Currency Manipulation Not The Solution

For a good while now, I've been hearing and reading reams of reports from pundits, politicians and journalist about how the Chinese undervalue their currency thus keeping our currency weak and thus running up our trade deficit. To add insult to injury these individuals keep on jumping up and down about how the Chinese have got to "re-evaluate" their currency to make our dollar stronger and possibly reduce our trade deficit(People tend to forget that Americans have so much disposable income that they're able to buy so many goods from China and elsewhere.). N0w while these individuals might be lauded as "dollar patriots" by domestic manufactures, labor unions they are just pushing for the imposition of trade barriers of tariffs that might look good in the short-term but in reality will create greater problems for our economy in the long-run. Someone who seems to understand the cost of pushing through currency tariffs is Thomas Bray of the Detroit News. In his most recent column, Bray points out that while we can find folks to blame for the US economic woes (Japan, China or others) we cannot fall into the trap of economic protectionism to reduce our deficits or improve the value of the dollar but should focus more on growing the economy through the free market and other means that shy away from the "dollar populism" of Pat Buchanan, Chuck Schumer, Lindsey Graham, John Edwards and Lou Dobbs. I think Bray summed this up best when he noted the following:

It's déjà vu all over again. But as the Caldwell example shows, it's never enough. The Japanese yen has more than doubled in value against the dollar, yet Detroit's competitive problems remain severe, perhaps fatal. Bankruptcy has scythed through the automotive industry even as Toyota, Honda and others, to hedge against protectionism, have established strong beachheads inside the American market, mostly in right-to-work states.

And when governments start tinkering with currencies, or are even suspected of doing so, the market is quick to react. Think of the stock market crash of 1987, which followed a public spat between the U.S. Treasury and the German Bundesbank over currency issues. (At that point, the yen was about 150 to the dollar.) Only strong intervention by the new Fed chairman, Alan Greenspan, may have saved us from a new Depression. How good were the 1930s for manufacturing?

The current Fed chairman, Ben Bernanke, has been getting strong reviews of late. But he may yet be tested in the marketplace, particular if his decision to travel to China at the same time as Treasury Secretary Paulson is perceived as an attempt to strong-arm Beijing into a major currency realignment. The dollar has been declining for weeks, perhaps in expectation of a devaluation of some sort, Paulson's claim that he favors a strong dollar notwithstanding.

With Democrats in charge of Congress, the forces favoring dollar protectionism may be gaining ground. Michigan Democratic Congressman John Dingell, who will chair the powerful House Energy and Commerce Committee, says he plans to make currency issues a top priority. Translation: there might still be little appetite for old-fashioned trade barriers, such as tariffs, but the premise that the nation's trade deficit - now running at a rate of $229 billion with China alone -- poses a threat to American prosperity will provide plenty of cover for the more subtle poison of dollar protectionism.

I just wished the folks in Congress and within the Treasury Department would pay more attention to the economic wisdom of Bray and stop trying to play a unwise game of economic populism that will hurt us all.