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Exchange Rate Flu: How Bad?


Economic Trends

EXCHANGE RATE FLU: HOW BAD?

It's weakening U.S. competitiveness

Many observers tend to blame the exploding U.S. trade deficit on the economic debacle in Asia. And there's little doubt that collapsing exports to the region, along with a pickup in imports, are the main factors behind America's deteriorating trade position. But a closer look at trade statistics suggests that something more may be at work: the erosion of U.S. competitiveness due to shifting currency exchange rates.

The fact is, the accelerating decline in U.S. exports this year is evident in almost all product groups, including agricultural items, industrial materials, and capital goods. And slowdowns are apparent in shipments to Mexico, Canada, and Latin America, as well as to Asia and Eastern Europe. Even exports of services have started to decline.

A recent Labor Dept. report underscores how much currency swings have changed the global labor-cost rankings in a few short years. As recently as 1995, the U.S. was the preeminent low-cost major producer in the industrial world, with an hourly compensation rate of $17.19, well below rates of $31.85 in Germany, $23.66 in Japan, $19.34 in France, and $29.30 in Switzerland. By last year, however, Japan's costs exceeded U.S. levels by a mere 6%, and the labor-cost premium for all of Europe had shrunk from 29% to 12%.

Relative labor costs have also been dropping among other U.S. trading partners. From 1996 to 1997, compensation rates fell from 94% to 91% of U.S. levels in Canada, for example, and from an average 39% of American levels to 36% among the Asian Tiger contingent of Hong Kong, Korea, Singapore, and Taiwan. Although Europe's currencies have strengthened a bit recently, most of these nations' currencies have fallen even more against the dollar over the past year.

Currency shifts are only part of the story, of course. Economists Stephen S. Roach and Joseph P. Quinlan of Morgan Stanley Dean Witter note that U.S. industry is still far ahead of the game in the kinds of measures that foster long-term competitiveness: labor flexibility, restructuring, and technology investment. At last count in 1996, for example, the U.S. spent 4.1% of gross domestic product on information technology, vs. Japan's 2.5% and Germany's 2.1%.

The question is for the short run. Especially over the past year, the U.S. has acted as the buyer of last resort to an increasingly troubled world economy. As long as the U.S. economy was strong (and inflation-free), the widening trade gap was regarded as a positive development. The big fear now is that trade's impact could turn sharply negative if the U.S. economy slows significantly in the year ahead and other economies remain mired in recession.BY GENE KORETZReturn to top

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`MORAL HAZARD' ON THE MOUND

Economists mull a baseball puzzle

Last year, we described a study by Brian L. Goff of Western Kentucky University and William F. Shughart II and Robert D. Tollison of the University of Mississippi. The study noted that the number of hit batters in the American League rose sharply after it adopted the designated-hitter rule in 1973. The economists concluded that this was due to "moral hazard"--that is, American League pitchers threw with less caution at opposing batters because, unlike National League pitchers, they no longer had to take a turn at bat and face possible retaliation if they hit someone.

Now, two short articles disputing this view have appeared in the same journal, Economic Inquiry. In one, Steven D. Levitt of the University of Chicago argues that any rise in "plunked" hitters in the American League probably occurred because pitchers are bad hitters and are therefore less likely to be hit than other batsmen. Replacing them by designated hitters thus tended to raise the number of hit batsmen. Levitt also finds no correlation between the frequency with which individual pitchers in the National League hit opposing batsmen and their chances of being hit while batting themselves (on average, just once for every 50 times one of them hits a batter).

In the second article, economists Gregory A. Trandel, Lawrence H. White, and Peter G. Klein of the University of Georgia take the same argument a step further, noting that retaliation by one team for a hit batsman is far more likely to be directed at sluggers, such as designated hitters, than at weak-hitting pitchers. Thus, pitchers in either league face little risk of reprisal, undercutting the "moral hazard" theory. Predictably, National League pitchers are plunked less frequently than American League designated hitters.

Issue settled? Not necessarily. In response, the original authors claim statistical tests still support a "moral hazard" explanation. Like baseball itself, arguing about the game remains a national pastime--even among economists.BY GENE KORETZReturn to top


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