The ironic pairing: Globalization and Deficit Terrorism

Globalization - here used synonymously with "free trade" - punishes countries which pay their workers too much. It lets a flood of cheaply manufactured goods into wealthy countries' markets - and these goods are cheaper precisely because of the difference in wages. In other words, each portion of wage in the importing country can capture more than an equal portion of wage in the exporter country.

Since wages are typically paid in national currencies, this effect sees its expression in currency exchange rates. Since currency can only be used to purchase goods within an economy, a nation that imports more than it exports will, ceteris paribus, find that over time its currency will decrease in value relative to those of nations that export more than they import. However, this measure of value is only meaningful if incomes and currency circulation patterns are also taken into account. The simple measure of literal exchange doesn't tell the full story of the value of a currency. If an hours' labor earned worker A 1000 yuan that were each worth 0.25 dollars, while worker B slaved for a pittance of 10 dollars per hour, can one really say that the yuan is a "weaker" currency?

For the typically encountered modern situation where one large consuming nation is served by several satellite nations that function as producers, any additional money entering the hands of an investor will tend to be invested in a satellite nation if it is invested in production and a few other outsourceable functions, and invested in the importer nation for purposes like distribution and retailing. Therefore, a true currency supply expansion, distributed uniformly (such as through tax relief) in an importing country would in part be transmitted to foreign countries and in part into the local economy. This ratio is determined by the nature of the goods that are intended to be produced and by incentive structures that apply to these goods. Thus, such a currency supply expansion will increase the wealth of both the importer and the exporter nation.

However, this effect is moderated - and can even be supplanted completely - by rent-seeking behavior. If wealthy individuals are able to cartelize or monopolize any stream of consumer necessities, acts of currency issuance instead lead to a near seamless increase in the costs of those necessities until the effect of the currency issuance is absorbed. If labor markets are sufficiently slack to keep workers from bargaining effectively, the system will essentially remain as it was, except that the price of goods in the importing country will rise or fall relative to each other, depending on the nature of the rent-seeking. If, on the other hand, labor markets are tight (and not necessarily because of low unemployment but also possibly because of a shortage of qualified workers) inflation will occur as the workers demand greater wages to counter the increase in cost of living and these wages motivate increases in prices. But here it is worth noting that price increases and wage increases in pair do sometimes serve a beneficial equalizing function in the society, if the worst off see these wage increases.

Anti-deficit hysteria hinges on value of currency as expressed not in the wages of workers but in exchange rates. But this means that nations which refuse to devalue their currency through deficit spending are essentially capitulating on trade deficits, agreeing to continue exporting industry and jobs. The sensible policy - indeed what appears to be the strategic equilibrium - is to have every nation locked in a currency devaluation race. Such a race would proceed until full employment was reached.

This strategy will doubtless lead to inflation, especially since workers who depend on cheap imports to maintain a low cost of living will see these imports increase in price due to the inferior exchange rate. However, this inflation should be moderated by the reduction of profits collected by the outsourced companies. The inflation is also beneficial in the sense that it forces workers to bargain for higher wages and undermines the total profits of the wealthy, delaying the rent-seeking behavior that would otherwise lead to increases in the value of real estate and other owner-income-stream-type assets. The inflation is necessary to stimulate the growth of local industry in the importer country - from the perspective of the entrepreneur, inflation has the same effect that tariffs would, except that the upward price trend will tend to make investment more favorable in the long term than tariffs would, especially since tariffs can be much more effectively countered by foreign government policies than currency devaluations.

Therefore, the pairing of Globalization with deficit terrorism is particularly odd. On the one hand, nations are expected to put up no resistance to the exporting of jobs overseas. On the other, expansions of money supply are criticized as irresponsible, even though such expansions would correct the imbalance caused by the strategy of globalization. In fairness, as has been noted before, government borrowing from wealthy investors doesn't really expand the money supply. However, it does effectively increase the money in circulation , but with a much more mild effect than non-parity currency issue. But in their economic ignorance, most deficit terrorists are blind to the actual workings of the money supply anyway. What we should never forgive them for is their willingness to blindly repeat political talking points as if they represent real analysis.