Swiss, Baker versus Krugman

I think Dean Baker is wrong.

Paul Krugman and the Swiss Movement

Friday, 16 January 2015 06:01

It isn't often that I think Paul Krugman gets one wrong, but I think he wrongly attacks those chocolate loving cuckoo clock making Swiss in his column today. His complaint is that the Swiss central bank abandoned its commitment to keep down the value of the Swiss franc against the euro. Krugman sees this a failure of will, with the central bank giving up a commitment to pursue an inflationary policy. This is part of a larger saga of feckless central banks that continue to obsess about inflation when the real problem facing world economies is an inflation rate that is too low.

While the general point is right, it is hard to see how this story applies to Switzerland. Switzerland did not see the same sort of downturn as the rest of the OECD in 2008. Furthermore, it has fully recovered from its downturn with a GDP that is 8 percent above its pre-recession level and an unemployment rate of 3.5 percent.

In this context, it is actually doing what we should want Switzerland to do as a good world citizen. By allowing its currency to rise, it will make its goods and services less competitive internationally. This means it will import more from its trading partners and export less, effectively providing them with an economic boost. This is what we should want to see. The countries that are at or near full employment should be running larger trade deficits or smaller surpluses.

So give the Swiss a gold star. They called this one right. (Now if we can get them to talk to China ....)