THE BLOG

When Government Fails: Grade F for Exchange Rates and Manufacturing

09/07/2010 02:03 pm ET | Updated May 25, 2011

Our government has failed to honor its social contract with the American people. The second paragraph of the U.S. Declaration of Independence presents the first and most explicit social contract between the U.S. government and its people. The contract reads:

"We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. - That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed."

The social contract requires that the government provide the environment necessary for an industrious, competent and hard-working people to achieve reasonable levels of Life, Liberty and Happiness. To our founding fathers, these pursuits included the environment to earn a comfortable living wage or income. The government has failed to provide this environment and is in breach of contract.

In recent years, the U.S. government has complained vociferously that China has maintained its currency at an artificially low value. Chinese goods in the U.S. are cheaper than they should be and American goods in China are more expensive, contributing to our massive migration of manufacturing, loss of jobs and external debt. President Obama has gone to Beijing, hat in hand, to get China to revalue its currency. The U.S. government's policies of quiet persuasion have failed. In April, Treasury Secretary Geithner made a hurried trip to China and extracted meager promises from the Chinese to raise the renminbi's value. The Chinese appeared as surprised as the American people at what ensued: the Obama Administration accepted a vague Chinese offer to address the issue in the future - maybe. In a cultural context, the Chinese saw Secretary Geithner's trip as a sign of weakness, as a kowtow. They saw their political power demonstrated by imposition of their will.

Our elected representatives and businesspeople have admonished the President for not taking a stronger stance on China's currency manipulation. Other nations have also complained about China's currency manipulation. Following an inquiry, the International Monetary Fund (IMF) ruled that "the renminbi remains substantially below the level that is consistent with medium-term fundamentals." Regardless, the Obama administration has refused to act and to label China a currency manipulator.

China agreed to the IMF review only after it softened standards for determining if countries manipulate their exchange rates to boost exports. The new IMF standards give countries like China "the benefit of any reasonable doubt" when evaluating their policies. Increasingly certain that it will encounter no significant backlash, China continues to assert that its currency is valued correctly and does nothing to comply with the IMF's findings.

For Americans, the U.S. policy of appeasement has failed because it places American prosperity, employment and trade balances in foreign governments' hands. Through appeasement, the government has neglected to provide an environment where American workers and domestic companies can compete successfully in global markets, or even in their domestic markets. Generally, international markets determine currency exchange rates. When foreign governments intervene, they defeat the effectiveness of market mechanisms. Consequently, the U.S. government must intercede on behalf of American workers and domestic companies. By appeasing China on its currency manipulation, the U.S. government has outsourced compliance of its social contract with Americans to a foreign government. To its credit, the Chinese government appears more intent on meeting its social contract with the Chinese people.

Many point to China's low wages as the engine of its rapidly growing exports of manufactured goods and as the reason for its export prowess. Yet, they ignore the fact that China had to overtake Germany in exports to become number one - not the U.S.

In 2009, China overtook Germany to become the world's largest exporter. Germany has an economy roughly a quarter the size of the U.S's with wage rates about 66% higher than those of the U.S. Germany is a "...leading exporter of machinery, vehicles, chemicals and household equipment....", all manufactured goods. Among developed economies, Germany has performed best in recovering from the recent economic crisis. Germany provides clear proof that governmental policies abiding by social contracts can create jobs rather than export them. Germany shows that companies from industrialized nations can provide living wages to their employees and still compete in international markets with manufactured goods.

On the other hand, the U.S. government, regardless of the party in power, voluntarily chose to convert the U.S. into an economy that makes nothing and whose greatest export is its people's prosperity and jobs. This is not the American people's choice. Hence:

  • U.S. government's exchange-rate administration - Grade F
  • U.S. exchange-rate policies' benefits to manufacturing - Grade F
  • Ruling on the U.S. government's breach of its social contract - Guilty

Our founding fathers had an answer for the situation in which we find ourselves:

"That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness..."

We live in a democracy and our ballot boxes should speak on this issue.