Martin Wolf: The US had no choice …

Stephen Roach thinks that China’s exchange rate policy plays (almost) no role in an unbalanced world; it all stems from the Bush Administration’s loose fiscal and the Fed’s loose monetary policy.  Stiglitz, among others, tends to agree. 

Martin Wolf – in his Economists’ Forum – makes the opposite argument.  The world could not have grown as fast as it did if, in the face of Asian exchange rate targets and the resulting surpluses, the US has tried to slow its demand growth.   

“If a country cannot influence the relevant policies of others, it has to respond to them. I believe the US has responded reasonably sensibly to the impossible position in which it has been put by the surplus savings and associated exchange-rate policies of much of the rest of the world.”  

"More restrictive monetary and fiscal policies" in the US would only be desirable if they "would have led others to alter their exchange rate and macroeconomic policies.” 

I increasingly think Wolf has a point.  US policy choices have been constrained by the policy choices elsewhere.  However, I still would rather have had a less expansionary set of policies in the US, smaller imbalances and more pressure to change policies abroad - even at the price of a bit less growth.

I do fully agree with another of Martin Wolf’s points. 

In Wolf's forum, Buiter and McKinnon argue that if US domestic demand growth slows, the US will export more, even if the exchange rate doesn’t adjust. 

Why?  Because slowing demand implies more production is available to sell to the world.  US firms will lower prices, and, at some point, the world will buy ...  

That isn’t entirely wishful thinking.  We have one good example.   Boeing.  Domestic demand for civilian aircraft has collapsed.   US airlines are all more or less bust.   Of Boeing’s 260 or so deliveries so far this year, less than 40 -- by my loose count -- were to Americans.   And most of those were (cheap) 737s, not (expensive) 777s.  Americans only took 2 of the 43 777s that  have rolled off the line this year. 

Of course, exchange rates also played a role here.    Europe didn’t buy most of Boeing’s output (though Air France has delivery of more 777s this year than US carriers).  But I suspect that at least some of EADS troubles are due not just to the A380, but also to the euro/ dollar. Boeing has trouble with the euro/ $ at 0.85.   EADS is having trouble with the euro/ $ at 1.25 – especially when it prices in dollars and buys parts in euros. 

But I agree with Martin Wolf’s broader point.  There just aren’t that many Boeing’s out there. A 737, 747, 777 or 787 can be sold to a customer any place in the world. 

That isn’t the case with much of the US tradable goods output.   Autos produced in the US -- whether by US or foreign firms -- tend to be very, very big.  Often too big for other markets.    The same is often true of appliances.   Changing the composition of US output so that it better suits foreign demand, not US demand (at least US demand when energy prices are low) won’t be easy. Wolf: 

I also wonder how exportable many US tradeables really are and, for that matter, how easy it would be to expand US supply of import substitutes. The world market for cars, washing machines, refrigerators and other goods made specifically for the US market is likely to be modest, even with very large price changes. Equally, the US has next to no supply capacity in the production of many imported manufactures. Think of all the many components of a PC: screens; memory chips; and so forth. And I cannot see how the US can convert its recent investment in housing and other non-tradeable services into the balance of payments with ease. Not only will labour need to be reallocated, but a different capital stock will also need to be created. I suspect that this will need quite large relative price changes. 

Buiter says that Wolf underestimates the United States capacity to export services.  I hope he is right:  I work for a company that does export services (RGE certainly doesn’t provide a tangible product).  But generally speaking, most US services business seem very domestically oriented.  The US financial services industry, for example, seems a lot better at using US labor to repackage mortgages into a product that can be sold to China's central bank (exporting debt) than at using US labor to repackage domestic Chinese mortgages for sale to Chinese pension funds (exporting financial services).