The United Free States of America

Originally posted here.

Uncle Sam argues that China unjustly gains economic benefits by keeping the yuan undervalued (“U.S. Expected to Press China on Yuan,” Feb. 17).  Bad argument.

When I was a boy, my school held fund-raising fairs.  Using dollars, my classmates and I purchased as many fair ‘tickets’ as we wanted.  We then used these tickets to buy whatever foods and toys were sold at the fair.  Of course, some items cost more tickets than other items.  Each ticket, though, exchanged for a fixed number of dollars.

Suppose my school had undervalued its fair tickets – that is, suppose it gave too many tickets in exchange for each dollar.  (Or, put differently, suppose my school had demanded in return for each fair ticket too few dollars.)  Who’d be harmed?  The answer is my school.  By undervaluing its tickets, my school would have sold its fair items at prices below cost.  Its revenue at the end of the day would have been lower than its costs.  Rather than raising money, my school would have lost money – and we students would have been made wealthier as a result!

The same holds true for China.  If the yuan is undervalued, you can be sure that this policy drains wealth from China rather than builds wealth there – and makes Americans richer in the process.

Sincerely,
Donald J. Boudreaux

To elaborate on Don’s analogy, if China sold us their currency at a rate of $0.00 dollars for every yuan instead of the current rate of $0.14 dollars would we complain?  Of course not! They would be giving us free money which we could then use to buy all sorts of great Chinese products (like Apple’s iPod which is made in China).  So if we wouldn’t complain about them giving us their currency for free, why complain about them giving us a discount on it?  It only makes us richer and them poorer…doesn’t sound like a bad deal to me.  Free iPods anyone?

Ok so I rarely do this but Mark Perry had this laid out so nicely I borrowed it from his site Carpe Diem (which is a great site by the way). – Dave

From the report about Ireland’s taxi industry and the deregulation that took place in 2000, “Economic Review of the Small Public Service Vehicle Industry“:

Following these fundamental changes to the market, there was a sharp increase in the number of taxis. By the end of 2001, the number of taxis in the Dublin area had doubled from 2,700 pre-liberalization to 5,500. These trends continued, so that by the end of 2003, the number of taxis in the Dublin area had increased to 8,400. Similar trends were seen in the country as a whole. In 2000, there were a total of 4,200 taxis in the country and this had risen to 16,000 by end 2004.”

MP: Deregulation also led to a significant reduction in waiting times for a taxi, from 11.5 minutes in 1997 to 6.2 minutes in 2008, resulting in an estimated value of time savings of more than $400 million annually for Irish consumers. This is a good example of how excessive regulation stifles competition, leading to high prices and poor service, and how deregulation restores competition (often the best “regulator” of all), resulting in lower prices and better service.