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A disagreement with Krugman

March 16, 2010

tip from XBradTC

The Money Illusion strongly disagrees with Krugman’s suggestions on Yuan revaluation.

I had thought that nobody still believed the dollar was overvalued in 1971. I do realize that back in 1971 many of Krugman’s fellow liberals believed that the US economy was suffering from an “overvalued” dollar, but I also thought that this view had been pretty well discredited by Mundell and others. Keep in mind that in 1971 we had 6% unemployment and 4% inflation. Does that seem like an economy that needs to devalue its currency? In any case, Krugman got his way; the Europeans gave in and revalued their currencies. And I suppose you could say the “problem” was solved. By 1979 I don’t recall too many people worrying about the dollar being overvalued. Although come to think of it I don’t recall that pesky Japanese current account surplus going away either. There must be a lot of distinguished European economists who like reading Paul Krugman. Imagine their reaction this morning upon reading where he appears to praise Nixon’s crude attempt to force the Europeans to revalue their currencies in 1971 in order to solve America’s 6% unemployment problem.

Obviously the author knows more about economics than I do but everything I have ever read holds that in 1971 the dollar was competing against undervalued currencies which was hurting exports. I guess I will have to check out this Mundell guy (who by the way is the architect of the Euro, and we see how well that is working at the moment.)

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