Hm, you know what? You’re perfectly right, now that I think of it. Piling dollars removes the ‘excess’ purchasing power, which does not allow import to increase too. So yes, the policy does promote employment in exports, but still at the expense of jobs everywhere else. So, imports do not increase, but jobs are nonetheless shifter, not created.
Why does it promote employment in exports at the expense of jobs everywhere else? If imports do not increase because their currency is pegged, Chinese workers (as a whole) have no additional ability to purchase imports, and there is no shifting of jobs. Keep in mind that China has few hundred million unemployed workers. Additional workers for export are not taken away from industries for internal consumption, they are taken from the pool of unemployed workers.
@ Smiling Dave:
Oh, Americans are greatly benefiting from this situation. At least in the short term, at some point the debt will eat us. My argument is not that this is to the detriment of Americans, but that the Chinese government does artificially strengthen employment by reducing it’s peoples purchasing power. They do this solely to keep as many of their people busy as possible, to create social stability. That’s my theory.
Nero,
OK glad we agree. Your’e probably right.
Because the subsidy to exporters is taxed directly from everyone else, which, as you point out, lowers their purchasing power. If people can buy less than they would with no peg, than shops and factories meant for internal production will close down and jobs will be lost. That there are unemployed people changes nothing. With no peg there would be more production for internal consumption, and more jobs there, unemployment notwithstanding.
It lowers the purchasing power per capita, but it does not lower the purchasing power of Chinese workers as a whole. In effect it stretches the existing purchasing power across more people. (In this simplified market.) So internal production should not be harmed. That’s my guess.
If I tax 5 guys 100% to give everything to a sixth guy (take an extreme example), will the store that catered to six people function as it did, or will it be downsized? The worker that worked there will be laid off, and will go to work for the sixth guy, who knows that the only way he has to keep getting his tax money is to produce funny things no one needs. Just as taxation in general depresses the economy, so does this peculiar peg mechanism.
I agree that this peg mechanism depresses the economy, all I’m arguing is that a greater number of people will be employed than otherwise. I don’t quite understand the relevance of your example though. Chinese local production produces the same amount of goods, it just sells slightly smaller rations to slightly more people. More of the unemployed are now getting a share of the wealth pie of the employed, that stays the same size because of pegging.
Let us agree that than a peg-less China would have a more efficient production structure. The peg makes the production structure less efficient.
Now, we agree that employment and production in exports rises due to the peg. If overall efficiency and production fall but production in exports rise, does this mean that efficiency and production in everything but exports fall? Doesn’t his mean that employment in everything but exports falls, and cannot be recouped by the increase of employment in exports since we agree that the peg lower efficiency?
Well that’s adding a new variable, efficiency of the production structure. I certainly agree that every intervention of the commie government makes the economy less efficient, but does the peg in particular have that great an effect on efficiency? Normally we would consider it a form of inefficiency to distort the economy towards exporting, but if the goal is just to employ as many people as possible it doesn’t matter what they produce or how efficiently. I don’t think the peg decreasing the efficiency of the production structure has that great a negative effect. We could look at the extreme for an answer: Say a peg lowers wages to were they are half of what they would be without. Cleanly Chinese labor would be very competitive, and many more would be employed producing cheap gimmicks for export. The production structure would be slightly less efficient, but that does not make up for the greater affordability of labor. More people would be employed. They would all be poorer, and the country as a whole would be poorer, but a greater number of people would be employed.
Wages are set by the productivity of labor. Most of that productivity comes from the available capital stock per worker. With the peg we destroy capital in toto, and so wages do indeed fall, but that is not to mean that employment rises!
Wages fall because, with less capital to go around, the economy need less workers, and will thus lower wages until the surplus workers are done away with. Employment falls and is switched to the unneeded extra capacity in exports, it does not rise.
Frankly I don’t understand your point any more at all. How does a peg destroy capital? All I’m saying is that if a peg destroys the gains in purchasing power that people would otherwise have gained by working,then there will be more employment. Leaving aside efficiency , do you agree that a Dollar peg, while impoverishing the country in general and making workers poorer, does lead to a greater number of people employed?
Certainly not! What you’re saying is that taxes increase employment, for a peg is just an other name for inflation, and inflation is just a tax. So tell me, do you thing that taxes increase employment?
Yes, or so I think. When the government taxes people to subsidize exporters, it lowers the cost of labor in that country. It is the same as when the government buids infrastructure with taxpayer money which exporters can use for free, it makes production in that country more affordable. It is important to note that I purely mean the number of people in employment. Usually when we speak of “creating jobs” we mean a net increase in a countries wealth, but I realize that taxation can not make a country better off, it only employs more people for less money.
To repeat my point:
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taxation destroys capital
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with less capital the productivity of labor falls and,
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the optimal number of workers also falls,
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hence wages fall, because the demand for work is down, not because supply is up! In microeconomic supply-demand curves is easy to see that the total employment ‘quantity’ is decreased, not increased.
The optimal number of workers falls. What does this mean? That there is less demand for workers as a whole? It seems having less capital would lead to more need for human labor, not less.
I agree that “demand for labor” as such falls, but demand for human beings being employed whould have to rise.
I mean that the more capital goes around, the more productive is labor. Keep in mind that, with some capital, we employ workers until the marginal productivity of the next guy is equal to his marginal cost (wage).
Fine, now capital is burned, and worker productivity falls. Will you employ more workers or less, to equalize marginal costs (wages- which, must be reminded, rise the more guys we employ) with the lower marginal productivity? Of course you’ll fire folks: they’re just too expensive now.
What you are saying, and you are right up to a point, is that the ratio of workers to machines (a notinal example) will rise, but both capital and labor will decrease, though capita will go down by more. There is no way in which employment soars here.
Yes, workers are more expensive now that they have lower productivity, so normally I would employ fewer. But I’m also getting a subsidy! It depends whether the effects of capital destruction outweighs the effects of the subsidies for exporters. I would think that a direct subsidy for exporters does more to raise the marginal value of workers than it does to destroy it. Due to the peg, the Dollars I get out of my Chinese workers are artificially valuable, while the yuan I pay them are artificially cheap, due to constant inflation.
China would have to be cunning before they could have a cunning ploy. More concisely, they would need a stinking clue.
Now I’ve zeroed in on your argument: so employment is indeed lost in non-export sectors, but is gained in export-related sectors, which can outweigh the loss in the rest of the economy. Let us see why that cannot be the case.
The capital which is being gained in the export sector is being paid wholly by the capital lost in the non-export sectors. So, at the very least the capital gained in aggregate cannot be more than zero. But it is indeed far less! After all, if there had been a way to increase overall capital (hence wellbeing) by shifting resources form non-exports to export it would have happened without the peg. So the actual shift, being artificial, lowers the net capital stock: exports gain less capital than non-export lost.
When exports gain capital, both capital and employment rise but the ratio of machines-to-workers also rises: capital increases by more (monetary terms) than wages.
In the previous post I explained that in the non-export industry, both capital and labor are lost, but more capital than labor is lost. So (D standing for the absolute change):
- D(capital non-x)< D(labor non-x), and
- D(capital x)>D(labor x). Finally
- D(capital non-x)>D(capital x).
From these equation its clear that, ultimately D(labor non-x)>D(labor x), so more employment is lost than gained. It is an apodictical certainty that here both labor and capital are being squandered.
I agree that the capital available per worker is lowered, making workers less employable. But my argument was that the currency peg makes workers artificially valuable, because what exporters get out of their workers, Dollars, is bought by the government for more than it is worth. So essentially every hour of Chinese labor for export has, say, 1.1 hours of value in it for the exporter. So even though the peg destroys capital, it makes labor more affordable.
The core question is, I think, whether a taxpayer subsidy of exporters can make labor more affordable. Imagine a coastal city in the US building a port with taxpayer money. Exporters can use this port at low cost, they can bring their products to the world and the cost for that comes out of the standard of living of the workers, so wold that not make labor in that city more affordable for exporters?