Running the risk of serious brain damage, I watched Trump on O’Reilly last night. It was a cage match to determine the world champion of economic ignorance. I declare it a tie.
The “discussion” started out with China. O’Reilly asked Trump about China’s alleged devaluation policy. Except O’Reilly couldn’t pronounce “devalue”: he kept saying “devaluate.” But Trump took the bait and ranted (but I repeat myself) about how China has relentlessly devalued its currency over the years.
Except, of course, it hasn’t. It devalued years ago, but since the financial crisis it has pegged the yuan to the dollar, and only recently made two small devaluations.
Indeed, the yuan has been appreciating in recent years. Since 2011 the yuan has risen from about 6.8 to the dollar to 6.2 to the dollar, before dropping to 6.4 to the dollar as a result of the devaluations. It is arguable whether the yuan is undervalued or overvalued as a result of the peg, but that’s something completely different than devaluation. And it is just wrong to say, as Trump does, that China has been relentlessly devaluing its currency for years. If anything, indicators are that the currency has become overvalue of late: in particular, capital outflows signal overvaluation. Look at real estate markets in the Bay Area, Vancouver, Sydney, etc., or step into any luxury car showroom in the US, and you will see a lot of Chinese buyers. That’s a telling anecdote, but there is hard data to back that up.
What’s more, it’s not as if the US has been passive post-crisis. QE anyone? To ignore this is to ignore one elephant in the room, and criticizing the currency peg without mentioning QE has more than a little of the feel of “Mommy! No fair! Johnnie hit me back!”
Further, even if the Chinese have engaged in policies that keep their currency artificially low, the effect on the US is not unambiguously bad. Yes, some US industries and workers are harmed, but consumers overall would get a great boon, as we exchange overvalued paper for artificially cheap goods. It is not uniformly bad for US manufacturing either, as many of the “consumers” are manufacturers who can purchase cheaper inputs. This raises the derived demand for other inputs, including some labor.
The best part was where Trump repeated one of his common themes that American leadership is dumb (I don’t disagree) but that Chinese leadership is really smart. But then he went on to screech that the Chinese have created a huge bubble that is imploding, and threatens to bring down the US economy with it. But, if the Chinese leadership is so damn smart, why would they create a huge bubble, and then be incapable of preventing its bursting? And if we live in a zero sum world where China’s gain is America’s loss, wouldn’t a Chinese economic collapse be good for the US?
Another lowlight was the discussion of trade with Mexico, which is apparently also governed by those overqualified for Mensa. (Who knew?) He is furious at Nabisco for moving a plant from Chicago to Mexico. Presumably if elected president he will force the company to forego use of the “Ritz” brand (because that’s the name on a fancy-schmancy American hotel!) and preclude them from selling Oreos with a cream center in the US. Nope, just two dry chocolate biscuits, unsweetened, held together with a nail. Ford also came in for a bashing for moving assembly to Mexico.
Perhaps to give him more intellectual credit than he deserves, Trump is a died-in-the-wool mercantilist who believes trade is a zero sum game, and who favors protectionism and beggar-thy-neighbor currency policies. He talks like it is the late-80s, and Japan is still an economic juggernaut that will overwhelm the US, completely overlooking the fact that Japan’s crypto-mercantilist policies gifted it a 25 year long lost decade, and that neo-mercantilist China is on the brink of the same fate. If it is lucky.
Adam Smith is spinning in his grave.
But alas, mercantilism is a like a zombie. It has no brain, and has proven impossible to kill. Which means, I guess, that in Donald Trump, it has found its perfect advocate.