Whyte: The High Cost of a Cheap Pound

Another superb article from Jamie Whyte:

Every day, you can read some economic commentator or politician celebrating the fact that Britain has maintained its own currency rather than joining the beleaguered euro. This, they claim, has allowed sterling to lose value, making British goods cheaper for foreigners and thereby stimulating growth in exports. The argument goes that if only Greece and Portugal had their own national currencies and were not burdened with the euro, they could follow the same path to economic recovery.

Like so much of the standard economic opinion of commentators and politicians, this is a silly idea. When sterling devalues, British exporters benefit. They either receive more pounds in return for sales denominated in foreign currencies, or the foreign-currency price of their goods falls and they sell more. But this gain to those who sell to foreigners is offset by the loss to those who buy from foreigners, who must now pay higher prices. Currency devaluations effectively provide a subsidy for exporters funded by a tax on importers.

He goes on to address the claim that "exports create jobs in Britain whereas imports create jobs overseas":

When sterling devalues, increased foreign demand for British goods creates work at exporting firms. Of course, British consumers have less to spend after paying more for their imports, which reduces employment in Britain. But this offsetting effect may itself be partially offset by some consumers switching to British-made substitutes, from the now more expensive imports. All in all, a currency devaluation could boost employment (at least, until inflation drives up production costs and thus export prices).

But aiming to create work in this way is perverse. Labor is a cost, not a benefit. If a currency devaluation makes no difference to aggregate wealth—because it is simply a transfer from importers to exporters—while increasing the amount Britons work, then it has made Britons worse off. Neither an individual nor a population benefits by working more to consume the same amount of goods and services.

Moreover,

Like any other import tax or export subsidy, currency devaluations interfere with the price signals that direct resources to their most productive uses. Exporting businesses get a boost in profit that attracts capital and labor to them. But nothing has really changed; those exporting businesses are not making any better use of resources than they were before the devaluation. The devaluation has, rather, misdirected resources. If it increases employment, it has achieved this only by making labor less productive.

Those Luddites who once argued that we should protect jobs by resisting advances in labor-saving technology are rightly regarded as fools by today's peddlers of standard economic wisdom. No British commentator or politician has suggested a tax on computers to increase employment for filing clerks or a ban on washing machines to create jobs for housemaids. Yet their beloved currency devaluations are economically no different; they are just another way of encouraging unproductive jobs.

The whole article is well worth reading. If you're not a Wall Street Journal subscriber, you can get the full text by Googling for the title: "The High Cost of a Cheap Pound".