Neo-Classical Crap re “US Jobs Through Exports” Unmasked

16 November 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com.

16 November 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com.

Yesterday, we criticized President Obama and several other world leaders, notably Germany’s Angela Merkel, 

for parroting the stale old neo-classical line equating a trade surplus with virtue,

and, consequently, how exporting is the only way to create jobs.

Now, at least this last part is true for Germany’s totally export-oriented economy,

but is laughable when it comes to the US, 

which has, since the end of World War II, grown, and promoted growth around the world,

precisely by being a structural IMPORTER, the global “consumer of last resort”.

This uncritical embrace of “the god of exporting” and neo-classical orthodoxy in general, we pointed out,

is the reason so much attention — wrongly, in our view — is paid to currency values in general,

and in particular why the US — again, wrongly, in our view — keeps going after China for its allegedly “undervalued” currency.

Put bluntly, we argued yesterday, it’s absurd for Obama and the rest of the US elite to be concerned about currency values and exporting,

when the US has run a chronic trade deficit since 1971, and an overall balance of payments deficit since 1959,

WITHOUT any noticeable decline in the US standard of living until the late Clinton and Cheney / Bush years,

when they destroyed any semblance of financial sector sanity with the dismantling of Glass-Steagall etc, 

and the “under cover of night” total de-regulation of derivatives —

an area that, conveniently enough, TBTF banks made sure continued during Obama’s so-called / self-styled “financial reform.”

Having said that, let’s make clear before proceeding further that 

we think there may well be reason to criticize China for its weird pattern of action v-a-v its East Asian neighbors of late,

but NOT for its general economic strategy and practice, in which, as we pointed out yesterday and many times before,  

China is focusing on becoming a world leader in advancing areas like clean energy and other high-value-added sectors,

and where the government tells the banks what to do — namely, lend to precisely these cutting edge areas of economic innovation.

This is UN-like, say, the US / Japan / EU, where the TBTF banks / insurance companies etc tell the government what to do —

a pattern of action that we might have expected from Clinton / Cheney / Bush, 

but whose continuation under Obama has been a HUGE disappointment —

not to mention, in our view, the fundamental reason he and the Democrats got so badly pounded in the mid-term elections earlier this month.

In the context of the utter emptiness of neo-classical theory in general, 

AND the irrelevance of exports, and hence currency valuations, to the always key issue of JOBS, 

as well as the basic observable realities of the world political economy since at least 1947,

we were not surprised to see that, despite an evidently weakening US dollar,

business executives and economists are now saying they doubt this “devaluation” would do much, if anything, about increasing employment in America —

which is the whole reason it’s supposedly happening in the first place.

Again, as we noted yesterday, other world leaders have complained that American policies, 

especially the monetary easing the Federal Reserve announced this month, the so-called QE,

will depress the value of the dollar and give American exporters, such as they are, an unfair advantage —

which shows that ignorance of global economic realities isn’t limited to the US.

Put bluntly, even if the Fed’s action does end up weakening the dollar further, 

America’s millions of jobless are unlikely to benefit very much. 

For one thing, many big American manufacturers, from General Motors to General Electric, 

often make goods in the countries where they are sold, rather than shipping the products abroad. 

This effectively takes exchange rates out of the equation, since they are using only one currency.

Further, companies that do send goods to other countries often buy components from abroad, 

so the alleged advantage of a weaker dollar in selling is offset by the higher cost of buying.

And even IF a company enjoys a relative surge in foreign sales, it won’t necessarily lead to a hiring spree. 

That is because the largest proportion of American exports are still manufactured goods, which are no longer so labor-intensive.

In fact, many of the companies that still manufacture in this country are businesses that have not gone offshore 

because they are too small to justify setting up overseas operations. 

A weak dollar may help their businesses, but it is most unlikely to prompt a wave of hiring.

“The net export effect is going to be positive, but it won’t be the driver of jobs,” 

said Daniel J. Meckstroth, chief economist of the Manufacturers Alliance, a trade group. 

“You can replace people with machines,” 

as BIG US corporations have been doing since the 1950s in general, 

and especially since the IT / Internet revolutions of the 1980s and 90s.

According to Nigel Gault, chief United States economist at IHS Global Insight, 

the dollar fell by 31 percent against a basket of major currencies since 2001, as American exports increased by 45 percent. 

But manufacturing employment dropped by nearly a third in that time, to 11.7 million workers from 16.4 million.

The dollar has already fallen by about 10 percent against a range of currencies since the beginning of June, 

and government figures show that American exports rose in September by $500 million, or 0.3 percent, to their highest level in two years.

Despite the outcry from other world leaders after the Federal Reserve’s decision to inject $600 billion into the economy, the dollar strengthened slightly last week. 

But even if it does start drifting down again, most economists — there they are again 😉 —

do not expect the devaluation to be steep. 

Some argue that most of the weakening has already happened 

because traders have anticipated the Fed’s action for some time.

Gary C. Hufbauer, a senior fellow at the Peterson Institute for International Economics in Washington, said 

he expected the dollar to fall another 10 percent in coming months, 

based on a basket of currencies from countries that trade with the United States.

He estimates that such a decline would lead to about a $100 billion increase in American exports over the next two years, 

which he believes could — not will, but could — translate into about 500,000 jobs. 

Although Mr. Hufbauer said that number was “not bad,” he noted that 

it would not put much of a dent in the nearly 15 million people who are still out of work.

Another reason increased sales abroad might not translate into American jobs is that 

American companies have moved steadily overseas in recent decades. 

The number of workers employed by American companies abroad more than doubled from 1989 to 2008, to 10.5 million, 

according to the United States Bureau of Economic Analysis. 

Companies mostly wanted to open up foreign markets, and in some cases take advantage of cheaper labor, studies show, 

but less vulnerability to currency movements was an important fringe benefit.

With more companies building local factories, exchange rates matter less. 

General Motors and Volkswagen compete fiercely for business in China, 

a crucial market where both automakers build almost all their cars locally 

rather than ship units in from their home countries.

Because the Chinese renminbi is tied to the US dollar — 

meaning that products from the United States should be cheaper than imports from Europe, 

at least according to neo-classical orthodoxy — 

G.M. would seem to be at an advantage.

BUT …

while G.M. has been gaining market share in China, “it has nothing to do with currencies,” 

said Ferdinand Dudenhöffer, director of the Center Automotive Research at the University of Duisburg-Essen in Duisburg, Germany. 

Rather, he attributes G.M.’s gains to cars like the Chevrolet Sail that have found favor with local consumers.

“The dollar is not a problem for VW or G.M.,” Mr. Dudenhöffer said. 

Imagine that — it’s not about currency values, but there’s actually an American PRODUCT Chinese consumers like, 

altho I personally wouldn’t dream of buying a US car, where everything is on the “wrong” side, compared to a Japanese or Korean automobile, 

but maybe that’s just me 😉 .

The historical record, as we’ve noted, suggests currency movements alone are unlikely to eliminate trade imbalances or lift exports — let alone create jobs.

A decline in the value of the dollar against the yen did little to help the United States trade deficit with Japan during the 1980s, 

according to a study released last week by HSBC.

Indeed, some American companies report that a weakening dollar does not enhance export volumes. 

Roger Sustar, president of Fredon Corporation, a Cleveland-based manufacturer of parts for the aerospace, defense, rail and medical industries, said that 

although the dollar had weakened against the British pound over the last two years, 

the company had not increased sales in Britain.

And, Mr. Sustar said, existing clients “haven’t been beating the bejeebers out of us to lower our prices.” 

Hear that, Mr. President 😉 ???

Potential for jobs might come from foreign companies who build operations in the United States, 

in part to avoid currency fluctuations going the other way. 

BMW, for example, broke ground on its first plant in South Carolina in 1992, 

and in September opened a second factory near Spartanburg, where it had already hired 1,000 workers, with plans to hire 600 more. 

Gee — a multi-national company that builds factories near its overseas customers.

What a shock — if it hadn’t been going on big-time since the 1960s.

But, of course, neither history nor currently observable reality is of much interest to the priests of the neo-classical dogma.

In fact, currency fluctuations are just one part of what makes an American good or service more attractive to foreign buyers. 

Typically, a weaker dollar has provided a lift to American hotels and tourism destinations, 

as travelers from Europe and Asia suddenly find their money goes further at Disneyland or Bloomingdale’s.

But these days, tourism officials say, travelers have so many locales around the world to choose from 

that currency moves don’t necessarily translate into travel booms.

“Nowadays in the travel world, it’s such a competitive market to try and get people to come to your destination,” 

said Carol Martinez, a spokeswoman for the Los Angeles Convention and Visitors Bureau. 

“The cost is a factor but there are many other factors, too,” 

she said in this article that appeared in the New York Times.