The U.S. economy grew substantially in the 1980s and ‘90s. Not surprisingly, employment on Wall Street surged in concert with this broad economic boom.
As a Presbyterian minister explained it in 1901, “Wall Street is one of the longest streets in the world. It does not begin at the foot of Trinity Church … and end at the East River, as many suppose. It reaches through all of our American cities and across the sea.” All businesses are formed on the proverbial Main Streets of the world; to grow they require intrepid investment, so Wall Street only succeeds insofar as it brings investors and promising businesses together. Wall and Main are joined at the hip as it were.
Which brings us to a story that Clark Judge, a speechwriter and Special Assistant to President Ronald Reagan, once relayed to me. Sitting in Reagan’s Situation Room, Judge listened intently as Secretary of State George Shultz discussed with Reagan the globalized nature of automobile manufacture. While certain cars were “Made in America,” Shultz detailed the myriad foreign-made inputs without which American-made cars wouldn’t operate.
Shultz’s broad point from decades ago brings to mind a crucial admonition from Nobel Laureate economist Robert Mundell: the only closed economy is the world economy. Much as Wall Street’s wealth is a function of the U.S. and the rest of the world’s prosperity, so is the U.S. most prosperous when the rest of the world is thriving. As the division of labor expands to “hands” around the world, so does the ability of individual workers to specialize their work efforts on the way to exponentially greater productivity. Similar to Wall and Main streets, the U.S. and the world are joined at the hip.
The globalized nature of prosperity can’t be minimized, and arguably requires discussion more than ever. While the Trump administration has expressed laudable goals about reducing the tax and regulatory burden placed on American workers and companies, it has at the same time revealed a nationalist economic agenda on the trade and currency front that, if actualized in terms of policy, would suffocate any of the good that would spring from tax cuts and deregulation.
Recently Steven Mnuchin, Trump’s Treasury Secretary, observed that “as it relates to trade, having a weaker dollar is somewhat better for us.” Mnuchin’s comments were worrisome. They were a reminder that Mnuchin, along with the president he serves, is perhaps unfamiliar with Mundell’s essential truth about the closed nature of the global economy.
Worse, currency traders pay close attention to the musings of Treasury heads simply because they’re the mouthpiece for any administration’s policies with regard to the dollar. Specifically, when they express a preference for a weak dollar, markets usually comply. That they do speaks to the importance of Mnuchin being coached more closely about his currency rhetoric. A weaker dollar will benefit no one, while inflicting great harm on the U.S. and global economy.
Seemingly missed by Mnuchin is what Shultz and Reagan knew instinctively: the U.S. economy is part of a global whole. While there are American-made goods, nothing is solely a product of American inputs. Whether it’s Apple iPhones being manufactured in China, Nike shoes being produced in Vietnam, or the Boeing 787 Dreamliner being manufactured in six countries around the world, the most prominent companies in the U.S. are happily reliant on the world’s labor and inputs.
In that case, a shrunken dollar would raise the cost of the goods and labor necessary to create American products and services such that there would be no trade gains to speak of if the U.S. devalues the dollar. Contrary to popular belief, devaluation renders producers within the devaluing country even less competitive for it raising the cost of imported inputs, labor and transport of products and services.
Also, support for devaluation ignores the dominant role of investment when it comes to enhancing company competitiveness. Stated simply, investment in productivity advances is always and everywhere the path to competitive prices. At the same time devaluation is a certain barrier to investment for it shrinking the income streams that investors are buying when they put money to work.
But the greatest truth missed by Mnuchin is that per Adam Smith, “the sole use of money is to circulate consumable goods.” Money is not wealth as much as it facilitates the exchange of wealth. Along these lines, production is an expression of a desire to import, whether from across the street or from the other side of the world.
Considering the above through the prism of Mnuchin’s expressed comfort with a devalued dollar, such a result would instantly injure American workers eager to receive goods and services in return for their work, thus weakening the economy. We must never forget that American workers are the U.S. economy, and American workers earn dollars.
Adding insult to what is plainly injurious, trade among individuals and without regard to country borders is what enables the specialization without which economies can’t grow. Free trade isn’t just great because it ensures global competition for our dollars, pounds, euros and yen. What makes free trade truly spectacular is that it maximizes the odds that we’ll get to do the work that’s most commensurate with our skills.
Simply put, when we’re free to exchange our production for the production of others, and without regard to country or continent, we have the greatest chance to do the work most likely to elevate our unique talents. With trade it’s products for products, and the act of trading is an expression of our desire to exchange the product of what we do best with others doing what they do best. Translated, American workers gain the most when the world’s workers are similarly prospering.
Crucially, money is once again what facilitates the exchange without which workers can’t prosper. Applied to Mnuchin’s faulty view that there’s something to be gained from currency devaluation, nothing could be further from the truth. Money is once again a measure that facilitates exchange and investment, so when the value of money is uncertain, so is wealth-boosting trade and investment rendered much less likely. That’s why there are no winners when the integrity of money is compromised. Trade is the sole purpose of work, and devaluation makes it less likely.
That the desire to get informs our work efforts is something Treasury secretary Mnuchin will hopefully keep more in mind going forward. Not only does devaluation raise the cost of production, sap our competitiveness, and render us poorer, its cruelest byproduct is that it makes global trade less likely for it creating uncertainty about what we’ll get to import in return for our exports.
Let’s never forget that the act of importing is the wondrous reward for all of our hard work, and it’s also what regularly enhances the product of our work as divisions of labor always do. Currency devaluation is a horrid barrier to importing and the globalization of labor that lifts all boats. As such, when monetary eminences like Mnuchin talk up the benefits of devaluation, they’re actually promoting stagnation.