Krugman’s peculiar views on American nationalism and the Chinese yuan

This will be a long post, as Paul Krugman’s recent piece on the yuan raises all sorts of different questions.  Let’s start with his assertion that an overvalued Chinese currency is restricting our ability to reflate our economy:

But given our economy’s desperate need for more jobs, a weaker dollar is very much in our national interest — and we can and should take action against countries that are keeping their currencies undervalued, and thereby standing in the way of a much-needed decline in our trade deficit.

That, above all, means China.

But how do we know the yuan is undervalued?  Its current value is not out of line with predictions of the Balassa-Samuelson Theorem, which predicts that countries with higher per capita GDPs will have higher real exchange rates.  Krugman points to the huge Chinese trade surplus.  But is their surplus actually all that large?  After all, China is a very big country.  As I pointed out earlier, the Germanic/Nordic current account surplus is vastly larger, despite the fact that the countries lying between Switzerland and Norway have a combined population only a tenth as large as China’s.  The smaller East Asian countries also have vastly bigger surpluses on a per capita basis.   So why focus on China?

Another argument is that China’s surplus is in some sense “unnatural,” whereas the surplus of the Nordic bloc is natural, reflecting the decisions of the private sector.  There are several problems with this argument.  First, in all countries the level of savings is strongly influenced by fiscal policies.  For instance, Sweden has no inheritance tax, whereas Austria and Germany have no capital gains taxes.  These fiscal policies boost saving rates.  Singapore forces its citizens to save a large fraction of their income.  In contrast, China is a former communist country that lacks a sound social security system.  It makes a lot of sense for the Chinese government to have a high level of saving, especially given their approaching demographic time bomb.

But what about the charge that China is a currency manipulator?  Krugman’s too smart for that argument, I recall he once acknowledged that the real problem was Chinese government saving.  Indeed if the Chinese government continued to buy large quantities of foreign debt, the value of the yuan would stay “artificially” low, even without a formal currency peg.  So the “problem,” if there is a problem at all, is not fixed exchange rates, it’s that some countries save too much.  And for some odd reason Krugman adopts a stance that you’d expect from right-wingers—private saving good, public saving bad

Some observers question whether we really know that China’s currency is undervalued. But they’re kidding, right? The flip side of the manipulation that keeps China’s currency undervalued is the accumulation of dollar reserves — and those reserves now amount to a cool $3.2 trillion.

BTW,  Greg Mankiw offered a similar criticism of Fred Bergsten a few days ago.

Last year Paul Krugman made this observation about Switzerland (in criticism of one of my posts):

Oh, and about the exchange rate: there’s this persistent delusion that central banks can easily prevent their currencies from appreciating. As a corrective, look at Switzerland, where the central bank has intervened on a truly massive scale in an attempt to keep the franc from rising against the euro — and failed:

Later I showed that Krugman was wrong; Switzerland’s policy didn’t fail.  Now his tune seems to have changed.  Yes, I know some readers will point out there is no contradiction in the following, (and technically that’s true), but Krugman’s smart enough to know how most readers will interpret this:

To get our trade deficit down, however, we need to make American products more competitive, which in practice means that we need the dollar’s value to fall in terms of other currencies. Yes, some people will shriek about “debasing” the dollar. But sensible policy makers have long known that sometimes a weaker currency means a stronger economy, and have acted on that knowledge. Switzerland, for example, has intervened massively to keep the franc from getting too strong against the euro. Israel has intervened even more forcefully to weaken the shekel.

Yes, he doesn’t say the massive intervention “succeeded,” but it’d be a bit odd to argue for currency depreciation in the US by pointing to countries that tried to do currency depreciation, and “failed.”  BTW, the recent Swiss intervention has succeeded, so far.

What bothers me the most is Krugman’s assertion that China is “standing in the way” of an increase in US aggregate demand.  This makes the Chinese seem like some sort of enemy of the US, even though the private actions of those thrifty Nordics are doing us far more harm, according to Krugman’s model.  Even worse, it suggests that we are helpless victims, whereas even Krugman admits that the fundamental problem is that we don’t use monetary and fiscal policy to boost our own aggregate demand (AD.)  So the “harm” being done is only harmful if our policymakers ignore textbook advice to keep AD at an adequate level.  Yes, we are ignoring that textbook advice, but I’m having trouble seeing how that’s China’s fault.  Again, I’m not arguing that there is any logical inconsistency there, but I can’t imagine that many of Krugman’s readers will connect the dots as I have.  Most will assume that China really is “standing in the way,” not that we could offset any harm with the flip of a switch. 

Even worse, Krugman’s appealing to people who completely reject his AD-view of the recession, which these days isn’t just Pat Buchanan, but rather 90% of the public, and 90% of the “Very Serious People.”  Don’t believe me?  Go ask around and see how many people think our unemployment problem could be solved with an increase in the inflation target to 4%. 

Here’s an especially odd juxtaposition:

And the reality of the unemployment disaster is also my answer to those who warn that getting tough with China might unleash a trade war or damage world commercial diplomacy. Those are real risks, although I think they’re exaggerated. But they need to be set against the fact — not the mere possibility — that high unemployment is inflicting tremendous cumulative damage as we speak.

Ben Bernanke, the chairman of the Federal Reserve, said it clearly last week: unemployment is a “national crisis,” with so many workers now among the long-term unemployed that the economy is at risk of suffering long-run as well as short-run damage.

China bashing helps, if it helps at all, by boosting AD.  No one claims it boosts the supply-side of our economy.  So Krugman cites Ben Bernanke in defense of the argument that we need more AD to reduce unemployment; even though Ben Bernanke is the guy that controls AD, and who defends current Fed policy as being appropriate, and who opposes higher inflation despite the fact that any attempt to boost AD (especially tariffs on Chinese goods) will mean higher inflation.  

Perhaps in his heart of hearts Bernanke favors easier money.  But people should be cited on the basis of their publicly expressed policy views.  This may sound grotesque, but right now the Fed’s publicly expressed policy is to keep inflation steady, which means they are officially committed to offsetting any boost to AD from more expensive Chinese imports.  Good luck with trying an end run around the Fed (as I’ve been correctly warning since late 2008.)

Here’s what we know:

1.   An appreciation of the Chinese currency is contractionary for China, perhaps costing millions of jobs and slowing growth sharply, just as a strong yuan in 1998 sharply slowed Chinese growth.

2.  Both China and the world seem to be teetering on the edge of another recession.

3.  In March 2009 many observers, and many market participants, predicted a depression.  Then China began to recovery rapidly, boosting world trade, and easing fears of an outright worldwide depression.

4.  If the Fed follows its announced policy of inflation targeting, the contractionary effect of China’s action on world output will not be offset by any expansionary effects on the US.  Yes, they may not follow a strict inflation target, and hence it’s possible the action will have some expansionary effect here.  But the only effect that’s certain is the contractionary effect in China.

5. If China went to a policy of complete laissez faire, it’s possible (albeit unlikely) that so many Chinese would rush to get money out of the country, and into houses in Vancouver/LA/Sydney, that the yuan would depreciate.  Especially if China does go into recession.

6.  From a liberal utilitarian perspective, trade barriers on Chinese imports are completely unjustified, even if Krugman is 100% right in his analysis.  Chinese workers are several orders of magnitude poorer than US workers, and our safety net seems almost Nordic in comparison to the Chinese safety net.

The most distressing aspect of Krugman’s post is its nationalistic tone:

. . . standing up for our national interests.

The worst mistake the world could make right now is to descend into nationalistic posturing.  We can all see what’s going on in Europe, and we all know how nationalism can end up hurting everyone.  The last thing we should be doing right now is pointing fingers at foreigners. 

We have the ability to solve our own AD problem; now we need to get on with doing it.  If the Senate wants to do something constructive, give the Fed a mandate consistent with what the Senate wants the Fed to accomplish.  If the Senate wants more AD, don’t try to take it out of the pockets of Chinese workers.  Let’s do it the way economics textbooks say it should be done, with Federal Reserve targeting of prices or NGDP.

Don’t make policy based on zero sum thinking.  The world needs growth, not trade wars.

HT:  Clark Johnson


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58 Responses to “Krugman’s peculiar views on American nationalism and the Chinese yuan”

  1. Gravatar of K K
    3. October 2011 at 09:38

    If China wants to play hedge fund, two can play at that game. The treasury should issue the bonds it needs to finance the deficit *plus* whatever excess demand the currency manipulators, oops, I mean *savers*, are creating. If China wants bonds, lets make them some! And the rest of the market also wants more bonds (negative beta). With a bit of luck, additional issuance will increase inflation expectations and bring the dollar back to equilibrium and get us underway. If and when that point comes around, treasury can make a big profit when they buy back those bonds at a discount. All we need is to get congress on board :-(

  2. Gravatar of W. Peden W. Peden
    3. October 2011 at 09:39

    Good stuff, as always. A lot of people should be eating their words over Switzerland right now.

    On the subject of poking holes in Krugman’s commentary-

    http://ritwikpriya.blogspot.com/2011/09/old-keynesian-deceit-crisis-europe.html

  3. Gravatar of Brett Sheckler Brett Sheckler
    3. October 2011 at 09:41

    Great post, Scott.

    In a nutshell, it seems to me that you are arguing that, if countries want to support current account imbalances by expanding their dollar-denominated holdings, the way to hold them to account is by taking aggressive domestic action to bolster AD in the face of their actions.

    It occurs to me that the reason we are having such a hard time actually moving in that direction might be that the United State’s rentier-class views itself as having interests in common with the Chinese.

  4. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    3. October 2011 at 10:09

    The Minute Man noticed too:

    http://justoneminute.typepad.com/main/2011/10/its-krugman-v-krugman-as-times-change.html

    ———–quote————-
    Krugman 2011, also known as Krugman with a Democrat as President, lambastes China and any of its defenders. Now, China is their currency, and the undervalued yuan is costing the US jobs. That is probably true, but it is fun to contrast this with Krugman 2003; back in the day, George Bush was making the case that the undervalued yuan was costing the US jobs, so we can easily guess which side Krugman was on.

    ….Let’s flash back to Krugman 2003, when Krugman was bashing Bush for even suggesting that the yuan was manipulated and undervalued:

    ‘Instead, however, he’s [Evil, stupid, President Bush. And did I mention "Evil"? And "Stupid"?] decided to plead with the Chinese for help [with our jobless recovery].

    ‘Admittedly, it didn’t sound like pleading. It sounded as if he was being tough: ”We expect there to be a fair playing field when it comes to trade. . . . And we intend to keep the rules fair.” Everyone understood this to be a reference to the yuan, China’s supposedly undervalued currency, which some business groups claim is a major problem for American companies.

    ‘By the way, even if the Chinese did accede to U.S. demands to increase the value of the yuan, it wouldn’t have much effect unless it was a huge revaluation. And China won’t agree to a huge revaluation because its huge trade surplus with the U.S. is largely offset by trade deficits with other countries.’
    ———–endquote————

  5. Gravatar of Paul Paul
    3. October 2011 at 10:21

    As a Krugman fan I’ve never really understood his position on China.

    I don’t get how he overlooks the real effects on everyone, as you mentioned (a topic typically not mentioned in popular discussion).

    So I guess my question is, do you think Krugman thinks that rectifying, what he believes to be a market distortion, will have a positive impact on citizens in the global economy (in the US, China, and everywhere)? Or is it simply that he belives that this is an economic distortion that is an overwhelming impediment to the proper functioning of markets (and his argument is purely of economic analysis)?

    It just seems to me China should get the benefit of the doubt, having done more to eradicate absolute poverty in the past couple of decades, in a sustainable way, then I’ve ever seen. We should be VERY sure they are messing things up on a large scale if we are to impose impediments that destablize this very ‘poor’ country, especially if it is intended the ‘poor’ of the developed world.

  6. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    3. October 2011 at 10:25

    Not to mention that the minimum wage here in the state of Washington is now over $9 per hour ($8.80 in neighboring Oregon). I wonder what Krugman thinks is the more important factor in Our Jobless Recovery, that, along with 99 weeks of unemployment compensation, or the undervalued Yuan?

  7. Gravatar of Matt Matt
    3. October 2011 at 10:42

    I remember an excellent book (more a collection of essays) that warned against such zero sum thinking, it’s called pop internationalism, I can’t seem to remember the name of the author though.

  8. Gravatar of johnleemk johnleemk
    3. October 2011 at 12:02

    If one were to show these remarks from Krugman 2011 to the Krugman of the Clinton era, Krugman 1990s would be lambasting Krugman 2011 for blind nationalism and protectionism. Krugman 1990s would say (these are all verbatim quotes from three different Krugman articles published in the 1990s):

    “If you want a simple model for predicting the unemployment rate in the United States over the next few years, here it is: It will be what Greenspan wants it to be, plus or minus a random error reflecting the fact that he is not quite God.”

    “The only reason developing countries have been able to compete with those industries is their ability to offer employers cheap labor. Deny them that ability, and you might well deny them the prospect of continuing industrial growth, even reverse the growth that has been achieved.”

    “You may say that the wretched of the earth should not be forced to serve as hewers of wood, drawers of water, and sewers of sneakers for the affluent. But what is the alternative?”

    “The real complaint against developing countries is not that their exports are based on low wages and sweatshops. The complaint is that they export at all.”

    “In short, my correspondents are not entitled to their self-righteousness. They have not thought the matter through. And when the hopes of hundreds of millions are at stake, thinking things through is not just good intellectual practice. It is a moral duty.”

    Krugman is so bloody smart, he’s outsmarted himself.

  9. Gravatar of johnleemk johnleemk
    3. October 2011 at 12:56

    Scott,

    It looks like Obama reads blogs on his iPad: . Maybe we should start a letter-writing campaign to the White House urging him to add The Money Illusion to his bookmarks.

  10. Gravatar of johnleemk johnleemk
    3. October 2011 at 12:57

    Sorry, link came out funny: http://www.nationaljournal.com/obama-received-an-early-ipad-from-steve-jobs-20111003

  11. Gravatar of anon/portly anon/portly
    3. October 2011 at 13:14

    “Let’s do it the way economics textbooks say it should be done, with Federal Reserve targeting of prices or NGDP.”

    But Krugman can’t embrace this. Why? Because he didn’t think of it before people like Scott Sumner. Maybe he was too invested in the desirability of increasing government spending. (It was a two-fer!).

    Perhaps if Scott Sumner (and a few other Market Monetarist bloggers) had never been born, the likes of Krugman and Delong would have been able to “own” the idea of price or NGDP targeting and would therefore have already put their weight behind it. (Of course maybe this wouldn’t be enough to sway opinion in the economics profession generally). They certainly seem to hint and feint in that direction.

    As proof of this conjecture, consider the increasingly [choose the adjective you prefer] posts coming from DeLong, e.g.:

    http://delong.typepad.com/sdj/2011/10/alan-blinder-ben-bernanke-deserves-a-break-wsjcom.html

    This seems like a convoluted effort to come to the conclusion that monetary policy is unduly tight but via some route that was not taken by men of below-Harvard standard. But the anguish of Robert Waldmann becomes ever more terrible to see.

    Okay this comment is almost Morgan stupid but still I wish if price or level targeting *isn’t* the right idea I could read from Delong or Krugman or Thoma or Duy (or even Williamson or Waldman or Waldmann) a thorough and elegant take-down of it. Or even a slapdash and clumsy take-down of it. There’s your dog that isn’t barking….

  12. Gravatar of K K
    3. October 2011 at 13:40

    johnleemk:  If you want to play chess, you have to at make at least a *minimal* effort to imagine what your opponent’s response to your next move might be. In this case, your disdain for Paul Krugman appears to have left you incapable of even imagining what he might respond. So let me give you a hand.

    Krugman: “If you want a simple model for predicting the unemployment rate in the United States over the next few years, here it is: It will be what Greenspan wants it to be, plus or minus a random error reflecting the fact that he is not quite God.”

    Imaginary Krugman: “But *now* we are in a liquidity trap and the Fed no longer has the power to keep the economy out of a deflationary disequilibrium.”

    Krugman: “The only reason developing countries have been able to compete with those industries is their ability to offer employers cheap labor. Deny them that ability, and you might well deny them the prospect of continuing industrial growth, even reverse the growth that has been achieved.”

    “You may say that the wretched of the earth should not be forced to serve as hewers of wood, drawers of water, and sewers of sneakers for the affluent. But what is the alternative?…”

    Imaginary Krugman: “But *now* we are in a liquidity trap and the Fed no longer has the power to keep the economy out of a deflationary disequilibrium. Competitive devaluation by our trading partners deepens our liquidity trap, aggravating the output gap. This is a net loss for the global economy and is doing us all harm in the long run. First let us get our economy back in a controllable state of positive equilibrium growth. Then, by all means, do what you want with your currency if you think that will improve the lot of the hewers of wood, etc.”

    You may not believe the liquidity trap. That’s fine. But Krugman does and he has been warning about its consequences for well over a decade. In his mind, everything *has* changed since the Greenspan era. And there is nothing hypocritical about him saying so. It is consistent with the model that he has been loudly advocating for eons.

  13. Gravatar of W. Peden W. Peden
    3. October 2011 at 13:57

    Patrick R. Sullivan,

    The correct answer, of course, is that the US recovery is jobless because it isn’t much of a recovery. It’s true, however, that tragically labour market inflexibilities are making a bad situation worse and they will turn a bad short-term situation into a terrible long-term situation.

  14. Gravatar of Scott Sumner Scott Sumner
    3. October 2011 at 14:47

    K, If we’re going to do insider trading, I’ve argued the Fed should buy foreign bonds to inflate. As the dollar falls, the Fed profits.

    W. Peden, Thanks for the link.

    Brett, No that’s not my argument. I don’t want to “hold China to account” because China’s not doing anything wrong; they aren’t doing anything that hurts the US economy. The Fed determines the path of AD in the US, not China.

    Patrick, Thanks, I liked the old Krugman better.

    Paul, Very well put.

    Patrick, We both know what Krugman would say is the bigger problem, and we both know he’s wrong.

    Matt, Yes, who did write that book?

    Johnleemk, Now I’m getting really depressed. The world has lost a great spokesman for free trade.

    anon/portly, Monetary policy is actually tight!!! Why didn’t I think of that?

    K, you said;

    “Imaginary Krugman: “But *now* we are in a liquidity trap and the Fed no longer has the power to keep the economy out of a deflationary disequilibrium.””

    But you aren’t thinking ahead enough moves. Over here we have all his academic papers explaining that even in a liquidity trap the Fed can do unconventional policies like higher inflation targets (say 4%) The Fed isn’t out of ammo (in Krugman’s view) they simply don’t want higher inflation, higher NGHDP growth.

  15. Gravatar of johnleemk johnleemk
    3. October 2011 at 15:08

    K:

    I actually have a lot of regard for Krugman, especially since he is the reason I hold an economics degree today; he’s why I got interested in the whole field to begin with. You don’t have to dislike Krugman to be annoyed by the stuff he writes for popular audiences these days. He’s always been a clever writer, but as Scott’s observed many times, he increasingly writes so he can stay within the bounds of economic orthodoxy while leading his lay disciples away from it.

    If what you submit is the best Krugman 2011 has to offer (and I’m positive it wouldn’t be, because repeating “liquidity trap liquidity trap” ad nauseam isn’t an argument), Krugman 1990s offers plenty of rebuttals. You must not have actually read his papers on the liquidity trap in Japan, such as http://www.pkarchive.org/japan/ItsBaaaack.pdf and http://www.pkarchive.org/japan/japtrap.html

    His points essentially are:

    1. Yes liquidity traps exist, e.g. Japan
    2. But the common prescription, i.e. fiscal policy, is not necessary and can lead to more bad than good (excessive public works projects result in environmental pollution, corruption, etc.)
    3. Supply-side reforms may help (he proposes deregulation of the Japanese service sector)
    4. But really all you need to do is fire up the helicopters: buy long-term government debt and promise to keep printing money till nominal growth returns — be credibly irresponsible
    4. And this credible irresponsibility must be indefinite or at least long term, because short term monetary policy has no effect
    6. But yes, you can inflate your way out of the liquidity trap.

    Krugman 2000s agrees with all 6 points: http://www.pkarchive.org/economy/FearEconomy.html

    Note in The Fear Economy that:

    1. He explicitly criticises fiscal policy, both in Japan and the US, as harming the environment and ballooning public debt
    2. Recommends buying long-term government debt and/or inflation targeting as solutions to the liquidity trap should it arise in the US
    3. Cites Lars Svensson approvingly
    4. Worries that the monetary authorities may not have the gumption to do what is needed to address the liquidity trap should it arise, and be paralysed by the simplistic idea of the zero-rate bound.

    If it wasn’t for the fact that he said “inflation targeting” instead of “NGDP targeting,” I bet I could convince a reasonable person that Scott Sumner wrote that article.

    Yes, the US should inflate the value of the dollar lower. But there’s no reason to bring China into this. Absolutely none. The US is free to determine its exchange rate, since it has its own printing presses. And as Krugman so clearly explains, the liquidity trap exists only if the monetary authorities freeze up. If we want to talk political feasibility, I’ll bet you it’s easier to convince the Fed to pursue a policy of credible irresponsibility than it is to convince China to revalue its currency.

    Words fail to describe the insanity of making monetary policy by bugging other superpowers to revalue their currencies…

  16. Gravatar of Edward Edward
    3. October 2011 at 15:10

    We don’t REALLY have a floating system. Not really, we have dirty, managed floats, which are almost as bad as completely fixed system.
    Wont more AD and expansionary MP automatically strengthen the yuan vis a vis the dollar?

  17. Gravatar of johnleemk johnleemk
    3. October 2011 at 15:13

    Scott beat me to it. I have a long comment currently in moderation explaining what Krugman of the 1990s and even the 2000s (at least as of just after 9/11/2001) would say to K. I’ll let Scott approve it rather than repost the whole thing, but I just want to say again for emphasis that as of exactly 10 years ago, Paul Krugman believed:

    1. Fiscal policy often results in harm to the environment and ballooning public debt
    2. Buying long-term government debt and/or inflation targeting are solutions to the liquidity trap
    3. Lars Svensson’s ideas about unconventional monetary policy place him among the world’s “best economists”
    4. It would be very scary if the monetary authorities do not have the gumption to do what is needed to address the liquidity trap should it arise, and be paralysed by the simplistic idea of the zero-rate bound.

    If it wasn’t for the fact that he said “inflation targeting” instead of “NGDP targeting,” I bet I could convince a reasonable person that I was describing Sumner, not Krugman — and I’d have the evidence to boot (in the links which are currently holding the comment up for moderation).

  18. Gravatar of johnleemk johnleemk
    3. October 2011 at 15:20

    Actually the more I go back to Krugman the more I wonder if Scott isn’t just plagiarising the Nobel Prize winner. In one of the papers I link to, Krugman spends quite a bit of time talking about how it was misleading to focus on the banks in the Japanese Lost Decade — that nominal growth, not the financial system, was responsible for Japanese stagnation. Scott spends a lot of time arguing that the housing and financial crises had nothing to do with the Great Recession, and that the Fed simply didn’t act irresponsibly enough to boost inflation expectations.

    Scott, the world hasn’t just lost a great free trade advocate — it’s also lost a great Sumnerist/market monetarist.

  19. Gravatar of John Thacker John Thacker
    3. October 2011 at 15:46

    The public doesn’t know better, politicians either don’t know better or pander to the public– which has to be expected in a democracy. But Krugman? He’s an op-ed writer with an enormous (and safe) speaking perch and credentials to convince people, and he surely knows better, as he demonstrated in 2003.

  20. Gravatar of Benjamin Cole Benjamin Cole
    3. October 2011 at 16:11

    Very thoughtful post.

    And yes, all of us have to be on guard against “us vs. them” arguments, whether put forth by Krugman, or by Rick Perry (Bernanke is a treasonist) or other hate-mongers. (I don’t think Krugman is a hate-monger, although he sometimes comes close).

    Depressions, as we all know, can breed fear and hate.

  21. Gravatar of StatsGuy StatsGuy
    3. October 2011 at 16:52

    The following is not necessarily true:

    “If the Fed follows its announced policy of inflation targeting, the contractionary effect of China’s action on world output will not be offset by any expansionary effects on the US.”

    If the brief inflation spike this summer was primarily driven by commodities (likely), then a large demand reduction in China could reduce the cost of commodities enough to force monetary expansion in the US to restore inflation to 2% target, which could be expansionary.

    This is far from certain. It depends on the relative elasticities involved.

  22. Gravatar of Mike Sandifer Mike Sandifer
    3. October 2011 at 16:53

    Scott,

    Maybe you’re a better person than me for reading through that claptrap. It’s obvious we’re to blame for our AD problem. Most of the points you mention didn’t occur to me though, but then if they did I might be an economist.

    When I was taught basic macro years ago, I was taught that anti-trade policies were never justified based on pure economics, and that view makes sense to me. It’s funny how someone who made his name in trade theory seems to get this so wrong, especially since he laments so many ignoring basic macro.

    This just goes to show Krugman isn’t immune to the generalization failures that seem to have stricken so many in this downturn.

  23. Gravatar of Mike Sandifer Mike Sandifer
    3. October 2011 at 17:00

    K,

    Krugman argues now that fiscal policy could get us out of a liquidity trap, yet blames China for our lack of AD. That doesn’t make sense. We’re to blame for not stimulating our economy enough, not China.

  24. Gravatar of Blair Blair
    3. October 2011 at 17:07

    Scott,

    I disagree. You make some good arguments but I don’t think they outweigh the negatives of China’s mercantilist policy settings. The dollar value of the imbalances matters. China’s policy settings (not just exchange rates, but interest rates and factro prices) necessarily create a wall of exports that depress AD globally. Opinion inside China is finely balanced between the reformist PBOC and the commerce ministry. A little outside pressure wouldn’t hurt.

  25. Gravatar of Scott Sumner Scott Sumner
    3. October 2011 at 18:02

    Edward, Probably, it depends how China reacts. But that’s not our concern, as all we need is more NGDP, not a weaker yuan.

    johnleemk, Sorry for the comment hold-up, I need to fix the multiple link problem.

    John and Ben, I don’t doubt that Krugman is well-intentioned, but I think he’s off base here.

    Statsguy, Yeah, that’s possible, but of course Krugman would never make that argument. It would truly be a beggar thy neighbor policy.

    Mike, Yes, I tend to notice a lot of flaws in other posts.

  26. Gravatar of Scott Sumner Scott Sumner
    3. October 2011 at 18:06

    Blair, You haven’t really addressed my arguments, other than to say they are “good.” I’m arguing that China’s policy has no impact on AD in the US. What’s wrong with my argument?

    BTW, I don’t agree that their policies are mercantilist. And if the dollar value of imbalances matter, why isn’t the much much larger Nordic surplus a much much greater problem?

  27. Gravatar of K K
    3. October 2011 at 19:00

    Scott: “K, If we’re going to do insider trading, I’ve argued the Fed should buy foreign bonds to inflate. As the dollar falls, the Fed profits.”

    Why not. We could buy Bunds. Apparently they don’t believe themselves to be liquidity trapped, so what’s the harm. But it lets China off the hook. I think it would be more fair to just mint 10yr treasuries.

    “But you aren’t thinking ahead enough moves. Over here we have all his academic papers explaining that even in a liquidity trap the Fed can do unconventional policies like higher inflation targets (say 4%)”

    They can do all sorts of stuff but there’s no guarantee it can get them out. If the state of the (NK) economy is such that there is a low probability that a positive cumulative inflation process would develop even with rates at zero, then a commitment to 4% inflation under that circumstance (even if credible) would have a correspondingly small effect. And the prospect of the current Fed being able to make a commitment to permitting excess inflation in a future state of the economy in which such inflation would actually be harmful, is slightly ridiculous (The Perry/Paul White House is in one of those states of the economy). And without a strong ability to commit to harmful future policy, the power of the Fed is vastly reduced and will be unlikely to succeed under some circumstances.

    Now if you want to argue in favor of aggressive industrial fiscal policy (e.g. buying stocks) then you could be right. But don’t call it “monetary policy”.

  28. Gravatar of K K
    3. October 2011 at 19:52

    johnleemk: I’m going to go with your second comment. If I miss something in the first, let me know.

    “1. Fiscal policy often results in harm to the environment and ballooning public debt”

    Sure, especially bad fiscal policy. But don’t forget, there are Harberger triangles in monetary policy too. All you need is one sticky price, and one that isn’t. Nothing’s pure.

    “2. Buying long-term government debt and/or inflation targeting are solutions to the liquidity trap”

    Not “solutions”. But definitely possibly effective strategies. I challenge you to find where Krugman says either of those can always get you out of a liquidity trap. Sometimes, for sure. Credible targeting, especially, could be a powerful tool in theory. But as I replied to Scott above, there are circumstances where it’s ineffective. And contingent on achieving the same yield via a policy rate commitment, QE is useless as pointed out by Eggertson, and possibly harmful by depriving the market of a portfolio hedge.

    “3. Lars Svensson’s ideas about unconventional monetary policy place him among the world’s “best economists””

    So? Svensson’s Foolproof Way isn’t foolproof *at all* except in an exchange rate targeting open economy. Apart from from that it’s just a level target (see 2.) But if you want to get into a currency war with China, I say go for it. And I don’t imagine that Krugman would object.

    4. It would be very scary if the monetary authorities do not have the gumption to do what is needed to address the liquidity trap should it arise, and be paralysed by the simplistic idea of the zero-rate bound.

    And yet here we are. But even if we had an intrepid Fed, there’s no guarantee of success. The FOMC hawks and the political environment means they just aren’t credible. And even if they were credible there’d be no guarantee of success.

    I checked out the last paper you pointed to (the others I’ve read in the past). I found *no* evidence that Krugman ever said that monetary policy was *the solution*. He said it could help and it could do more if the CB was braver than the BOJ. And he definitely seems to indicate it’s preferable to fiscal policy when possible. But I found nothing contradicting the use of both monetary and fiscal tools in a severe crisis.

  29. Gravatar of An economist´s “snake oil” | Historinhas An economist´s “snake oil” | Historinhas
    3. October 2011 at 20:04

    [...] his long comment on Krugman´s post, Scott Sumner writes: China bashing helps, if it helps at all, by boosting AD.  No one claims it boosts the [...]

  30. Gravatar of RebelEconomist RebelEconomist
    4. October 2011 at 00:06

    I do agree with you about China’s exchange rate policy, Scott. Krugman and many other commentators take the increase in China’s reserves as conclusive evidence of currency manipulation, but I don’t think you can do that when the country has a closed capital account. The fact that China’s private sector saves a lot despite low renminbi interest rates suggest that, if China did free its capital account, it might run a capital account deficit at least as large as the present level of intervention. Effectively, the Chinese government is running a collectivised national overseas saving scheme, and it is not certain what would happen if it did not. As you say though, Krugman is clever, and writes to use his readers’ presumptions rather than to inform – Krugman is increasingly an economic lawyer rather than an academic.

    That said, I suppose that, given that China is imposing a restriction that the US is not, if the US feels that this is unacceptably detrimental to its economy, it should have the right to address that restriction specifically, by targeting the unwelcome official capital inflows, as I describe here: http://reservedplace.blogspot.com/2008/10/just-say-no.html

  31. Gravatar of JW Howard JW Howard
    4. October 2011 at 01:30

    What Americans need to realise is that this Krugman character is making millions of easy bucks by writing outrageous articles and promoting racism against China.

    Yes folks! Real easy money. Keep up the hate mongering, reader numbers are up and the cash keeps rolling in. Swiss bank accounts are a nice place to stash the cash.

    A trade war with China will mean a temporary (say three years) shortage of consumer goods, prices spiking up possibly by 50% during that period and a permanent 10 to 20% after that. Meanwhile the swiss alps is a nice place to retire with all that loot. And do not forget about interest rates moving up, all you mortgage holders. Yeap folks, there will be plenty of jobs making replacement consumer goods at a rate of two dollars a day but Mr Krugman will not apply for one of these jobs.

  32. Gravatar of Kevin Donoghue Kevin Donoghue
    4. October 2011 at 02:27

    @Edward: “Wont more AD and expansionary MP automatically strengthen the yuan vis a vis the dollar?”

    Not automatically, no. China can still peg its currency to the dollar while both collapse against sterling, the yen, the euro etc.

  33. Gravatar of StatsGuy StatsGuy
    4. October 2011 at 04:14

    Kevin, there are limits to that approach. China complains loudly when the US expands money supply because it is forced to mop up dollars by buying US debt. In doing so, this increases the cost of supplies (many of which it buys in NON-dollars), keeps revenue flat (in dollars), and thus squeezes margins (which pay wages) while inflation (from input prices) increases. This can only be offset by rapid productivity increases, but those are leveling off (catchup room is running out).

    If the US would simply hold to a self-interested monetary policy, eventually China would face some stark choices. The argument for this not happening is that the US is worried about China dumping its debt. Of course, that would cripple China too…

    US *heart* China

    Best Frenemies 4ever

  34. Gravatar of Kevin Donoghue Kevin Donoghue
    4. October 2011 at 04:31

    StatsGuy, I agree there are limits. If such a policy were adopted the Chinese would certainly complain loudly. But then so would Kocherlakota, Plosser and Fisher. My guess is that Bernanke would cave in pretty quickly, long before Governor Perry’s goons came to lynch him. Actually, that’s not even a guess. He’s not prepared to even embark on such a policy and it’s not because of Chinese complaints.

  35. Gravatar of K K
    4. October 2011 at 05:13

    johnleemk: “If what you submit is the best Krugman 2011 has to offer (and I’m positive it wouldn’t be, because repeating “liquidity trap liquidity trap” ad nauseam isn’t an argument)…”

    For Keynesians sometimes it is. And as if on cue.

  36. Gravatar of John Thacker John Thacker
    4. October 2011 at 05:27

    I don’t doubt that Krugman is well-intentioned, but I think he’s off base here.

    Ah, so you do “assume sincere motives for economists” (even famously partisan ones), unlike politicians? Generally I do as well, but I wonder about Krugman’s apparent switch from 2003 to now on China. I have no problem with that, but then again I think that it’s equally obvious that politicians sincerely want to be re-elected, and that they have the most success when they can convince themselves to sincerely believe what the public believes (even if they also sincerely believe something contradictory at the same time.)

    The rollcall on the China vote was 89-19. All the big Tea Party aligned Senators voted against– Coburn, DeMint, Lee, Paul, Johnson. Presumably they’ll be widely praised for avoiding theatrics and nationalism?

  37. Gravatar of mbk mbk
    4. October 2011 at 06:10

    Scott, for the record, Austria, Germany, Switzerland, all have capital gains taxes. There are variations in rates (20-35%) and in inceptions. AT: final flat rate tax, but income may be added to income tax instead at prevailing rates; CH: withholding of 35% but later restitution within the framework of the normal income tax and in some way I do not completely understand, it may act as a wealth tax; DE: variable but if I understand correctly it is similar to dividend tax in the US, meaning the tax is not final.

  38. Gravatar of johnleemk johnleemk
    4. October 2011 at 07:45

    K:

    Re that last Krugman post, that just makes me sad. (Although devilish Krugman as always is actually careful not to contradict himself or orthodox economics: the US is in a liquidity trap under his definition, but by that same definition this liquidity trap is not a true trap in the sense that the authorities have no power to act. Rather, the monetary authorities can and should pursue as irresponsibly inflationist policies as possible. He just conveniently forgot to mention that in his post.)

    As for the rest of your arguments, I don’t see how they do anything to undermine the conclusion that Krugman 2011 is going after the wrong culprits. He spends more time bashing opponents of fiscal stimulus and China than he does bashing the monetary hawks (he bashes them all, but poll his readers and see how many think the deflationists are the primary reason why things aren’t getting better).

    His own work very clearly indicates monetary policy takes precedence over fiscal policy especially under the very same conditions we currently face. And not once in any of those papers does he suggest Japan should have gone after its trading partners who might be running excessively large current account surpluses. Yet he keeps going after opponents of fiscal stimulus, opponents of healthcare reform, and the Chinese.

    Sure, those might all be worthy targets of derision. But it is the deflationists in the Fed and in the political community which are the main culprit of so much suffering today. This is what Krugman’s work has taught us.

    (BTW I don’t know where you get the idea that I think fiscal policy can do no good. Like Scott has said many times, it probably is better than nothing, at least in the short run. That does not imply that the preferred solution should necessarily include fiscal policy, especially when public debt levels become prohibitive. Regardless of its original author, this sentence could have come from either Sumner or Krugman: “True, since the economy is demand- rather than supply-constrained even wasteful spending is better than none. But there is a government fiscal constraint. And anyway, is it really true that it is impossible to use the economy’s resources to produce things people actually want?”)

    You might say but Krugman never said monetary policy is a surefire solution. Sure, it might not be. The crisis might be more supply-side than demand-side. And there are probably a million other reasons why monetary stimulus might not work. But it is the best option moving forward and to suggest any other solution, if you are a Nobel Prize-winner who has spent so much ink bashing protectionists and old-style zero-rate liquidity trap analyses which only offer fiscal policy solutions, is simply crazy. Krugman is throwing away all his work, all because of this not very clearly articulated notion that somehow, this time it’s different.

  39. Gravatar of SRK SRK
    4. October 2011 at 09:22

    I question whether you can stimulate your way out of a recession if you are resource-constrained, as we are with oil.
    Liebig’s Law of the Minimum (a somewhat elastic version) comes into play. The Law states that growth is controlled not by the total amount of resources available, but by the scarcest resource (limiting factor).

  40. Gravatar of Doc Merlin Doc Merlin
    4. October 2011 at 09:37

    ” Go ask around and see how many people think our unemployment problem could be solved with an increase in the inflation target to 4%. ”

    But we DO have 4% inflation.

  41. Gravatar of Charlie Charlie
    4. October 2011 at 09:53

    “An appreciation of the Chinese currency is contractionary for China, perhaps costing millions of jobs and slowing growth sharply, just as a strong yuan in 1998 sharply slowed Chinese growth.”

    This is true if expected future NGDP is too low or optimal. Is that true? What data are you using to form this belief? I’m not arguing. I just don’t know how to find good data on China. First, I don’t even know how to find current and past data on China NGDP, and second, I would think that market data that one might normally use to forecast future NGDP is more problematic for China, since the private sector is considerably smaller.

  42. Gravatar of Rayson Rayson
    4. October 2011 at 09:59

    whereas Austria and Germany have no capital gains taxes

    As far as Germany is concerned, this has changed to a certain extent: Capital gains on securities have been taxed like interests since 2008.

  43. Gravatar of Meg Meg
    4. October 2011 at 10:45

    My text books mentioned raising spending somewhere in there. Just sayin’…

  44. Gravatar of Gerard MacDonell Gerard MacDonell
    4. October 2011 at 10:47

    It seems to me that the real debate here is whether the Fed’s ability to deliver sufficient aggregate is actually constrained by the zero bound and the political/prudential limits on its balance sheet expansion. I believe the Fed is so constrained and that this is one reason that Bernanke — contra your claim — implied in testimony today that the RMB peg is unhelpful. It is a debatable point, but it is not resolved by a selective reading of what Bernanke said in the past. You would have to argue the point. Perhaps you have elsewhere.

  45. Gravatar of JY JY
    4. October 2011 at 10:56

    Good post. I don’t understand why people are not bringing up the savings angle. It is also not just that China is “over” saving, but that the US has low public and private savings.

  46. Gravatar of Protectionism is still evil « The Market Monetarist Protectionism is still evil « The Market Monetarist
    4. October 2011 at 11:42

    [...] Sumner also has a comment on Paul Krugman’s China piece. Share this:TwitterFacebookLike this:LikeBe the first to like this [...]

  47. Gravatar of Kevin Kevin
    4. October 2011 at 12:38

    I find this statement glib and likely dramatically inaccurate: “Chinese workers are several orders of magnitude poorer than US workers.” By the usual definitions of ‘several’ and ‘orders of magnitude,’ Chinese workers should be one thousand to ten thousand times poorer than their American counterparts. Are they really working for the equivalent of $5 to $50/year?

    I’m no economist, just a guy trying to learn about the larger forces affecting my world, but statements like this seem designed to obscure rather than illuminate.

  48. Gravatar of johnleemk johnleemk
    4. October 2011 at 13:38

    Kevin,

    Of course if you take it literally that statement is false. But even in PPP terms the mean Chinese income is about 15% that of the mean American income. Since the bulk of Chinese wealth and income is likely concentrated in an elite few (Shanghai and Shenzhen are very rich, but Xinjiang and many other regions are still very poor), it’s no exaggeration to say millions of Chinese are living on $5,000 dollars (whether at nominal exchange rates or PPP) a year or less. A difference of about 10 times is not literally “several orders of magnitude,” but either way it is really difficult to justify on moral grounds an attack on the livelihoods of millions for the benefit of a smaller population that earns 10 times them.

  49. Gravatar of Kevin Kevin
    4. October 2011 at 13:56

    If the arguments aren’t intended to be taken literally, then why make them? Why create a straw man with references to what should be fairly hard numbers? No matter how you slice it, the statement I quoted is wildly inaccurate and completely misleading.

    From the statistics I’ve been able to find, average Chinese worker income isn’t even a single order of magnitude less than average American worker income, and I think one could argue that when household debt is factored in, the disparity between American worker’s wealth and Chinese worker’s wealth is even less dramatic than that.

    Political discussions in the US have devolved into dishonest rants full of hysterical exaggerations and outright misrepresentations of the opposing point of view. I hate to see even a whiff of that leaking in to what should be honest and thoughtful intellectual debate. Maybe Krugman deserves it, because he can get pretty snarky, but I think both the snark and the misrepresentations discredit the underlying arguments.

    And by the way, who made an immoral attack on the livelihoods of millions of people? Isn’t that a little over the top?

  50. Gravatar of johnleemk johnleemk
    4. October 2011 at 14:10

    In the first place I don’t know why you assume a writer should literally mean “several orders of magnitude” when he writes the phrase — it’s a common phrase to denote “the numerical gap is so huge, it’s insane”. I don’t recall the last time I saw someone use the phrase and actually mean “a few thousand times”, outside of a scientific/mathematical context. This is a blog, not an academic journal.

    I don’t normally accuse people of this but you’re really getting your panties in a twist over nothing. You’re essentially demanding totally literal wording and a footnote for every mention of something empirical. If that’s what you’re looking for, go pick up a textbook.

    P.S. When Krugman says the US should prioritise its national interest over the greater good in trade with China, I don’t see how he could possibly not mean “It’s good for Americans to become wealthier at the expense of poor people who aren’t Americans.” Not when he is a Nobel Prize-winning trade theorist.

  51. Gravatar of Kevin Kevin
    4. October 2011 at 14:57

    John, I assume when an educated, thoughtful person says ‘literally’ they mean ‘literally,’ even though many ignorant people use that word to mean ‘very.’ And I assume that when an economist, using lots of genuine statistical data elsewhere, says ‘several orders of magnitude,’ that he intends people to believe that statistic also.

    Imagine that sentence your way: “The numerical gap between the wealth of Chinese workers and US workers is so huge, it’s insane.” Not very convincing, especially since, while it’s a large gap, it’s not insane (i.e., unimaginable) and it’s closing rapidly. Imagine if the rest of this piece were just as vague and hyperbolic.

    Others have pointed out inaccuracies in this piece regarding tax rates and so on. These things directly affect the argument being made, and are worth correcting.

    I know this isn’t an academic journal — no politician or policy wonk or CFO or journalist is likely to read most of what’s published in academic journals, so this blog (and others like it) are probably more influential than any journal. I have no problem with that. I think it’s great that smart, politically powerful economists are mixing it up on-line, and I enjoy reading along and learning. I’m far from your straw man who is “demanding totally literal wording and a footnote for every mention of something empirical.” I’m asking for intellectual honesty in an intellectual debate. Otherwise, I have to assume that there’s just as much hand-waving and this-means-what-I-want-it-to-mean arguing here as I get from the grand-standing political hacks.

  52. Gravatar of Scott Sumner Scott Sumner
    4. October 2011 at 15:48

    K, Commitment has never been a problem for central banks. No fiat money central bank has ever tried to inflate and failed. The NK models you refer to are based on a misunderstanding of the Japanese situation, which led to a model (expectations traps) with no real world counterpart.

    We all know the Perry administration will be screaming for easy money from the moment he’s elected, so let’s not even go there.

    But there’s a bigger flaw with your entire argument. You are discussing the specific aspects of our politics that prevent us from stimulating. But that has no bearing on whether China is morally to blame for our situation. If Krugman was dictator of monetary and fiscal policy we’d stimulate. We can’t blame China if we are too stupid to do that.

    And finally, I want to let China off the hook. I want them to do well. It’s much more important that they do well than it is that we do well.

    RebelEconomist, That’s exactly right. All the East Asian countries are relatively high savers. There is no guarantee at all that China wouldn’t run a large surplus under complete laissez-faire. I should have pointed that out–I did in earlier posts.

    Our best counter-policy is too save more ourselves, which we should do for all sorts of reasons.

    JW, I assume he’s well intentioned.

    Kevin, That’s right.

    John Thacker, I HEREBY LOUDLY PRAISE THE TEA PARTY SENATORS FOR THEIR BRAVE CHINA VOTE. AND WHILE I’M AT IT I LOUDLY PRAISE PERRY FOR HIS COMPASSIONATE STANCE ON EDUCATING ILLEGAL CHILDREN. (not being sarcastic, I mean it.)

    mbk, Interesting, my source on the internet (I think Wikipedia) was wrong. I wonder why?

    SRK, Oh come on, China’s just as resource constrained as we are and is growing at 10% in recent years.

    Doc Merlin, No we don’t, it’s averaged 1% since 2008, and is expected to average well under 2% for many years to come.

    Charlie, Most people believe China is currently slowing. If you are asking about 1998, there is all sorts of data like electricity consumption that confirm the slowdown.

    Rayson, Thanks for clearing that up–how about other investments?

    Meg, What kind of spending?

    Gerard, Bernanke continues to insist that the Fed has plenty of ammo, plenty of ability to inflate. His view isn’t really even in dispute–it’s public knowledge.

    Did Bernanke advocate tariffs on Chinese goods? I doubt it. BTW, I think a stronger yuan might be in China’s interest.

    JY, Exactly right.

    Kevin, I should have just said much poorer. Recently they made only about 25 cents an hour, which is orders of magnitude poorer, but wages have recently risen so it’s probably just an order of magnitude poorer today. I stand corrected.

  53. Gravatar of mbk mbk
    4. October 2011 at 16:45

    Scott,

    “mbk, Interesting, my source on the internet (I think Wikipedia) was wrong. I wonder why?”

    For what it’s worth German language Wikipedia is quite comprehensive on it, including references to laws passed, revised, etc. That’s where I double checked ;-)

  54. Gravatar of K K
    4. October 2011 at 19:27

    Scott: “No fiat money central bank has ever tried to inflate and failed.”

    Hard to think of relevant examples of escapes from liquidity traps that don’t effectively involve fiscal policy. The separation of monetary and fiscal powers is a very recent phenomenon in government.

    “The NK models you refer to are based on a misunderstanding of the Japanese situation, which led to a model (expectations traps) with no real world counterpart.”

    I find them compelling. All models miss stuff. I think these capture essential dynamics.

    “But that has no bearing on whether China is morally to blame for our situation. If Krugman was dictator of monetary and fiscal policy we’d stimulate. We can’t blame China if we are too stupid to do that.”

    There’s a deadweight loss from a disequilibrium exchange rate. Stimulus cant rectify *that*. And it robs exporters to pay importers. In principle, we could restore the efficient equilibrium (*and* extract a huge tax from China) by imposing a tariff and paying the proceeds as an export subsidy. But I agree that the morally reprehensible part is not the impact on us. If anything, it’s the repression of Chinese wages.

    “And finally, I want to let China off the hook. I want them to do well. It’s much more important that they do well than it is that we do well.”

    Hallelujah!

  55. Gravatar of K K
    4. October 2011 at 19:57

    johnleemk:

    Krugman: “True, since the economy is demand- rather than supply-constrained even wasteful spending is better than none. But there is a government fiscal constraint, even if Japan has probably been too ready to use it as an excuse. And anyway, is it really true that it is impossible to use the economy’s resources to produce things people actually want?”

    You forgot to quote the boldy part! That was very, very naughty! That entirely changes the weight the author gives to fiscal policy. He’s saying they should have done *even more* fiscal policy. And the part about producing what people want is a reference to *good* rather than bad fiscal policy. It’s clear you’ve got an axe to grind, and are willing to misrepresent the facts to achieve that. I don’t have the time.

  56. Gravatar of TallDave TallDave
    5. October 2011 at 05:39

    and our safety net seems almost Nordic in comparison to the Chinese safety net

    I’ve been wondering, how does say, SS/Medi compare to the Nordic model on an absolute PPP per recipient basis? I suspect ours may actually be more generous for those who get it.

    Of course, it should go without saying we’re much closer to the Nordic countries than we are the Chinese.

  57. Gravatar of Charlie Charlie
    5. October 2011 at 08:21

    “Charlie, Most people believe China is currently slowing. If you are asking about 1998, there is all sorts of data like electricity consumption that confirm the slowdown.”

    Yes, I was talking about today. I also have the impression that China is “slowing,” though I’m not sure if you mean real growth slow down or nominal. It’s just I had the opposite impression that China’s NGDP was growing too fast, so a nominal GDP slow down could be a more optimal growth path. And if NGDP were growing at trend and the slow down is real, well, it’s china, right, there’s lots of explanations for real growth slow downs.

    I just assumed China would eventually have to let their currency appreciate, because their NGDP was growing too fast. Just not sure that is wrong.

  58. Gravatar of Scott Sumner Scott Sumner
    5. October 2011 at 18:18

    K, The very rapid inflation and NGDP growth of 1933-34 was produced by monetary stimulus, not fiscal stimulus.

    No modern country (post 1960) has ever escaped from a liquidity trap. (Of course I don’t believe in liquidity traps, I’m just using the term others use.) As far as I know no modern country in a liquidity trap has ever tried to create 3% inflation. Thus no country has tried and failed.

    You said:

    “I find them compelling.”

    As an explanation of what? Certainly not Japan.

    K, You said;

    “There’s a deadweight loss from a disequilibrium exchange rate.”

    I have no idea what you mean by disequilibrium exchange rate. Is there a deadweight loss if a private Chinese citizen buys a US bond? How about if the government buys a US bond? Why does one hurt the US, but not the other? They both have the same effect on the equilibrium exchange rate.

    I think you need to review your trade theory. A US tariff is only efficient to offset a Chinese subsidy. And an undervalued yuan is nothing like a Chinese subsidy. A Chinese trade subsidy would actually increase US exports to China above the optimal level, that’s why a US tariff would be optimal in that case.

    TallDave, Our medicare/medicaid benefits are probably by far the most generous in the world in dollar terms. But I don’t know about quantity terms. Even there, they are probably pretty generous. I once went to the doctor in London, and you immediately notice that they spend far less on health care. I was very sick, and the doc said take some aspirin and sent me home. In the US I would have been put on antibiotics. It took me weeks to recover.

    Charlie, Those are all fair points. If the world recession scare is wrong, then you will have been right. I still don’t have a good sense about the risk or world recession–forecasting is not my thing.

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