How economic fallacies lead to bad policies – Twin Cities


Ed Lotterman

A New York Times headline, “The Dollar Is Strong. That Is Good for the U.S. but Bad for the World,” was a kick in the gut to economics teachers.

Teach college econ for 35 years and you feel like Sisyphus, the mythic Greek who was condemned to push a rock up a mountain only to see it roll to the bottom every time.

And this mistaken nonsense comes at a particularly bad time.

Econ profs know and teach that currency exchange rates are prices. Whether a higher price is good or bad depends on if you are buying or selling. You never see the N.Y. Times declaring, “High toilet paper prices are good for the United States.”

Forget the notions of “strong” and “weak” where it applies to currency. A high-priced dollar relative to other currencies is good for consumers. Imports such as European and Asian cars, electronics, steel, wine, cheese, ham, etc. are cheaper. And this pressures competing U.S. producers to not raise prices. It helps curb inflation. Low-priced British pounds and EU euros make vacations in Europe cheap. Great for our consumers, and maybe “bad for the world.” But also bad for Minnesota iron miners, farmers and med-tech workers and anyone who proclaims “Made in USA.”

The pricey dollar, or cheap pound and euro, means that giant local employers like 3M, Medtronic, Boston Scientific, CHS or Cargill, with plants around the world, will get far fewer dollars on their bottom line here even if profits at their overseas plants stay the same in those nations’ currencies. If you work there, this isn’t good for your retirement fund.

This is an old lesson, just one journalists who aren’t econ students refuse to learn.

So why is this a particularly bad time for such bad economic reporting?

It’s because the entire world is in an economic crisis, the most complex and perhaps the most dangerous in 90 years. We are in a sort of octuple witching hour.

Our nation is one of many coming out of fiscal binges meant (back then) to keep COVID from bringing economic activity to a halt. But now, these very policies threaten to do just that. Our response to COVID included doubling down on the money supply growth started after the 2007-09 financial market meltdown. Now we face the resulting inflation.

China’s complete shutdowns of large cities to control COVID is shaking its economy, along with huge overhangs of bad debt from vacant apartment projects and riderless trains. So it is scrambling to raise the price of the yuan instead of suppressing it as often has been the case.

Then there is the war in Ukraine that affects exports of natural gas, petroleum, grains and oilseeds and fertilizers with knock-on effects on Europe’s industrial output and the safety and comfort of its citizens going into winter. And consider the U.K. and Turkey dashing madly into idiotic economic policies plus political turmoil-ridden elections here and in Brazil. Then add one of Latin America’s cyclical epidemics of financial crises.

The mix ain’t pretty, folks. So just when we need to understand basic econ relationships, we are fed confusion.

The dollar is getting pricey because the Federal Reserve is raising interest rates to limit inflation. Why? Because too much growth of the amount of money sloshing around the economy causes prices to rise. You reduce inflation by reducing excess money, but with less money available to lend, interest rates rise. What the Fed is doing is crimping down on the money supply. Higher interest rates are just an indicator of this.

But higher U.S. interest rates tell countries around the world it is better to invest money here to get the high return. But to do that, those countries need to trade their local currencies into U.S. dollars. That makes the dollar expensive and the euro, pound, yuan, yen, etc. cheap. That affects the relative prices of imports and exports. That affects consumers and producers.

Cheap pounds hurt British consumers but help their wheat and canola farmers. A cheap euro hurts feed-buying Dutch and Danish livestock farmers but makes their cheese and ham a deal to North Oaks residents. And cheap euros are great for French and Italian wineries.

This has a ripple effect: More competition from imports means that growth in U.S. jobs will be weaker.

Everything else equal, this ought to help Brits. But their conservative government has gone from one personal conduct scandal to another. New Prime Minister Liz Truss needs to reduce inflation, largely caused by the fighting in Ukraine. But she doesn’t want output and employment to fall. So while the Bank of England stomps the monetary brakes, raising interest rates, the British treasury floors the budgetary gas pedal with large tax cuts, mostly for high income folk, flooding the economic engine with yet more money and — guess what — fueling inflation.

Is that stupid? Well, back in the day we called it Reaganomics, with the president and Congress cutting taxes and increasing spending while Paul Volcker raised interest rates at the Fed, with 30-year Treasury bonds hitting 14 percent for a while. High rates sucked in money from around the globe, pushing the value of the dollar up. The “strong” dollar had the effect of a Louisville slugger to the back of the head of U.S. agriculture and the rust-belt, U.S. steel and auto producers along with iron range miners and towns. Adjusting to all this has taken decades.

However, it still makes more sense than what’s happening in Turkey. There, President Recep Tayyip Erdogan, a dictator in all but name, thinks it is high interest rates that drive up inflation. Cut interest rates and inflation will fall. So the Turkish central bank is cutting interest rates. But to do that it has to balloon the money supply. So Turks scramble to get their money out of the country, the value of their currency falls, inflation rises and output and employment tumble into the tank.

One could go on and on. South America is a column in itself right now, with crisis from Argentina in the south to the meltdown of the Cuban economy 90 miles from our shores.



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