Awhile back, Max submitted an article by Dean Baker:
Title: Business Week Restates the Nineties
[Apologies for html, but you need it for the charts. This came up a week or
so ago. Dean finally finished this, after my egging him on. Feel free to
circulate, with credit of course to Dean Baker, Center for Economic and
Policy Research. -mbs]
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comment: This is a very good article, but it's interesting that Dean never
mentions a major factor that BUSINESS WEEK also skips, i.e., the high
exchange rate of the dollar during the late 1990s (and today, but the
subject is the 1990s).[*] The high dollar implies that imports are cheap (as
do low oil prices), boosting U.S. real wages. On the other hand, the high
dollar intensifies competition from imports and competition for U.S.
exporters, hurting profits. This suggests that to the extent that BUSINESS
WEEK is correct that workers gained in the 1990s (and Dean admits that there
is _some_ truth to this view), it is a temporary matter, since the dollar is
extremely unlikely to remain high forever (especially given the large U.S.
current account deficit). Also, following the logic of PPP, according to the
ECONOMIST's "Big Mac index," the dollar is significantly over-valued.
("Overall, the dollar looks more overvalued against the average of the other
big currencies than at any time in the life of the Big Mac index." -- quoted
in the L.A. TIMES, 4/27/02, page C3 ("Measured in Burgers, Greenback
Overvalued").)
Michael Perelman mentioned the discussion between Ellen Frank and Jane
D'Arista about the likelihood of the dollar falling drastically: >I will
have to be careful about misrepresenting and oversimplifying, but I
understood Ellen to be saying that the dollar was not in danger because
investors had nowhere else to go; Jane, that the dollar was in danger if
other countries ceased buying new financial assets because they needed their
foreign exchange for other uses.<
The point that I understand Ellen to have made is that it's unlikely that
the US dollar will lose its status as "paper gold," the world money imposed
by its hegemonic power. I agree. However, that does not mean that the dollar
can't fall drastically relative to other currencies, as it did in the
mid-to-late 1980s.
Going from 1985 to 1986, the G-10 trade-weighted exchange rate of the dollar
fell 24.3%. The next year, it fell 14.7%, while for 1987-88, it fell 4.4%.
The "major currencies index" fell 19.7%, 12.3%, and 7.2% during those
periods. This meant that imports became significantly more expensive while
competition for US business eased up, encouraging stagflation and the
decline of real wages relative to productivity.
The big questions concern _when_ the dollar will fall and, (more
importantly) _how quickly_. The dollar doesn't have to fall to zero in order
for there to be a stagflationary shock that will make Alan Greenspan face
nothing but bad choices. (Such shocks are more important today than in the
1980s, because of the increased openness of the U.S. economy.) On the other
hand, if the dollar falls slowly and gently, it's no big problem. But this
latter seems unlikely given the way that currency markets are so speculative
in nature -- unless the Fed succeeds in slowing the fall down. But the Fed's
efforts would involve higher interest rates, which would encourage the
"double dip" recession scenario.
what's Alan to do?
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[*] I asked Michael Mandel, the author of the BUSINESS WEEK article about
this, and he said:>Now, one could argue about the sustainability of the
strong dollar--but that argument has been going on for years without a good
conclusion.< This hardly seems satisfactory.
I had written:> I have just one major & one minor comment about what's left
out of the
following [the BW article]
> Major: the soaring exchange rate of the dollar isn't mentioned at all.
That
> allowed real wages to soar after 1995 or so because it made imports much
> cheaper. It also put pressure on export-competing employers, keeping them
> from raising prices. (Having a similar effect was the relative stagnation
of
> economies outside the U.S.) Normally, a rising dollar would pull down
> aggregate demand (as in the early 1980s), but the credit- and
optimism-based
> private sector boom more than counteracted that drag (along with the drag
of
> the rising federal government surplus). It also meant increasing external
> debt.
>
> Minor: the rise of house ownership was also encouraged by lowering
standards
> in mortgage loaning (partly encouraged by Clinton-era policies). This
makes
> consumer spending more prone to a fall [since it allowed the accumulation
of potentially unsustainable debt].
His full reply was as follows:
>I can rephrase your dollar comment. What we had in the 1990s was the good
impact
of the rising dollar, with none of the bad impacts. Imports were cheaper,
and
unemployment continued to fall. Now, one could argue about the
sustainability
of the strong dollar--but that argument has been going on for years without
a
good conclusion.
>As for the mortgage lending: I agree (and have written) that at least a
partial
cause for rising homeownership rates was the shift of Fannie Mae and Freddie
Mac
to lending policies which allowed more low-income households to get
mortgages.
Fannie and Freddie claim that their new credit scoring system gives
mortgages to
people who have the capability to pay for their own homes, but would have
been
denied credit under the simple, share-of-income rules.
>This claim cannot be rejected out of hand. It is certainly consistent with
long-term complaints about the unfair deprivation of credit to low-income
and
minority households. Conversely, what you say could also be true--it just
depends on how the data plays out over the next few years.
>My point in the story, however, was simply that homeownership rates went
up--and
I think most people would agree that was a good thing.<
-----------------
Jim Devine [EMAIL PROTECTED] & http://bellarmine.lmu.edu/~jdevine
