The Trump administration's recent, welcome announcement that it won't label China a currency manipulator spurred me to recall my days in elementary school — in particular, the annual fair that it held for its students. Reflecting on that little school fair helps clarify much of the confusion that surrounds allegations of currency manipulation.
If the value of a foreign currency, such as China's yuan, is kept artificially low against the dollar, Americans who convert dollars into yuan get artificially large amounts of yuan. The result is that, for any given amount of dollars, we Americans buy more imports from China than we'd buy if the yuan's value were higher. An artificially devalued yuan also means dollars become more expensive for the Chinese, who buy fewer American exports.
For people who believe America “wins” the more it exports relative to the amount it imports, an artificially devalued yuan is bad news. Yet this belief, widely held, is wildly mistaken.
In reality, just as an individual gets richer as he acquires more goods and services in exchange for an hour of his work, the people of a country get richer as they acquire more imports in exchange for a given amount of their exports. So, if Beijing keeps the yuan's value artificially low, it makes us Americans richer than we'd otherwise be.
Who pays for our greater enrichment? Return with me to the school fair, where we students couldn't spend dollars directly on the food, toys and other marvelous offerings. We first had to convert our dollars into fair tickets. The school administrators determined a fixed number of tickets that each dollar bought.
The fair tickets were, in effect, a different currency, the only one used in the small economy that was our school fair. Each good and service for sale was priced in these tickets — for example, one ticket for a box of popcorn, five for a donkey ride.
Obviously, the more fair tickets we students could buy for each dollar, the more fair goodies we could purchase. Lower ticket prices enriched us students.
Equally obviously, the lower the dollar price of a fair ticket, the less money the school earned on sales of any fair offerings. Because the purpose was to raise money for the school, the administrators had no incentive to price the tickets too low in terms of dollars.
Suppose, though, that the administrators had fallen for politicians' and pundits' claims that a country enriches itself by devaluing its currency against the dollar. The administrators would have intentionally priced each fair ticket too low. We students would have gotten lots of tickets for our dollars and feasted merrily on the fair's offerings. To supply our very high demand for fair goodies, the school would have had to increase its production of them. This increased production is, of course, costly.
The bottom line: If the school administrators had underpriced their fair tickets, the school would have lost, rather than made, money. And in doing so, it would have subsidized its students' consumption. In short, fair-ticket devaluation would have transferred wealth from the school to its students.
Donald J. Boudreaux is a professor of economics and Getchell Chair at George Mason University in Fairfax, Va. His column appears twice monthly.
