The Big Three blame their troubles on the Yen.

I'm a big fan of the first amendment, but I wouldn't mind changing it to forbid all political finger-pointing that involves exchange rates.

You see, exchange rates are a topic in economics that is just confusing enough that it always sounds vaguely menacing--so when someone says something like

the Japanese government unfairly intervenes in currency markets to artificially depress the yen,

then a chill of fear runs up the spines of even smart people who otherwise wouldn't fall for economic snake oil. It just sounds kinda ominous, don't it?

So, in this week's installment of exchange-rate-manipulation-as-all-powerful-ring-of-Sauron, we have the Big Three automakers, blaming their problems not on their own adequate-but-overpriced cars (hat tip: Kausfiles, who blames union work rules), but on Japanese exchange rates! That quote above--that's the Big Three's plotline for why they're in the dumps and need a government bailout. Here's what Ford honcho Bill Ford has to say:

We can compete with Toyota, but we can't compete with Japan....

Great sound bite! But bad economics....

As I mentioned a couple of months back, exchange rates don't matter much in the long-run. If Japan "artificially" makes its currency cheaper, then self-interested Japanese businesses will choose to raise the price of their cars, won't they? So after (at most) a year or two, Japanese car companies will eventually figure out that their cars are super-cheap to Americans, and then they'll raise their car prices, undoing the oh-so-ominous "price manipulation" all by themselves...

But let's suppose the Japanese car companies don't raise their car prices. Let's suppose instead that Japan decides to become an auto-making charity, making cars for free, and shipping them to America as a way of saying 'thanks' for sending the blessings of militarily-imposed-freedom-and-democracy their way.

British PM Margaret Thatcher eloquently answered this question years ago, but Google isn't helping me today to find her quote. She pointed out the obvious: Of course we'd take the free cars. Free cars are good. People in the U.S. who used to make cars would find something else to do, since we wouldn't need cars made anymore.

And the average American would be richer as a result: After all, we'd have all the cars that used to be made by U.S. autoworkers, plus whatever the former-autoworkers made in their new jobs: Old + New > Old. That sounds like more to me......

So don't buy the exchange-rate-manipulation snake oil. Cheap cars: good, not bad. More free stuff: Good, not bad.

Here endeth the lesson.

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Posted by Garett Jones to Right Economy at 12/04/2005 02:16:00 PM