Matthew Yglesias writes:
Matthew Yglesias: Getting Serious: Dan Drezner's got a post entitled 'The Bush administration gets serious about the dollar'. It's hard to detect much seriousness there. Rather than addressing, say, the massive budget deficits that are leading to the unusual currency situation, or trying to do something that would reduce American oil consumption, they're getting serious by asking the government of China to float their currency. They've got no leverage they can use to make China do this. They're just asking. But seriously. This is, admittedly, a more serious approach than Senator Schumer's bill 'that would impose a 27.5 per cent tariff on all Chinese imports if China does not revalue in the next six months,' which is apparently gaining traction in the Senate. And what if this approach worked?
If I were part of the Bush Administration's economic high command, though, I would worry that China might take the hint. If China revalued (really revalued) and its reserve accumulation slowed, the US might find it a bit harder to find buyers for all the IOUs the Treasury is churning out, even as US 'soft patch' could widen the US deficit. And there might not be quite so much demand for Agency debt/ mortgage backed securities either.
There seem to be good arguments in favor of a revaluation of Chinese currency, but they're mostly arguments that this would make China better off. From the American perspective, revaluation isn't a substitute for real policy measures aimed at bringing our financial system back toward sustainability, it's just something that would force action on us.
This is more evidence that Matthew Yglesias's transformation into an economist is advancing rapidly. To a political scientist, you "get serious" about an issue like the currency by sending an ambassador to have an unpleasant conversation with a foreign government. Call this "get serious(ps)." To an economist, you "get serious" about an issue like the currency by changing your government's policies in such a way as to change the balance of returns and risks facing those buying and selling in foreign exchange markets. Call this "get serious(e)." Matthew is complaining that Dan is talking like a political scientist.
Soon he will grow his invisible hand...