July 1, 2019 Reading Time: 5 minutes

Last Tuesday Cars.com came out with its annual “Made in USA” list. Jeep’s Cherokee came in at #1 as the most “American-made” of the vehicles, but of the top 10 most American-made of the cars, seven were Japanese brands; six Honda and one from Honda subsidiary Acura. It’s all a reminder that the foreign competition which needlessly inflames opportunistic politicians is rooted in a whole lot of nothingness. The foreign “competition” frequently employs American workers.

But that’s not the purpose of this write-up. Much as it’s unfashionable to say today, it’s the countries most open to the world’s plenty, including plenty produced in countries that allegedly “cheat” when it comes to trade, that are the most prosperous. Thank goodness the U.S. doesn’t have a level playing field when it comes to Americans exchanging with producers in other countries. While countless other countries that are much poorer than we are put up excessive barriers to foreign goods, the average tariff in the U.S. on foreign goods is 1.4%. It’s still too high, the number should be zero, but immense American prosperity is a reminder that the countries with markets that are largely open to foreign production prosper. Always. When we’re free to import from anyone, we also have the best chance to specialize in what we produce here. Sorry protectionists, but rich countries don’t spend time worrying about poorer countries harming their people through tariffs. Still, that’s once again not the purpose of this write-up.

Instead, the focus will be on another stat unearthed by Cars.com. While the Jeep Cherokee is the most “American-made” of vehicles, 28% of the inputs that make up the final product are imported.

The above rates mention in consideration of Judy Shelton’s “Weekend Interview” with the Wall Street Journal. Shelton is the very excellent author of the very excellent book Money Meltdown, she’s U.S. Executive Director of the European Bank for Reconstruction and Development, and also one of the most gracious people I know. At present she’s being considered for the Federal Reserve Board, and while I think Fed critics and supporters alike vastly overstate the central bank’s relevance, my hope is that Shelton is nominated and confirmed. She will quickly expose the economists in the Fed’s employ as hopelessly wedded to easy-to-discredit notions about money, inflation and economic growth, including the laughable belief inside the Fed that growth causes inflation.

Importantly, it’s because Shelton could so easily outclass the well-credentialed inside the Fed that her interview was at times disappointing. No doubt compromise is the norm in Washington, but it seems like Shelton is compromising too much to please a Washington that’s seemingly gone protectionist and devaluationist overnight. She didn’t sound like her wildly insightful self in her interview with Tunku Varadarajan.

In particular, Shelton made the point more than once that currency devaluation by countries makes their products more competitive globally. In Shelton’s words, “nations gain a price advantage over competitors by devaluing their currencies.” But the Jeep Cherokee shows why this isn’t true. Like any product in the world today, it’s the result of enormous amounts of global cooperation such that 28% of the Cherokee is foreign made. So if currency policy accents devaluation, the price of manufacturing said product naturally rises. And that’s only the beginning.

As Shelton no doubt knows, the biggest driver – and nothing else comes close – of price advantage is investment. It’s through feverish investment that businesses are able to produce more and more goods and services at costs that continue to decline. But if currency policy favors devaluation, the tax on investment grows. There’s a reason that malaise was so evident during the Nixon/Carter 1970s, and the Bush/Obama 2000s: the heavily devalued dollar during both decades existed as a cruel tax on investment.

That’s why it was so puzzling to read Shelton say that devaluing countries are “cheating” American producers. No, they’re cheating their own. Devaluation erodes the exchangeable value of work in countries forced to endure it, plus it once again exists as a huge tax on the investment without which there is very little economic growth.

As Shelton surely knows, money is a veil. Changes in its price won’t alter the real price of anything, but they will raise the dollar/yen/euro/pound/yuan (to name a few currencies) price of production. Devaluation always harms the country pursuing it the most.

Instead of making this crucial point, Shelton blamed the loss of market share by U.S. automakers to Japanese competition in the 1980s to an allegedly weak yen. About the ’80s and Japan (China is the new Japan from a political standpoint), Shelton told Varadarajan about U.S. auto workers telling her then “that ‘we can compete against the best in the world, but we can’t compete against the central bank of Japan.’” The quibble here is that from 1971 right through the 1980s, the United States was the devaluing country, not Japan. While a dollar bought 360 yen in 1971, by 1985 it only purchased 240.

Crucial here is that in 1985 a yen that had already crushed the dollar was per the Plaza Accord forced even higher versus the greenback. The Plaza Accord communiqué specifically stated that “some further orderly appreciation of the main non-dollar currencies against the dollar is desirable,” and the yen’s rise versus the dollar continued. At present a dollar buys 107 yen. In short, the enemy for U.S. auto workers wasn’t a weak yen, but in fact a weak dollar that rendered gas guzzling American cars quite a bit less competitive in the ‘70s and ‘00s. More specifically, it’s no surprise that Chrysler was bailed out in the late ‘70s, and that GM and Chrysler were bailed out in 2008-09. A weak dollar is terrible for carmakers whose comparative advantage is large, thirsty cars.

There’s no arguing with Shelton that “stable money is the only proper foundation for capitalism,” but the fact that it is calls into question her assertion that cheap, floating money somehow benefits “wealthy investors.” Important is that Shelton knows this too. She knows that when it comes to investment, it’s all about products for products much as trade is products for products. With investment we delay consumption in the near term in order to hopefully attain returns exchangeable for a great deal more in the way of resources longer term. Money is always and everywhere an agreement about value that facilitates trade and investment. This matters in consideration of Shelton’s implicit stance that monetary mischief somehow benefits those who “can borrow vast sums on margin.” No, investors gain from relentless capitalism, which means they do best when the dollar is in the best shape such that people are improving one another as much as possible through trade and investment.

Which brings us to present Fed policy. Shelton asks “why permit the most important price for channeling financial resources to their most productive use – i.e., the cost of capital – to be determined by a government agency?” It’s troubling, but per Shelton’s prescient prediction long ago about the U.S.S.R.’s looming crash, the Fed clearly doesn’t set the cost of capital. That only happens in poor countries like the former Soviet Union. The U.S. is staggeringly rich. That’s all the evidence we need that the Fed’s power is quite a bit more theoretical than real.

So while there’s disagreement with Shelton about money, the Fed and markets (there’s little evidence that QE has been the source of stock-market vitality in modern times), it’s my hope once again that she winds up at the Fed. If so, she’ll expose disdain among economists for gold-defined money as hopelessly uninformed. It will be a blast to watch. What’s less fun is watching Shelton compromise her brilliance even a little bit to fit how Washington works. Washington needs the brilliant Shelton, not the other way around.

A version of this column ran in Forbes

John Tamny


John Tamny, research fellow of AIER, is editor of RealClearMarkets.

His book on current ideological trends is: They Are Both Wrong (AIER, 2019)

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