Brenner on dollar devaluation

Rakesh Bhandari bhandari at phoenix.Princeton.EDU
Tue Mar 2 09:08:28 PST 1999


I am not sure what to make of the significance of the Warner paper--partly because I cannot follow it all the way through the very sophisticated econometrics. As you correctly underline, he only shows that dollar devaluation is less important in accounting for the variability in exports--not that it is not important. What seems to me most interesting about Warner's analysis is the emphasis on the changing composition of US exports; as capital goods and intermediate industrial supplies become more important--something James Galbraith had called attention to earlier--exports will be more sensitive to world investment demand, the strength of which is determined independently of the value of the US dollar or any variable manipulable by US technocrats.

Moreover, recent devaluations in Thailand, South Korea, Malaysia, etc have not stimulated the kind of export boom that Mexico's peso devaluation enabled in 1994. There seems to be at best a weak linear relationship between devaluations and exports.

In terms of Brenner's framework, one could actually argue that the dollar devaluation may have done greater work in maintaining excess capacity in the American based consumer goods industry in particular in the face of international competition than in actually stimulating exports which, given the weight of capital goods, are more conditioned by the strength of world investment demand.

James Galbraith writes:

"The United States is, by and large, an exporter of advanced capital goods. We export aircraft, computers, pharmaceuticals, and machinery. In these industries, we enjoy a degree of worldwide monopoly power challenged only by a handful of producers in other advanced countries. When the dollar goes up, many export sales happen anyway."

Actually it seems to me that if it's genuine monopoly power, a stronger dollar would enable some degree of greater monopoly profits. At any rate, Galbraith continues:

"Some markets are lost to competitors: Airbus takes sales from Boeing, Komatsu from Caterpillar. But these effects, while important, are no as strong as in industries that compete with imports, Import competing industries tend to be be mass production consumer goods industries, such as automobiles, consumer electronics, and clothing. When the dollar rises, US producers in these industries face intensified competition in the US domestic market from producers around the world. Foreign producers can gear up to supply the US market, and in the years following 1981, they did flood our market with imports." p. 141 of Created Unequal.

If this is the case, then the dollar devaluation did not so much serve to displace profitability difficulties on Japan and Germany as it prevented the liquidation of marginally profitable firms and industries witin the US itself and thus maintained the slow growth trajectory of the US economy. It served to maintain capacity in uncompetitive industries more than to restore profitability. After all, Brenner himself underlines that while exports grew in the wake of the La Plaza devaluation, profitability hardly spiked at all. I don't see how this conclusion does not follow from Brenner's anti Keynesian framework: if the restoration of profitability requires liquidation of marginal firms (or industries), then there can be no resort to any Keynesian measures--inflationary money creation, lower interest rates, lotsa govt spending or...devaluation of the currency.

Now on another front: Brad's drinking buddy has advised Japan not to rely on yen devaluations to stimulate its economy--why? He seems to be urging money creation to escape a liquidity trap, not simply lower interest rates and fiscal stimulus. He is worried about the slow down in investment in Europe and Japan and obviously concerned that in the face of a collapse in internal accumulation abroad, the US will not be able to withstand the resulting export push as a mounting US current account deficit leads to the implosion of America.

yours, rakesh

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