America the Gutted: A foolproof way to create US jobs

BOSTON — The hardship from unemployment in the US is astounding. Twelve million people remain out of work — or more than 20 million counting the under-employed and those who have dropped out of the workforce.

The trend is devastating the middle class, as GlobalPost reported in our recent America the Gutted investigation.

What to do?

Rob Scott, an economist at the Economic Policy Institute advocates a solution that wouldn't cost taxpayers a thing: Crack down on countries that game the value of their currencies — and he's not only pointing his finger at China.

"Certainly, the single most important thing to do is getting the value of the dollar right," Scott says. "And that is not going to cost us a penny. In fact, it will reduce the government budget deficit substantially over the next decade, and create millions of jobs."

Scott is not the only economist pusing this policy.

He points to an analysis by Peterson Institute economists C. Fred Bergsten and Joseph E. Gagnon, which identifies many benefits to ending manipulation:

If excessive currency intervention were to cease, the US trade deficit would fall by $150 billion to $300 billion or 1 to 2 percent of GDP. One to two million jobs would be created. The euro area and a number of other countries, both high income and developing, would gain by lesser but still substantial amounts. Countries formerly engaged in intervention could offset the impact on their own economies by expanding domestic demand, as China is already doing.

Here's the idea, unpacked: Currency manipulation occurs when nations interfere with exchange rates, making manufactured goods cheaper so they can boost exports.

Specifically, when a company from China exports a widget to the US, it gets paid in dollars. In a world without government interference, it would then sell those dollars and buy yuan to run its operations spend locally. That transaction would increase the supply of dollars on the market — massively, in fact, given that the US buys about $750 billion more than it sells the world each year.

According to the law of supply and demand, in a free market this flood of greenbacks should drive down the dollar exchange rate. Conversely, it should lift the cost of the yuan (or whatever other export currency). In theory, this rebalances things. Stuff from the US gets cheaper. And stuff from China, or other major exporters, gets pricier.

But in reality, that's not what happens.

Instead, governments in exporting countries typically buy the dollars from their manufacturers, effectively removing them from the market.

Governments around the world hold trillions in US dollar reserves. That, Scott says, renders the US dollar far too expensive. In turn, it makes American labor uncompetitive, enabling foreign workers to take US jobs. The euro also suffers from this problem.

China is the biggest scapegoat for this. In the presidential debates, Mitt Romney declared that he would declare China a currency manipulator "on day one," if elected president. Obama responded that he has already successfully pressured China, resulting in an 11 percent appreciation in the yuan.

In fact, China has long been a major offender, and it continues to benefit from the practice. Its $3 trillion in foreign exchange reserves (including, dollars, euros and other legal tender) is the world's largest.

But opinions differ as to the extent of its current transgressions. According to Bergsten and Gagnon, of the Peterson Institute, "China has largely curtailed its currency aggression, at least for now, but many other countries remain highly active." (Scott disagrees.)

The world's currency cheats include countries that make a lot of stuff (South Korea, Thailand, Malaysia, etc.) and oil exports (OPEC, Russia). Among the worst offenders are US allies Saudi Arabia, Norway and Singapore, which have each socked away more than $500 billion worth of reserves.

Perhaps the most flagrant is Japan, which held $1.2 trillion at the end of 2011. The Japanese government has one of the world's biggest debt burdens — meaning that Tokyo essentially borrows from its citizens to buy dollars as a ploy to keep exports cheap.

So how do you stop this currency manipulation, and give the dollar its true value?

There's already a legal framework for taking action.

Both the International Monetary Fund and the World Trade Organization forbid countries from manipulating exchange rates to maintain export surpluses. The victims (the US and Europe, primarily) would need to do a better job of taking action.

If this doesn't work, Bergsten and Gagnon advocate several other possible solutions.

First, the US Fed and the European Central Bank could essentially print money (again, costing taxpayers nothing) and buy the currencies of offending countries, neutering the effects of their manipulation. Alternatively, the US and Europe could slap tariffs on the US bonds these countries buy, or on imports from currency manipulators, as President Richard M. Nixon did in 1971.

As for China, the Economic Policy Institute's Scott still has an alternative solution: stop letting China buy the US government bonds that Beijing uses as a storehouse for its dollar holdings. He points out that China doesn't allow foreign countries to buy its bonds; in fact, Beijing is highly restrictive in terms of how the yuan is handled abroad.

The obvious fear would be that preventing China from buying US Treasuries would make it harder for Washington to service its debt.

No problem, says Scott. "Right now US companies are sitting on trillions of dollars of cash. They’re not investing, so they have plenty of money available to buy treasury bills." Moreover, given the Fed's policy of keeping interest rates near zero, the Fed "will buy up as much treasury debt as is needed to keep interest rates low. And if interest rates start to go up long-term, it means the economy is recovering and that’s a good thing. Higher interest rates are not going to snuff out recovery."

“We have enough savings in the United States right now to finance all of our government budget deficits, and we can grow our way out of those deficits by rebalancing trade,” he says. 

And it won't cost taxpayers a cent.

Nina Goldman provided research assistance

Follow journalist David Case on Twitter: Follow @DCaseGP