July 16, 2002
Yet Another Example of Truly Lousy Economic Journalism
After the revolution that establishes the rule of truth and justice, among the very first people to be sent to the reeducation camp will be Steven Erlanger of the New York Times, and his editor. Erlanger seems to think that the euro's rise to parity with the dollar is a "victory for Europeans"--as if the euro and the dollar were two competing sports teams, as if Europeans should cheer and feel proud for a high value of one and Americans feel proud for a high value of the other.
Euro Edges Past the Dollar in Victory for Europeans
By STEVEN ERLANGER, July 15, 2002
The euro became worth slightly more than the battered American dollar today for the first time in more than two years, giving Europeans a shot of pride at a time when many of them view the United States with some resentment. In a period when the United States is the world's only superpower, often perceived as selfish and unthinking about its European allies, today's little psychological victory of the euro over the dollar provided some not-so-sheepish satisfaction...
Read that? Good. Now how many of the following facts about the dollar-euro has Mr. Erlanger managed to convey to his readers?
- A stronger euro increases the wealth of European consumers, because they can buy imports more cheaply.
- A stronger euro reduces the welfare of European exporters, because they have a harder time selling their now-more-expensive goods abroad.
- In Europe today--with one of its chief problems being slack aggregate demand and a 10 percent unemployment rate--the reduction in demand for exports is probably more of a loss than cheaper prices of imports is a gain.
- In America today, a weaker dollar reduces the well-being of consumers: imports become more expensive.
- In America today, a weaker dollar increases exports because companies have an easier time selling their now-less-expensive goods abroad.
- Given that a principal long-run vulnerability of the U.S. economy is its large trade deficit and the possibility of some future crisis triggered by this deficit, the boost to exports (which is likely to reduce the trade deficit) is probably more of a gain for U.S. welfare than the rise in import prices is a loss.
- Thus the rise in the value of the euro is probably good for the U.S. economy--reducing the magnitude of potential long-run vulnerabilities--and probably bad for the European economy--reducing what is already anemic aggregate demand, and in all likelihood putting further upward pressure on unemployment.
Did you get zero out of seven? You are right. In his headline and opening paragraphs, Steven Erlanger managed to tell his readers precisely zero of the seven interesting and important economic implications of the recent rise in the euro against the dollar. Instead he talks about a "psychological victory" felt continent-wide by Europeans.
Is it any wonder that the state of economic knowledge and economic debate is so lousy, if this is what newspapers feed us?
July 16, 2002
Euro Edges Past the Dollar
in Victory for Europeans
By STEVEN ERLANGER
ERLIN, July 15 — The euro became worth slightly more than the battered American dollar today for the first time in more than two years, giving Europeans a shot of pride at a time when many of them view the United States with some resentment.
In a period when the United States is the world's only superpower, often perceived as selfish and unthinking about its European allies, today's little psychological victory of the euro over the dollar provided some not-so-sheepish satisfaction.
Analysts cautioned that the surge of the euro was largely about the weakness of the dollar, which they hoped would not fall too far too fast, dragging down the world economy. The dollar also fell to a near 10-month low against the Japanese yen and multiyear lows against the British pound and the Swiss franc. The euro finished United States trading at $1.0055.
"Mentally and psychologically, it is important, yes," said Josef Janning, head of the politics division of the Bertelsmann Foundation.
Currencies go up and down, but they provide a rough judgment of the confidence of investors in national economies and markets. And even if this renewed equality is less about a strong euro than worries on Wall Street translating into a troubled dollar, "the effect is the same in the way Europeans feel vis-à-vis the United States," Mr. Janning said.
When the euro was weak — as it has been for most of its three and a half years — there was "a sense of decline felt in the society, especially in countries with a hard-currency background, like the old Deutsch mark zone," Mr. Janning said.
A stronger euro helps bolster the European economy by making it easier for the European central bank to control inflation without having to raise interest rates. But the weakening of the dollar is not all bad for the United States; in particular it benefits American manufacturers by allowing them to sell goods abroad more cheaply and enables them to compete more effectively against foreign rivals.
Some analysts said that Americans may now begin to take the euro seriously as a symbol of how far Europe's efforts at integration have come. "This is not the worst thing for the trans-Atlantic relationship," a senior German diplomat said.
The European Union, 15 countries working to expand to 25 by 2004, is already a rival to the United States in the size of its population and of its economy. And it is debating a new constitution to make it more efficient and perhaps more united.
But as a collection of nation-states that have different views about how much power to cede to Brussels, the union has viewed the euro — like the common European passport — as an important symbol of the reality of this experiment in shared sovereignty. And that makes the moment of its breakthrough especially significant to Europeans.
The euro began life as a virtual currency on Jan. 4, 1999, worth about $1.18. As a measure of its member economies, whose currencies were then fixed at a certain rate against the euro, it created a more stable money based on a wider economic area. The idea was "to insulate the European economy from the volatility in the currency markets that had been devastating individual countries for 30 years," said Fabio Scacciavillani, a senior economist at Goldman, Sachs in London.
But the euro immediately slid against the dollar, hitting a record low of 82.25 cents in October 2000, just after the Danes rejected joining the euro zone. The euro, as a physical currency with its own bills and coins, went into circulation in 12 of the 15 member states of the European Union on Jan. 1 of this year.
"Certainly, parity is a psychological boost that could have important repercussions that are more tangible," Mr. Scacciavillani said. "It's about confidence, and it could impact the availability of capital and lower long-term interest rates if people buy euro financial instruments."
But the fundamentals of the economies on either side of the Atlantic do not make a clear case for the long-term prospects of the euro against the dollar, he and others said.
Mr. Scacciavillani said that the weakness of the dollar was driven by concerns over the gaping trade deficit in the United States "and the need to finance this deficit at a time when stock markets are weak and not attracting much capital from abroad."
Oscar-Erich Kuntze, an international economist at the Ifo Institute for Economic Research in Munich, said, "What we've not had until recently is twin deficits in the United States," both a trade deficit and a budget deficit.
He said the deficits combined with the business scandals like Enron and Worldcom undermined "the credibility of the U.S. economy."
That undermined credibility causes foreigners to pull money out of the United States and keep it in short-term investments denominated in euros, a senior German government economist said. "It's not really being invested right now," he said.
The idea of parity is a form of magic, of no significance in strictly economic terms, Mr. Kuntze said. "But weakness in the euro does have a detrimental psychological effect on the Europeans," who are feeling a bit more optimistic, he said.
"As a German I know how important psychology is in politics and economics," he said. "The strong German mark had such a strong effect on our psychology and this case may be similar."
With Germany in the middle of an election campaign centering on a weak economy and high unemployment, every little bit of good news can help the incumbent chancellor, Gerhard Schröder, who faces a strong challenge from the conservative Edmund Stoiber.
Still, Christoph Bertram, a well-known analyst, said the psychological impact would not be very deep. "For a while people thought that a strong currency is a virility symbol, but those days are gone," he said. "This won't lead to fireworks on Potsdamer Platz," the rebuilt center of a reunified Berlin.
At the same time, no one wants to see a collapse of the dollar and a large flight of capital from the United States. "If this happens in a bigger way," a senior German official said, "there will be a lot of fright."
Charles Grant, the director of the Center for European Reform in London, said a stronger euro would provide help to those who want Britain to replace the pound with the euro. "It will put a bit of spring into the stride of the bedraggled pro-Europeans in this country," he said.
He said the euro's value was only one issue in a highly political decision for the Labor government. More broadly, he said, "if parity gets people in the United States to understand that the euro is there and won't go away, then it's good."
Posted by DeLong at July 16, 2002 11:39 AM
brad - why was and is robert rubin so convinced that a strong dollar is in america's interest - rubin seems to think a strong dollar attracts foreign capital to a savings short economy and encourages american productivity by putting competitive pressure on export oriented businesses
A bit harsh, I think, Brad? (Although obviously, Year Zero and the Gulags were much worse, I hasten to add). Looking at that editorial from the perspective of Europe, I'd say that its main message was:
* The USA has for quite some time now presumed to lecture the world on how to organise its economy based on the gospel of "attracting investment".
* That was always a pretty dodgy argument on which to base such far-reaching theories of economic organisation and now has been shown to be so.
* Now that the rest of the world has stopped stepping up to the plate for the US consumer's excess consumption, the boot is quite possibly on the other foot.
It's not a good article about the economics of parity, because it's an article about politics, not economics. But the "important psychological victory" described could otherwise be described as a very real change in global investor sentiment, and if you don't think that changes in global investor sentiment matter, you should probably revisit your defence of Rogoff contra Stiglitz.
One trouble with unemployment figures is if unemployment is
high and stays high then the unemployment figures will begin to
disguise the true dimensions of what is happening; that is
people will give up seeking work and thus no longer be counted
Below I suggest a more meaningful comparison. Something
that probably already has a name, but I don't know what
it is, so I'll call it "comparative unemployment."
The key idea here is if you are going to compare one nation
to another it would seem sensible to have the same definition
of full employment for everyone. At first glance my viewpoint
would seem to be exceptional because I have never yet found
"comparative unemployment" presented as such, but on the other
hand, it's interesting but each time I have seen unemployment
source data, the additional data needed to calculate what I want
to see, is there.
It's almost like it's mildly encoded. There's the "unemployment"
table for popular consumption, and then there's the real
unemployment accessible through simple multiplication and division.
So here I've done the calculations for five countries.
Working age pop.
full employment (normalized to US) 68.4%
comparative unemployment (normalized to US)
The underlying data is from http://www.bls.gov/fls/flsichcc.pdf
at the U.S. Bureau of Labor Statistics. The year: 2001.
The above could be improved by adding military employment to
civilian, and that would only increase the discrepancy between
europe and the united states.
What it is captured, hinted at, by this different way of looking
at things, is the reality in people's lives, such as:
Imagine what it would be like to live in a country, where year
after year, decade after decade, unemployment hovers around
20 percent. That's the reality in germany, france, and much
of the rest of europe.
Where if you're under 30, odds are good you don't have a job,
and a significant percentage will never get one.
Employment in the united states is good, even extraordinary.
It's one of the best things we have going for us.
Re: >>It's not a good article about the economics of parity, because it's an article about politics, not economics.<<
Yes. But it ought to be an article about economics, not politics: the economics is much more interesting, and much more important after all.
And after the revolution, Erlanger *will* write articles about economics!
>>why was and is robert rubin so convinced that a strong dollar is in america's interest?<<
I have some trouble with this. The way that I make sense of it is not that Rubin believes that a strong dollar is good, but rather that a dollar that is expected to strengthen is good because it allows for lower interest rates and thus higher investment: domestic interest rate don't have to include an expected depreciation premium.
The statement "a strong dollar is in America's interest" is debatable and quite possibley wrong. The statement "a dollar that is expected to strengthen over time is in America's interest" seems to me to be surely right.
Rubin would probably say that I am trying to draw a scholastic distinction between things that in real-world market expectations cannot be distinguished. And he would probably be right.
I don't understand Mark Amerman's calculation above, except in as much as I have a sneaking suspicion that it implicitly assumes that the US level of female participation in the workforce is a norm against which all other countries must be judged rather than a very particular local social phenomenon.
>>I don't understand Mark Amerman's calculation above, except in as much as I have a sneaking suspicion that it implicitly assumes that the US level of female participation in the workforce is a norm against which all other countries must be judged rather than a very particular local social phenomenon.<<
But that is what we believe--that low female labor force participation abroad is a result of lack of opportunity pushing women out of the paid labor force coupled with stronger degrees of patriarchy pulling women out of the paid labor force.
After all--we think--we *are* the more advanced country, and doesn't the more advanced show the less advanced the image of its own future?
The move to the Euro was very much seen in Europe as a political move towards greater integration and unity, rather than an economic construct.
Paul Krugman, among others, has pointed out that the euro area lacks the labour mobility at the margin that one would expect for a common currency area. The likely outcome for the euro area is excessive inflation in the 'fringe' countries (that joined with too low exchange rates: Portugal, Spain, Ireland, Greece possibly) and deflation in the core areas (especially the less competitive regions of Germany).
But Europeans think of the euro in the way Americans think of their dollar and their flag (and they lack other symbols of unity: who even knows what a european flag looks like?): as a symbol of european strength and resolve.
The man on the street in most nations confuses a 'strong' currency with national success. Witness Britain rejoining the Gold Standard in 1924 at $4.85/ pound, the same rate as prevailed in 1913. This led to the General Strike, and, indirectly, to the Great Depression (via overly lax US monetary policy). The chancellor at the time? Winston Churchill.
>>But that is what we believe--that low female labor force participation abroad is a result of lack of opportunity pushing women out of the paid labor force coupled with stronger degrees of patriarchy pulling women out of the paid labor force.<<
Why do we believe this? I think I'd need quite compelling evidence to convince me that Sweden was a more patriarchal society than the USA, or France than Japan. I'd say rather that what we're seeing here is a social preference for single-income, parent-as-full-time-childcare households over double-income, parent-as-part-time-childcare households, with the fact that "single income" means "single male income" being explained by the general patriarchical structure of society. This isn't a society in which "year after year, decade after decade, unemployment hovers around 20%"; it's a society in which women give up work to look after children, and based on limited casual empiricism, I don't think it's fair to pathologise that choice, even under the current rather curious incarnation of "feminism" which so far as I understand it is largely concerned with the promotion of strip clubs.
>>After all--we think--we *are* the more advanced country<<
Hmmm, I seem to remember hearing that this belief is indeed common :)
>>and doesn't the more advanced show the less advanced the image of its own future?<<
Well, this is the sort of thing about which Karl Marx has a lot to say. You're using "advanced" here to mean:
* All labour is marketised and brought into the system of surplus-value
* Only market values matter
* The highest ambition for female emancipation is to be brought into the wage labour system.
I hesitate to use the term "third way", but have a lot of sympathy for Jospin's distinction between a "market economy" and a "market society", and suspect that Americans in general underestimate the extent to which this is a genuine social and political choice rather than sour grapes at not being able to afford sufficiently large sports utility vehicles.
Just to agree with some of the comments above, the FT has a pretty similar article in today's edition
Of course economically speaking $1 = Euro 1 means nothing, but pyschologically it does mean something, and at least in the short-term and to markets, politicians and the public pyschology is important. I can remember back in 1985 when Sterling was about to fall below $1 and Mrs Thatcher, who hitherto had been 'let the market decide', was suddenly all in favour of intervention.
The unemployment figueres quoted above don't actually mean much either. It takes no account of people who don't want jobs (housewives/househusbands, the early retirers). Europe does have higher unemployment than the US, but it is not a great a difference as is often made out and to some extent reflects diffences in working attitudes.
Yes, I think it does reflect true differences in attitudes and preferences, in addition to slack demand and (clearly in some places, clearly not in others) patriarchy. But on this side of the pond we tend to ignore those true differences in attitudes and preferences.
Ok, here are the explanations proposed so far for the differences
in "comparative unemployment."
Daniel Davies said, "...I have a sneaking suspicion that it implicitly
assumes that the US level of female participation in the workforce
is a norm against which all other countries must be judged..."
That is Daniel is asserting that fewer european women want to
work than american women and that the difference in employment
is explained by this.
Daniel Davies: "I'd say rather that what we're seeing here is
a social preference for single-income, parent-as-full-time-childcare
households over double-income, parent-as-part-time-childcare
households, with the fact that "single income" means "single
male income" being explained by the general patriarchical structure
That is Daniel is asserting that europeans feel a greater obligation
to be stay-at-home parents than americans and that the difference
in employment is a reflection of this choice (or sacrifice) with
the exception that stay-at-home parents are disproportionately
female because of male dominance.
Matthew Turner: "It takes no account of people who don't want
jobs (housewives/househusbands, the early retirers)."
This statement can't be disagreed with because of course it's
true, but it also, likely, carries the hypothesis that the
difference in employment is mainly because europeans don't want
jobs to the same degree as americans.
Now my question for each of the above is what evidence is there
that these assertions are true?
Here's a thought experiment: Imagine that next year american
employment radically drops. We have 20% "comparative unemployment"
and 20% "traditional unemployment" because pretty clearly
everyone unemployed "knows" they want to be employed.
Now imagine that the 20% comparative unemployment turns out
to be long term so that 30 years from now there is still 20%
"comparative unemployment." Will it be the case that 30 years
from now we would still measure 20% "traditional unemployment?"
My suspicion is there would no such 20%. Thinking of oneself
as unemployed is a major stressor, I imagine that many would
adjust their expectations and think, "I don't want to have a
job, I want to take care of my children," or whatever. And in
particular this would happen especially easy for the young who
had never had a job.
Now in this thought experiment the reason for the 20% "comparative
unemployment" is clearly because the economy isn't generating
enough jobs. It isn't really because people don't want those
So here's the key question. How do you distinguish this scenario
from the situation where culturely people "really" don't want
to work, which is what Daniel Davies and Matthew Turner are
hypothesizing? After all if you talk to people who aren't working,
aren't these people going to be saying roughly the same thing in
So there is the possibility that low european "comparative
unemployment" has little to do with differences in sexual
discrimination or parental values but is almost entirely caused
by economies that for whatever reasons are not supplying jobs.
I'm not asserting that this is the case, but that it is a
reasonable hypothesis, and further that if one is going to
compare economies at all one should examine this assertion
because otherwise, what is the point? What's the point of
comparing if all differences are going to be explained by
assuming people want it that way?
One point of evidence that indicates that lack of jobs might
be the truer explanation for the differences in "comparative
unemployment" is the situation in Norway. I don't have the
reference at hand, but recall looking at OECD data showing
Norway with the highest employment in the world, and just
a little bit higher than the U.S. What makes Norway particularly
interesting is that a job there is apparently a civil
right. It's the north sea oil revenue that makes this possible.
So in Norway if you want a job and can't get one from one's
own efforts the government will make one up for you, and
if you don't like that one, the government will supply
Now in this ideal situation -- from a certain perspective -- the
interesting thing is that employment isn't that far
from recent U.S. or for that matter what used to be the
case in Japan. Suggesting that bottomline job desires
are perhaps more universal than a "people want it that
way" explanation for differences in employment would suggest.
Brad DeLong said, "I think it does reflect true differences in
attitudes and preferences, in addition to slack demand and (clearly
in some places, clearly not in others) patriarchy. But on this
side of the pond we tend to ignore those true differences in
attitudes and preferences."
This can't be argued with because it covers all possibilities.
"Slack demand" covers a lot of terrority.
My favorite little bit of junk NY Times journalism on economics was in a story on 'green economics' a while back. Quote:
"Virtually everyone agrees that without the natural world, the human economy, and indeed human life, could not exist."
As Homer would say, it works on so many levels. ;-)
As a comment on the reflexes of the journalists working in the contemporary respectable press, that is.
This is an interesting article because it reflects the way monetary policy gets into political news stories. I don't know if there's any point in moaning about it, but as a way to discuess the underlying action of the dollar and the euro it's ok.
If as conservative David Malpass has repeatedly said, the US went through a "Great Deflation" from 1997 to 2001, because strong growth was not supplied the propoer amount of liquidity by the Fed, it would explain much about the gyrations of the dollar and the Euro. He seems to base much of his analysis on gold, though, which nobody can talk about. It's worth noting that the orthodox supply-siders were the only conservatives to accurately forecast what would happen after Bush's tax cuts (they said the cuts would do nothing).
Mark -- let me turn this interesting argument of yours around:
>>How do you distinguish this scenario
from the situation where culturely people "really" don't want
to work, which is what Daniel Davies and Matthew Turner are
hypothesizing? After all if you talk to people who aren't working,
aren't these people going to be saying roughly the same thing in
But what if these people are *feeling* roughly the same way in either scenario? I don't necessarily think that we have the standing to gainsay people who claim to be happy not working, simply because we think that there are structural reasons why they are out of work.
Norway has another characteristic in common with the USA; unlike France, the social benefits available for the "idle poor" (people who could work but choose to sponge off the state instead).
So I'll turn your argument back round at you; economies like the US and Norway which provide a lot of employment, tend to valorise employment and consumer goods and produce social pressures to overwork and accumulate consumer goods. Economies like France produce a different set of social pressures, and leave their citizens with more leisure (I also find myself wanting to point out that citizens of the French kind of economy live much less in fear of their employers). If you regard an economy as a machine for producing human happiness rather than for producing GDP, it's pretty ambiguous which one is better.
Basically, my point is that it's probably correct that European economies produce lower levels of employment than Anglo-Saxon ones, but very shaky to assume that this is because silly Europeans are making mistakes, and the hypothesis that they are defending other, not-narrowly-economic values has to be taken seriously. I don't really think it's valid to judge this by thinking about what long-term unemployed Americans would say, because they would be unemployed in America, not France.
The only other point I would make, and I think it might be against my argument, is that as I recall European unemployment rates were much lower than US rates in the 1950s and 1960s, and it is only since 1970s that the reverse has been true.