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Jeffrey Frankel
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This week, Project Syndicate catches up with Jeffrey Frankel, Professor of Capital Formation and Growth at Harvard University’s Kennedy School of Government.

Project Syndicate: The recent US decision to label China a “currency manipulator” has been roundly criticized. The People’s Bank of China (PBOC), you wrote last month, merely “gave in to market pressure – the immediate source of which was none other than President Donald Trump’s announcement” of new tariffs on Chinese goods. But with Trump announcing yet another escalation in tariffs and pressuring the Federal Reserve to cut interest rates and weaken the dollar, could the label become a self-fulfilling prophecy, with both sides engaging in competitive depreciation?

Jeffrey Frankel: The US finding of manipulation was absurd. China has been intervening to resist renminbi depreciation since 2014. It is Trump who seems eager to engage in competitive devaluation, despite a February 2013 G7 agreement not to do so: he has been strongly urging the Fed to cut interest rates, with the explicit motive of pushing down the value of the dollar.

If the dollar does depreciate in the future, other monetary authorities, such as the European Central Bank, might respond by renewing their own monetary expansion, with an eye toward exchange-rate competitiveness. That scenario would have some characteristics of the type of “currency war” that is so often discussed, but direct intervention in the foreign-exchange markets still seems to me unlikely.

The Chinese, in any case, won’t fit the pattern. They are unlikely to take active steps to depreciate their currency in the foreseeable future. I do not think they want their currency to weaken substantially from where it is now.

PS: You argued last November that the Fed cannot take responsibility for offsetting the supply shock created by Trump’s trade war. If, however, that trade war – which has already hurt almost every segment of the US economy – undermines price stability and employment, the Fed would presumably have to take action to fulfill its mandate. Is the Fed fated to become a mere tool for offsetting the administration’s policies, independent in name only?

JF: I don’t see it that way. The Fed has a dual mandate: to sustain employment and to maintain price stability. (Its original mission was to safeguard financial stability.) As a result, it is not as clear as many seem to think how the Fed should respond to a trade war.

On one hand, a trade war hurts output and employment. Indeed, most observers attribute the slowdown in global growth over the last year partly to unfortunate protectionist trade policies. That would seem to suggest that the Fed should cut interest rates, to forestall a recession.

On the other hand, tariffs raise prices. That would suggest that the Fed should not cut interest rates, because inflation may already be headed higher.

This dilemma, intrinsic to a supply shock, means that the central bank could not offset foolish trade policies, even if it wanted to.

PS: Fed Chair Jerome Powell has acknowledged as much. And lack of monetary-policy space doesn’t bode well for responding to a recession, which increased stock-market volatility and an inverted bond-yield curve suggests is increasingly likely. What could be done, both in the US and by policymakers elsewhere, to counter the next downturn?

JF: When Powell, in his recent Jackson Hole speech, diplomatically hinted that the Fed can’t fix bad trade policies, he wasn’t making the point that with interest rates at barely 2%, it lacks monetary-policy space. Even if they had lots of room to cut interest rates, a central bank couldn’t fix bad trade policies any more than it could fix bad health or security policies.

Nonetheless, it is true – as a separate matter – that the Fed has much less monetary-policy space now than it has had at similar points in past business cycles. If a new recession does come, interest rates can’t be cut five percentage points as in the past.

I believe that policy ought to be generally counter-cyclical, to moderate swings in the business cycle. Admittedly, it is hard to get the timing right; but that is no excuse for pro-cyclical policies, which intensify the swings.

And yet too many politicians have effectively been pursuing pro-cyclical policies. When unemployment is near or below 4% – as it has been in the United States for more than a year – it is not the time for trillion-dollar fiscal deficits, ultra-low interest rates, and financial deregulation. Yet that is what we have gotten, meaning that we have little ammunition for responding to a recession. We should have spent the last three years keeping our powder dry – ready to be used when a recession does hit.

Trump and his supporters are not the only ones who act as if they believe in pro-cyclical policy. In the eurozone, fiscal and monetary policy has at times been pro-cyclical. German-driven austerity in times of recession is a notable example. And most developing countries have long followed a pattern of raising spending during booms, only to be forced into austerity when the downturn comes.

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Frankel recommends

We ask all our Say More contributors to tell our readers about a few books that have impressed them recently. Here are Frankel's picks:

  • Open: The Progressive Case for Free Trade, Immigration & Global Capital

    Open: The Progressive Case for Free Trade, Immigration & Global Capital

    Why should the anti-globalizers have a monopoly on the idea that the goal of maximizing GDP must be supplemented by human values, cultural considerations, and a concern for inequality? It is neither a paradox nor a coincidence that “liberal” can mean both “progressive” and “laissez-faire.” Would it be progressive for a consumer to discriminate against a product because it was produced by somebody of a different race, creed, or national citizenship? Reed College’s Clausing, a leading expert on globalization and international taxation, makes the case for an open economy, and outlines a progressive agenda to manage globalization more effectively.

  • These Truths: A History of the United States

    These Truths: A History of the United States

    I am intrigued by some of the incidental tidbits that Lepore, a Harvard historian and New Yorker writer, includes in her new book. Who knew that the (dreadful) Dred Scott decision of 1857 was only the second time that the US Supreme Court exercised judicial review over Congress?

  • Enlightenment Now: The Case for Reason, Science, Humanism, and Progress

    Enlightenment Now: The Case for Reason, Science, Humanism, and Progress

    The assertion is hard to believe, and Pinker – a psychology professor at Harvard – knows it, but “life, health, prosperity, safety, peace, knowledge, and happiness are on the rise, not just in the West, but worldwide.” For example, the English homicide rate is down by a factor of about 50 since the Middle Ages. Worldwide – including among poor countries – average life expectancy is now 71 years, up from 30 back then. About a billion fewer people are living in extreme poverty than in 1990.

    The underlying reason is the legacy of the Enlightenment – that is, the philosophy of reason, science, and progress. Pinker is an all-too-lonely voice calling on us to appreciate these values, rather than take them for granted or even attack them and the institutions of liberal democracy they underpin.

  • Clashing Over Commerce: A History of US Trade Policy

    Clashing Over Commerce: A History of US Trade Policy

    A talked-about economics book that amply rewards reading all 860 pages is rare. A very clear explanation of the overarching political economy of trade that frames America’s tariff history is even rarer. Irwin, an economics professor at Dartmouth College, delivers both.

    Irwin persuasively divides this history into three segments:

    1. 1763-1865 – Revenue: Alexander Hamilton established tariffs that were no higher than necessary to fund the new government.
    2. 1865-1932 – Restriction: When the agricultural South lost the Civil War, it also lost the political power to counter-balance the protectionism of Republican manufacturing interests concentrated in the Northeast.
    3. 1932-2017 – Reciprocity: Learning from the catastrophes of the 1930s, the US led the world to an open rules-based multilateral trading system, from which all countries benefited.

From the PS Archive

From 2017
Early in Trump’s presidency, Frankel warned that economic conditions were far less stable than investors seemed to think. Read the commentary.

From 2019
This summer, Frankel argued that, rather than doubling down on their oft-missed 2% target, the Fed and other central banks should quietly stop pursuing it aggressively. Read the commentary.

Around the web

In an interview with Chosun Ilbo, Frankel answers nine questions about the US-China trade war and the emerging dispute between Japan and South Korea. Read the transcript.

Frankel discusses the renminbi/US dollar exchange rate and the Trump administration’s decision to label China a currency manipulator. Listen to the podcast.

In a conversation with the Harvard Gazette, Frankel analyzes the recent market selloffs and discusses the possibility of a US or global recession. Read the interview.;

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