Anyone up for a free lunch? Two United States Senators
are. A new bill, from Tammy Baldwin (a Democrat from Wisconsin) and Josh Hawley
(a Republican from Missouri), would mandate the country’s central bank to zero
out the current account. In effect, the Federal Reserve would often have to
ensure that exports equaled imports; that the amount that the US sells to other
countries equals the amount that it buys from them. Congress has already
charged the Fed with creating jobs and cutting prices.
The Fed is powerful but not omnipotent: It cannot
satisfy all three mandates. Suppose, for example, that the world economy slows
down. US exports would fall, pulling down US income and spending. Under the
trade policies that the US now has, this need not be a calamity, because the
exchange rate can adjust: The demand for the US dollar would tumble, so its
exchange rate would weaken. A euro could buy more bucks than before. This would
lower the euro price of US exports, so Europeans would buy more autos from
Detroit. US income would rise again. The auto exports would offset the loss in
US exports that was due to stagnation of the world economy.
But under the new Senate bill, the global slowdown
could imperil the Yanks, because the bill effectively requires the Fed to set
the exchange rate at the level where exports equal imports. As the US began
selling more cars to the Spanish, its balance of trade would rise; that is,
exports would increase relative to imports. But the Senate bill wouldn’t permit
this for long. It would require the Fed to
strengthen the dollar, in terms of euros, so that the balance of trade would go
back to zero, where exports equal imports. This would have a nasty consequence:
To boost the euro value of the dollar, the Fed would reduce the supply of bucks.
This would leave Americans with fewer dollars to spend, so spending would drop.
US production would fall again, on top of the reduction that was due to the
global slowdown. In short, the commandment to zero out the current account
would make matters worse, at least in the short run.
Beat
the heat
“No problem!” the senators might say. “We’ll just
rewrite the bill to permit trade surpluses and prohibit trade deficits!” Suppose
that they do. Now consider a global boom. World income would ascend, raising
world demand for American exports. If the US economy is already running on all
cylinders, then it won’t be able to produce much more for long. Workers will
demand pay for overtime, which will raise production costs and prices.
Inflation will rear its dastardly head.
If
exchange
rates can change easily, then the overheating of the Yankee economy will be
temporary. The global boom increases the demand for the US dollar, so it would
buy more euros than before. The euro price of auto exports from Detroit would
go up, so the Spanish would buy fewer Chevys. In general, the reduction in US
exports that was due to the stronger dollar would offset the rise that was due
to the global boom. US output would drop back to the level that it could
sustain, and US prices would no longer rise.
But the Senate bill would give us a different story.
As the dollar strengthened under the global
boom, the Fed would perforce weaken it again by creating more bucks.
Americans would try to spend them, heating the economy even more. Inflation
could get out of hand.
One implication of the Senate bill for Kazakhstan is
that the Fed would determine the tenge’s exchange rate. The National Bank of Kazakhstan would no
longer be free to stimulate the Kazakhstani economy by increasing the number of
tenge that trade for a dollar. The
boomerang of trade could harvest a few unwary heads in Nur-Sultan and Almaty.--Leon Taylor, tayloralmaty@gmail.com
Reference
David J. Lynch. Senators pursue foreign investor tax,
saying goal is competitive U.S. dollar. The
Washington Post. July 31, 2019. Online.
