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Weak Dollar Doesn’t Really Beneft Manufacturers

April 7, 2013
Pat McGeehan , The Intelligencer / Wheeling News-Register

There is a prevailing myth today, commonly upheld by politicians and the media. This myth is an economic myth, an economic fallacy - and is crucial to expose. This erroneous belief is that a "cheap" dollar, or a cheap currency, helps the manufacturing sector of our country by increasing American exports to other nations.

In other words, if the dollar is worth less and less, then American manufacturing is aided, as more of their products can be sold around the globe. Cheap money is good for American manufacturing. In order to keep the dollar weak, more dollars must be continually "printed-up." This then, is said to be healthy for our American exports. Some are willing to admit that a cheaper dollar hurts importers, but still foolishly maintain that exports are conversely boosted with an ever-devalued dollar. This myth is not just wrong, it is a dangerous way of thinking. A devalued dollar not only harms the manufacturing sector, but it causes great harm to the country as a whole.

Intellectual folklore like this lends cover to our own government's harmful activities. It is vital to set things straight.

To debunk this train of thought, a fundamental difference between capital goods and consumer goods must be understood. Consumer goods are those goods produced for more immediate use, while capital goods are those goods produced not for an end in themselves, but in order to produce consumer goods down the line. Capital goods then are used to produce other goods for consumption at some point in the future.

Here's an example: Pretend a man is stranded on an island. In order to survive, the man must catch fish from the shoreline. First, he begins to catch fish by hand - a time consuming and labor intensive process. However, the man soon figures that he can drastically increase his productive efforts if he builds a fishing net from the various materials on the island. The man calculates that it will take three days to find enough material to build the finished fishing net. But what will he eat while he is constructing his fishing net? He must first abstain from eating all the fish he has been catching by hand, placing some fish aside for future consumption, to provide for his meals during the three days he will be dedicating toward furnishing his fishing net. He must save fish to eat during his three days of downtime, and when his fishing net is completed, he now can use far less energy to catch many more fish. In this example, the fish the man catches is the consumer good, and the fishing net is the capital good (or the good used to produce other goods for later consumption).

Imagine another scenario where individuals stranded on such an island are hired to work by one of the various producers of fish. Suppose that one "employer," who catches fish by hand, becomes skilled enough at his fish catching that he can hire another person on the island to cook the fish for dinner. Now imagine in a different setting on the island, that another man, the man who has saved and furnished himself with a fishing net, decides to hire a cook as well. Which cook will likely receive more fish for himself at the end of the day? One producer is by far more productive - he can catch with his net, say, 200 fish every day in the market instead of say, five fish by hand - and hence, the employer with the fishing net obtains more resources. All other factors aside, it is likely that the cook who is employed by the man with the fishing net will receive more fish to eat after the meal is cooked. This is why employees who work for those with capital goods - the manufacturing sector - generally receive more income than those who work in the consumer goods industry (the service sector). Regardless of the employee's general skill level, the cook who works for the man with no fishing net, despite being the best cook on the planet, will never receive more fish at the end of the day than the cook employed by the man with the net. In other words, a janitor at Burger King will likely never earn as much as a janitor at a steel factory.

Now under the complex economy, money is used to trade instead of fish, and here is how we can deduce the effect of inflation. Fishing nets eventually need replaced, so the producer on the island with a fishing net must always calculate when he will need to repair his net after it becomes less usable through depreciation, or wear and tear. He must again set aside savings for his downtime from fish catching, the time that he must instead dedicate to mending and tending the upkeep of his fishing net.

Imagine, though, that suddenly, some of the fish the man with the net catches are inedible; they are rotten - yet since this has never happened before, the man with the fishing net will not find this fact out until some point later in the future. Because of this, he will not be able to eat all the fish he catches. Since these rotten fish are not immediately realized to be inedible, the man with the fishing net still believes he has the same amount of resources to survive on while he is repairing his fishing net. The man still calculates that it will only take him three days to perform the upkeep to his net, because he still believes that he has enough fish saved from his current batch to hold him over for meals during this time period.

The fact that some of the fish are rotten is only revealed to him after he begins his downtime maintenance on his fishing net, when he realizes that he cannot consume part of the fish he had placed away into savings. He then takes "losses" - as the man has now discovered he has fewer real resources at his disposal. Some of his savings are rotten fish. The man must either go hungry for part of this time, or ditch the unrepaired net and resume catching fish by hand again, in hopes of getting an immediate meal. But of course, he is not the only one affected by this distortion in calculation. His cook will be left with less income as well. Fewer fish can now be caught and cooked.

Inflation can be seen as the rotten fish. Inflation - or increasing the supply of money and devaluing the dollar - dilutes the money supply, the yardstick of measurement that provides for economic calculation, such as the amount of savings needed to repair a fishing net. A "cheaper dollar" silently dwindles the capital stock of the producer, by stealthily taking resources away from the producer and swelling the government. In essence, this redistributes wealth much as counterfeiting would.

This activity perhaps falls hardest at first on those industries most dependent on accurate forecasting. Industry and manufacturing, or the man with the fishing net, must be able to utilize accurate accounting and forecasting in order to continue efficient production. Our example makes it easier to see what is harder to see in our complex economy. Yes, the man who imports goods immediately notices the effect of a cheaper dollar. It now costs him much more to import goods, as the dollar has fallen in value. The exporter typically does not notice these negative effects. His actual numeric prices for his products remain the same, only more customers abroad begin to buy more of his goods. The exporter is moving more of his product, but gaining less real resources in return, as he is now receiving cheaper dollars for them.

In other words, the man on the island who catches fish by hand immediately notices the rotten fish problem as soon as it arises - and discards them as inedible. The man who uses the fishing net does not notice the rotten fish "issue" until later, when he eats into his savings while trying to repair his fishing net. In the complex economy, when the manufacturer finally goes to order more parts for his machinery, or repair his industrial "capital goods" equipment, it becomes realized that his depreciation costs are much higher than what was always accounted for. He has sold his product overseas for cheap dollars, and has less real resources on hand to pay for the upkeep of his production plant and facilities.

The real longer term effect is the most harmful. When the government purposely devalues our money, everyone outside of government special-interest groups is worse off in the long run. The government swells its size and scope, leaving fewer resources behind for everyone else. This longer-term phenomena of less and less American manufacturing has largely been brought about because of this inflationary age.

In the end, inflation merely provides an avenue for this to take place - the swelling of our nation's government - with far less resistance from the public. Maintaining economic myths about the "benefits" of cheap dollar policies help to prop-up this trend.

Though it has taken time, the result of our inflationary age has been the utter liquidation of American industry. In has been replaced with a giant service-sector of retail outlets, banking conglomerates, and an ever expanding government. Since the last tie between the dollar and gold was severed over 40 years ago, inflation and "printing-money" to expand government with more ease has truly been the rain that brought about today's rust belt. It should be no surprise then that for some time now, two of the largest employers outside of the coastal banking areas have been government and Wal-Mart.

As Thomas Jefferson wrote, "I place economy among the first and most important virtues, and public debt as the greatest of dangers to be fearedto preserve our freedom, we must not let our rulers load us and our children with perpetual debt."

Guest columnist McGeehan is a graduate of the U.S. Air Force Academy in Colorado Springs. He served in the West Virginia House of Delegates from 2008-2010. He currently works for Frontier Communications in Wheeling and resides in Chester.

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