November 16, 2016


Trump can't repeal the laws of economics (Lawrence Summers November 14, 2016, Washington Post)

While drastic changes in the proposed domestic program are necessary for it to work, the general direction of increasing public investment, reforming taxes and adjusting regulation is appropriate. The same cannot be said of Trump's global plan, which rests on a misunderstanding of how the world economy operates.

Consider the immediate effects of Trump's victory. The Mexican peso has depreciated about 10 percent relative to the dollar over fears of new protectionist policies, and many other emerging market currencies have also fallen sharply. The impact of this change is to raise the cost of anything the U.S. exports to Mexico and to lower the cost of anything Mexico exports to the United States.

It will also make Mexico and other emerging markets much cheaper relative to the United States for global companies. So U.S. workers, particularly in manufacturing, will face increased pressure.

The plan seems to assume that we can pressure countries not to let their currencies depreciate, as suggested by the intention to have the new treasury secretary name China as an exchange-rate manipulator. This is ludicrous. While there are reasonable arguments that China manipulated its exchange rate for commercial advantage in the past, the reality is that for the past year the country has intervened to prop up its exchange rate. The same is true of most emerging markets. Not even U.S. presidents with political mandates can repeal the laws of economics.

The dollar is only going to get stronger.

Posted by at November 16, 2016 1:21 PM