We've another of those calls to arms over the loss of American manufacturing jobs. From the usual suspects, the Alliance for American Manufacturing (a lobby group of a few manufacturers and the United Steelworkers). They claim that Japans's "currency manipulation" has been responsible for the loss of 900,000 jobs in the US. This isn't, I'm afraid, true. The level of aggregate employment in the US is something that is the responsibility of Congress (fiscal policy) and the Fed (monetary policy). Trade doesn't affect that level of aggregate employment. It might well affect the mix of employment, that's true, but not that total level. And anyway, what is Japan supposed to do when sunk in a two decades long slump?
The allegation is here:
Nearly 900,000 U.S. jobs were lost in 2013 due to America’s growing trade deficit with Japan. Even more jobs could disappear if the proposed Trans-Pacific Partnership (TPP) with Japan and 10 other nations is approved without a provision to prevent currency manipulation. Tell Congress to take action to guarantee a level playing field for American workers and businesses by ensuring currency manipulation is stopped in the TPP.
The truth is that trade with Japan, the Yen/$ exchange rate, doesn't change the number of jobs in the US at all. That is determined by the level of aggregate demand in the US. And that, in turn, is determined, in part, by what the fiscal stance of the government is. What is the gap between how much tax revenue Congress is authorising be taken from the economy and how much spending is Congress authorising at the same time? The result of those two being the deficit (or, don't laugh, because it has happened a few times, the surplus) and thus the amount of fiscal stimulus being pumped into the economy. The other infleuce is the Federal Reserve. What are interests rates? What's the nominal interest rate and what's the real interest rate? This then determines the amount of monetary stimulus in the economy. Add the two together, monetary and fiscal effects, and we get the determinants of that aggregate demand. This is what determines the level of employment in the US economy.
Trade can (and will) affect which jobs get done, but not the number of them. So we could, if we wished to, say that whatever Japan is doing has affected which jobs people are doing but not that 900,000 jobs have gone from the economy as a result.
There's also two other points we might make here too. The first being, well, what should Japan be doing? Assume that the AAM is even correct here, still, what should Japan be doing? They've been in an economic slump for two decades now. They've tried all of the Keynesian measures, they've built so much infrastructure that every culvert in the country has been concrete lined and has it's own bullet train station. It hasn't worked. All that's left is that monetary stimulus that is Abenomics. And that is obviously going to work in large part through the exchange rate. Is the AAM really saying that Japan mustn't use the only method it has to get out of that slump in order to preserve American jobs? Seriously? Mustn't there be at least a bit of give and take in international economic affairs?
And the second is that, even if the AAM is correct, the thing we should be concerned with is not production, nor jobs, but consumption. If Japan lowers the Yen/$ exchange rate then that makes Japanese goods cheaper for Americans. That's what the AAM is complaining about, of course. But cheaper goods for Americans makes Americans better off. And given that that is (as Adam Smith said) what we should be concerned about this is a good thing. Do note how this feeds back into aggregate demand. If Americans now buy the cheaper Japanese goods then they have more money to spend on other things. Thus it really is that aggregate demand which determines the number of jobs.
So we end up in rather a strange place over this complaint. If they're right, they're still wrong. We want cheaper goods for Americans, whether because American producers make them more cheaply or because exchange rates move and make foreign goods cheaper. Cheaper goods is better. And if they're not right, and it is aggregate demand which determines the total employment level in the US then they're still wrong, aren't they?
