Thursday, December 02, 2004

Paging Dr. Krugman

DeLong says:

The real side counterpart of "financial adjustment" is that eight million American workers have to move from working in construction and consumer services to working in import-competing and export manufactures and services. If this takes place over five years, few will notice--and those who notice will be pleased as they will be pulled out of their current jobs into ones that are likely to be high paying in industries that are already rapidly expanding. If this takes place over one year, it becomes a big problem: you can fire eight million people in construction and consumer services in an instant, but creating and expanding the organizations to employ eight million more people in a particular slice of industries takes a long time.

I'm a wee bit rusty on my international econ, but DeLong hits on one of the things I've been mulling over lately. The basic idea is that the dollar drop is both necessary/inevitable in that it will put our long out of whack current account back into balance, and at least partially "good" in that it increases demand for exports. But there's a bit of a potential problem with that last bit.

Our manufacturing sector has been in relative decline for a long time. A big chunk of our economy now involves the production of non-tradeable (aside from tourism) goods. It isn't a matter of reopening some recently shuttered factories or boosting capacity. Sure, a declining dollar might sell a few more cars on the margin, but a big boost in exports would require not simply an uptick in employment in existing sectors, but the expansion of the economy into mostly non-existent ones. We economists all love our instantaneous adjustment models, but that isn't how the real world works.

Another thing to ponder is how all of this is affected by the vertical disintegration of the production chain which has really been the primary consequence of "modern globalization." Intermediate inputs are purchased from abroad, even when final production stages take place here. A falling dollar therefore equals not just higher prices on imported consumption goods, but increasing intermediate input costs for many industries.

This post is meandering, but there are a lot of reasons to be concerned about the consequences of a falling dollar. If the structural changes in the economy are very slow, then one can imagine a downward spiral taking place.