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Matthew Yglesias: Steve Pearlstein Doesn't Understand the Economics of Exchange Rates

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Indeed. Exchange rate depreciation is the best solution to a country that has priced itself out of export markets. I wonder why Steve Pearlstein doesn't say that a weaker dollar is in America's interest?

Matthew Yglesias comments:

Yglesias » Pearlstein on Wage Cuts: [A] lot of people are going to despite today’s Steven Pearlstein column advocating lower wages for American workers especially since he throws in a gratuitous paragraph suggesting that highly compensated newspaper columnists are the reason the US outperformed the USSR. But this is the paragraph with analytic weight:

Which brings us back to the story of GM’s Orion plant. There are lots of reasons why American companies like GM have lost market share (yes, I wrote about currency manipulation last week), but one is that in too many industries, our labor costs are now too high to be globally competitive. Reducing wages and benefits in those industries would not only help to create and save jobs, but would also force a further reduction in consumption and living standards that is necessary to bring the U.S. economy back into balance....

Pearlstein... [does not] understand that Yuan revaluation is the same thing as lower wages for American workers.... [I]f dollars become less valuable relative to other important currencies, our real compensation declines. By the same token, if the Federal Reserve succeeds in raising the price level, our real compensation declines. These are all related concepts.... [O]f the three, nominal wage cuts are... least attractive.... If you force nominal wage cuts on an indebted population, you get an unbalanced deflation where existing debt obligations come to consume a larger and larger share of income. Alternatively, if you reduce real compensation via currency devaluation or higher inflation you reduce income and debt alike, allowing us to dig out of the balance sheet hole more quickly.

It is getting to the point where I don't believe that Matthew Yglesias wasn't an economics major...