ECON 309

This short writing was written by your fellow student John Choi:

John Choi
ECON 309
Smith
Despite Threats, China Unable to Displace Dollar

Due to the recent events concerning the U.S. economic downturn and its resulting affect on the global economy, China has questioned the United States’ position as the leader of the global economy and the use of the dollar as the universal medium of exchange. Over the past few decades, China has amassed an incredible sum of U.S. government bonds which amounted to $772 billion as recent as May 2009 (“Retired Military Personnel” 4). For years, China has used this against the U.S., questioning its economic stability and the stability of the dollar, and even threatened on multiple occasions to sell back all its holdings of U.S. treasury bonds, which would significantly slow down the U.S. economy. However, as much as China threatens to sell U.S. treasury bonds to attack the U.S. and encourages the disuse of the dollar as the universal standard currency, I believe these things will not happen.

The recent push, led by China, to replace the dollar is no mystery. However, what currency does China propose to replace the dollar with? No surprise China probably wishes for its own currency, the Yuan, to be the successor of the dollar. Both the dollar and the Yuan have the necessary qualities to serve as the global currency, but what many are wondering is whether or not the dollar is still the “safest currency” or will the Yuan be preferable? The Chinese claim that the dollar no longer is and that the substantial U.S. debt makes the dollar unreliable and potentially unstable. However, the U.S. debt has been significant for years without making a significantly negative impact on its ability to function as the universal medium of exchange. As long as China does not do anything to negatively impact the dollar’s strength or the United States’ ability to manage its debt, the dollar will remain strong so while China claims the dollar is no longer good, they are the reasons why it may be.

This brings us to the question, how willing are Chinese to make good on their threats to sell their share of U.S. securities? As of January 2009, China held roughly 24.07% of total foreign-owned U.S. treasury securities, which is hard to ignore and the U.S. must certainly be wary of the danger (U.S. Treasury Department 1). However, there is more than meets the eye when employing this tactic. China holds more of a double-edged sword because selling U.S. securities will not be without severe repercussions. By selling U.S. treasury bonds to China, the U.S. receives dollars, but you have to wonder where all those dollars go. Currently, China is the second largest trading partner of the U.S. with exports to the U.S. totaling an incredible $252.3 billion in 2008 (China-US Business Council 1). So you see, the U.S. may be borrowing from China, but much of what it borrows goes right back to them through the purchase of goods and services. Without those export dollars from the U.S., China would not be able to maintain economic stability either. By simply selling back U.S. treasury bonds, China would hurt its own production and both countries would experience a slowdown because the global economy is more interconnected than ever.

China stated repeatedly that the U.S. will have trouble paying off its debt, but it is much to blame for that. It has implemented measures to make things more difficult for the U.S. to do what China claims it wishes, pay off its debt. A major benefit of the elimination of the gold standard is that fiat money allows the U.S. to print more money than it holds in gold reserves. Therefore, any debt the U.S. has can be easily paid back by simply printing more money because while inflation may rise with increased supply, deficit accounts do not rise with them. However, this is one reason why the Chinese have pinned the Yuan to the U.S. dollar, which has appreciated the Yuan’s value and made it artificially strong. China has also greatly restricted the supply of the Yuan so while the U.S. increases the supply of U.S. dollars, it is becoming increasingly difficult to pay back its debt. This has created much controversy because if market forces determined exchange rates for the Yuan, its value would have increased greatly over the past several years due to the China economy’s rapid recent growth. As a result, as long as the Yuan/dollar exchange rate is fixed I do not see how China will be able to effectively convince the international market to Yuan were to replace the dollar as the global medium of exchange.

China claims the dollar is no longer the most secure currency to remain the international medium of exchange due to the high U.S. debt, but while is threatens to sell back its holdings of U.S. treasury bonds, which would effectively disrupt the U.S. economy, it will not because of the negative repercussions that would result. Thus, as long as there are no shocks to the U.S. economy and the dollar remains stable, there will be no need to replace it as the international currency. Also, in order to curb the U.S.’ ability to pay off its debt, China has fixed the Yuan/dollar exchange rate. In the end, China will not be able to achieve its goals to replace the dollar unless it is willing to accept the repercussions on its own economy and unless it is willing to stop fixing exchange rates.

Works Cited
"Retired Military Personnel". Patrick Air Force Base, Florida: The Intercom (publication of the Military Officers Association of Cape Canaveral). June 2009. pp. 4.
The U.S.-China Business Council. http://www.uschina.org/statistics/tradetable.html. July 9, 2009.
U.S. Treasury Department. June 15, 2009 “MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES” July 9, 2009. http://www.treas.gov/tic/mfh.txt

It would require much more space and the greatest minds in the field to wrestle with all the questions raised in this essay.  A lot of things about international money are not well understood.  But John alludes to theoretical perspectives while mustering evidence in support of his thesis concerning a highly salient economic issue in the news.

This short writing was written by your fellow student Andrea Lively:

Andrea Lively
Professor Smith
ECON 309
13 July 2009

Card and Krueger: A Study Commonly Cited By Politicians

In just under two weeks, an increase in minimum wage will be effective for all Americans, prohibiting any worker from receiving less than $7.25 per hour, and making it illegal for employers to offer anything less than that wage. By 2011, Obama plans to institute a minimum wage of $9.50. How are these wages determined? A mathematical formula that adjusts for inflation, or just some arbitrary number? Perhaps we should let the market do its job and let prices adjust for themselves.

Minimum wage leads employers to hire more productive workers, who are relatively cheaper to hire with the minimum wage. This makes it hard for the low-skilled workers to compete for employment. In 1992, Card and Krueger conducted an experiment which raised the minimum wage in New Jersey and kept the minimum wage of Pennsylvania constant. The results of the study found "no evidence that the rise in New Jersey's minimum wage reduced employment at fast-food restaurants in the state," but found "that the increase in the minimum wage increased employment .” In the short run, perhaps employers were able to support a wage increase. The study conducted was only one year long, and demand for low-skilled labor is inelastic for such a short period of time. Because minimum wages reduce the cost of discrimination, employers were able to discriminate against less productive workers, and in the short run may temporarily increase their profits, or not lose a significant amount, if each worker is more productive and works less hours. In the long run, businesses will try to compensate for the lower profits by merely raising the prices of goods and/or services, causing inflation and making the minimum wage relatively lower.

In 1998, Berman suggested that the study take into consideration the number of hours rather than the number of employees. The demand for labor, or the number of man hours, is determined by the expected productivity of the given workers . Some may argue that it is “fair” to even out the number of hours worked between people in the labor force to keep a higher percentage employed. However, economists are not comfortable with ethics, and they will look to find the more efficient solution.

We should look at the total output of goods, or productivity to see whether the policy is worthwhile; jobs are a means to an end, not the end itself. If the market is allowed to function without restriction, prices will adjust accordingly, and employers have the option of raising their own wages above equilibrium price in order to attract prospective employees. Labor is merely a commodity, and should be allowed to fluctuate in our constantly changing market with price signals as information of value. When government imposes a minimum wage, not only does it deprive some workers of their best option, it is also attaching an “inaccurate” value to labor. The reason for minimum wages having statistically insignificant changes in employment is that it is has been set close to equilibrium price. If this is the case, government has inefficiently used resources in order to put this law into practice (ex. lobbying), when the market would automatically send price signals to employers and employees in the labor market. Union workers may benefit from minimum wage, since their labor is more attractive as it becomes relatively cheaper. However, the lowest skilled workers, the group minimum wage was intended to help in the first place, are the first to get laid off. No system is perfect, but we should focus on the economic wealth of society as a whole and eliminate as much deadweight loss as possible.

The Joint Economic Committee (JEC) has been critical of Card and Krueger’s work. According to the JEC, studies have proved that minimum wage laws cause unemployment, as well as a higher turnover rate, less training, and fewer fringe benefits .
Card and Krueger found that an increase in minimum wage had no significant impact on employers’ intentions to lay off employers. If the demand for labor has not been changed by an external factor, such as a change in demand for the good or service produced, when the price of labor is artificially raised, it will automatically reduce the quantity of man hours demanded. Even if no employees are laid off, each of them will be working less hours.

David Neumark and William Wascher from the Federal Reserve found many errors with the Card/Krueger data. They reviewed payroll data gathered from the Economic Policy Institute (EPI), and when they applied it to Card and Krueger’s model, they found that the new data yielded a 4.8% decline in New Jersey’s employment relative to the Pennsylvania sample . The study also overlooked a large portion of the fast food sector, only surveying major fast food chains. The data collected by telephone surveys was inaccurate and inconsistent with that of the EPI.

Minimum wage “will have only negative effects on the distribution of economic justice. Minimum-wage legislation, by its very nature, benefits some at the expense of the least experienced, least productive, and poorest workers .” Before politicians try to help the least skilled workers by raising their wages, they should look at a supply/demand model and think about the unintended consequences of their actions.

Bibliography
Card, Krueger, "Minimum Wages and Employment." The American Economic Review 5, no. 90 (2000): JSTOR.
Joint Economic Committee. "50 Years of Research on the Minimum Wage." Talking Points. Available from http://www.house.gov/jec/cost-gov/regs/minimum/50years.htm. Internet; accessed 10 July 2009.
Kibbe, Matthew. "Policy Analysis." Cato Institute. Available from http://www.cato.org/pubs/pas/pa106.html . Internet; accessed 10 July 2009.
Zycher, Benjamin. "Minimal Evidence." Reason Online. Available from http://www.reason.com/news/show/29707.html. Internet; accessed 10 July 2009.

What I liked best about this is that Andrea goes to the sources and summarizes what other people have to say as well as offering her own arguments, which reinforce what she gets from the outside sources.