The Payoff of a Weaker Currency
Why does the idea of a weaker currency have so much allure? I asked myself this question while reading Tyler Cowen's (very good, very short) discussion of what the weaker euro means for Europe's economies. The (even) shorter answer: The weaker euro will make the euro area's exports cheaper, but that reduces the buying power of existing incomes and wealth.
That's a trade-off people generally seem happy to make. When a falling currency gooses exports, this is generally thought of as a good thing, even though the necessary corollary is a reduction in domestic purchasing power.
Why is this the case? One possibility that you frequently hear is that people are fallaciously comparing nations to households. If you sell more labor or stuff to people outside the household than you consume, then you're in good economic shape, so that must be true of your country, too, right?
Maybe so. But I think there's another reason that we want to export more than we import, and that has to do with the importance of work.
As I've written before, work is central to our lives -- so central that, in a modern industrialized democracy, being persistently unemployed is about the worst thing that can happen to you short of death or dismemberment. Government unemployment benefits can take care of the financial pressure, but people who have been out of work for a long time are still very unhappy even in countries with generous unemployment programs. Not having a job denies you a sense of purpose and structure to your life. It's not surprising, then, that the public supports stronger employment, even at the cost of some purchasing power.
For the past year or so, I've heard people starting to say that with the automation revolution coming down the pike, we need to find a way for people to create meaning in their lives outside of having a job, because many people won't have one. This phenomenon shows why I'm so skeptical of this idea: People may hate their jobs, but the alternative is not writing symphonies or doing woodwork; people tend to use the extra time to sleep and watch television ... or look for a job. However unpleasant your job may be, it provides a measure of independence and the knowledge that you're creating value for someone else. So wanting to sacrifice purchasing power for employment may be economically illogical ... not least because we can't have an entire world of net exporters. But it has a certain human logic that we ignore at our peril.
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