Wednesday, December 03, 2008

I am re-linking to yesterday's Yves Smith post on Stimulus programs. The disucssion in comments is awesome. There one of the questions raised in how dollar depreciation of past few years has not actually mattered for American Jobs. Here is my response -(too late to comment there I guess)
A declining dollar hurts the mfg and export industry in China, India and other countries. There is no doubt. But to move the mfg locations takes time - it takes structural change and confidence (that it wont be a passing competitive advantage). That confidence is coming to companies that US mfg will stay competitive for sometime to come. China's low CNY was more of guarantee that helped manufacturers to shift production. Again, China is also on productivity gain curve - so we still have margin to cut cost. The labour costs were increasing and China also responded by creating labour movement from rural to urban areas. Now you can only shift new labour to cities - till the old displaced labour finds employment. Trust me, you don't want wealthy unemployed labour used to specific lifestyle - bad for social unrest. The other way is to increase capital intensity of mfg. This has happened in tech mfg to a small extent. Here the capital intensity of mfg was increasing. So tech mfg should be closer to moving back into US. (But tech mfg did not fully move out of US did it? we can do with some evidence here). On the flip side this does not create jobs in volumes that US needs. This is the same problem with China - China needs to retain volume jobs. The dollar devaluation of last few years never tipped the scales to realign manufacturing. Theoretically, had it run for some more time, you would have had a tipping point where sustaining low wages would become difficult.
Secondly, either we (US China and world together) engineer a revaluation or turn a Nelson's eye to it - devaluation is going to happen. To control or not to control is the question (a la Shakespeare).
NDK makes a great point about running differential inflation. But I have two worries - first market participants will preempt this by rushing to gold or commodities and the like - creating strong one-time devaluation catastrophe. Second - even if this is managed - it puts US and world through super-slo-mo pain and distress that may be difficult to address in social context.
A note, commentators at the nakedcapitalism.com believe I am suggesting strong dollar - but its other way round. Further, there is a debate about manufacturing - which should be about any "producing" activity rather than manufacturing. In sum, US should produce something that world wants - it may be shoes or it may be website design services - so long as the relation of producer-buyer is unaltered it will work.