Professor Don Boudreaux of George Mason University has an excellent post about exchange rates and politics over at Cafe Hayek.  He makes an eloquent argument about the implausibilities and inefficiencies of currency manipulation that I couldn’t improve upon.

However, I am reminded of the discussions I had with my International Law professor.  He was convinced that China is actively and successfully strengthening the Yuan against the dollar by buying U.S. bonds and that the resulting trade deficit is disastrous for the U.S.  After he raised the issue for the forty-third time, I pointed out that if the Chinese government was in fact propping-up the Yuan, the end result would be a transfer of wealth from poor Chinese to wealthy Americans.  And why, I asked, would Americans think this was a bad thing?  His response was essentially, “Well the Chinese aren’t stupid, are they?”

Unfortunately, I didn’t have a witty response to complete this anecdote, but I have given some thought to the issue.  I think the correct response may well be, “No, Chinese politicians are not stupid, but they are beholden to special interests just like American politicians.

It is striking to me that we ascribe such a superior level of knowledge, wisdom and focus to foreign leaders.  The near hero worship of Soviet leaders during the Cold War by some, especially among the academy, is one example.  Then, during the ’70s and ’80s others imagined a concerted effort by the Japanese to conquer America economically.  People never saw individual Japanese companies competently competing in a global market place.  Rather, we were afraid of “the Japanese” invasion.

We see U.S. politicians enacting measures that benefit politically connected minorities at the expense of the majority of Americans, but we don’t assume a visionary effort to dominate the world sugar market.  Why then do we assume that Chinese politicians are so much more strategic?  Every government must appease a certain constituency in order to stay in power, even nondemocratic governments.  If we assume that the Chinese are successfully manipulating the currency market, isn’t it more logical to assume that the goal is to appease a powerful domestic manufacturing lobby?  The alternative is to assume that China plans to dominate the West by giving away its wealth.

Note:  Brad Delong sees the deficit as the result of U.S. exports of international liquidity and wealth preservation services, and Tyler Cowen notes that revaluation of the Yuan would likely have negligible effect.

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