Wednesday, July 10, 2019

Interview: Should free trade impact currency valuation? Cato's George Selgin explains.

Story by Joseph Ford Cotto

Libertarianism has seen better days.

A few years ago, certain political forecasters claimed that the future of America's center-right belongs to libertarians. Since the 2012 presidential election, however, protectionism surged -- not only in the GOP, but among Democratic ranks as well. Now, amid the age of Donald Trump, libertarianism's once-ascendant nature seems a distant memory.

"I fear that the classical liberal/libertarian idea and ideal will be seriously tarnished by the policies and politics of the Trump Administration," Dr. Richard Ebeling, one of our time's greatest Austrian School thinkers, recently told me.

He continued: "Virtually all of Trump’s proposed policies involve a continuation or an intensification of government involvement in social and economic life. He acts as the all-knowing government central planner when he calls in business executives and tells them where to invest and what products they should make to 'create jobs.' He undermines respect for and protection of essential civil liberties when he ridicules the freedom of the press and their way of reporting on his administration’s actions and his words."

Ebeling went on to state his worry "that with the assistance of the mainstream media the Trump Administration’s anti-freedom policies will tarnish the real case for a free society and a free market. That is, people who want lower taxes and fewer regulations on business will be identified as the people who also believe in torture, discrimination against immigrants, violations of civil liberties, and the instigation of trade wars because of aggressive nationalist attitudes."

Much, though certainly not all, of libertarian philosophy hones in on fiscal policy. Understanding the value system of economic libertarianism is not a simple undertaking, though often is presented as such by ideological opponents.

It is ironic that one of our time's foremost authorities on the finances of personal liberty does not refer to himself as 'libertarian.' Rather, he forsakes labels entirely -- along with movements -- and speaks his mind issue-to-issue.

Dr. George Selgin "is a senior fellow and director of the Center for Monetary and Financial Alternatives at the Cato Institute and Professor Emeritus of Economics at the University of Georgia," his biography at the former explains. "[The Doctor's] research covers a broad range of topics within the field of monetary economics, including monetary history, macroeconomic theory, and the history of monetary thought. He is the author of The Theory of Free Banking(Rowman & Littlefield,  1988); Bank Deregulation and Monetary Order (Routledge, 1996); Less Than Zero: The Case for a Falling Price Level in a Growing Economy (The Institute of Economic Affairs, 1997); and, most recently, Good Money: Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage(University  of Michigan Press, 2008).

"Selgin is one of the founders, along with Kevin Dowd and Lawrence H. White, of the Modern Free Banking School, which draws its inspiration from the writings of F. A. Hayek on denationalization of money and choice in currency. Selgin has written for numerous scholarly journals, including the British Numismatic Journal; the Economic Journal; the Economic History Review; the Journal of Economic Literature; and the Journal of Money, Credit, and Banking; and for popular outlets such as the Christian Science Monitor, the Financial Times, and the Wall Street Journal, among others.
"Selgin retired from the University of Georgia to join Cato in September 2014. He has also taught at George Mason University, the University of Hong Kong, and West Virginia University. He holds a BA in economics and zoology from Drew University, and a PhD in economics from New York University."
Selgin recently chatted with me about many issues concerning the American economy. Some of our conversation is included below.
Joseph Ford Cotto: Prominent economists and politicians often say that free trade will benefit America in the long run. What role do you think unfettered trade should play in the valuation of our national currency?

Dr. George Selgin: No role at all.  Monetary policy shouldn’t be treated as a tool for influencing trade, or used for any other purpose than that of keeping the economy reasonably liquid, though not excessively so.  That means regulating the supply of bank reserves and currency so as to maintain a steady overall levels of spending.  Using monetary policy to manipulate the dollar’s value relative to that of foreign currency sacrifices risks sacrificing macroeconomic stability, which benefits everyone, for the sake of gains to certain special interest groups.

Cotto: Libertarian economic theorists tend to believe that trade deficits are of minimal importance. Should these deficits have a great impact on American currency?

Selgin: It isn’t just “libertarian economists” who reject the idea that trade deficits are necessarily bad: it’s all competent economists! A trade deficit is just another name for a capital surplus, that is, for net foreign investment in the U.S. economy. Foreign demand for U.S. dollars also contributes to the trade deficit, and for that and other reasons the trade deficit is a factor influencing the value of the dollar, both internationally and at home.  But while the Fed is responsible for avoiding undesirable changes in the value of the dollar, it shouldn’t be concerned about trade deficits as such.

Selgin: Since it went into effect during late 1995, the North American Free Trade Agreement has formed a trilateral commerce bloc between Canada, the United States, and Mexico. From your research, has this proven to be of benefit to American monetary policy? 

Cotto: I’ve done no research on this topic.  However, I doubt the agreement has itself made monetary policy either less or more challenging.  Again, that policy shouldn’t concern itself with trade. Good monetary policy ultimately facilitates trade of all sorts, internal and foreign.  But trade agreements and such shouldn’t have much bearing on how monetary policy is conducted.  Nor do I think that they have been a major factor in fact.