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.