Distributional Effects of the Weak Yuan in the US
In general, having a strong currency (e.g. the dollar against the yuan) tends to benefit consumers and hurt producers. Consumers get more for their money, and producers face weaker demand (lower prices) because of the competition. In our society, most people are both producers and consumers. However, richer people tend to do more consumption than poorer people (in absolute terms, though not as a fraction of income), whereas richer people probably don’t, on average, do more production than poorer people. Consequently, the weak yuan tends to shift distribution from poorer to richer people in the US.
You might argue that only those producers who compete directly with the Chinese are hurt by the weak yuan. The problem is, though, that US workers – even those in different industries – compete with one another. If you get laid off because your job is being outsourced to China, and then you come and apply for my job, it makes my boss that much less likely to give me a raise.
US workers compete with other US workers, nationally, but US capitalists compete in a global capital market. Thus, even though capital is part of the production process, the capital side of production isn’t hurt (at least not in aggregate) by the weak yuan. Sure, if you have all your money in one domestic business, and the Chinese start making your product more cheaply, you’ve lost part of the value of your investment. But if you have a diversified portfolio of capital assets, you’ll take losses on some and gains on others. If the expected return on US capital goes down, you stop investing in the US and start investing abroad. Workers don’t have an analogous option.
Just as most consumers are also producers, most workers are also capitalists, but again it is a matter of degree. Poorer people, and younger people, tend to derive most (or all) of their income from labor, whereas richer people, and older people, derive a comparatively greater share from capital. Thus, again, the weak yuan tends to shift distribution from poorer to richer people in the US (and from younger to older people).
In a comment to one of his blog posts, Greg Mankiw implicitly made the counterargument that (1) consumers benefit in proportion not to the total amount that they consume but to the amount of Chinese goods they consume, and (2) Chinese goods are widely consumed by the poor and middle classes. (“Inexpensive goods from China are sold at Walmart…”) This becomes an empirical issue: I won’t concede that rich people consume a much smaller proportion of Chinese goods until someone shows me the evidence.
Another counterargument (also perhaps implicit in Greg’s comment) is that, even though the distributional shift may be toward the rich, the poor still end up better off. When I see real wages falling, I’m rather skeptical of this argument, too. Of course, we can’t blame falling US real wages primarily on the weak yuan, but I’m guessing it’s a factor.
You might argue that only those producers who compete directly with the Chinese are hurt by the weak yuan. The problem is, though, that US workers – even those in different industries – compete with one another. If you get laid off because your job is being outsourced to China, and then you come and apply for my job, it makes my boss that much less likely to give me a raise.
US workers compete with other US workers, nationally, but US capitalists compete in a global capital market. Thus, even though capital is part of the production process, the capital side of production isn’t hurt (at least not in aggregate) by the weak yuan. Sure, if you have all your money in one domestic business, and the Chinese start making your product more cheaply, you’ve lost part of the value of your investment. But if you have a diversified portfolio of capital assets, you’ll take losses on some and gains on others. If the expected return on US capital goes down, you stop investing in the US and start investing abroad. Workers don’t have an analogous option.
Just as most consumers are also producers, most workers are also capitalists, but again it is a matter of degree. Poorer people, and younger people, tend to derive most (or all) of their income from labor, whereas richer people, and older people, derive a comparatively greater share from capital. Thus, again, the weak yuan tends to shift distribution from poorer to richer people in the US (and from younger to older people).
In a comment to one of his blog posts, Greg Mankiw implicitly made the counterargument that (1) consumers benefit in proportion not to the total amount that they consume but to the amount of Chinese goods they consume, and (2) Chinese goods are widely consumed by the poor and middle classes. (“Inexpensive goods from China are sold at Walmart…”) This becomes an empirical issue: I won’t concede that rich people consume a much smaller proportion of Chinese goods until someone shows me the evidence.
Another counterargument (also perhaps implicit in Greg’s comment) is that, even though the distributional shift may be toward the rich, the poor still end up better off. When I see real wages falling, I’m rather skeptical of this argument, too. Of course, we can’t blame falling US real wages primarily on the weak yuan, but I’m guessing it’s a factor.
Labels: China, economics, exchange rates, income distribution, international trade, macroeconomics
posted by knzn at 5/03/2006 02:52:00 PM
9 Comments:
"richer people tend to do more consumption than poorer people"
Knzn, my friend, rich people dont buy cheap Chinese goods at Walmart etc. They likely spend most of their income on services in the US.
Nontradables are what rich people/countries spend money on.
Cheap Chinese imports surely predominantly benefit poorer consumers in the US.
Evidence? Where are you living knzn. A room with no windows?
"But if you have a diversified portfolio of capital assets"
Home bias, my friend. Home bias.
"When I see real wages falling, I’m rather skeptical of this argument, too."
Dont buy that liberal canard, knzn. What matters is compensation, not wages. Thats a sleazy liberal trick. Also, real wages ought to be interpreted broadly; the utility they afford. Given more product variety, real wages now yield a lot more welfare and thats, ultimately, what matters. Indeed Krugmans econ geog relies heavily in this principle (though hes conveniently forgotten about it).
Anyway, knzn, forget about your class warfarism and "distributional effects". Thats an outmoded, flawed preoccupation.
The “Made in China” tags are too far away to see from my window. I admit I don’t really have a very good idea of which goods we are importing from China, but I don’t find the references to “Walmart etc.” very convincing.
Real compensation is rising much more slowly than productivity, no matter how you measure it (even if you use a Paasche index, which should more than account for the utility improvement due to lower prices – perhaps not for utility improvement due to innovation, but that’s not the issue here, since it has little to do with the weak yuan). I tried to abbreviate my point by looking at real wages, but the real point is that workers are not getting the benefit of productivity growth, which ordinarily they would get regardless of new consumption possibilities.
I guess your view, mvpy, is that the equality-efficiency tradeoff should be made entirely on the side of efficiency. Personally, I think diminishing marginal utility is quite important, normatively speaking, and I think there may be something to the view that relative wealth makes a difference, so I’m going to continue concerning myself with distributional effects. It seems to me that people who use the term “class warfare” are the only ones fighting a war. The rest of us are just trying to maximize welfare.
"Personally, I think diminishing marginal utility is quite important"
I beg to differ, knzn. Remember, DMU holds for a specific good eg the second car is not as useful as the first etc. But today there are millions, indeed many millions, of goods. That way, utility is not diminishing as quickly as you seem to assume. Indeed, your beloved Krugman exploited this in his new trade theory. So, what now, knzn, how can justify your redistribution schemes?
"The rest of us are just trying to maximize welfare."
Well, sorry, knzn, what maximizes welfare for you mightnt maximize welfare for another person. Ive explained above that $100 could easily be as worthwhile to a rich man or a poor man. After all, the rich man surely worked hard for his money, and, by extension, surely values the fruits of his work. I see no justification for redistribution. And, of course, leisure is also a "good". Poor people have lots of leisure and are surely better off in that sense. Indeed, revealed preference, indicates they prefer leisure to work.
"Real compensation is rising much more slowly than productivity, no matter how you measure it"
But knzn, buck up! One of the most robust empirical observations in economics is the stability of the labor share of income. All right, there might be some temporary deviation from a stable "trend", but historical experience teaches us that its only temporary.
"I think there may be something to the view that relative wealth makes a difference"
Yes, inequality promotes growth. You see, rich people are necessary to generate a demand for luxury goods. Then they're mass produced in time and we all benefit.
So efforts to stop it are detrimental to growth. End of story. Full stop.
I think you ought to concern yourself with efficiency. Forget Marx et al.
Good night, knzn.
What can I say, mvpy, you’re just wrong. DMU holds for overall wealth as well, which is why people are risk-averse. There is evidence that relative wealth probably belongs in the utility function as well. Poor people, on average, may prefer leisure, but on average, they also have smaller endowments. $100 is worth a hell of a lot more to a bum on the street than it is to me. (This is where having a window helps.) Luxury goods, by definition, are things we don’t really need. I would rather see a more reliable availability of necessities than a wider availability of luxuries. As for Marx and Krugman, I’ve always though Marx was full of crap (but then I’m a child of the late 20th century, so of course I have), and I’ve had (and still have) my disagreements with Krugman (e.g., housing boom a rational response to low real interest rates, not a bubble). (It occurs to me that Greg Mankiw was a bit out of bounds – stooping to Krugman’s level, as it were – when he made that comment in New Republic about a less elegant version of Marx. Of course I expect that sort of thing from you…)
The point about a stable labor share is interesting, but (1) the fact that it has been true historically does not imply that it will continue to be true – today’s deviation already seems more persistent than what we’ve seen in the past; (2) even in the past, the deviations have been nontrivial; and (3) part of the reason for the stability may be political.
"What can I say, mvpy, you’re just wrong."
Oh, yeah?
"DMU holds for overall wealth as well, which is why people are risk-averse."
I didnt deny that, knzn; you have misrepresented what I said. I said, DMU isnt as strong as you seem to think. Think, knzn:
U(C) = nU(C/n)
If there are n goods than thats the utility function. If n is growing then that can offset the concavity of U. Hence DMU isnt as strong as the usual one good model.
Right? Again, you seem to be living in a world with no windows. Theres, like, lots of goods out there.
"Poor people, on average, may prefer leisure, but on average, they also have smaller endowments."
But most lifetime income comes from earnings. This is just a distraction.
"Luxury goods, by definition, are things we don’t really need."
Analytically weak. You just said above that relative income matters. On your own argument, then, luxuries become needs.
"I would rather see a more reliable availability of necessities than a wider availability of luxuries."
By definition there are only a given set of necessities. Unless you are saying that necessities grow due to relative wealth ie everyone now needs a laptop etc.
"..about a less elegant version of Marx."
But he was spot on. Collectivists couch their statist views in econobabble about redistribution. Fundamentally, thats what ManQ was saying. Theyre just a watered-down version of Marx, so to speak.
" I’ve always though Marx was full of crap"
Did you see Krugmans latest column. Believe me, its worse than Marx; at least Marx had a coherent vision. Today, Krugman was basically saying free-market policies are bad for your health. (He can't trash the economy, alas). Marx wouldnt plunge this low, to make his case.
"The point about a stable labor share is interesting, but (1) the fact that it has been true historically does not imply that it will continue to be true – today’s deviation already seems more persistent than what we’ve seen in the past;"
Well for you, knzn, to dismiss parenthetically prob one of the most robust empirical results of the literature as simply "interesting". Interesting, mind you.
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