China’s stupendous consumption boom

My first visit to China occurred in 1994.  Here’s what I recall:

1.  Beijing was a very poor, drab, gray city.  I recall reading that very few people owned a phone.  The upper middle class (college professors) lived in slums.  Everyone rode bicycles.  Not bicycles like ours, but old rickety bikes.  Home appliances were rare.  Drab clothes.  People were thin, because there was little rich food to eat (like meat or pizza.)

I’ve been back 5 times, most recently in 2009.  I’ve traveled all over China.  Here’s my current impression:

2.  The cities are far more colorful, with many sophisticated stores, restaurants, nightclubs, etc.  The middle class lives in modern apartments.  Most people have telephones (at least in the cities), often cell phones.  Lots of people have home appliances.  Much nicer clothes.  The streets are now clogged with cars.  I read that China’s car sales have now surpassed America.  People aren’t as thin–there are many more rich foods to eat.

Here’s Karl Smith’s impression of Chinese consumption:

People are worked to the bone, but have little to show for it. Their roadways and office complexes are massive, but rice takes up half of the family paycheck. Everyone has a job, but no one can afford new clothes. Kids drop out of school at 14 because being a day laborer pays nearly as much as being a doctor. Besides, they’ll have to save for a decade before they can afford a new car and then work double shifts to pay for the gasoline.

So who’s right?  Maybe we both are.  Maybe China’s big enough for both realities to be correct.  Maybe a country that grows at 10% a year for 30 years can see consumption fall as a percentage of GDP, and still see mind-boggling changes in the LEVEL of consumption.

This post doesn’t really have a point, other than that China’s bigger than any generalization.  Or that any generalization about China will be wrong.  Except this one.

PS.  In this post Karl Smith does a good job explaining why the Krugman critique of China has nothing to do with their exports to America.  Krugman would be just as angry if China didn’t export a single item to the US, but continued to save as much.  That’s the argument I push back against in this blog, not the vulgar protectionism that Ricardo discredited 200 years ago.  Don’t even waste my time with “Chinese imports steal US jobs” arguments.

PPS.  If anyone’s stealing US jobs it’s Fisher, Plosser, Kocherlakota, etc.

HT:  Becky Hargrove


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33 Responses to “China’s stupendous consumption boom”

  1. Gravatar of Tuzanor Tuzanor
    11. November 2011 at 14:58

    If you were to transport poverty advocates from 1910 into the present day, they’d profoundly declare that poverty is dead in the developed world. Yet activists continue the “fight”.

    Your (and Karl’s) China observations are interesting indeed.

  2. Gravatar of Benjamin Cole Benjamin Cole
    11. November 2011 at 15:21

    “PPS. If anyone’s stealing US jobs it’s Fisher, Plosser, Kocherlakota, etc.”

    No, they are not stealing US jobs. They are killing US jobs, by monetary asphyxiation.

    Central bankers motto: “Today Japan, tomorrow the world!

  3. Gravatar of John John
    11. November 2011 at 18:15

    I really hate the hostility to savings. Without savings, everyone would be living off of berries they picked or animals they managed to kill. All capital goods and technological development are possible because of underconsumption. If everyone had been concerned with consuming as much as possible, no one would have saved and had the material wherewithal to create better methods of production. We’re lucky that people before us had common sense and didn’t think like Keynesian economists.

  4. Gravatar of RHD RHD
    11. November 2011 at 18:32

    I’d say both lifestyles are taking place in China. In case you haven’t seen it before, the Asia Society has an interesting video on John Burns’ time in China in the 70s and 80s:
    http://asiasociety.org/video/countries/john-burns-1970s-china-complete
    Long before Burns was covering G.W. Bush’s war in Iraq, he was covering G.H.W. Bush’s stint in Beijing as U.S. Liaison among other things.
    I’ve been in China for over two years now and am constantly surprised by how much credit is still given to Mao and Zhou Enlai for making China “strong.” That was clearly Deng’s work…… Anyway, if you liked Hessler’s Country Driving, check out that video.

  5. Gravatar of kai kai
    11. November 2011 at 18:38

    It’s my first time to post here. As a Chinese, I can say, both are true. but Prof. Scott Sumner’s China is more true than the other one. Can we say NYC represents the US? How about Utah? or the Amish?

  6. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. November 2011 at 18:46

    John,
    I can’t believe I’m doing this but I’m rushing to Keynes’ defense.

    Keynes was very pro-savings. He understood the relationship between savings and investment and he identified investment as the prime driver of aggregate expenditures. He thought allowing an economy to persist below potential output with low investment was a gigantic waste.

    I recommend you read Keynes before you criticize him (or his adherents). He was one of the biggest fans of capitalism of all time.

  7. Gravatar of DW DW
    11. November 2011 at 19:18

    What about the Internet. Did they have the Internet in 1994?

    What!? Isn’t that a big deal?

    TGS!

  8. Gravatar of John John
    11. November 2011 at 19:26

    Mark,

    I have the General Theory sitting behind me on my bookshelf right now. I’ve read that piece of shit cover to cover and came out stupider on the other end. What I think Keynes fails to understand is that you first have to “hoard” money to invest it.

    In any case, I think you need to read him. He is certainly no fan of capitalism or savings (at least not when he wrote the General Theory) and I’d challenge you to find quotes that agree. He compared investing to a beauty contest where you try to guess the girl other people will think is prettiest. He criticized the profit motive and sought a day when profits wouldn’t matter. He favored abolishing interest rates. I could dig through and find all these quotes for you if you want.

    Keynes was a guy who criticized the market economy without bothering to understand it first. Hayek says he never read anything besides the Cambridge economists like Marshall and Pigou. He had no idea of a capital structure with higer order goods or the function interest rates play in coordinating production like the Austrians because he never bothered to read them.

  9. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. November 2011 at 19:40

    John,
    You wrote:
    “He criticized the profit motive and sought a day when profits wouldn’t matter. He favored abolishing interest rates. I could dig through and find all these quotes for you if you want.”

    I’d be happy to review these quotes with you one by one. It might be a good exercise for the both of us.

  10. Gravatar of ssumner ssumner
    11. November 2011 at 20:36

    Tuzanor, The first part of your comment is certainly correct–far more so than most progressives realize. Yet I can’t really object with their zeal for trying to make things still better. Just their methods.

    ben, Yeah, “stealing” implies someone else is getting them. You are right that “killing” is better.

    John. I agree about saving.

    RHD, Thanks for the tip.

    Kai, Thanks for that insight–I agree.

    Mark, But wasn’t he against private saving? Or is that a myth? I’m thinking of the paradox of thrift. Of course all this depends on which time period, Keynes was famously inconsistent.

    DW, There’s no TGS in China!

  11. Gravatar of John John
    11. November 2011 at 20:38

    Mark,

    You got it. Here are a few quotes from chapter 24. I’d suggest rereading that chapter and getting back to me.

    “I see therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work” (376).

    “The owner of capital can obtain interest because capital is scarce…there are no intrinsic reasons for the scarcity of capital” (376). YES THERE ARE!!

    Here’s his take on trade; “[with his full employement recommendations] International trade would cease to be what it is, namely, a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases, which, if successful will merely shift the problem of unemployment to the neighbor which is worsted in the struggle” (382-383). He completely misses out on the mutually beneficial results of trade and the way that policies aimed at promoting exports hurt domestic consumers.

    Gimme another minute to dig up the quote about the evil profit motive.

  12. Gravatar of John John
    11. November 2011 at 20:40

    Scott,

    You been agreeing with me a lot lately, what gives?

  13. Gravatar of John John
    11. November 2011 at 20:52

    Mark,

    I’m cheating and doing a quick search of his quotes. Here’s are the two I was thinking of.

    Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.

    Read more: http://www.brainyquote.com/quotes/authors/j/john_maynard_keynes.html#ixzz1dSmtuLgP

    “When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues.” Keynes in 1931.

    Keynes didn’t see the profit motive as virtuous because he didn’t understand that in a laissez-faire system, a man can only make money by efficiently serving other people. Fundamental misunderstandings like this, so common to liberals, are what make Keynes one of history’s worst hacks. He really set back the economics profession and it has never come close to recovering.

  14. Gravatar of Edward Edward
    11. November 2011 at 20:53

    Here’s the way I look at it. China wishes to fix it’s nominal (and real) exchange rate to help it’s exporters. it does this by raisingthe value of the dollar and lowering the yuan and this means AS A SIDE EFFECT, it’s government engages in massive dollar saving. by the way, a crawling peg is still in effect a fixed currency, with all the drawbacks and hours that Keynes and Friedman documented. if we were to follow your advice, and I think we should, of deflating ngdp to is prerecessionary trend China would raise hell. Think of the response to qe2 and multiply it by a million. And it’s not so much saving that is the problem it’s the mercantilist peg, and artificial policies that distort the free markets natural tendencies, whether in china or in scandinivian country. I’m not opposed to china’s CA surpluses, I’m opposes to the way it goes about getting them, and the reason we should be concerned about china rather than scandinavia is because china is a rising ILLIBERAL superpower, not racism for God’s sake.

  15. Gravatar of Edward Edward
    11. November 2011 at 20:55

    I should have said horrors instead of “hours”

  16. Gravatar of John John
    11. November 2011 at 20:59

    Ben Cole,

    If we didn’t want to end up like Japan, we shouldn’t have bailed out the financial system, spent a bunch of money tearing up and paving roads, implementing a bunch of new regulations while the economy was down, and inflating the monetary base. That was the Japanese recipe and we followed it.

  17. Gravatar of Edward Edward
    11. November 2011 at 21:04

    Sorry about the spelling, it should have said “opposed” instead oppose and reflating instead of deflating

  18. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. November 2011 at 21:26

    Scott wrote:
    “Mark, But wasn’t he against private saving? Or is that a myth? I’m thinking of the paradox of thrift. Of course all this depends on which time period, Keynes was famously inconsistent.”

    He was in favor of balancing public savings against private. As for inconsistancy all great minds have been known to be inconsistant. (None more than your own.)

    John wrote:
    “Mark,

    You got it. Here are a few quotes from chapter 24. I’d suggest rereading that chapter and getting back to me.

    “I see therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work” (376).”

    The end of that quote is:

    “And with the disaapearance of its rentier aspect much else in it besides it will suffer a sea change. It will shall be, morover, a great advantage of the order of events which I am advocating, that the euthanasia of events, which Iam advocating, that is the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution.”

    That quote is probably the most pro-free market quotes ever in the history of economics. He feels there is no need of communist or socialist revolution because the function of the Rentier will be rendered obsolete through the efficiency of the capital markets.

    You also quoted:
    “The owner of capital can obtain interest because capital is scarce…there are no intrinsic reasons for the scarcity of capital” (376).”

    The remainder of that quote is:
    “An intrinsic reason for such scarcity, in the sense of a genuinine scarifice which could only be called forth by the offer of reward in the shape of interest, would not exist, in the long run, except in the event of individual propensity to consume proving to be such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so it will still be possible for communal saving through the agency of the state to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce.”

    I fail to see how this is controversial unless one is opposed to states running fiscal surpluses.

    John wrote:
    “Here’s his take on trade; “[with his full employement recommendations] International trade would cease to be what it is, namely, a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases, which, if successful will merely shift the problem of unemployment to the neighbor which is worsted in the struggle” (382-383). He completely misses out on the mutually beneficial results of trade and the way that policies aimed at promoting exports hurt domestic consumers.”

    But you cut him off before he said “but a willing and unimpeded exchange of goods and services in conditions of mutual advantage.”

    Sounds to me like he mentioned that part.

    So far it sounds like 0 for 3. In baseball we call that an “out.”

  19. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. November 2011 at 21:33

    John,
    I don’t know where your additional quote comes from. I’ll take it as accurate. But I don’t see it as incriminating at all. Keynes saw capital as having diminishing marginal returns as all good economists do.

  20. Gravatar of John John
    11. November 2011 at 21:59

    Mark,

    It seems like you missed the points Keynes was trying to make and, if you didn’t, you certainly missed my criticisms of his points.

    My primary criticism was the idea that the government could abolish the scarcity of capital. Fiscal surpluses have nothing to do with it. I shouldn’t even have to say why that is wrong. Printing money is different than creating capital by saving. The amount of projects the economy can undertake depends on the availability of capital goods. The creation of capital goods depends on the amount of real savings. It would be physically impossible to “grow capital to the point where it ceases to be scarce” because there is always some type of scarcity out there. No economic system can abolish scarcity.

    About the rentier. A person who earns income on rents is not a functionless investor. That’s absurd and frankly I don’t see any connection to the efficiency of capital markets. All investors in a market system have a role in efficiently guiding resources that is every bit as important as the guy who works in a factory or whatever. People who earn income off of rents aren’t any different.

    Third, Keynes is making a basic mercantilist fallacy by saying that “forcing sales on foreign markets and restricting purchases, which, if successful will merely shift the problem of unemployment to the neighbor which is worsted in the struggle.” There is no reason for a country to be hurt by a neighbor trying to run a trade surplus. They get artificially cheap goods and workers can shift their labor into different industries. Overall, the “losing” country gets to consume a lot more while the “winning” country gets to consume less. Keynes can’t seem to get his mind around that, come to think of it, neither can Krugman.

    I don’t like how you say 0 for 3. That’s dumb and you totally ignored my criticisms of what he was saying and then claimed that Keynes’s comments were pro-market in ways that seemed strange or irrelevant to me. It didn’t quite seem like a huge rhetorical victory even if I saw this as some kind of weird pissing contest.

  21. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. November 2011 at 22:27

    John you wrote:

    “Mark,

    It seems like you missed the points Keynes was trying to make and, if you didn’t, you certainly missed my criticisms of his points.

    My primary criticism was the idea that the government could abolish the scarcity of capital. Fiscal surpluses have nothing to do with it. I shouldn’t even have to say why that is wrong. Printing money is different than creating capital by saving. The amount of projects the economy can undertake depends on the availability of capital goods. The creation of capital goods depends on the amount of real savings. It would be physically impossible to “grow capital to the point where it ceases to be scarce” because there is always some type of scarcity out there. No economic system can abolish scarcity.”

    Keynes is not an idiot John. He knows full well that the there would not even be a field of economics without the whole notion of scarcity. He’s clearly referring to the relative scarcity of capital. And one can reduce the relative earnings to any factor by merely increasing its relative abundance.

    You wrote:
    “About the rentier. A person who earns income on rents is not a functionless investor. That’s absurd and frankly I don’t see any connection to the efficiency of capital markets. All investors in a market system have a role in efficiently guiding resources that is every bit as important as the guy who works in a factory or whatever. People who earn income off of rents aren’t any different.”

    Don’t be silly John. The value of any good or service is relative to the efficiency of its market. If you reduce the value of arbitrage you reduce the beyond normal economic profit to that good or service in trade. A purely efficient market will of course render rentiers with no more than a normal economic profit (i.e. equal to their opportunity costs). This is obviously what Keynes was referring to.

    You wrote:
    “Third, Keynes is making a basic mercantilist fallacy by saying that “forcing sales on foreign markets and restricting purchases, which, if successful will merely shift the problem of unemployment to the neighbor which is worsted in the struggle.” There is no reason for a country to be hurt by a neighbor trying to run a trade surplus. They get artificially cheap goods and workers can shift their labor into different industries. Overall, the “losing” country gets to consume a lot more while the “winning” country gets to consume less. Keynes can’t seem to get his mind around that, come to think of it, neither can Krugman.”

    The key condition is stated near that passage, ie “the prevailing international system.” Keynes was speaking in the context of a fixed exchange rate system. Under such a system it is entirely possible for international trade to be win or lose from an aggregate demand perspective. Krugman’s argument is that in a liquidity trap we are thrust into very similar conditions from the inability to change exchange rates due to the zero lower bound in interest rates.

    I don’t agree with Krugman on that point. But at least I disagree with Krugman for the correct reason.

    You wrote:
    “I don’t like how you say 0 for 3. That’s dumb and you totally ignored my criticisms of what he was saying and then claimed that Keynes’s comments were pro-market in ways that seemed strange or irrelevant to me. It didn’t quite seem like a huge rhetorical victory even if I saw this as some kind of weird pissing contest.”

    Sorry John. I didn’t mean to be offensive. But often quotes taken out of context, misquotes or partial quotes will cause me to say things like that.

  22. Gravatar of John John
    11. November 2011 at 23:57

    Mark

    First off, I want to say that I was trying to present the quotes fairly but I hate holding the book open to type quotes so I was concise. I tried my best to get his meaning across in a succinct way. I didn’t and still don’t think that what you added on to the quotes I picked changed the meaning of Keynes’s quotes I was trying to attack.

    About the scarcity thing, Keynes was a fan of Silvio Gessel. Gessel proposed making money freely available. I’ll find a quotation praising Gessel if you want. This is what Keynes is talking about when he is talking about eliminating the scarcity of capital. I think you’re misreading him here and he really is just an idiot.

    With regards to international trade, I’m not sure whether Keynes was talking about the gold standard he hated so much or a fiat system since most major governments had gone off of gold by 1936 when he wrote the book. Either way, the real gold standard died with WWI and was a great period of international trade and development.

    By fixed exchange rate system, I assume you’re talking about gold. I don’t really think that matters in your argument though because trade is always win or lose from a strict aggregate demand perspective in which Y= C+I+G+X-M. The country that raises exports minus imports wins. However, if you look beyond that simple equation, trade can grow an economy in ways that aren’t captured by those numbers. Specifically, trade can indirectly cause C,I, and G to go up by stimulating a larger and more productive economy overall.

    Imagine an island country that imports all its food and where exports equal imports. If all trade stopped, from a simple accounting perspective, an economist might say AD would be unaffected. In the real world, everyone on that island would starve to death and there would be no economy to speak of. Krugman made this same mistake and Bob Murphy took him down on it. It’s a quick and entertaining read.

    http://mises.org/daily/3945/Krugman-Falls-into-the-Keynesian-Accounting-Trap

    Again I can find quotations where Keynes praises the mercantilist in the General Theory. He has a section devoted to it in Chapter 24.

    Could you clarify what the correct reason you disagree with Krugman is and how a fixed exchange rate system creates winners and losers from trade in a way a floating exchange system doesn’t?

  23. Gravatar of John John
    12. November 2011 at 00:13

    Mark,

    I should be more clear when I say that Keynes was an idiot in regards to the scarcity of capital. I think that if you asked Keynes what the difference is between crediting someone’s bank account with $100 or having them save $100 , there is nothing in his analysis that leads me to believe that he would be able to explain the differing economic consequences. To repeat, it appears that to him there is no difference between producing, underconsuming, and investing your income compared with creating money out of thin air and investing it.

    There is a simple explanation for why he seems to make such a crazy analysis. It’s because he was trying to influence public opinion in the direction of greater fiscal and monetary stimulus. This is what he told Hayek. He also told Hayek that if inflation became a problem, he’d turn public opinion around with another book. The guy didn’t really believe in economic laws, he focused on simple expediency.

    His supporters might say that he doesn’t see the difference between saving and printing money because of liquidity trap rules. He called it the general theory to extend economic analysis to depressed economies.

    In any case, his analysis in the General Theory really doesn’t make any distinction between creating money out of thin air to invest or saving to invest. That’s why I think his views and the views of his followers are so insidious and it’s the point I was trying to make in the original comment of this post.

  24. Gravatar of dtoh dtoh
    12. November 2011 at 10:34

    Scott,
    It seems to me the problem is that individual firms and employees are being hurt by “unfair” trade practices. Clearly at the micro-level there are some players that are made worse off by Chinese exports, and if these exports are realized through illegal/unfair means, then the firms and the workers have a reason to complain.

    Also to your point, China is not unique. If my recollection serves, a large part of “Trend Acceleration in the Twentieth Century” (which was kind of the bible on Japanese economic growth) is devoted to the dualistic aspects of the Japanese economy… in particular I think it highlighted both regional differences as well as differences in living standards between employees working for big firms and those who were employed in smaller or more traditional industries.

  25. Gravatar of ssumner ssumner
    12. November 2011 at 11:42

    John, You said;

    “You been agreeing with me a lot lately, what gives?”

    You are being converted.

    Edward, I and afraid that your economic analysis is wrong. Saving is the issue, and is indeed the only way China can control the real exchange rate. And China doens’t care if we have 5% NGDP growth–last time we did that (2005-07) they simply raised the value of the yuan by 20%. They can easily do so again–it’s no big deal.

    As far as being a rising illiberal power–that gets things exactly backward. China today is much more similar to America, than it is to the China of 1979. China is rising precisely because it’s rapidly getting more liberal. If it wants to keep rising it will have to keep getting more liberal. That’s how the world works.

    It’s also one of the least militaristic of all great powers throughout history.

    Mark, There is no one more inconsistent than me? NGDP, NGDP, NGDP, NGDP, NGDP, NGDP, NGDP, NGDP . . .

    dtoh, You said;

    “It seems to me the problem is that individual firms and employees are being hurt by “unfair” trade practices. Clearly at the micro-level there are some players that are made worse off by Chinese exports, and if these exports are realized through illegal/unfair means, then the firms and the workers have a reason to complain.”

    No they don’t have a reason to complain, We buy things from others because they are cheaper. That’s the only reason international trade is a good thing. It makes no difference we things are cheaper because they have a comparative advantage or because of subsidy. If we benefit, then we benefit. Yes individuals with the economy are hurt by imports, whether they are fair of unfair.

    BTW, “unfairness” has little to do with the Chinese export onslaught. Even if they had a Hong Kong-style laissez-faire economy they’d be the world’s biggest exporter (indeed even bigger) and have huge trade surpluses. They have a comparative advantage in a wide range of manufactured goods.

    The role of exports in Japan is greatly overstated. Planning had little to do with export growth, nor did a manipulated exchange rate. They raised it from 350/$ to 75/$, and the surpluses continue. Exports are a relatively low share of the Japanese economy, compared to other developed countries.

    Everyone, Can someone show me a news article from the last 40 years complaining that the Greek economy is more closed to the US than Hong Kong?

    Now I’ll give you and easier task; find an article complaining about Korea’s mercantilism, written when Korea was running persistent CA deficits (70s and 80s). That should be easy.

    We see what we want to see.

  26. Gravatar of dtoh dtoh
    12. November 2011 at 16:35

    Scott,
    I agree that there is a huge racial bias against China, and Japan before it, and Asia, and things Asian, and it’s not just limited to trade (but don’t get me started on college admissions).

    My views are the subject of trade however are not influenced by this bias. You know a little bit about my background and if anything I’m an Asian apologist.

    Having lived in Japan and seen the damage and stagnation wrought by rigidities in regulation, the labor market, etc, I am in general a huge opponent to trade (and other) barriers which restrict the free transaction of commerce.

    That being said, if the process whereby new firms and new workers replace other firms and workers takes place very rapidly, then there can be some very wrenching and painful dislocations for some firms and some workers, or even whole communities. One has to ask does the benefit of cheaper plastic widgets at Walmart, outweigh the pain of individuals whose lives and vocations have been literally destroyed. Maybe arithmetically, the aggregate price reduction in widgets is greater than the loss in wages, but is this a trade individuals or society would make if the person losing their job was a family member friend or neighbor?

    In particular, I think this is a reasonable question to be asked when that dislocation is very rapid and caused by government policies or the actions of firms which are clearly and blatantly in violation of law and/or international treaties. (And I”m not disputing your claim that most trade is a result of simple comparative advantage… but there is more than just comparative advantage.)

    I agree that planning and the exchange rate did not play a large role but hugely subsidized capital and illegal activities (e.g. dumping) did have a lot to do with the rapid rise in exports.

  27. Gravatar of Lorenzo from Oz Lorenzo from Oz
    12. November 2011 at 18:01

    Everything old is new again. Why the Fed and ECB see what they can do about reprising the early 1930s, the acrimony over China is just recycling exactly the same complaints about Japan in the 1980s.

    Downunder we generally just point and laugh, as most of us did over the Japan-bashing. Those nice Chinese are buying the stuff we dig up just like those nice Japanese did (and still do). And we wish our American friends would just calm down and get with the program.

    The Japanese famously paid far too much for overpriced American (and Australian) assets before their bubble economy collapsed. In total, they lost the equivalent of one year’s UK GDP on their foreign investments. While many Americans were whining, the US ended up benefiting from the largest voluntary transfer of wealth in history.

    A bubble economy in China? The Chinese paying far too much for overprice American assets? That couldn’t happen, could it? Why would systematically pushing up the price of your currency lead to that? …

  28. Gravatar of Lorenzo from Oz Lorenzo from Oz
    12. November 2011 at 18:02

    Everything old is new again. Why the Fed and ECB see what they can do about reprising the early 1930s, the acrimony over China is just recycling exactly the same complaints about Japan in the 1980s.

    Downunder we generally just point and laugh, as most of us did over the Japan-bashing. Those nice Chinese are buying the stuff we dig up just like those nice Japanese did (and still do). And we wish our American friends would just calm down and get with the program.

    The Japanese famously paid far too much for overpriced American (and Australian) assets before their bubble economy collapsed. In total, they lost the equivalent of one year’s UK GDP on their foreign investments. While many Americans were whining, the US ended up benefiting from the largest voluntary transfer of wealth in history.

    A bubble economy in China? The Chinese paying far too much for overprice American assets? That couldn’t happen, could it? Why would systematically pushing down the price of your currency lead to that? …

  29. Gravatar of ssumner ssumner
    13. November 2011 at 10:27

    dtoh, You said;

    “One has to ask does the benefit of cheaper plastic widgets at Walmart, outweigh the pain of individuals whose lives and vocations have been literally destroyed. Maybe arithmetically, the aggregate price reduction in widgets is greater than the loss in wages, but is this a trade individuals or society would make if the person losing their job was a family member friend or neighbor?”

    I don’t think that’s the right question, as people tend to wrongly assume that trade barriers stop these wrenching changes from occurring. But in fact they still occur, but in other areas. If we stop imports, that also stops our exports, which causes wrenching changes in export towns.

    A better question is whether we’d want to stop technological change in America. Suppose the coal, steel and auto industries can produce the same amount as 40 years ago, with only 1/3 third the labor. Should we have not done this technical improvement? I don’t know anyone who says “yes.” But it’s the identical argument to trade barriers.

    And finally, if a flood of cheap Asian economics professors stole my job, I wouldn’t be happy, but I still think free immigration of Asian economics professors is the right public policy.

    The college admission quota is an interesting example. Does anyone know if it also applies to Jewish students? Also, look at how Asians are portrayed in Hollywood films.

    Lorenzo, Great points, and of course Australia’s an example that persistent CA deficits can coexist with a booming economy.

  30. Gravatar of dtoh dtoh
    13. November 2011 at 15:40

    Scott,
    1. Strictly speaking, a reduction in imports does not have to be offset in the current account. It could simply result in less foreign investment and have no impact on exports.

    2. Technological change is not a different question. It is exactly the same question. Specifically, does the loss of wages fully account for the economic cost of the change. Pretty clearly not when you have very rapid and dramatic changes which deprive lots of people of any meaningful vocation for the rest of their lives. The harder aspect of this question, is whether you want to try to temper the change (be it technological or trade) in order to try to achieve a more optimal economic outcome. In my opinion, generally not because it is a very slippery slope. However, when there are clear cases of dumping, government subsidies, etc., then I would certainly favor more effective U.S. government action to stop this kind of activity.

  31. Gravatar of ssumner ssumner
    13. November 2011 at 19:32

    dtoh, You said;

    “1. Strictly speaking, a reduction in imports does not have to be offset in the current account. It could simply result in less foreign investment and have no impact on exports.”

    Yes, but generally that’s not how it works, and it would be dangerous for protectionists to assume otherwise. Protectionists need to decide not whether they are against imports, but rather whether they are against trade.

    You said;

    “In my opinion, generally not because it is a very slippery slope. However, when there are clear cases of dumping, government subsidies, etc., then I would certainly favor more effective U.S. government action to stop this kind of activity.”

    The Europeans tried to slow change back in the 1970s and 1980s, and ended up with worse unemployment than we did. So I agree about the slippery slope. But I don’t follow your last comment. Why would it matter why imports are cheap? Subsidies are a gift to the US. If we are going to stop imports, it seems to me it should be on some other basis from whether they are subsidized. Indeed I’d be more inclined to stop imports that are not subsidized, as the gain to the US is probably smaller.

    Reductio ad absurdum: I recall reading that we once blocked an import of a Japanese supercomputer on dumping grounds, because the price was zero (it was a gift.) Not sure if it’s a true story.

  32. Gravatar of dtoh dtoh
    13. November 2011 at 21:18

    Scott,
    So even if the gift is free, if it ends up putting people permanently out of work it is certainly possible that the cost would outweigh the benefit and if you want to optimize utility you would be better off rejecting the gift regardless of whether it was legal or illegal. In the case of these gifts with negative utility, the distinction I was trying to make is that the slippery slope makes it much more difficult to regulate legal trade. On the other hand it does seem possible in some cases to more vigorously enforce the rules against illegal trade (thereby increasing utility if the utility of the gift is negative) without getting on the slippery slope.

    A good example of a gift with negative utility is if an Asian (or Greek or Martian) University set up shop in the U.S., undercut prices, put competing universities (and Economics professors) permanently out of work, and then raised prices and restricted the course offerings to Keynesian economics.

    I am by no means a protectionist (quite the contrary), but I do think if the pace of change of trade or technology is very rapid there are clear cases where you have negative utility, and it is at least worth thinking about whether these can be better optimized.

  33. Gravatar of Scott Sumner Scott Sumner
    14. November 2011 at 18:12

    dtoh, The predatory pricing you describe exists in economics textbooks, but does not exist in the real world. It has been completely discredited by empirical economic studies.

    In addition, we will have unemployment whether we trade or not. The US unemployment rate will not be lower if we become protectionist.

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