In a recent post on his blog The Grumpy Economist, Hoover Institution senior fellow John Cochrane criticized a May 2019 Treasury report on currency manipulation as “institutionalized nonsense” or “institutionalizing nuttiness” (his emphasis). This characterization might seem too strong, but alas it isn’t.

The report, “Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States,” extended the list of countries the United States government deems possible “currency manipulators.” It now includes three Eurozone countries—Germany, Italy, and Ireland—that do not have a currency to manipulate. They use the euro, a currency controlled by the European Central Bank, which is independent of any particular national government.

Currency nuts / Currency manipulation typically occurs when a national government or its central bank uses the domestic currency to buy a foreign currency with the purpose of causing a devaluation of the former. If, for example, the U.S. government bought a large quantity of Chinese yuan on world currency markets, the price of the yuan in dollars would increase or, what amounts to the same, the price of dollars in yuan would decrease. This would make American goods cheaper for Chinese importers because the dollar is worth less, favoring American exporters. Conversely, the price of Chinese goods would rise for American importers because the yuan is worth more. Such a “competitive devaluation” is prohibited by international trade rules because it is equivalent to a general tariff.

The Treasury Department did not think it was necessary to explain how a government can manipulate its currency when it does not have one. It is like accusing Texas of being a currency manipulator. This led George Mason University economist Don Boudreaux to conclude on his Cafe Hayek blog, “We Americans are today governed by imbeciles.”

There exist indirect ways to manipulate one’s currency, which is perhaps what the Treasury subliminally meant. Keynesian policies (monetary or fiscal) aimed at cooling down or stimulating the economy can have effects similar to a direct currency manipulation. For example, if the Fed pushes down interest rates, American investors will invest more in foreign countries with higher interest rates, which will push down the relative value of the dollar. Another example: Scott Sumner of the Mercatus Center suggests that a tight fiscal policy—by, say, the German government—could reduce the domestic price level and thus encourage exports and discourage imports. (This explanation still does not apply to Italy, where there is no chance of a government budget surplus.)

Such macroeconomic policies are, for better or worse, generally recognized as falling within the purview of national governments. As for intentional competitive devaluations, they should be avoided, as the early 1930s showed. This suggests not engaging in a currency war even if some other government starts it. One thing is pretty sure: it does not make much sense to accuse a country of currency manipulation if it does not have its own currency.

China, of course, has its own currency. In its May report, the Treasury Department declined (once again) to label the Chinese government a currency manipulator. But three months later, on August 5th, the Treasury changed its mind, explaining that the yuan had dropped suddenly. This drop was most likely a direct market consequence of President Trump’s announcement of new tariffs and the fear this move stoked in financial markets.

Trump himself has advocated or implemented a number of policies that have devalued the dollar. His 2017 tax cuts, by stimulating the American economy and increasing incomes, likely had the indirect effect of increasing imports, which, ceteris paribus, put more dollars on currency markets and devalued the U.S. currency. His pressures on the Fed to push down interest rates will have a similar effect on the dollar, and many indicators suggest that this is exactly his intention. Who is the currency manipulator?

The Chinese government isn’t the only one failing to behave according to White House diktats. The Treasury report hectors the German government about the need to “make use of existing fiscal space”—that is, to increase its public expenditures and reduce its budget surplus. It complains about Italy’s “weak social outcomes” (whatever that means) and “the long-term sustainability of its public finances,” as if the U.S. government is in a position to lecture on budget deficits.

A wide pursuit? / The Trump administration’s nuttiness is not limited to the May Treasury report. Underlying all that is its trade-deficit obsession, reminiscent of the mercantilist sermons of the 17th and part of the 18th century. A trade deficit or surplus depends on many economic factors other than tariffs. Other Trump policies besides tax cuts and lower interest rates have the effect of increasing the trade deficit. Defying logic, Trump seems to want both A and ∼A.

Since the administration started making protectionist noises in 2017 and then implemented many waves of tariffs in 2018 and 2019, the U.S. trade deficit has increased. The trade deficit in goods, which was $749 billion in 2016, increased to $805 billion in 2017 and $887 billion in 2018. Available data suggest that this trend is continuing in 2019. The deficit on goods and services follows a similar trend.

Even with China, the trade deficit on goods increased from $347 billion in 2016 to $419 billion in 2018, as exports decreased more than imports. Many of the goods previously imported from China are diverted to more costly suppliers, which contributes to increasing the global trade deficit. (Evaluating the data is complicated by transshipments meant to avoid American tariffs and the fact that data from China may be unreliable.)

Chinese retaliation for the U.S. tariffs further fueled the trade deficit. “Trade wars are good and easy to win,” President Trump memorably tweeted on March 2, 2018. This wishful pronouncement flies in the face of a few centuries of economic analysis and trade experience.

In a Forbes article, John Hopkins University economist Steve Hanke explained that the American trade deficit is homegrown, notwithstanding “Trump’s trade rubbish.” The Trump administration has only intensified the homegrown factors. It increased the federal budget deficit and created trade uncertainties, driving foreign investors to U.S. bonds and stocks, pushing up the dollar. A higher U.S. dollar, in turn, pushes imports up and exports down, thus increasing the trade deficit.

The vast majority of economists would agree that trade deficits, especially bilateral trade deficits, are meaningless. The increase in the trade deficit over the past two years is only significant because it results from the inconsistent policies of a government ostensibly intent on reducing it.

Another illustration of the pursuit of nuttiness is Trump’s refusal, along with his official trade adviser, Peter Navarro, to admit what happens in all but exceptional cases: that U.S. consumers pay these tariffs in the form of higher prices, reimbursing the importers who have previously paid the tariffs to the Treasury. Economics students know this from basic courses on international trade. Many recent studies, data, and frequent examples reported by the press have confirmed this. Yet Trump and his mouthpieces have repeatedly claimed that tariffs are paid by Chinese exporters. After several rounds of tariffs and after announcing more of them, Trump tweeted on August 3rd, “So far our consumer is paying nothing.”

Ten days later, Trump expressed unusual doubts about his trade policy, probably caused by stock market resistance. Announcing a suspension of his new tariffs against China until December 15th, he declared, “We’re doing this for Christmas season, just in case some of the tariffs would have an impact on U.S. customers.” If he had serious doubts, he would fire Navarro. But then, he could change his mind the next day and announce new tariffs by tweet.

New and not newer / That politicians, whatever their party, are incentivized to be illogical and incoherent, and then to cover up in public statements, is not news. But the phenomenon usually remains within certain limits. In November 2013, Barack Obama admitted that he was wrong when he said that his health care law would allow people to keep their doctors and health care plans. Disregarding any constraint set by personal morality, politicians’ main limit is that their fabrications must not be too glaring, even to rationally ignorant voters facing whole baskets of complex policies with unknown future consequences. Politicians have an interest in retaining some credibility. They do not want to be seen as nuts.

Why this minimal constraint does not seem to work anymore—why nuttiness is becoming institutionalized—may have something to do with this era’s seeming retreat from reason, the substitution of wacky information sources for more credible ones, the intensification of blind partisanship, and the lure of raw government power. Those are features of populism on the right and left.