Did you Know that the Economics Award is not Really a Nobel Prize?
Question: Excluding weapons, can you name five American-made consumer products that you want to buy?
Forcing China to allow its currency to appreciate won't address the fundamental problems behind the trade imbalances. What it will do is make it cheaper for China to purchase raw materials to feed their production, so maybe even if China's labor costs rise from the revaluation, their recurring material costs will decrease. By low-value, mass-produced goods the net change will probably be a wash.
Raising China's currency will probably help America's raw material exporters such as the lumber, paper or agriculture industries. I don't see it helping America's manufacturers.
Expecting the Chinese consumers to use their newly-gained purchasing power won't help the U.S. unless America starts domestically producing products that Chinese people want to buy. Most American businesses have already moved their manufacturing to China or other low-wage companies, so the money will probably stay within China.
But engaging China in a high-profile spat does make for good political campaign noise. Maybe the government should do more to keep manufacturing jobs within the country. But the old saying in politics is follow the money. So I think a lot of this has to do with the lumber and agricultural lobbies and is cloaked in a mantle of fake populism.
Forcing the RMB to rise against the dollar won't encourage manufacturing over here. In the mid 80's, when the Japanese were running huge trade surpluses with the US, pressure was applied to force the Yen to rise against the dollar. The Yen went from 275 to about 120 to the dollar - a huge rise - and the result was even larger surpluses. The Yen is now worth 85 to the dollar, and the Japanese still enjoy a large trade surplus with the US.
The Germans also saw the Mark sky-rocket against the dollar, and now the Euro as well, but in spite of this, Germany is the no. 2 exporter in the word, only recently surpassed by China. Clearly our trade deficits result from American capitalism's emphasis on return on capital to the detriment of all other considerations.
What (The US) really needs is an intelligent long-term industrial policy that encourages employment in this country rather sending jobs to whatever country pays it workers the lowest wages. When the average hourly wage of a Chinese factory worker is 50 -75 cents an hour, the RMB could reach parity against the dollar and it would still be much cheaper for US corporations to manufacture in China. Tariffs, on the other hand, would at least bring in some money to the US treasury.
Mr. Krugman's arguments are standard Keynesian and consistent with the mainstream US economic doctrines since the 60's, when the US became a deficit nation. But if we go a little further back to the mid 40's, when the US was the surplus nation of the world, what was the US' position on this issue?
During the Bretton Woods negotiation, the chief representative of the UK (the major deficit nation of the day) was none other than Mr. Keynes himself. His main proposals were:
(1) to set up a new global currency supervised by an independent world central bank and
(2) to have a pre-set mechanism for currencies of surplus nations appreciate and those of deficit nations to depreciate.
The US' response was NO and NO!
This happened at the height of WWII, so guess which side prevailed. The dollar became the global reserve currency, and all others were pegged to it for the next three decades, until Nixon unilaterally trashed Bretton Woods. More precisely, he trashed the second part, which was the only thing that had prevented the US from printing unlimited amounts of money as its deficits increased. The dollar remained the global reserve currency, however.
Now, however evil the Chinese de facto peg to the dollar is nowadays, it is only so to half the degree as the US was under FDR (coincidentally one of Mr. Krugman's heroes) because China is at least not forcing the rest of the world to accept the Yuan as the reserve currency.
Now, the dollar remains the global reserve currency and the Fed gets to print and has indeed been printing unlimited amounts of it. Chinese labor and products get traded for this worthless piece of IOU and, there is no real global currency for the Chinese to convert it to, thanks to the foresight of FDR. So, more than two trillion US dollars have to be put back into treasuries and wait for the eventual depreciation.
Believe it or not, the evil Chinese, instead of accepting this depreciation, actually have the temerity to emulate the US and print a large amount of their own money in a futile attempt to delay the day of reckoning. This is the true crime of China. All the talks about jobs are just smoke and mirrors because however much the Yuan appreciates, the overall US trade deficits will not drop. They will simply shift to cheaper countries like India, Pakistan, Indonesia, Vietnam, you name it.
Although there is a real offense made by China, the urgency to dwell on the issue now comes from other considerations, notably the easy scapegoating by Obama administration about the deficits before the election and the geopolitical benefit of weakening China while strengthening its neighbors. The Chinese leadership knows this, so I doubt that they will welcome the American liberators with flowers as Mr. Krugman claims. If the US persists in this attempt, a trade war is not far off.
During the past couple of years, the writings of Professor Krugman often puzzled me. Is this the same Krugman who taught me so much with his earlier books, like, “Peddling Prosperity”? Holding large amount of foreign reserve is a sign of an economy’s inability to utilize her assets, isn’t it? Buying a lot of US treasury bonds is a way of giving a loan to the seller, isn’t it? The borrower can use the loan in different ways, like building green technology, improving the crumbling infrastructure, but should not be used in blowing up a real estate bubble. Right? The loan provider, in this case, cannot dictate to the borrower for what the loan is to be used. Right?
Krugman’s accusation that China restricted foreign investment is ludicrous. China is the destination one of the largest FDI in the world!
Is China hurting US employment? One period that had unemployment figures, comparable to today, was during the early 1980’s, before China began to export at all. In subsequent years, China began to export more and more and correspondingly the US boomed!
There was a time when New England had a major textile industry that shriveled away. Jobs of those textile workers were taken by foreigners, Japanese first, Asian tigers next, and China following. It was the Japanese who took away US jobs not the Chinese. The jobs are now leaving China for places like Vietnam, Sri Lanka. They will not go back to New England!
The irresponsible Wall Street types playing with “financial innovation” caused the financial crisis, which led to the current high unemployment. Wasn’t it? The whole world, including significantly the developing countries, paid for that bit of Anglo-Saxon shenanigan and we are, by and large, out of it by now.
The US is not even in recession; the corporations are making record profits but they are just not hiring. One may argue that the US workers are improving on productivity so much that not so many is needed. If you look beyond the US, Germany is booming! Their unemployment rate dropped significantly. Newly rich Asians want to buy BMWs and Porsches, not Ford.
Appreciation of the RMB will reduce the trade imbalance! Will it? During 2007 to 2008, RMB did appreciate over 20% and the trade imbalance worsened.
Is the US government too passive in facing up to China? It is true that whatever you think the Obama government doesn’t have many cards to play against China short of going to war. The US is in two wars right now already! It is also true the government can’t do much on anything else either, not on further stimulus, not on immigration, not on renewable energy. It is mired in the quagmire of political polarization of historical proportion!
China has far greater unemployment problems than the US does with its present 10% unemployed. China therefore fears riots and chaos from its citizens much more than does the US from its population.
It's poor are infinitely poorer than the poor of the US. The razor thin margins that Chinese entrepreneurs make is also another reason for keeping their currency low. Because of the US's past profligacy, Krugman's economic belligerence might be the way things are done in Israel but it is no solution with regard to China which has not spent its way into mountainous debt.
China is infinitely cleverer than Nobel prize winner Mr. Krugman.
Based on this and other columns that Paul Krugman has written recently, one can summarize his views on our path back to prosperity as:
This might make sense to Krugman, but it makes no sense to me.
Why should the Chinese compromise their standard of living to help the US out of recession? Were Americans thinking about the the harm they could be doing to the global economy when they were on an uncontrolled credit-fueled binge? Americans won't compromise on their standard of living even if their way of life will cause the planet to implode tomorrow.
Wow, Paul, instead of the usual fawning over your diagnosis, commenters are actually drawing the sensible conclusion that the USA brought all of these problems on itself, not that the third world has a duty to help out the rich nations that spent way beyond their means for decades!
The problem between the US and China lies not in the undervaluation of the RMB, but the fact that China is ruled by a group of very smart and technically trained leaders and the United States at all levels of government and Congress is governed by a bunch of mediocre lawyers who could not make a living practicing law. Given enough time and enough stupidity on the part of the US, the Chinese will own us.
"Naturally, capital from wealthier but depressed nations is flowing in their direction. And emerging nations could and should play an important role in helping the world economy as a whole pull out of its slump."
A connotation is: the Chinese should slow down and help the US recover so that the income and wealth gap between them can be maintained.
I always thought that success is synonymous with using advantage to maximum effect. The US must have done this in the past; 4% of the world population consuming 25% of all energy output. The current 10% unemployment is a result of a maligned internal wealth distribution that trade tiffs with China cannot solve.
So we put tariffs on Chinese goods. Will the jobs quickly return to the US? No. What happens when the Chinese auto industry starts producing cars for export that are half the price of their competitors and the American people learn that they can't enjoy these savings because of the tariffs? Repeal. Nothing good will come from actually following Dr. Krugman's advice except a lobbying campaign for a larger naval presence in the Pacific.
I wish our brilliant economists would think outside the box to help redirect us. Perhaps we should act as the European nations acted after WWII: Give up our dreams of world domination - soft or hard - and focus on improving the quality of everyday life of our citizens.
Samuleson made a similar agrument on Monday in the Washington Post. There, he noted that China's share of worldwide exports has risen from 6% in 2006 to 10% in 2010.
Well, inasmuch as China has a third of the world's populaton, what principled reason is there why its share of exports (and hence share of jobs) should not rise to 33%?
If our answer to that question is nothing more than "because it hurts us" then I would not expect much sympathy from the Chinese anytime soon.
It should be remembered that for 200 years the so called "Western nations" treated China as a vassal state. China spent most of the 20th Century fighting foreign invasion. The optimistic view of Chinese state capitalism would be that it would actually value Confucian principles of civic responsibility. Human greed, however, operates on a more personal level, a level which, lamentably, seems to transcend all other imperatives.
With all due respect, this article is ridiculous, childish, irresponsible, etc. etc.
The problems in the U.S. are not caused by China. Don't overstate the importance of China when finding someone to blame. China, no matter how promising it seems, is still a weak country. Or you could say it's a rich country with poor citizens. China has many huge problems: the disparity in the society, corruptions in the ruling party, the skyrocket house price, the lack of beliefs among citizens, etc. etc. How could you expect a country that is weak and has tons of problems itself to solve problems of the most powerful and irresponsible country in the world? China is no savior, U.S. itself is. Think about all those stupid things U.S. has done before accusing others.
In short, please grow up and be a man.
Paul, you're insufferable.
It'd be the ultimate of ironic unintended consequences, if your blathering about unpegging the Yuan caused the Japanese to peg the Yen at a hundred to the dollar - after seeing China's progress.
By the way, tell us about the comparative advantage of producing rare earths, from one nation to the next. They raised the price of these exports, just like you wanted. Perhaps you'd like Congress to slap a tariff on top of the several-fold recent price increases?
Where is the evidence backing Mr.Krugman's assertions? Where is the analysis that takes into account the whole of U.S. economic relations with China? The article has a single objective, and that is to make China responsible for the failure of U.S. policymakers in addressing the current economic crisis. It is regretable that Mr. Krugman has forgotten economic science in order to become a political zealot engaged in China bashing.
I don't see anything wrong what the Chinese said about the currency and trade deficlit. Since 2005 the Chinese currency has risen 25% while the US trade deficit skyrocked. Similar thing happends to Japan. 1n 1988, 320 Yen bought you a dollar, the US pressed Japan with the Plaza Accord in 1988. Now 85 yen is for one dollar, Mr. Krugman, have you seen any reduction in trade deficit between US and Japan?
Also, Mr. Krugman intentionally misled with his selected quotes about what the Chinese said. They argued, rightly, that an increase in value of Chinese currency will not reduce America's oveerall trade deficit and create jobs for Americans. If Wal-mart does not buy T-shirts from Chna, it can buy the same things from Vietnam, India, and a long list of other nations.
The only reasonable purpose for for the pressure is geopolitical - to steer US trade away from China to other nations that are subsevient to the US interests and dictates. That is all. Despite his claims, I suspect that Mr. Krugman is more than a casual anti-Chinese.
So lets see, if Krugman gets his way not only would Obama be single handedly responsible for causing the greatest damage possible to the poorer classes by raiseing their cost of living significantly during a near depression, but he will also get the glory of throwing the world into a trade war. Sounds about par for the quality of the good Doctor's advice.
The Chinese, on a deep level, distrust the West. This distrust was brought about by the nineteenth-century Opium War and Arrow War, when the Western powers bombarded coastal cities, looted and burned the Old Summer Palace (Yuanmingyuan), and invaded Beijing, all for the purpose of opening trade so that the British especially could sell opium from India in China. Then too China had a trade surplus with the West, and this was our forebearers way of solving the issue. We in the West have forgotten all this; the Chinese will never forget.
When in history have economic sanctions ever improved the lives of anyone? The development of the middle class in China is one of the few bright spots in the global economy. Is China using its undervalued currency to maintain a somewhat unfair competitive edge? Absolutely, however, they are and will continue to fix this over time, recognizing that the current situation is unsustainable in the long run and that a gradual shift to fair value in their currency is better than a sudden one. What would the U.S. gain by having a sudden revaluation of the Yuan? Nothing immediately except significantly higher inflation and interest rates. One way or another, the U.S. economy needs to go through a transformative period where we become less reliant on finance and business services and more focused on production – preferably high value-added production. A sudden spike in the costs of imports will do little to help that. The blame rests on the lack of real world experience exhibited by the Obama administration, and their inability to use the largest fiscal stimulus on record to help U.S. companies re-invest in local production. Economic sanctions against our largest trading partner, and the second largest economy in the world, will not help.
I think there is a flaw in your logic. As far as I know, we owe the Chinese $700 Billion, if not more. If China increases the value of its currency, it would be practically decreasing the value of its $ debt. As a debtor, I see that it's to our benefit to have to repay as little as possible. In fact, this is the line of thinking that got us in this foreclosure and mortgage crisis in the first place. But a creditor would go bust if the $700 Billion debt it holds depreciates. In fact, bad lending was one of the the reasons why our banks needed the bailout. Now, the U.S. government gave U.S. banks a bailout so they can suck up the bad debt. If someone is willing to give China a bailout on U.S. debt, I'm sure it would be happier to appreciate its currency. The truth is, we have spent ourselves into a stupor, have woken up with more debt than any bailout we can afford, and now we're demanding that someone else suck it up and take our punches. If not, we call it "bad behavior." I'm a high school sophomore, but I follow politics and the state of the economy in this country closely, and I would not be talking economics in front of a Nobel laureate unless I felt like I'm seeing something bewildering in his logic. I know, however, that if he started arguing for changing the rules each time the game turned against him on my JV volleyball team, there's a name for such behavior...
This whole argument about Chinese currency manipulation seems a bit odd - they have a trade surplus, don't they? Perhaps the real issue here is that the U.S. has been using petrodollar politics for decades to artificially inflate the value of the U.S. dollar? That is, foreign banks must keep a good chunk of U.S. currency on hand if they wish to purchase oil on the global exchanges, correct? Efforts to create a Euro-based oil trading scheme have faltered due to intense U.S. opposition - recall how furious Wall Street was when Saddam converted all his dollars to euros in 2000, turning a 30% profit as he did so? Using petrodollar schemes to boost the value of U.S. currency is A-OK, though - so it seems a little hypocritical to complain about China pegging the value of their currency to the dollar.
There will be a trade war. Essentially we are asking them to give us something for nothing. We want them to revalue the renmimbi. But what can we give them in return? They don't want our approval, that's for sure. Global influence as "approved" by the west is surely less than useless to them. I can't imagine them rolling over and acqueising like our friendly allies the japanese did.
So what can we give them in exchange? We don't want them to dig our minerals out from the ground, we don't want them to buy our companies, we refuse to work for their companies, so what's left? We can cut off their access to our markets, I suppose our markets still command some value.
And that's what we are going to do, even though it'll probably hurt us more than it hurts them. Because there is no other option, not until the new generation comes along and stop regarding the chinese as the enemy.
There is a perverse part of me that understands and admires China’s willful display of thumbing their nose at us. All during the last century the U.S. was the power to reckon with and we battled China directly and indirectly out of fear of a global spread of communism. We backed the Nationalist in their civil war against Mao. We fought wars against enemies we considered China’s proxies (N. Korea and Vietnam). We did all we could to hem them in. Now China is in their ascendency and the U.S. is in decline, which seems to be the natural rhythm of nation states throughout history. If the shoe were on the other foot and the U.S. endured what we did to China, would the U.S. readily change its policy for the good of China? These events are not that old. They occurred in my lifetime (Vietnam) and all of them in my father’s life, now 88 years old.
Krugman writes: "...taking on China is one of the few policy options for tackling unemployment available to the Obama administration, given Republican obstructionism on everything else."
Or so it would appear. Washington and Krugman do indeed seem to feel that they are out of chips. Odd that they should see things that way, of course, given that there is plenty of work to do to solve the real problem, the lack of competitiveness of the US economy, itself a consequence of the US turning itself into a financial theme park over the past thirty years, featuring real estate bubbles, stock bubbles, bond bubbles, insurance bubbles, deficit bubbles, credit card bubbles. Why, there's enough variety in this Bubble Trouble theme park to make Walt Disney envious.
What has been exasperating me over the past two years has been the way that politicians and pundits have been making excuses for America's problems. Do they really think people are stupid enough to believe that printing money, borrowing, and fiddling with currencies and interest rates are going to solve our serious economic problems? They won't. In fact, the "show-me-the-money" obsession is a distraction that is making things worse.
It also reveals that, far from having learned from the mistake of redefining productive economic activity as a series of fiscal and monetary moves and regulations, officials are intent on continuing down the same path banal path, and pundits like Krugman are in the bleachers cheering - no, egging - them on.
The myriad market irregularities we see today are a consequence, not a cause of the global crisis. And culprit number one for the break down of the markets is the US, which has been promoting inflationary devaluation of its currency since the end of the post-war boom in the 1970s. Industrial activity as a contribution to US GDP has gone from being around 30% to around 15% over the past three decades; during the same period, financial activities have swollen from around 15% to 30%.
Krugman is also disingenuous (and perhaps less polite words could be used to describe his attitude) in brushing off inflation. He himself in a recent column noted with absolute glee that the US was able to erase most of its WWII through inflation. And you don't need a PhD in economics to see that currency debasement is the only way that governments have out their current debt bubble trouble.
Moreover, he ignores the relevant, current, real-world experience of Greece. Months ago Krugman wrote that Greece will inevitably sink into a deflationary hole because it can't (unlike the US - did I hear the phrase "currency manipulation"?) print or devalue its own currency. In the real world, however, Greece is sliding slowly into a deep recession featuring high unemployment, severe slowdowns in commerce and production, and, yes, high inflation.
It's hard to see why Krugman thinks there is no inflationary risk. It's so hard to see, in fact, that he probably does see it. He wants inflation as a way of writing off bad debt.
What Krugman doesn't like to say is that currency debasement and other inflationary policies are a destruction of the wealth of creditors, and people on fixed incomes, and a giveaway to debt-holders. But then, he wouldn't want to mention that, would he? But that's capitalism: when you've got a bubble, it means that there is more "wealth" on people's books - in the form of bank deposits, houses, gold, you name it - than society consumes. One way or another, the books will be balanced. The only question is, will money lose its value or assets?
On another leve, I also find distasteful, racist, and dangerous Krugman's continued attempts to talk up some Chinese peril. Krugman reproduces in a sanitized form the old American racist stereotypes of the Chinese as inscrutable, devious, cold, and caluclating fiends who are selfishly destroying the US economy. The US, on the other hand, is seen as the good guys who just want to pitch in and help "the global economy" recover. The truth is that the US wrote the book on currency manipulation.
Krugman should stop blaming the Chinese and take a look at the man in the mirror.
It's interesting that this column appears only two days after a very insightful op-ed by Stephen Roach, yet Paul Krugman doesn't even so much as acknowledge the existence of Roach's column, or of the one by two former trade negotiators that appeared several weeks ago.
Both op-eds rather deftly refuted Krugman's constant refrain that:
We already tried this tactic with Japan and Germany back in 1985 with the Plaza Accord, and what did it get us? To this day, we still run trade deficits with both countries, even though their currencies are now stronger than the dollar! The Washington Post even reported that German companies have been making all kinds of money selling their products to the Chinese, even though at the time, the euro was trading at $1.30 to the dollar!
The Chinese didn't come over here and steal our manufacturing sector; rather, they simply took advantage of our own stupid and shortsighted economic policies, policies whereby the government essentially bent over backwards to encourage companies to increase their profits by shipping manufacturing and, increasingly, R&D to countries with cheaper labor.
A number of economists have countered the dangerous ideas being put forth by people like Krugman and various members of Congress, showing that even a dramatic revaluation of the renminbi would in fact result in little job creation here in the United States. The manufacturers that have moved their factories there would simply move them to cheaper countries like Bangladesh, India and Vietnam.
Another thing is that if we couldn't get goods from China, then where would we get them? We don't have the manufacturing capacity here to make things like flat-screen TVs, iPhones and other products. If they become too expensive, then the companies that make them (including many American companies) and the retailers that sell them will lose money and, in many cases, go out of business or get gobbled up by foreign competitors.
How would Krugman like to see Apple acquired by China's Lenovo, hmm? That's why two retailing lobbies -- the Retail Industry Leaders Association and the National Retail Federation -- have both come out against this bill.
If we want to revive manufacturing in this country, then rather than blaming the Chinese for our problems, we should take a cue from the Germans and get into manufacturing value-added goods, high-value goods that sell regardless of currency exchange rates on the basis of their QUALITY, not just their PRICE.
A big reason why have such a huge trade deficit with China is because our products suck, not because they're too expensive.
The first is titled "Paul Krugman appears to have lost his marbles". It appears increasingly likely that Alan Greenspan may not be the last economist to totally discredit himself. Read Here
The next is a link to an editorial titled "More Nonsense by Paul Krugman ... Who appears to have lost all sense of integrity". It's a response to one of Krugman's biased and error-ridden articles, published in the NYT, with appropriate critical commentary. Read Here
The third is a scholarly refutation made in response to one of Krugman's Error-Ridden Articles, written by Raghuram G. Rajan, who was foolishly attacked and misquoted by Dr. Krugman in one of his nonsense articles. Read Here
The Structure of the US Economy Today
A brief look at Trade Surpluses and Deficits
Let's have a Financial Crisis