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KEYNESIAN ECONOMICS

Wednesday, December 20, 2006

Graham attacks low Wal-Mart prices Ralph Bristol December 20, 2006 Sen. Lindsey Graham is unhappy with President Bush again. This time it's because prices are too cheap at Wal-Mart, and it's Bush’s fault. Let's backtrack a little. Senator Graham and his friend, Democratic Senator Charles Schumer of New York, have been the leading critics in Congress of China for allegedly manipulating its currency. What does that mean and why should you care? It means that China has allegedly artificially depressed the value of the Chinese yuan compared to the American dollar. It takes 40 percent more yuan to buy a dollar than it should, or so goes the charge. Why does that matter? If a United States company produces a computer chip that costs, say $20, and it took five yuan to buy one American dollar, it would cost the Chinese consumer 100 yuan to buy the computer chip. But, if the yuan is deflated by 40% and it takes 7 yuan to buy one dollar, then it costs the Chinese consumer 140 yuan to buy the chip. The Chinese can afford fewer American computer chips and that hurts the computer chip business, which employs American workers. Now, let's look at the flip side. Let's say the Chinese can make T-shirts for 10 yuan, and there’s a big market for T-shirts in America. If the exchange rate were five yuan to the dollar, the shirt would have to sell for more than $2 for the Chinese to make a profit. But if the exchange rate is 7-1, the shirt would start making a profit after $1.40. That means an American T-shirt company would have to be able to make T-shirts for $1.40, instead of $2, to compete with the Chinese. To do that, they may have to pay their employees less than they otherwise would. So goes the Graham-Schumer et al argument. They want the U.S. government to either convince the Chinese to quit deflating the yuan, or to impose a big tariff on Chinese goods entering the United States. The Bush administration has determined that it cannot cite China as a currency manipulator. Democrats (and Sen. Graham) are furious with the administration finding, and have promised hearings on the matter next year. Either of the actions favored by Graham and Schumer would raise the prices at Wal-Mart – and other places too of course. That apparently is what they want, in order to help American producers. They have chosen to side with producers over consumers in the belief that their position will improve the American job market. I disagree. So far this year, Americans have purchased $243 billion worth of goods from China. If we forced the Chinese to inflate the yuan by 40 percent, those goods would have cost $340 billion. But we didn’t have $340 billion to spend on that stuff. We had $243 billion. If prices were higher, we would have bought less stuff, which would not likely have helped American jobs, but would probably have depressed Chinese jobs. I can't guarantee that would have been the effect, but I know this for sure. When prices are lower, people buy more stuff. When they are higher, we buy less. When we buy less, companies need to produce less, and they need fewer workers. Exactly where the job gains and losses occur when prices go up and down is less predictable. The Chinese may be hurting our workers by deflating their yuan, but they are hurting their consumers more. American politicians, including Sen. Graham, want to follow the Chinese model of trying to help producers by hurting consumers. The U.S. unemployment rate has hovered around five percent for some time now, while the last reported Chinese unemployment rate was over nine percent. The only time since the great depression that the U.S. had a nine percent unemployment rate was when Jimmy Carter was finishing his first and only term as President. President Reagan helped bring that rate down with lower taxes and free trade policies. Let's not go back to the Carter glory years by forcing higher prices on U.S. consumers. Sen. Graham needs a healthy dose of economic philosophy from Adam Smith, Milton Friedman and Walter Williams, and a little less influence from Chuck Schumer. NEWS SNIPET NOTE: Senator Graham (R-SC) is essentially a socialist. Socialist adovocate Keynesian economic models as valid fixes. The only economies that resond well to Keynesian models are those under totalitarian,(or close-to) rule (Communism, fascism, socialism).

posted by Jack Mercer @ 12/20/2006 10:59:00 AM

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