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logo    Junk Writing-Martin Feldstein on the Dollar's Value


People are rightly warned not to take what they read on the Internet at face value. A good warning but hardly sufficient. Anyone who has regularly read academic journals and attended academic conferences knows that peer review is hardly foolproof. Publishers with hoards of editors publish junk books, and newspaper editors and columnists disseminate propaganda. So the only authority anyone can appeal to is a good mind highly schooled in the techniques of critical reading. Even people with eminent reputations often publish junk but are rarely upbraided. (Eminence has its protections and deference, its rewards.)

Recently I came across citations to an article written by Martin Feldstein (Why is the Dollar so High?), and since the summaries I read did not ring true to me, I sought out the article itself. Unfortunately the final version, published in the Journal of Policy Modeling, is available only for a fee, I had to settle for a working draft (http://www.nber.org/papers/w13114), but since the parts summarized seem to be intact, I assume the draft does not differ much from the final version. The working draft, however, is so sophomoric that even as an exercise in composition, it would not have passed muster in any composition class I ever took, and since sloppy writing is usually the result of sloppy thinking, I have serious concerns about how it came to be published and why others cite it.

Although I do not intend to concentrate on the article’s compositional shortcomings, its organization is a literal nightmare made up of loosely related topics that seem to have popped into Mr. Feldstein’s head in no logical sequence, it contains elementary grammatical errors, misstatements, and a conclusion quite different from what one  would expect from its title. He writes, for instance, “if the dollar were to fall before the saving [sic ] rate declined, the level of aggregate demand in the U.S. would rise” which contains a sequence of tense error, a case error, and a misstatement. Surely what he is trying to say is this: If the dollar’s value were to fall before the savings rate increases, the level of aggregate demand in the U.S. would rise.

The conclusion, however, is more revealing. He writes, “The best hope for a smooth adjustment of both the global and U.S. imbalances would be a substantial fall of the dollar followed by a significant rise in the U.S. saving [sic] rate and a policy of fiscal stimulus in other countries. Achieving this will require both good policies and good luck.” Given this conclusion, one would expect a title somewhat like, “Smoothly Adjusting Global and U.S. Imbalances,” and a discussion of why Mr. Feldstein believes that to be unlikely. But although there is some discussion in the article’s body that relates to this conclusion, the article’s actual title leads one to look for something else. ‘Nuff said.

Mr. Feldstein’s argument for why the dollar is so high goes like this: “The basic national income accounting identity tells us that investment minus saving equals imports minus exports. If saving is low relative to the investment . . . we must have a trade deficit to bring in the resources to fill the gap. This line of reasoning leads us to the low level of the U.S. saving [sic ] rate as the primary cause of the high level of the dollar.”

All this comes down to is a mere equation—investment (I) minus saving (S) equals imports (M) minus exports (E). A mere equation, however, doesn’t rise to the level of “reasoning.” But seeing what Mr. Feldstein is getting at is easy. Merely put some numbers into the equation. If one does, whenever S = I the equation’s value is zero. When S > I, E > M, and when S < I, M > E. How this leads to a conclusion about the dollar’s value, however, is a mystery, since there is no term in the equation for dollars or their value.

Mr. Feldstein’s mistake, however, is drawing any conclusion at all from this equation. He admits that the equation is merely an accounting identity. He also admits this: “Although . . . individuals might have regarded . . . spending as a form of investment, these outlays are treated as consumption in . . . national income accounts.”

So what? How does this accounting convention relate to anything real? For instance, the FED, I have read, relies on  core CPI because it is thought to be a better predictor of future inflation than the real CPI. But core CPI doesn’t relate to anything real in terms of household management, where food and fuel are major, required expenditures. So Mr. Feldstein’s stated conclusion is a non sequitur. The only valid conclusion is this: in terms of accounting conventions, when S is small in relation to I, M is large.

Any inference drawn from this equation is perplexing. Equations don’t have gaps. So what does Mr. Feldstein mean by “the gap”? From his conclusion, I assume he means the difference between investment and savings that makes up the left side of the equation. But the right side of the equation contains the same gap. In fact, the gap on the left side is identical to the gap on the right side; otherwise, the two sides would not be equal. So if Mr. Feldstein can infer that the gap on the left side means that the low savings rate is the cause of the high value of the dollar, why can’t we equally infer from the gap on the right side that the low level of exports is the cause of the high value of the dollar? Why would Mr. Feldstein ignore the right side and make his inference from only the left side?

I suspect Mr. Feldstein, as many orthodox economists, harbors a bias. These people are inherently anti-consumer and pro-business. It is ordinary household savings that Mr. Feldstein says is low, so the ordinary householder is to blame for not being more frugal. But if one draws the inference from the right side, it is manufacturers who are the blame for making products that foreigners don’t want to buy or for not making products that American consumers must buy. To these economists, it’s always the people but never the system that is to blame, which is pure bias.

He then writes that, “Two primary forces have been driving down the household saving [sic] rate: increasing wealth and . . . mortgage refinancing. . . . Individuals who are saving for retirement can rightly conclude that, because of these wealth increases, they can afford to save less. And retirees who are dissaving can look at their wealth and conclude that they can afford to dissave relatively more than previous generations of retirees. This has progressed to a point where the depressed saving of the savers and the increases [sic] dissaving of the dissavers has caused the net saving  [sic] rate to be negative.”

Well, yes, individuals could have drawn these conclusions, but how can anyone know that they did? And by what system of logic can one derive an indicative statement from two modal statements? No logician would say that that’s possible.

And how could Mr. Feldstein have neglected the loose lending policies of bankers who literally pushed revolving credit cards into the hands of consumers, whose loans were too easy to get and almost impossible to repay? Surely credit cards have played a large role in the spending habits of Americans, perhaps even a greater role than wealth drawn from investments in the market and home refinancing. Did this banking policy play no role? Did Mr. Feldstein ignore it because it is a business practice, not a consumer practice?

Anyhow, talk about saving money is America is difficult to make any sense of. The word “save” has a precise meaning. It means to protect something from danger of loss, injury, or destruction. A grandmother can save her wedding dress so her granddaughter can wear it on her wedding day, but a dollar cannot be saved. No conditions exist in America in which a dollar can be put away and protected from the danger of loss. So Americans can’t properly save, but they are told that they save almost every time they buy. They are to told to put money away for a needy day by investing in (insecure) securities. They are also told that a home is the largest investment that most people make. They are never told, however, that the market is one giant casino, and that so called investing is really wagering. But if proper saving is impossible, what becomes of the basic national income accounting identity Mr. Feldstein bases his conclusion on? One of the terms in the equation’s left side disappears, and when it disappears, so does the so-called gap. Of course, this result is merely semantical, but it does show the inappropriateness of using an equation created for a special purpose to draw a conclusion unrelated to that purpose.

Mr. Feldstein also writes, ”The household saving [sic] rate will rise because the two primary forces that have driven savings down will come to an end. First, the sharp rise in wealth caused by abnormal gains in share prices and house prices will not continue. Home prices are already beginning to decline and the prices of stocks are not likely to outperform earnings in the future in the way that they did in the past.”

But how can these lead to a rise in savings? Wages have been stagnant in this century, and if stocks are “not likely to outperform earnings in the future,” people will be poorer and less able to borrow for consumption because of the decline in home prices. Where do the increased savings come from, especially if consumers are forced to buy imported clothing, oil, and other necessities at higher prices as the value of the dollar drops? Poorer people can not increase their financial assets unless incomes remain constant or grow and the prices of the imported items needed decrease. Given the decline in the dollar’s value, the latter is not likely to happen and there is no reason to believe the former will either.

As absurd as all of this is; however, the worst is yet to come.

Mr. Feldstein writes, “households and businesses . . . must be given an incentive to spend more on American made goods and services and less on the goods and services made elsewhere. . . . The way in which this will come about is a decline in the value of the dollar. . . . When the dollar declines . . . American goods are cheaper relative to European goods. That makes American households and businesses buy less in Europe and more in America. And the same happens in reverse for European buyers. . . . It is common to hear . . . that the U.S. no longer has the ability to manufacture and export. Or . . .  that we will never be able to compete with the low labor costs that drive imports. . . . Both of these worries are unfounded. The U.S. is a major exporter. . . . Caterpillar tractors compete with the Komatsu tractors made in Japan. Boeing airplanes compete with European airbus planes. California wine competes with wine from France, Italy and Spain. . . . But what about the goods that come from countries in which [wages] [sic] are very low? It is certainly true that . . . [w]e will not see American factories making the products now produced in very low cost . . . countries.  But instead of substituting American made goods for very similar imports,   . . . American consumers . . . will shift to buying U.S. goods and services. . . . For example, as imported t-shirts and sneakers become more expensive, American consumers will spend more on meals away from home and on travel in the United States.”

Well, I don’t know how many Americans will buy Boeing 747s and Caterpillar tractors, but Mr. Feldstein and his fellow orthodox economists may very well drive us all to drink. And those meals away from home and travel in the United States will be taken bare footed and shirtless, I presume. Since even McDonalds has a sign saying “No shoes, no shirt, no service,” will we all be taking our meals away from home at truck stops?

These examples are so ludicrous that no competent thinker or writer would have included them in an essay, the purpose of which is to produce conviction, since these examples are not convincing. As a matter of fact, if they are the best Mr. Feldstein can come up with, he must certainly be wrong.

I have been hard on Mr. Feldstein, but not nearly as hard as I could have been, given the vast number of compositional and logical errors in his paper. Continuing to flog this dog will not add anything to what has already been demonstrated.

It is difficult to understand how a person with Mr. Feldstein’s reputation could have had the temerity to exhibit this junk publicly. Given his positions as George F. Baker Professor of Economics at Harvard University, and president and CEO of the National Bureau of Economic Research (NBER), this article should be an embarrassment. Given his past association with the Reagan administration, I suspect very strongly that Mr. Feldstein is not and never has been an objective researcher and thinker, that he, like many orthodox economists, is and always has been a mere ideologue. Reagan once remarked that he studied economics in college but that “it didn’t take.” He was an easy mark for economists like Mr. Feldstein and Arthur Laffer who helped kick this economy into the freefall it is now going through.

There is one sure test that separates ideologues from objective thinkers and researchers—how they respond to criticism. Ideologies, by definition, never have rational foundations; they are belief systems. Ideologues cannot react to criticism with rational argument; to do so would be to commit intellectual suicide. So when faced with criticism, ideologues merely ignore it or attack the critic with an ad hominem ”You just don’t understand.” In that way, they can never be refuted even though they can never demonstrate their case. So they continue to publish the same, tiresome old stuff. And given Mr. Feldstein’s prominence, that’s scary. Do people really take the stuff that comes out of the National Bureau of Economic Research seriously, or do they consider it just another one of the stink-tanks from which America reeks? (12/2/2007)