Many thanks to
Barkley for his tribute to Joan Robinson, which included this interesting line:
In 1937 she wrote her influential essay on "Beggar thy neighbour policies," which made the concept associated with competitive devaluations widely known, although the term had appeared before previously, used once by Adam Smith and also by a British economist named Gower in 1932.
Her critique is part of Part III of her
Essays in the Theory of Employment. She goes beyond calling competitive devaluations a zero sum game by suggesting that they might raise interest rates, which would worsen a global depression. I’m not sure I entirely agree.
Ben Bernanke recently noted:
Competitive depreciation became a contentious issue during the Great Depression. During the 1930s, the international gold standard collapsed, but it did so in a staggered way, with countries abandoning the gold standard at different times. The currencies of countries that left gold relatively early (like Great Britain, in 1931) depreciated relative to the currencies of countries that stuck with gold longer (like France, which left gold in 1936). The economies of countries that left gold earlier were also seen to recover more quickly from the ravages of the Depression. Some economists of the period, such as Joan Robinson of the University of Cambridge, argued that the recovering countries were doing so primarily through “beggar-thy-neighbor” policies of undercutting other nations in export markets.[1] In modern lingo, they were saying that depreciation was a zero sum game; gains for one country came only at the expense of other countries. However, over time, the recovery from the Depression became global, even as nations’ export shares and currency values stabilized. What was not adequately appreciated by Robinson and her contemporaries was that a country’s abandonment of the gold standard did more than affect the value of its currency: It also freed the country to use more expansionary monetary policies, which increased demand and incomes at home. The increases in total demand, for both domestic and foreign goods, served to promote recovery in output and trade in all countries, ultimately proving far more important than the temporary trade diversions created by changes in exchange rates. In other words, the monetary easings that followed the collapse of the gold standard amounted to a positive sum game.
Of course we are no longer on a gold standard even if Ted Cruz wants us to return to one. Bernanke had much more to say about these issues. Given that the 2016 campaign has revived populist notions of using trade protection in an attempt to shift the burden of weak aggregate demand from one nation upon another, we have another reason to consider the considerable contributions of Joan Robinson.
20 comments:
No serious disagreement here, pgl. I think you make the important point that we are no longer on the gold standard, so Bernanke's discussion of how the 1930s policies were not a zero sum game and maybe in the longer run a positive sum one do not hold as strongly now as they did then, although it may be that a bout of competitive devaluations might even now push the average world macro policy (especially monetary policy) towards more stimulative easing.
As it is, in relative terms, Joan Robinson was right about the 1930s in that those nations that got off gold and devalued, did so at the expense in the short term of those that did not, even if some years later they were better off by all getting off gold.
I might add that apparently in the 1920s and 30s there was a card game in Britain called "Beggar Thy Neighbour," the rules of which I know nothing about. But, obviously this was another influence on Joan Robinson's writings on the topic.
I should also highlight this from Bernanke's post:
"the dollar fell somewhat in early 2011, after the beginning of the Fed’s second round of quantitative easing in November 2010 (and about the time that Minister Mantega was lodging his complaint). But the U.S. currency recovered in the second half of 2011, then climbed gradually until mid-2014, when it began its recent sharp rise."
Europe likely needs net export stimulus more than the US does and its movement to easier monetary policy has led to an appreciation of the US$ of late lowering US net exports. Alas - US politics has returned to China bashing even though its real effective exchange rate has appreciated considerably. In effect Robinson beggar they neighbor survives this debate in spades. I think her message today would be a call for global fiscal stimulus.
Let us be clear that it is possible for there to be beggar-thy-neighbor policies that not only do not lead to global aggregate demand expansion, but that in fact it is possible for them to contract it. This is all a matter of the form that these policies take.
So the first part of this is to have the devaluation(s) occur within an adjustable peg setup, so that nations do not devalue by running stimulative monetary policies as is more or less what goes on now, but simply be adjusting their peg with other currencies to devalue theirs without any change in policy. If there are no other policy changes then this the outcome may look like the zero sum game where the devaluing nation gains at the expense of those that did not do so, with no net global gain in aggregate demand.
However, suppose that in addition to this the devaluing nation accompanies its devaluation with a combination of stimulative fiscal policy in order to stimulate its economy but a tight monetary policy in order to dampen down the impact of imported inflation, this could end up with a net negative aggregate demand outcome. Anybody doubting this should remember how the 1982 recession under Reagan came about, which was essentially that: a combination of tight monetary policy with loose fiscal policy that resulted in massively soaring interest rates and an unemployment that rose higher than was ever hit during the more recent Great Recession.
Granted that the 1982 toxic mix of fiscal stimulus with a draconian tight monetary policy led to a deep recession. But a lot of what drove that was a massive dollar appreciation lowering net exports. I like the term imported inflation as what we had back then was an overzealous Federal Reserve trying to kill inflation ASAP with the massive appreciation of the dollar giving a one time downward shot to consumer prices. I still remember people like Willem Buiter noting that when the currency returns from its massive appreciation - the gains in reducing inflation would be soon reversed. Of course we kept our inflation low but only because Volcker insured we had at least some GDP gap for years to come.
The really big dollar appreciation came after the 1982 recession ended. Most think there was a full-blown bubble on the dollar, which peaked in 1985, finally broken by the Plaza Accord. Those were the days of the "double deficits."
Have you read David Glasner's write-up on competetive devaluation? He discussed this with Frances Coppola a couple months ago.
https://uneasymoney.com/2016/02/17/competitive-devaluation-plus-monetary-expansion-does-create-a-free-lunch/
https://uneasymoney.com/2016/02/25/currency-depreciation-and-monetary-expansion-redux/
Barkley:
"As it is, in relative terms, Joan Robinson was right about the 1930s in that those nations that got off gold and devalued, did so at the expense in the short term of those that did not, even if some years later they were better off by all getting off gold."
I'm afraid I have to vehemently disagree with this statement. Not even in the short run was this ever true.
Here is a study of the competitive devaluations of the Great Depression by Barry Eichengreen and Douglas Irwin:
http://www.nber.org/papers/w15142.pdf
An examination of Figure 4 on page 48 reveals that the only countries that experienced import growth from 1928 to 1935 (the UK, Japan, Sweden and Norway) were members of the sterling block that devalued early (1931).
In most of these countries net exports actually declined over the period because imports rose more than exports. Thus these countries were effectively "exporting" the increased aggregate demand resulting from their devaluations.
Moreover, this pattern persists in each of the subsequent devaluations during this period.
The US devalued in 1933 which immediately led to a swift recovery from the Great Depression. Nominal exports doubled from 1933 to 1937. But nominal imports increased by 110.5%:
https://research.stlouisfed.org/fred2/graph/?graph_id=120991&category_id=0
As a result net exports went from a small surplus (about 0.2% of nominal GDP) to being roughly in balance.
France was part of the Gold bloc of countries that devalued late (1936). From 1936 to 1938 nominal exports increased by 95.4% and nominal imports increased by 80.9%:
https://research.stlouisfed.org/fred2/graph/?graph_id=120992&category_id=0
However, since imports were already substantially greater than exports, the nominal deficit actually increased by 55.4%.
So there's no doubt in my mind that Joan Robinson was wrong then on this issue, and an examination of the recent empirical evidence concerning currency devaluation will show that she continues to be very wrong on this issue today.
Sorry, Mark, I am not impressed. The big story in the GD was nations getting off gold and thus moveing to stimulative monetary policies. The sterling bloc did that first. So they grew, with their growth clearly driven more by their monetary policy than by their exports, as their imports also grew. This may be argued to show that they were stimulating others, but the others were continuing to decline in any case.
I am not going to argue about whether Joan Robinson was definitely right or not about what went down in the GD, because indeed what happened was that the devaluations were indeed accompanied by stimulative monetary policies, and I have already agreed that this can stimulate aggregate demand. What I argued was that they could lead to a diminution of aggregate demand under certain conditions. Not you or anybody else has succeeded in demolishing that.
The 1982 case is complicated in that indeed the dollar was rising, although it rose a lot more after the end of the recession. I note that 1982 differed from the case I formulated in that it was a floating rate regime rather than an adjustable peg system.
RasP - yes I have. It is consistent with what Bernanke wrote. Beggar Thy Neighbor per se does not raise world aggregate demand but relaxing any constraints on monetary stimulus does.
Mark - Eichengreen has also noted that joint monetary stimulus would be better than competitive devaluations. I think this is where Barkley is going with this in part. Interestingly, the US went first with QE and we enjoyed US$ devaluation and rising net exports which came at Europe's expense. But over the last couple of years, the Euro has been devaluing which has lower US net exports.
A graph of China's real effective exchange:
https://research.stlouisfed.org/fred2/series/RBCNBIS
If we go back to circa 2005, this index was only 80 and a lot of folks including Bernanke were suggesting that China's exchange rate needed to appreciate by something like 40%. I suspect this is where Trump gets his proposal to impose 45% tariffs on Chinese imports.
But notice that their exchange rate has appreciated by even more. To suggest China is manipulating their currency is to cite data from over a decade ago which is not very outdated. And yet the populist zeal right now is to blame China for our economic woes.
Barkley,
"This may be argued to show that they were stimulating others, but the others were continuing to decline in any case."
And how then can this be construed as doing "so at the expense in the short term of those that did not"? It can't. Your original statement is simply nonsense.
The others continued to decline because of their untenable commitment to a restrictive monetary policy, not because of the sterling block's willingness to abandon that policy.
Mark,
My case has not been about the GD per se. It has been that in a world of adjustable rates, it is possible for such competitive devaluations to be associated with declining global aggregate demand. This was not the case in the GD because, as already noted, that these devaluations involved leaving the gold standard and engaging in stimulative monetary policy.
Do you dispute this, or are you just out to declare Joan Robinson wrong in her 1937 paper. Frankly I do not have her 1937 essay at hand, so I cannot check on precisely what she said and how wrong or right it was. Maybe you can make clear just what it is that you want to argue.
ProGrowthLiberal,
"Interestingly, the US went first with QE and we enjoyed US$ devaluation and rising net exports which came at Europe's expense. But over the last couple of years, the Euro has been devaluing which has lower US net exports. "
Actually from 2009Q2 to 2011Q2, a period of time when the US monetary base increased by nearly a trillion dollars due to the expansion of QE1 and to QE2, the US trade deficit increased from 2.4% of GDP to 3.8% of GDP.
Only during QE3, did the trade deficit fall, going from 3.3% of GDP in 2012Q3 to 2.9% in 2014Q3. But I do not think that is a significant change. And since the end of QE3, the US trade deficit has actually fallen somewhat, to 2.8% of GDP as of 2016Q1.
It’s very telling that the Euro Area, the only major currency area up against the zero lower bound in interest rates that didn’t do QE between 2009 and 2014, was also the only major currency area where the trade balance improved substantially during that time period, going from 0.9% of GDP in 2009Q1 to 4.1% of GDP in 2014Q4.
And now, with the initiation of the Euro Area QE, the Euro Area trade surplus fell from 4.6% of GDP in 2015Q2 to 4.4% of GDP in 2015Q3 and again to 4.2% of GDP in 2015Q4.
That's the first back to back quarterly declines in the Euro Area's trade surplus since 2011Q1 (which incidentally was just prior to the ECB's disastrous decision to raise the Main Refinancing Operations rate from 1.0% to 1.25% in April 2011 and to 1.5% in July 2011, which in turn set off the Euro Area's double-dip depression).
So I would have to say that you have this precisely backwards.
The Euro Area's tight monetary policy was sucking aggregate demand out of the global economy from 2009 through 2014, and only since 2015 has the Euro Area been "exporting" aggregate demand thanks to the initiation of its own QE.
Barkley,
Currency devaluations that come without monetary expansion are extremely rare. Such devaluations almost always require some sort of capital controls. The best recent example that comes to mind is the case of China.
In contrast the QEs conducted by the US, Japan and the UK are not a "beggar thy neighbor" strategy. None of these nations experienced a significant increase in net exports during QE, and that even includes the example of the original Japanese QE in 2001-06.
Japan’s first QE was officially announced in March 2001 and concluded in March 2006. The following is a graph of the BOJ’s estimate of Japan’s real effective exchange rate which is trade weighted with respect to 16 different currencies and takes into account their relative inflation rates:
http://thefaintofheart.files.wordpress.com/2013/06/sadowski2b_1.png
The real effective exchange rate fell from 116.25 in February 2001 to 91.09 by March 2006, when the BOJ announced the completion of QE, a decline of 21.6%.
Exports rose from 10.2% of nominal GDP in 2001Q4 to 19.3% of GDP in 2008Q3. Imports rose from 9.4% of GDP in 2001Q4 to 19.5% of GDP in 2008Q3. From 2002Q1 to 2008Q1 real exports (adjusted by the GDP implicit price deflator) grew at an average annual rate of 11.0%. Real imports grew at an average annual rate of 12.1%.
So there was boom in both exports and imports. But imports grew faster than exports, and net exports actually moved from surplus (0.8% of GDP) to deficit (-0.2% of GDP) between 2001Q4 and 2008Q3:
http://research.stlouisfed.org/fred2/graph/?graph_id=120989&category_id=0
So the issue of the absence of a gold standard is completely irrelevant. Monetary expansion led devaluations lead to declining net exports more often than they do not. And they never lead to a substantial increase in net exports.
Mark,
I agree about China. But the question of the nature of how the devaluation is carried out is important. In a more or less floating rate regime, one pretty much must run a stim M policy to do the devaluation, so one gets the desired effect, and that is pretty much our current system globally. The other outcome can only come about when rates are adjusted by policy moves themselves, which can allow for it to happen without an M stim (or with cap controls, as you note).
"Actually from 2009Q2 to 2011Q2, a period of time when the US monetary base increased by nearly a trillion dollars due to the expansion of QE1 and to QE2, the US trade deficit increased from 2.4% of GDP to 3.8% of GDP. Only during QE3, did the trade deficit fall, going from 3.3% of GDP in 2012Q3 to 2.9% in 2014Q3. But I do not think that is a significant change. And since the end of QE3, the US trade deficit has actually fallen somewhat, to 2.8% of GDP as of 2016Q1."
I was referring to the devaluation of the US$ after 2009, which reversed course circa 2013 not how much the monetary base changed. Yes as the US economy saw real GDP fall, the trade balance improved as Keynesian economics would suggest. But note from 2009 to 2013, we had an increase in real GDP of more than $1 trillion but only a $22 billion rise in the trade deficit. Of course the trade deficit rose after 2013 as the US$ appreciated.
Get into the weeds all you want but these are the developments that jump out at me.
As far as calling what Barkley said about the 1930's nonsense, let me simply note this. Any expenditure switching event that increases the net exports of one nation by definition lowers someone else's net exports. That was the concern Joan Robinson so ably expressed in her 1937 Essays.
Why should this be called beggar thy neighbor when the fault lies in the hands of the ECB? They shoot themselves in the foot and the fed gets the blame? Seems fair.
RasP - granted the formation of the Euro was a disaster waiting to happen and the ECB has made its share of mistakes. Ours is a different world than the 1930's even as we could have learned from some of the mistakes back then. It still stands as a general proposition, however, that anything we do to increase our net exports will by definition lower someone else's net exports. What the US, China, UK, and Europe should be doing is jointly increasing aggregate demand.
That is the thing. There doesn't need to be a joint action. The ECB can act in a responsive manner and devalue the currency on their own. Why again do you want to stick with this "beggar thy neighbor" term when the EBC has the sole responsibility.
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