We all remember the famous line by Bill Clinton’s campaign advisor James Carville: “It’s the economy, stupid,” he said about what mattered most to voters. The economy still matters, of course, but one of the major fundamentals of the economy is the dollar and it’s non-competitive with the rest of the world. It’s too strong. It makes it more affordable to set up shop in Mexico or Vietnam, meaning American manufacturing is not only up against a weaker regulatory environment, lower labor costs, and in many cases lower taxes, but they also have a currency problem.
“We can’t compete in foreign markets because our price is too high as it is, and the foreign competition drives prices down, making it worse for us,” said Brian O’Shaugnessy, Chairman of Revere Copper Products. He said it’s not because of labor and taxes. It’s because of currency.
O’Shaugnessy was on hand as a panelist discussing currency during the live streaming CPA Annual Conference that kicked off on Tuesday and goes until Friday. His company’s namesake is Paul Revere. Yes, that Paul Revere. It was started in 1801 and is still alive today, producing copper sheet, strip, coil, and busbar sourced from their own copper mill. Their market is domestic. Many of their competitors have gone bankrupt or left the US.
The dollar is up 30% since 2011 despite our ever-expanding trade deficit.
In theory, countries are supposed to have a high deficit and weaker currency. “We have defied that economic theory for decades,” said Jeff Ferry, CPA chief economist and co-author along with senior economist Steven L. Byers, PhD of a white paper proposing a Market Access Charge (MAC) on foreign investors of US securities. It was published in September of 2020.
The real dollar is up just around 24% from its low point. The overvalued dollar gives importers an unfair advantage against US producers in their own market. Europe manages to take great advantage of this. Despite being one of the richest places on Earth, our third largest deficit is with the EU, with Germany and Ireland topping the list.
“The fundamental cause of the deficit is an overvalued dollar,” said Ferry. “The cause of that overvaluation is the persistent international flow of capital into US stocks and bonds.”
Last year, gross inflows equaled $40 trillion, of which 53% went into Treasury bonds and 42% into US equities. Inflows are up 65% in the last 10 years and are double our GDP. Ferry and Byers research suggests the US needs a 26.4% devaluation to bring the dollar to a trade balancing level. Driving the dollar down by around 6% a year would add roughly 1% to GDP, based on the MAC model.
A realigned dollar would also have great benefits for working men and women, creating roughly 3.97 million jobs across all sectors of the economy, of which around 1.2 million would be in manufacturing by 2026 if the MAC was enacted this year.
O’Shaugnessy said if the dollar was 25% lower, his pricing would be on par with Germany, and maybe a bit cheaper. “German competitors would then do what we have been doing, just eat part of the change in the currency realignment. The price impact on consumers would not be what you would expect and it would have a major impact on our ability to compete,” he said.
Panelist Rob Scott, senior economist at the Economic Policy Institute, has been pounding the table on this issue for a few years now. He sees this as a headwind for manufacturing, a sector that is famous for hiring blue-collar workers and paying good wages, giving them a chance to enter in and stay in the middle class. In 2019, he wrote an op-ed in the New York Times highlighting how Senator Elizabeth Warren and President Trump actually saw eye-to-eye on how an overvalued dollar was a major stumbling block for American manufacturing labor.
“The simplest way to make the dollar less attractive is to impose a tax on foreign purchases of US assets,” Scott said. “You can tax new purchases of US assets, so this is not a tax on US investors. We have lost 5 million manufacturing jobs over the last 20 years, which has led to the devastation of the industrial heartlands in the upper northeast and Midwest and Southeast. And it has been especially harmful for non-college educated workers.”
This month, the Peterson Institute for International Economics published a report on foreign exchange rates. They found that fiscal policy and exchange rate policy (measured by net official financial inflows) are the most important factors behind trade imbalances. Factors related to demographics and economic development are secondary. When trade balances are cumulated over time, net official financial flows become especially dominant.
The Commerce Department put the 2020 current account deficit at 3.1% of GDP. It was 3.5% in the fourth quarter, which is likely where it will remain this year assuming an economic turnaround and the continued over-reliance on imports.
Peterson Senior Fellow Joseph Gagnon has an idea he shared with those in attendees from their homes and home offices today: “The best way to confront countries that manipulate their currency is to just counter manipulate; buy their currency,” he said.
The US Treasury is not in the habit of buying foreign currencies because it does not maintain any meaningful level of international reserves (China has over $3 trillion in reserves) and doesn’t have a national sovereign wealth fund like many European countries do.
“If they can buy ours, let’s buy theirs and increase inflows to strengthen their currencies. If we want to buy foreign currencies, there is nothing they can do to stop us,” he said. “Longer term, for countries that are not manipulating their currency, we know private investors want to invest here. We should start the discussion with them on how we intend to bring the US on a path to a more balanced trade…and one way to do it is to tax capital inflows like the Market Access Charge that CPA is promoting.”
A MAC would reduce capital inflows by around 25%, said Ferry.
The MAC model suggests that even with a 5% MAC, foreign portfolio inflows would continue at a rate in excess of $3 trillion a quarter simply because this is the world’s largest, most trustworthy securities market. MAC transaction fees, paid by foreign purchasers of US securities would give Treasury as much as $672 billion, equivalent to 19% of last year’s total federal tax revenue. The Treasury and the US taxpayer would be a net gainer from a MAC.
Paul Revere’s old company’s chairman agreed. “The inflows in terms of the monetary benefit of a MAC…would cause employment in manufacturing to climb,” O’Shaugnessy said. “I think you’re looking at a 25% increase in manufacturing, at least.”
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