules or laws. A good example of this was the article on China closing Walmart for some time giving rise to speculation that China did this because of the currency issue as a warning to the foreign investors in China using food safety as a cover story.

      All of the incentives in an economy can easily be changed by policy makers, much easier in China than here in the U.S.

      To reduce the risk that a crackdown on currency manipulation would lead to other forms of manipulation, I think you have hit the nail on the head with your analysis that many of the “solutions” can easily be circumvented by policy changes in a country.

      The problem we have with “free trade” is the same basic economic problem we have with companies in the United States using different policies in different states to carve out benefits for themselves (tax incentives) to relocate in the most favorable states. The Commerce Clause of the Constitution and an effective Judiciary would stop some of these blackmail schemes by corporations. We just don’t have a federal Judiciary or Executive Branch that is willing to actually govern as they seem to be prone to give way to the rule of gold and the wealthy elite. In a similar manner, an effective trade policy would accomplish the same goals in international trade.

      Currency manipulation circumvents the benefits of free trade allowing the Walmarts of the world to sell our economic activity to the Chinas of the world and in so doing, obtain competitive benefits. One good thing is that this can reduce the cost of goods but the bad thing is that it comes at the expense of economic activity. We are suffering from the latter more than we are benefiting from the former.

      Of course, Georg Orwell came up with the scenario of war you suggest that we are headed for. It may be inevitable if we and China don’t stop the wrong kind of rule of gold vs. the golden rule from prevailing in our respective societies. At this point, the corruption in China and in Washington seems to be tilted the wrong way or we wouldn’t be having the current set of problems facing us.

      Tom T.

  6. Will Wilkin says:

    Hi Tom, I think the most damaging operative form of corruption is the old-fashioned greed and selfishness that has been preached against for thousands of years. Certainly more limited and formal “rule-breaking” corruption makes its contribution, but the biggest problem is the Ayn Rand-style of thinking that preaches the “virtues of selfishness” that the invisible hand of the market supposedly will magically convert to larger efficiency and good. This is the kind of market fundamentalism that becomes anti-social and unpatriotic, blind to the need for civic virtue and a degree of collective security and solidarity that makes for a sustainable and prosperous national system. With their contempt for collective interests and their belief “there is no such thing as society,” patriotism becomes extraneous and personal gain the only goal. That has led to our smash-and=grab economy wherein international corporations become the vehicle for enrichment of the 1% without any regard for the long-term viability of the American economy and the people whose fate will be defined by that economy.

    I interviewed Ken Davis Jr. recently, and he described this deterioration of elite American ethics in somewhat different terms:


    KD: The problem was, and we still have this problem today, the multinational companies are doing well the way things are. As a CEO of a very large corporation told me just last year, when I asked “Why are you still backing all the free trade deals?” He said “Because we’re global, Ken.” I said “Yes, but its killing our domestic industry, what are you going to do when there is no domestic industry left, aren’t these your customers too?” He answered “We’ll make it up abroad. We have no more responsibility to the US than to any country where we do business.” I’ve told other people that story, quietly naming the company, and they say “that’s not unusual, we hear the same thing from GE, Apple and many others.”

    WW: Through your 20 years with IBM, and decades more of interacting with so many other big companies, would you say there has been a change in attitude? Were corporations that way when you started your career, saying they were international and had no responsibility to the country, were they always that way?

    KD: No. I think there’s been a big change, not just about trade, but rather a changed attitude that their obligation is to their shareholders, not the country. So it affects all of their dealings. Like in taxes, how many of these big companies don’t pay any income taxes, by clever management of their taxes?

    WW: That wasn’t always true?

    KD: When I left Washington in 1970, I became the CFO of Syntex Corporation, an international pharmaceutical company. They were incorporated in Panama, they had all kinds of tax advantages. The Chairman said to me “We’ve got to pay some taxes every year, I don’t want anybody to look at us and say ‘they’re not paying their share.’ So you be sure we pay our taxes.” But I don’t think that attitude exists today, its quite different. Shareholders first. And it also gets into the status of the top executives of these companies and their compensation, they get a lot more pay than they used to get.

    WW: Its somewhat of an American phenomenon, from what I read, for example in a lot of European countries the ratio is a lot lower between highest and lowest pay in a company.

    KD: I don’t know where it comes from. I’ve had these conversations even at church. Why are so many people so aggressive about their compensation? And about how they share it with others? Now its often “me first, every man for himself, the almighty market will take care of things.” This attitude is now rampant, it is a whole broader issue.

    WW: So is this a broader change, like a decline in civic spirit, a decline in patriotism, how would you summarize it?

    KD: The only way I can put it is the opportunities for a few people to make a lot more money are there. One way it shows up is when young people graduate business school these days. Where are they going to work? When my class finished, some of us were going to take a job in the Macy’s training program, I took a job as a sales trainee at IBM, but today they want to go into Wall Street or hedge funds, they want to get rich by the time they’re 25, and they see possibilities of doing it. I even remember getting that question when interviewing for IBM, they asked “how much money do you think you should make when you’re 40?” I said “Maybe thirty or forty thousand dollars.” [laughs] That seemed like a lot of money then, but it is no comparison to today.


    • Tom T. says:

      ” “We’ll make it up abroad. We have no more responsibility to the US than to any country where we do business.” I’ve told other people that story, quietly naming the company, and they say “that’s not unusual, we hear the same thing from GE, Apple and many others.””

      The corollary is that the U.S. government has no responsibility to these corporations. If only we could get our government to act in the best interests of the country rather than that of money, we could well be on our way to solving some of these problems.

      Unfortunately policy is influenced by this money to protect these corporations when in fact, we should be protecting our markets and its economic potential and real economic activity.

      I could care less if Walmart is shut down by the Chinese government in China. If the Chinese are trying to influence U.S. government policy of currency manipulation by doing this, then I say let them have the worst we have to offer. Companies who have economic interests in global trade should never influence U.S. politicians who are protecting our economy.

      The best thing that could happen is for U.S. investors overseas to see the real risks in investing in a country that manipulates its currency among other things.

      All of these businesses will react to the policies they are dealt in the respective countries and global trade. It is the policy maker’s job to make policies that help the general welfare, not the corporate welfare. Too many of our politicians have this mixed up.

      Tom T.


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