What will economists 40 years from now think of us?

When you read this you’ll see why I couldn’t resist falling off the wagon.  Paul Krugman has again called for the US to pressure the Chinese to revalue the yuan.  The reasoning is even more puzzling than usual:

Some still argue that we must reason gently with China, not confront it. But we’ve been reasoning with China for years, as its surplus ballooned, and gotten nowhere: on Sunday Wen Jiabao, the Chinese prime minister, declared “” absurdly “” that his nation’s currency is not undervalued. (The Peterson Institute for International Economics estimates that the renminbi is undervalued by between 20 and 40 percent.) And Mr. Wen accused other nations of doing what China actually does, seeking to weaken their currencies “just for the purposes of increasing their own exports.”

As you may recall, back around 2005 a number of Congressman were insisting that the Chinese revalue the yuan by 27%.  In fact, they did revalue their currency by 22% over the next 3 years.  But now we are told they need to do another 20% to 40%.  And people wonder why the Chinese are so frustrated with the West.  Does this game ring any bells?  I seem to recall that back around 1970 the US government kept insisting that the Japanese trade surplus was caused by an undervalued yen.  Then the yen was revalued 20%, but the “problem” continued.  Then another 20%, then another 20%, then another 20%, then another 20%.  The yen has now gone from 350 to 90 to the dollar.  My math isn’t very good, but that sure seems like a lot of 20% revaluations.  And the Japanese still run a current account surplus that is more than half the size of China’s surplus, despite having less than 1/10th China’s population.  I think it’s fair to say that international economists have become increasingly skeptical of the notion that simply by manipulating nominal exchange rates you can eliminate current account imbalances that represent deep-seated disparities of saving and investing.  But I guess hope springs eternal.  Maybe this time it will finally work.

Krugman also repeats his argument that US monetary policy is paralyzed, and this time he rather bizarrely extends the argument to most of the major economies in the world:

Most of the world’s large economies are stuck in a liquidity trap “” deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset.

Does Krugman really think the US is “stuck” in a liquidity trap?  Obviously not, otherwise why would he have started criticizing the Fed for what he claims is an excessively restrictive monetary policy?  No his policy views depend on which audience he is addressing.  When talking to Bernanke, he suggests the Fed do much more, when talking to the Chinese he pleads that the Fed has done all it can.  I can just see the frustration in Chinese central bankers reading this NYT article: “Those Americans must think we are a bunch of fools.  Don’t they know we are Western-educated, and can read English newspapers?  Do they really think that when they say one thing to their own Fed, and something completely different to us, that we won’t understand?”

But this time it’s even worse, as Krugman now claims that “Most of the world’s large economies are stuck in a liquidity trap.”  At least with the US you can sort of make the liquidity trap argument.  And perhaps with Japan, if you ignore that fact that the BOJ recently rejected their finance minister’s request for a more expansionary monetary policy.  But who else?  I don’t think there is anyone who believes China, India, Brazil or Russia are stuck in liquidity traps.  Australia and South Korea have been raising rates.   Nor is there anyone claiming Germany, France, or Italy are stuck in liquidity traps.   The ECB raised its policy rate to 4.25% in July 2008, and then cut it to 3.75% when the global economy collapsed in October 2008.  Yes, rates have since gradually come down much further, but at no time in 2008-09 did it look like the zero bound was constraining the ultra-conservative ECB.  Indeed the ECB has frequently emphasized that it doesn’t want to cut rates further and that it is focused on keeping inflation below 2%.  So even if you wrongly believe that countries with zero percent interest rates are “stuck” with tight money, that condition only applies to a few countries.

So what does Krugman suggest we do?

In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action “” except that this time the surcharge would have to be much larger, say 25 percent.

This comment surprised me.  I had thought that nobody still believed the dollar was overvalued in 1971. I do realize that back in 1971 many of Krugman’s fellow liberals believed that the US economy was suffering from an “overvalued” dollar, but I also thought that this view had been pretty well discredited by Mundell and others.  Keep in mind that in 1971 we had 6% unemployment and 4% inflation.  Does that seem like an economy that needs to devalue its currency?  In any case, Krugman got his way; the Europeans gave in and revalued their currencies.  And I suppose you could say the “problem” was solved.  By 1979 I don’t recall too many people worrying about the dollar being overvalued.  Although come to think of it I don’t recall that pesky Japanese current account surplus going away either.  There must be a lot of distinguished European economists who like reading Paul Krugman.  Imagine their reaction this morning upon reading where he appears to praise Nixon’s crude attempt to force the Europeans to revalue their currencies in 1971 in order to solve America’s 6% unemployment problem.

Think about the following questions:  How many economists today honestly believe that America’s economic problems in 1971 were due to the European currencies being 10% undervalued?  How many economists today honestly think that if the Chinese give us another 25% revaluation that this will significantly improve America’s economy?  And how many of you think that 40 years from now, when we look back on the American economy in 2010, that most economists agree with Krugman’s argument that a significant part of our economic problems were due to an overvalued yuan?  In contrast, how many people think that 40 years from now most economists will agree with Krugman’s claim that our economic dilemma is due to the stubborn refusal of the Fed to set a higher inflation target?

My claim is that in 40 years most economists will agree with Krugman.  I mean the good Krugman.  The guy who wrote Pop Internationalism.  Not the guy who says we’re “stuck” in a liquidity trap and who ends his NYT editorial with the crude populist slogan “It’s time to take a stand.”

BTW, I notice that Krugman often implies  that those who oppose health care reform and unemployment comp. extensions are just a bunch of cruel, heartless, right-wingers.  Does Krugman know that if his proposed 25% tariff “works,” and does in fact sharply reduce Chinese exports, that millions of extremely poor Chinese workers will lose jobs in exports industries?  Workers who are much worse off than even the bottom 10% of American workers.

One final point.  If we do nothing the Chinese will probably revalue the yuan by about 5% to 10% this year, with vague assurances that further increases will occur as conditions allow.  If we threaten a trade war there will probably be some compromise in the end, and China will revalue the yuan by 5% or 10% this year, with vague assurances that further increases will occur as conditions allow.  But in the second case a lot of bad blood will be stirred up, financial markets will be depressed by uncertainty, and the world recovery might even slow down a little bit.  And that’s the best case from his proposal.  If a trade war actually does occur I shudder to think what the effect would be on world markets, and the world economy.  If you go back another 40 years before Nixon’s threats against the Europeans, there really was a trade war.

Krugman points out that the Treasury must make a decision by April 15th (another reason to dread that date.)  Eighty years ago on April 17th, 1930, the US stock market was up 48% over post-crash lows, on hopes for economic recovery.  But as the Congressional debate over Smoot-Hawley became more acrimonious the market began dropping sharply.  The biggest drop of the year occurred the day after Hoover announced he’d sign the bill.  Then other countries started retaliating.  By mid-June stocks were down more than 25% from mid-April levels, and hopes for a recovery had been dashed.  Let’s not re-enact that fiasco this spring.  Instead let’s do what Krugman and I both agree should be done; let’s have our own Fed solve our own problems (of inadequate AD.)  That would be a win-win-win-win policy.  Good for workers, good for investors, good for foreigners, and good for shrinking our budget deficit.  I wish more Americans would “take a stand” against our own monetary policymakers, not foreigners.

HT:  Marcus

Update:  Marcus just sent me this Ryan Avent post.  Last time I criticized Krugman on China I implied that he sounded like a Buchanan-like xenophobe.   A liberal blogger I respect pointed out that that was unfair.  I suppose he was right, so I held back a bit this time.  But here’s what Avent had to say about Krugman’s post:

The general tone of his column””focused on toughness, insensitive to the internal politics of foreign nations, blind to potential negative outcomes, reckless and impatient””is familiar. It looks like nothing so much as the argumentation deployed by the Bush administration as it rushed to war in Iraq. Mr Krugman was prescient and prudent in fighting back against that misguided policy. He would do well to stop for a moment, take a deep breath, and think again before urging America to “take a stand”, damn the consequences.

Note there is no insinuation of racism, rather Avent points to a misguided overconfidence in America’s ability and right to push other countries around.  I think Avent’s criticism is completely fair.  Read the entire post, it’s much better than mine.  I don’t know whether progressives in America realize just how different our sabre-rattling looks to their fellow progressives who live outside of the “big bully.”

Update#2:  This Ryan Avent post is also very good.


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62 Responses to “What will economists 40 years from now think of us?”

  1. Gravatar of Blackadder Blackadder
    15. March 2010 at 11:11

    I have a suggestion: if you want to blog you should just go ahead and do it. No need to feel guilty or whatever. My only suggestion would be that if you do so put the links and comments in a separate post, rather than attaching them to the beginning of one of your manuscript posts. I know it feels like you’re not blogging if you do it the other way, but you really are, and not breaking the posts up can be confusing.

  2. Gravatar of ssumner ssumner
    15. March 2010 at 11:24

    Blackadder, I understand what you are saying, but until I finish revising my book I DO feel guilty everytime I blog. The reason I don’t put the small items in separate posts is to reduce comments. I think it helps slightly. Once I finish that revision I may take your advice. Which reminds me . . .

  3. Gravatar of azmyth azmyth
    15. March 2010 at 12:02

    If China is indeed undervaluing the renminbi, that policy acts as an export subsidy. In the long run, if the markets are close to competitive, profits in the export industry will be driven down to the level of non-exports and most of the gains from the subsidy will be captured by consumers of Chinese exports. American consumers are among the largest beneficiaries of that policy. The policy is a transitional gains trap that the exporters don’t want to give up because of the short run losses that they would suffer. Krugman knows this – I learned it by reading his textbook!

    The only way to really determine if the renminbi is over or undervalued is to let it float and see which way it moves. Anything else is just trying to centrally plan the price and will ultimately fail to get it right. However, since the beneficiaries of getting it wrong are American consumers, why should we care? If Chinese comparative advantage is based on currency manipulation, the gains from trade to the U.S. are just as real as if they were based on technology or endowments or any of the other standard explainations. It seems like Ricardo’s Difficult Idea eludes even the best trade theorists from time to time.

  4. Gravatar of Jim Glass Jim Glass
    15. March 2010 at 12:08

    It looks like nothing so much as the argumentation deployed by the Bush administration as it rushed to war in Iraq.

    Avent isn’t the only one who’s noticed.

    Daniel Drezner at Foreign Policy: Paul Krugman is to China as neoconservatives were to Iraq. Discuss.

  5. Gravatar of Doc Merlin Doc Merlin
    15. March 2010 at 12:47

    If his “tarriff” works, it will hurt american poor more also, who have been effectively subsidized by China’s low transaction-cost manufacturing-environment.

    Sigh, in the medium run, exchange rates don’t matter at all. What matters is legislative policy, and enforcement policy, and state spending. China was, during most of the last 10 years, a much easier and cheaper place to start and run a manufacturing businesses, so naturally they outcompeted us in that sector.

  6. Gravatar of gaius marius gaius marius
    15. March 2010 at 12:54

    though i don’t blame china for what’s happened, i’m of the opinion that prolonged current/capital account imbalances are in fact at the root of global financial crises such as this one. so i think there are very real costs, and not just to american consumers, of creating a system within which large imbalances are recycled over currency boundaries, facilitating overcapacity problems on the current account surplus side and overleveraging on the capital account surplus side.

    i take the point about the yen’s revaluations, and there are obviously structural issues to work out on both sides thanks to many years of this imbalance existing and fostering specialization and codependence. but i am then compelled to ask what can be done to mitigate capital flow issues? what causes these imbalances if not a mispriced currency peg? or would you make me out wrong in my presumptions?

  7. Gravatar of marcus nunes marcus nunes
    15. March 2010 at 15:07

    Krugman noticed:
    http://krugman.blogs.nytimes.com/2010/03/15/curveball/

  8. Gravatar of The Beginnings of a Trade War? » Ape Man » Blog Archive The Beginnings of a Trade War? » Ape Man » Blog Archive
    15. March 2010 at 16:31

    […] are shaking their heads at the shear stupidity of Krugman’s purposed course of action (a good take down here using Krugman’s own prior arguments). Yet their arguments are all futile. The dangerous thing […]

  9. Gravatar of Ricardo Ricardo
    15. March 2010 at 18:17

    Scott, you seem to assume that a revaluation of the yuan would benefit the bottom 10% of American workers. Is that right? Who are the main consumers of cheap Chinese exports? Wouldn’t a 25% revaluation of the yuan, specially in a recession, hit the poorest Americans the hardest? How many would find work in American industries that compete directly with the Chinese?

  10. Gravatar of StatsGuy StatsGuy
    15. March 2010 at 20:47

    Doc:

    “If his “tarriff” works, it will hurt american poor more also, who have been effectively subsidized by China’s low transaction-cost manufacturing-environment.”

    That’s arguable – the distributional impacts are difficult to predict. It depends on the elasticity of supply for unskilled labor in the US, and the elasticity of demand. If the supply is relatively inelastic, then by shutting off a source of low skilled labor from abroad, the unskilled poor could see a much larger gain in incomes. But don’t listen to me – labor arbitrage has been the rationale neoclassical economists give to justify the widening wage gap in the US between (skilled) rich and (unskilled) poor (at least, until skilled jobs began to be offshored too).

    Regardless of the moral issues (which I know Scott will jump on) it is not a priori obvious (without data) where the distributional/income effects will net out for the unskilled poor. The skilled wealthy (I dare say, most readers of this blog) will probably be worse off. So it’s somewhat self-serving of us to defend the poor by arguing they are better off getting cheap imports than having slightly better paying jobs.

  11. Gravatar of StatsGuy StatsGuy
    15. March 2010 at 20:54

    Just to clarify, I think it’s somewhat incorrect to read Krugman as being inconsistent in his views of whether we are in a liquidity trap. He has fairly explicitly argued that the “impossibility” of Fed action is not an economic issue, but a political issue. You may believe that Krugman should be fighting the political status quo rather than accepting it (though he does fight it sometimes), but he’s been quite clear about what he means.

    BTW, in 40 years, I think economists will be looking back and saying, “how silly we were to think we could control the money supply without even being able to agree what money really is”. The notion, for instance, that monetary policy is separate from banking regulation – in 40 years that will be regarded as archaic.

  12. Gravatar of StatsGuy StatsGuy
    15. March 2010 at 21:02

    Ricardo:

    “Wouldn’t a 25% revaluation of the yuan, specially in a recession, hit the poorest Americans the hardest? How many would find work in American industries that compete directly with the Chinese?”

    Immediately, few, but more as the J-curve takes effect. Even with the relatively modest weakness of the dollar, some companies have begun to “on-shore” jobs, pulling them back into the US. The wage gap does not need to be closed completely – just enough to compensate for supply chain/IP security/property rights stability/currency stability, etc… Surely, a bigger move in the dollar would strengthen this trend (or do you disagree)?

    Functionally, btw, ssumner’s reco (increase domestic savings rate using policy, raise taxes, trim govt spending,and then expand money supply enough to achieve 5% NGDP target) would accomplish much of what Krugman wants – indeed, it would rapidly force China to abandon the peg by devaluing the dollar globally, which would increase the price of raw materials that China imports in order to sell finished goods for devalued dollars. China would face severe internal inflation if it tried to hold the peg at that point, and see squeezed margins for exporters.

    This would achieve Krugman’s goals more effectively than a tariff, without inviting WTO action and such.

  13. Gravatar of Jon Jon
    15. March 2010 at 21:06

    I don’t worry about trade imbalances per se; that isn’t the problem. What I do worry about is wage mismatches. The yuan is undervalued, and the proof is in the labor market.

    … and that’s what is causing all the destruction.

    Many countries run surpluses and don’t cause the trauma that China causes. For instance, German has large surpluses but you’d be hard pressed to claim that German labor is ‘cheap’. Its not, its expensive. As I’ve discussed before, the Chinese manipulate the real-exchange rate not just the nominal-rate–they do so by issuing both currency and bonds. The standard models under which the CB can only manipulate nominal rates is inapplicability based on assuming that the CB only issues currency and buys assets.

    My final, somewhat tangential, observation is that a significant portion of the Chinese surplus is tied directly to their mechanism for implementing monetary policy. The ECB monetizes EU debt; the US Government monetizes US debt. The BoJ monetizes Japanese debt. The Chinese monetize … US debt.

    A significant portion of the trade imbalance goes part-in-parcel with an expansionary monetary policy. China has a growing economy. They are trying to expand their money supply apace. Their trade surplus must expand so long as they continue to back their monetary base with 90% EU and US government debt.

    Back last year there was this shockingly curious thing in the financial press. Two completely independent articles: one on the Chinese CB monetary expansion and the other on the sudden surge in the trade deficit. Barely a link mentioned between the two. Idiocy.

  14. Gravatar of Alex Alex
    15. March 2010 at 21:53

    The argument that 22% devaluation from 2005 to 2008 makes up for a 27% overvaluation going in seems weak. Sort of like someone borrowing $5 for a sandwich, paying you $4 over three years, and calling it even. Add to it that the Chinese economy has been growing at ~10% a year faster than the US, and the 20-40% numbers seem very plausible. And those are the kind of cost differences that companies will close US plants for, and just buy goods abroad, so it doesn’t sound so crazy to me. It may not be THE PROBLEM, but it is a problem.

  15. Gravatar of FT Alphaville » Further reading FT Alphaville » Further reading
    16. March 2010 at 00:02

    […] – Paul Krugman’s protectionism: maximum pwnage. […]

  16. Gravatar of malavel malavel
    16. March 2010 at 02:12

    “Wouldn’t a 25% revaluation of the yuan, specially in a recession, hit the poorest Americans the hardest?”

    Why would it make any difference? Let’s say China decided to remove one zero from all bills and coins. This would lead to a 1000% revaluation and surely export prices from China would fall by 90%. So there would be no difference at all, except for Krugman now claiming that China was dumping their prices and demanding tariffs anyway.

  17. Gravatar of J Belbruno J Belbruno
    16. March 2010 at 03:03

    Complete and utter garbage, Scott. You have totally misrepresented the reality of a currency (the yuan) that is subject to strict capital controls and not allowed to float freely.

    You have completely failed to grasp that the Chinese Politburo is now exporting unemployment for its own benefit (the profits of export-oriented state-owned enterprises) andto the most inhuman detriment of its own working class who slave for Western corporatins and consumers.

    And you have totally missed the point that the US is less concerned about the surpluses of Germany, Japan, Korea and so forth because these are US allies and do not pose a strategic threat to the capitalist world-market order – which the Chinese Politburo certainly does!

    You should read a little less bogus economics and a little more political economy. Do me a favour: do not argue with the likes of Paul Krugman; you are simply not in that league.

  18. Gravatar of Richard Richard
    16. March 2010 at 04:01

    ‘…and does in fact sharply reduce Chinese exports, that millions of extremely poor Chinese workers will lose jobs in exports industries? Workers who are much worse off than even the bottom 10% of American workers. ‘

    I am not an American but it is utterly ridiculous to imply that US policy should be made with any consideration to what is good for Chinese export workers. If the RMB freely floated does anyone seriously believe it would depreciate? It would significantly appreciate so it is seriously undervalued. Any currency peg is by definition manipulation. This is not just a RMB/USD issue, but a RMB against everyone else in the world. If the US imposed a tariff on Chinese goods this would not lead to an all out global trade war. The EU would probably follow and impose a tariff on Chinese goods but trade between the EU and US and intra global trade would be free. It would be the world against China until they amend their policy of exporting their surplus capacity to the rest of the world. Unemployed Chinese export workers is a problem for China not anyone else.

  19. Gravatar of TK in Texas TK in Texas
    16. March 2010 at 05:33

    This is an interesting argument, but has too much of an inside baseball feel. The structure of the post’s argument is a sort of gotcha where the author doesn’t make a positive argument, but rather criticizes inconsistencies that he discerns in the argument of his adversary Krugman. It also fits within the habit of many conservatives of lecturing liberals on the subject of what liberalism is or should be. This is the only way I can account for the inclusion of the argument that Krugman should be concerned with the potential for rising unemployment in China. The relevancy of this is unclear, but seems to come down to something like, “you’re a liberal Krugman, shouldn’t your bleeding heart bleed equally for the Chinese worker as for the American worker?” Certainly the author weeps for the Chinese “capitalist.”

    What do we make of the body of the post reaching back nearly 40 years to find the basis of Krugman’s inconsistency.
    I graduated from high school at about the time of these super-important Nixonian precedents and can’t say I specifically remember them as news flashes. I think that Nixon did not float the dollar until 1972. If so, the precedent is from the time of the Bretton Woods endgame, a monetary context that is simply not present today. It’s a false analogy.

    I also can’t let pass the comment the “6% unemployment, 4% inflation.” That the author is willing to laugh at the politicians of that era for being concerned about this just shows how a generation of Reaganism has degraded our expectations. The author’s implicit point that both must be much worse before we should be concerned just shows how little duty to the American population the modern Republican, Ricardian economist feels. Hey if it works for the top 5%, what’s the gripe? Stay tuned for a return to natural wage.

    You are right that Japan has made a lot of 20% changes in the value of the yen, and still has a trade surplus with the US. At the currency level this has largely been driven by the markets, but China doesn’t let the market operate on the RMB. Oops, false analogy. There are also structural issues but that involves tedious details.

    I would like to understand the “win, win, win, win” in which the Fed solves the “AD” policy. I’m not an economist, and it took me a few minutes to come up with “aggregate demand” as a phrase to meet this abbreviation, but I must be wrong because I don’t see how the Fed solves a problem of demand. That requires jobs, and interest rate manipulation is a highly indirect way to improve the job picture, at best.

    To sum up, drop the snark about how Krugman is not consistent with his own theory and tell us what your theory is.

  20. Gravatar of scott sumner scott sumner
    16. March 2010 at 05:35

    azmyth, Good comment. BTW, even letting the yuan float would not definitely prove whether it was overvalued. Suppose the Chinese government adopted the following two policies:

    1. They let the currency float freely.
    2. The Chinese fiscal authority bought $800 billion worth of European and Japanese bonds each year. In that case the yuan might well depreciate, but the China critics would still cry foul, claiming they aren’t playing fair. Many people confuse two separate issues, the currency peg and the Chinese decision to accumulate large forex reserves. The issues are logically separate, although obviously related.

    Jim Glass, Thanks for the link.

    Doc Merlin, Yes, it would also hurt the poor in America.

    gaius marius, I don’t agree that our problems are due to capital account imbalances. One of the largest imbalances in the world is in Australia, and they haven’t had a recession since 1991. Our problems are due to reckless banking and tight money which depressed NGDP.

    Ricardo, No I didn’t mean to suggest the poor in America would be helped. You are right that they would be hurt by a Chinese tariff.

    Statsguy, We know that tariffs produce deadweight losses. If we don’t know their distributional consequences (and I agree that is uncertain) then let’s err on the side of policies that don’t reduce the total size of the pie.

    You said:

    “Just to clarify, I think it’s somewhat incorrect to read Krugman as being inconsistent in his views of whether we are in a liquidity trap. He has fairly explicitly argued that the “impossibility” of Fed action is not an economic issue, but a political issue. You may believe that Krugman should be fighting the political status quo rather than accepting it (though he does fight it sometimes), but he’s been quite clear about what he means.”

    I couldn’t disagree more strongly. Of course politics is involved in every economic decision, but that doesn’t mean the Fed is powerless. I am sure there are powerful special interests in China pressuring the government to keep the yuan weak. Almost by definition any policy that is actually adopted, whether the current US monetary policy or the current Chinese currency policy, represents the policy that has the most political support. If that is an excuse for inaction at the Fed, then it is equally an excuse for inaction by the Chinese. Krugman can’t have it both ways.

    Regarding the J-curve, when is that going to kick in and reduce the Japanese surplus, now that the yuan has been raised from 1/350 to 1/90? The answer is obvious–it won’t kick in because Japan’s surplus is not caused by the exchange rate, it is a symptom of the saving/investment imbalance. As we’ve seen, if you raise the nominal yen exchange rate you get deflation in Japan, and the real rate simply moves back to the level that reflects the savings investment imbalance.

    Jon, I don’t agree that Chinese wages are the problem. There is a reason why 80 million Germans export roughly as much as 1300 million Chinese, despite much higher wages–the German workers are far more productive.

    The Chinese government does not have to back new money with foreign bonds, but I agree that if they choose to do so this will probably lead to a current account deficit.

    Alex, The point is that, as we saw with Japan, there is no devaluation that will satisfy foreigners. Americans will always complain about Asian surpluses as long as Asians save far more money than we do. In my view the problem is not excessive Asian savings rates, but rather an inadequate US saving rate.

    malavel, That’s right, and relates to my earlier response to statsguy.

    J Belbruno, You said;

    “Do me a favour: do not argue with the likes of Paul Krugman; you are simply not in that league.”

    I agree, I am not in league with Krugman. I do not favor protectionist policies like tariffs.

    Richard, You said;

    “I am not an American but it is utterly ridiculous to imply that US policy should be made with any consideration to what is good for Chinese export workers.”

    I am an American, but I am also a utilitarian. I believe everyone in the world should be treated as if they are of equal moral worth. I believe the well-being of each and every person is equally important. And I believe public policy should be made on that basis.

    Fortunately, as is often the case in economics, the policy that is best for America is also best for other countries, including China.

  21. Gravatar of Dirk Dirk
    16. March 2010 at 06:07

    “Yes, rates have since gradually come down much further, but at no time in 2008-09 did it look like the zero bound was constraining the ultra-conservative ECB.”

    So, investment in the eurozone has picked up because of the low interest rates? Somehow the data tell a different story:
    http://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=119.ESA.Q.I5.S.1000.P51000.0000.TTTT.V.U.A

    It seems that whatever the ECB does, investment in the euro area is falling. I’d call that a liquidity trap, because monetary policy fails at what it is supposed to do: lower interest rates should lead to more investment. What do you call this situation?

  22. Gravatar of scott sumner scott sumner
    16. March 2010 at 06:19

    TK, I didn’t say 6% unemployment isn’t a problem, I said 6% unemployment combined with 4% inflation is not a problem requiring currency devaluation. The best solution is probably to try to boost AS. If you insist on using AD, then use monetary policy because at 4% inflation we certainly aren’t stuck in a liquidity trap.

    Krugman’s the one who accuses those he disagrees with of being cruel, not me. I was just pointing out his inconsistency.

    I agree that 1971 is not a good analogy for the current situation, and I can’t imagine why Krugman thought it was.

    If you want to learn about my views on monetary policy and AD, take a look at FAQs, on the right margin of this blog.

  23. Gravatar of scott sumner scott sumner
    16. March 2010 at 06:25

    Financial Times, Hey FT, thanks for the plug. I am such an old foggy, and so out of touch with current slang, that I had to look up the term “maximum pwnage” in their link to my post. I believe after reading the definition that they think I came out ahead. Is that right?

  24. Gravatar of malavel malavel
    16. March 2010 at 06:47

    Re “maximum pwnage”: yes, that’s most likely what they meant.

  25. Gravatar of Artturi Björk Artturi Björk
    16. March 2010 at 07:56

    FT definitely meant that you pwned Krugman and hard.

  26. Gravatar of Jeff Jeff
    16. March 2010 at 08:10

    To keep the yuan from appreciating, the Chinese central bank buys U.S. Treasuries. These are assets. To match them on the liability side, the central bank has to print money, increase the reserves of banks at the central bank, or issue bonds. The first two options directly create inflation, so they mostly do the third. The only real difference is that central bank bonds have a longer term than currency or reserves. To the extent that they are substitutes for money, money demand is decreased, and unless the money supply is also decreased, you still get inflation.
    Chinese inflation is picking up, particularly in real estate. If China maintains a fixed nominal exchange rate while experiencing higher inflation than the U.S. does, it’s real exchange rate appreciates. It’s the real exchange rate that matters for trade, so the imbalance has started correcting even as you read this.

  27. Gravatar of Richard Richard
    16. March 2010 at 09:52

    ‘ I am an American, but I am also a utilitarian. I believe everyone in the world should be treated as if they are of equal moral worth. I believe the well-being of each and every person is equally important. And I believe public policy should be made on that basis.

    Fortunately, as is often the case in economics, the policy that is best for America is also best for other countries, including China. ‘

    The utilitarian action to take would be what served the greatest number of people. More people in China are outside the export sector than are in it. Although the export sector gains from an undervalued currency a greater number are deprived of purchasing power.

  28. Gravatar of StatsGuy StatsGuy
    16. March 2010 at 09:59

    ssumner:

    “let’s err on the side of policies that don’t reduce the total size of the pie.”

    Well, sure – since we benefit distributionally too (being higher skilled). There’s no downside for us. And when it’s our turn to accept distributional losses for the public pie, we’ll nobly follow through.

    I’m sure the financial sector, which benefited tremendously from labor arbitrage, feels the exact same way.

    Oh, wait…

  29. Gravatar of StatsGuy StatsGuy
    16. March 2010 at 10:03

    ssumner:

    Regarding the J-curve, are you arguing that it doesn’t exist, or that it’s effects are moderated by savings differentials? You know I agree with the latter, and agree with your policy suggestions to raise savings rates, but that doesn’t mean the J-curve doesn’t exist.

    You are comparing two longitudinal events without considering the counterfactual – what WOULD Japan’s surplus be if it continued to underconsume/oversave relative to the use and AT THE SAME TIME take action to keep its currency artificially low?

  30. Gravatar of D. Watson D. Watson
    16. March 2010 at 11:30

    Another home run. Thank you.

    Re: powerful special interests in China and the US

    I’m working on a food policy textbook where we talk a lot about stakeholder analysis. One of the questions I’ve been playing around with is what the difference is between a stakeholder and a special interest, powerful or otherwise. My first cut has been that a stakeholder is a special interest you agree with while a special interest is a stakeholder you don’t. Any thoughts?

    Re: Belbruno’s Leagues

    So only Nobel laureates are allowed to criticize each other’s ideas? Any chance of getting Vernon Smith as a co-blogger? 🙂

  31. Gravatar of Myself Myself
    16. March 2010 at 11:56

    I wonder if Krugman also thinks that the Sun is unfairly imposing savings on the Earth’s economy and, like Bastiat’s candlemakers, would advocate a law requiring the closing of all windows to stimulate our economy.

    http://bastiat.org/en/petition.html

  32. Gravatar of Chris Bolts Sr. Chris Bolts Sr.
    16. March 2010 at 12:46

    I was redirected here by Veronique DeRugy over at National Review and while I like it when anybody rips a Krugman column to shreds (it just gets easier each time he writes a column), I just have a simple question: when will people learn to ignore this man? Almost everything he has written about has turned out to be either a) wrong or b) unprincipled and childish.

    BTW, the comment from The Economist is incorrect. The Bush Administration didn’t rush into war with Iraq. I seem to recall that the Bush Administration used almost all of 2002 to lay out its case for going to war in Iraq. I also seem to recall that overwhelming majorities in both the House and Senate voted to authorize the war. Now, we may question whether it was wise to go to war, but it’s a fabrication to state that Bush never laid out his case for war.

  33. Gravatar of Nathan Nathan
    16. March 2010 at 13:15

    Yes, Japan has let the yen appreciate over time – but maybe not as much as it would have if it didn’t continue to intervene through large foreign exchange purchases. Look on a table of foreign exchange reserve holdings and you’ll see China closely followed by Japan at the top, and at a completely different magnitude than the runners up. So pointing to continuing trade imbalances there as an argument against the importance of Chinese policies seems less than persuasive.

  34. Gravatar of Scott Sumner On Krugman’s China Fallacies | Aktiebloggar.se Scott Sumner On Krugman’s China Fallacies | Aktiebloggar.se
    16. March 2010 at 14:07

    […] often disagreed with Scott Sumner's writings, and while I can't say that I agree with everything he writes in this article about Paul Krugman's call for trade war with China over its currency policy (which I commented on […]

  35. Gravatar of Jim Glass Jim Glass
    16. March 2010 at 16:08

    Perhaps not exactly on topic here, but on the larger topic of the Fed acting to offset the effects of the stimulus, I just saw this in the news
    ~~~~~
    Come March 31, the Fed is expected to have finished a year-long program involving the purchase of some one and a quarter trillion dollars of mortgage-backed securities, which has been widely credited with pumping up the housing market.

    “There’s a lot of anxiety about that,” says economist Ram Bhagavatula, managing director of the hedge fund Combinatorics Capital.

    The big question is how much mortgage rates will rise and how quickly as a result…
    ~~~

    Note the fiscal stimulus isn’t even half spent yet.

  36. Gravatar of StatsGuy StatsGuy
    16. March 2010 at 18:51

    Chris Bolts:

    “but it’s a fabrication to state that Bush never laid out his case for war.”

    It certainly is true that “fabrication”, “Bush”, and “case for war” belong in the same sentence, but that sentence should be constructed slightly differently.

  37. Gravatar of ca ca
    16. March 2010 at 20:38

    “It certainly is true that “fabrication”, “Bush”, and “case for war” belong in the same sentence, but that sentence should be constructed slightly differently.”

    If Bush “fabricated” the reasons for war with Iraq, then why was Congress complicit in these deceits?

    You’re impugning more than just Bush. Keep that in mind.

    I don’t wish to change the subject, but a comment like that cannot go unaddressed.

  38. Gravatar of Artturi Björk Artturi Björk
    16. March 2010 at 23:26

    StatsGuy:

    It certainly is true that “fabrication”, “Bush”, and “case for war” belong in the same sentence, but that sentence should be constructed slightly differently.

    hihihihihih 🙂

  39. Gravatar of Adam Smith Adam Smith
    17. March 2010 at 02:10

    “I think it’s fair to say that international economists have become increasingly skeptical of the notion that simply by manipulating nominal exchange rates you can eliminate current account imbalances that represent deep-seated disparities of saving and investing. ”

    Would it not follow that simply by manipulating the quantity of money you can’t eliminate deep-seated disparities of saving and investing?

    After all, the way you weaken your exchange rate is by increasing the money supply, is it not?

  40. Gravatar of vimothy vimothy
    17. March 2010 at 04:56

    This post is very confused. Why is it you think that Paul Krugman is bad?

    Revaluing the yuan will effect trade trade priced in that currency.

    China’s surplus must be matched by an equivalent deficit somewhere.

    This deficit represents a net subtraction of spending from the countries in question, and a net in injection of spending into China.

    This may or may not be in the best interest of Chinese workers or Chinese export oligarchs, but those interests do not define the best interests of America or the rest of the world.

    You are attacking Paul Krugman for no good reason here. It’s not even clear where or why you actually disagree.

  41. Gravatar of jean_ jean_
    17. March 2010 at 05:18

    New post of Krugman on the topic:

    http://krugman.blogs.nytimes.com/2010/03/17/how-much-of-the-world-is-in-a-liquidity-trap/

  42. Gravatar of MostlyAPragmatist MostlyAPragmatist
    17. March 2010 at 05:27

    if you ignore that fact that the BOJ recently rejected their finance minister’s request for a more expansionary monetary policy

    You don’t need to ignore this anymore. The New York Times now reports:

    In a 5-2 vote at a policy meeting on Wednesday, the Bank of Japan’s board decided to double a bank-loan program aimed at boosting liquidity in the Japanese economy*

    How does this affect your thesis?

    *http://www.nytimes.com/2010/03/18/business/global/18yen.html?ref=global-home

  43. Gravatar of scott sumner scott sumner
    17. March 2010 at 07:31

    Dirk, You said;

    “It seems that whatever the ECB does, investment in the euro area is falling. I’d call that a liquidity trap, because monetary policy fails at what it is supposed to do: lower interest rates should lead to more investment. What do you call this situation?”

    No, lower interest rates shouldn’t lead to more investment. That’s a misuse of S&D. Low interest rates reflect low investment. And investment is low because ECB policy is very tight, despite low interest rates. Interest rates are about the worst possible indicator of the stance of monetary policy. NGDP growth is much more informative.

    Malavel and Artturi, Thanks. He has some more posts and I replied again–round 2.

    Jeff, I agree, the real exchange rate will rise. Krugman would complain the actual problem isn’t the exchange rate, but the purchases of US bonds. I have a new post on this.

    Richard, You might be right, but that’s up to the Chinese to decide. There are lots of bad policies in the US, but that’s no reason to put tariffs on US goods.

    Statsguy, The poor who shop at Walmart won’t be helped by high tariffs on Chinese goods. And they won’t suddenly find jobs making Barbie dolls.

    I don’t understand your question about Japan. Government actions to manipulate the exchange rate are a form of government saving. So it enters into any savings/investment imbalance. Check out my new post, which discusses this issue.

    D. Watson. Thanks. I completely agree with your take on “stakeholders” and “special interests.”

    Myself, I love that Bastiat essay. Maybe Krugman would say “When interest rates hit zero it makes sense to close all window shades.” (Just kidding.)

    Chris, You are right about Bush, although we now know the case had lots of holes in it. I was one of those fooled into thinking Saddam was trying to develop nukes. It turns out that many people assumed the same, simply because he had kicked out the inspectors, despite trade sanctions. I didn’t think deeply enough into Saddam’s motives.

    Nathan, I address Japan in a new post. I agree that they have bought lots of foreign assets, and that the case for tariffs on Japan is much stronger than China. But those purchases are simply part of Japan’s saving/investment imbalance. If they had lower forex purchases but also shrank their budget deficit, it would be a wash. So I think it’s a mistake to look at the reserves; instead look at the overall saving/investment imbalance.

    Jim Glass, Very good point. For almost a year I have warned that the monetary stimulus would be pulled back before the fiscal stimulus was fully spent. That policy combination makes no sense.

    Statsguy and ca, I agree with ca. Bill and Hillary Clinton had access to the exact same intelligence as Bush, and also believed Saddam was working on WMDs. So did Gore.

    Adam Smith, Yes, monetary policy cannot solve long run problems of any sort, except inflation. Real problems are caused by more fundamental factors in the economy.

    Vimothy, Read it again, I explained why I disagree. I don’t think Chinese policy determines AD in the US. Monetary policy does. I have a new post that might help.

    Jean, Thanks, I responded at the end of my new post.

    MAP, Thanks. I don’t know how that program will work. It sounds more like fiscal than monetary policy, but I hope I am wrong. Here’s one indication. If the yen fell sharply on the announcement it is a bona fide monetary stimulus. if not, it is unimportant.

  44. Gravatar of vimothy vimothy
    17. March 2010 at 09:16

    Well, to the casual reader (me), it’s not clear. You give Krugman a bit of a bashing, but on what basis? In your argument, you suggest that revaluations of currency don’t effect trade priced in that currency, but kind of leave that statement hanging in the air. I don’t undeerstand what else your disagreeing with. The general thrust of Krugman’s argument is obviously true:

    China subsidises its export industry (not the same as Chinese workers) through its FX peg.

    This has the effect of making Chinese goods cheap in US markets.

    This helps China run a trade surplus w/ US (its goods are cheap relative to US goods).

    This trade surplus means that on aggregate China is earning more than it spends because its partners are net spenders in its economy, by definition.

    (There are a whole variety of factors that help to determine AD in the US. You can abstract out to whatever level you like (APC in household/business/foreign sectors/etc, fiscal policy/monetary policy/net exports, etc–or whatever), but clearly, if one sector is in surplus another must be in deficit, and this represents a net spending injection from the deficit sector to the surplus sector.)

    This may or may not be in the best intereest of Chinese workers and/or Chinese export oligarchs, but their interests do not define the best interests of the US or the rest of the world.

  45. Gravatar of vimothy vimothy
    17. March 2010 at 09:18

    Did you read Martin Wolf on surplus states? Here:

    Germany is in a supposedly irrevocable currency union with some of its principal customers. It now wants them to deflate their way to prosperity in a world of chronically weak aggregate demand. Mr Wen has the same idea. But the economy he wants to pursue this goal is the US. Fat chance!

    Speaking at the end of the National People’s Congress, Mr Wen declared: “What I don’t understand is depreciating one’s own currency, and attempting to pressure others to appreciate, for the purpose of increasing exports. In my view, that is protectionism.” He also insisted he was worried about the safety of China’s dollar investments.

    What, I wonder, does Premier Wen mean by this, apart from telling the US to leave China’s exchange rate policies alone? If the US desire for a weaker dollar is “protectionist”, how much more so is China’s determination to keep its currency down, come what may? There is nothing evidently “protectionist” about asking a country with a huge current account surplus to reduce it, at a time of weak global demand. If I understand China’s declared position correctly, it wants the US to deflate itself into competitiveness, instead, via fiscal and monetary contraction and, presumably, falling domestic prices. That would be dreadful for the US. But it would be dreadful for China and the rest of the world, too. It is also not going to happen. China surely knows that.

  46. Gravatar of mcmikep mcmikep
    17. March 2010 at 11:31

    Take a stand by joining the cause for a 5% NGDP target on Facebook.
    http://apps.facebook.com/causes/453256/115737260

  47. Gravatar of StatsGuy StatsGuy
    17. March 2010 at 14:05

    ssumner:

    “Statsguy and ca, I agree with ca. Bill and Hillary Clinton had access to the exact same intelligence as Bush, and also believed Saddam was working on WMDs. So did Gore.”

    This, I’m afraid, is a conservative position – not a libertarian one. One of the hallmarks of libertarians is distrust of government power – be they democratic or conservative. You don’t need to be a conspiracy theorist to distrust government power, _particularly_ in the area of military action. Indeed, especially in the area of military action.

    Interestingly, wikipedia handles this well:

    http://en.wikipedia.org/wiki/Rationale_for_the_Iraq_War

    There’s reasonably strong evidence the case for war was exaggerated (at the very least). The Downing Memo, and the IAEA report, are quite incriminating. The decision to go to war was an instance in which evidence followed decisions, rather than decisions following evidence.

    Perhaps most critical was the military doctrine invoked – pre-emption and prevention. The case for war dependended on three arguments: that Iraq was working on WMD, that Iraq would give WMD to Al Quaida, and that the threat was _imminent_. Intelligence was incorrect, or fabricated, on ALL THREE COUNTS. Yet, no heads rolled.

    The argument in retrospect was that “we acted on the best information at the time”. I have two replies:

    1) No. Back in 2003, in a job interview with a national weapons laboratory, I disagreed with the evidence, and was aggressively challenged by my interviewers (I did not get the job – thank goodness). I know several individuals at MIT’s Security Studies program, all of whom have decades of intelligence and foreign policy experience, who publicly made these arguments (and suffered the ire of the federal government).

    2) Even if the leadership acted on the best knowledge at the time (which it didn’t), then my response is: IT’S THEIR JOB TO KNOW. We fund tens of billions a year, and sacrifice liberties, to know – and instead we got fake vials at the UN and computer-generated-mockups of mobile laboratories.

    The fact that Bill Clinton supported the war is not a defense a true libertarian would offer. Clinton’s opinions changed with every public opinion poll.

  48. Gravatar of Chris Bolts Sr. Chris Bolts Sr.
    17. March 2010 at 18:49

    statsguy, I’m not going to relitigate the entire Iraq War with you. However, I am going to state fundamentally that the reason I do not pronounce myself a “libertarian” is because of distrust of military action. Not all military actions are equal. Surely you understand that military actions such as World War I and II and the Cold War were necessary measures and just use of military action. Also, the same is true of the Civil War and the Revolutionary War. You can say that war should only be used as a last resort, but define last resort. Is it before we lose citizens, after we lose citizens, or if we actionable intelligence that a threat is imminent?

    Bush did not fabricate intelligence to make a case to go to war with Iraq. However, as another poster mentioned, you cast a wide net when you make a baseless allegation. For sure you can realize that now that Obama is President, if he knows that the war was launched on false pretenses (and he would know that now, wouldn’t he?) surely he has an obligation to not only bring the troops home now, but also to investigate the entire Bush Administration, not to mention both Houses of Congress? Only the truly nutty will believe that we should do such a thing.

    Also, disagreement with the evidence is not an accusation of fabrication of evidence. Perhaps the intelligence was weak, perhaps it was inconclusive, perhaps it was old and needed updating. That does not equal fabrication or intentional misleading of the public.

    By the way, the Downing Memo and the IAEA report have been refuted. Also, are you REALLY going to use the IAEA after it got the nuclear report wrong on Iran?

    Vimothy, for you:

    http://article.nationalreview.com/428171/china-and-currency-valuation/daniel-ikenson

    It matters not if China pegs it currency. It does things out the interests of its own people, not for what America wants (and truthfully, should the debtor be demanding the creditor renew the terms of contract so that it can be more favorable? Then again, this IS the Obama Administration after all). You’ll have better luck doing another “Buy American” campaign that getting China to revalue its currency (though that won’t be effective either).

  49. Gravatar of We can do this the nice way or the nasty way « Freethinking Economist We can do this the nice way or the nasty way « Freethinking Economist
    17. March 2010 at 22:36

    […] believe that he is similarly misguided when attacking the idea that a remnimbi appreciation may boost US production.  His EconHistory counter-example is Japan; […]

  50. Gravatar of Kevin Donoghue Kevin Donoghue
    18. March 2010 at 00:27

    Chris Bolts Sr: “Surely you understand that military actions such as World War I and II and the Cold War were necessary measures and just use of military action. Also, the same is true of the Civil War and the Revolutionary War.”

    I visit this blog in order to read views which differ from my own, but even so I don’t expect to encounter opinions as bizarre as this. The actual shooting wars referred to were launched, respectively, by Kaiser Bill, Adolf Hitler, Jefferson Davis and George III. (The Cold War wasn’t a military action, it was a prolonged stand-off.) I suppose a dyed-in-the-wool British imperialist might say that George III was undertaking necessary measures to suppress rebellion. There may even be a case for the Kaiser, though I haven’t met anyone prepared to argue for him. But I would have thought that nobody, not even Victor Davis Hanson, was daft enough to defend all four.

  51. Gravatar of StatsGuy StatsGuy
    18. March 2010 at 05:42

    Chris Bolts:

    “Perhaps the intelligence was weak, perhaps it was inconclusive, perhaps it was old and needed updating. That does not equal fabrication or intentional misleading of the public.”

    Yes, the intelligence was weak and inconclusive… a point raised repeatedly by neutral intelligence analysts. At MIT CIS alone, credible folks like Eugene Skolnikoff, Barry Posen, Steve Van Evera were making a strong case questioning the intelligence. Federal funding that year became notably scarce… Go figure.

    Bush’s fabrication was in claiming – repeatedly – that we had credible and overwhelming evidence of WMD, of a link to Al Quaida, and of imminent threat.

    Powell:

    “My colleagues, every statement I make today is backed up by sources, solid sources. These are not assertions. What we’re giving you are facts and conclusions based on solid intelligence. I will cite some examples, and these are from human sources.”

    Except the intelligence was not solid. DoE memos contradicted CIA memos. The DoE memos were ignored, and not shared. Downing Street challenged CIA assertions of uranium sales, but this was deliberately kept in speeches even though white house speech writers were told beforehand the intelligence was flawed. The list just goes on…

    I’m sorry, Mr. Bolts, but the evidence is overwhelming.

    ssumner – if your only comment is that any critique of Bush should be shared with Clinton, then yes – although I will note that Bush had access to information in 2003/2004 which Clinton and Gore did not have in 1998-2000. But to favor the case for war, given the information available in 2003, is a deeply conservative position – not libertarian.

  52. Gravatar of scott sumner scott sumner
    18. March 2010 at 07:05

    vimothy, The foreign exchange peg doesn’t cause their surplus, it is the government purchases of foreign debt plus their exchange controls. But even without those factors it is very possible they would run a surplus. Most of the East Asian economies do, and often a bigger share of GDP than China. My new post discusses this in more depth.

    It doesn’t hurt the US because our NGDP is determined by monetary policy, not China. If the Fed isn’t doing its job (and they aren’t) that’s our failure, not the Chinese government’s fault.

    You said:

    “Did you read Martin Wolf on surplus states? Here:

    Germany is in a supposedly irrevocable currency union with some of its principal customers. It now wants them to deflate their way to prosperity in a world of chronically weak aggregate demand. Mr Wen has the same idea. But the economy he wants to pursue this goal is the US. Fat chance!”

    This is a non-sequitor. Greece doesn’t run its monetary policy; German and France run Greece’s monetary policy. In contrast, there is nothing stopping the US from inflating.

    You said:

    “There is nothing evidently “protectionist” about asking a country with a huge current account surplus to reduce it, at a time of weak global demand”

    But there is something protectionist about putting 25% tariffs on Chinese goods, when you have the option of depreciating your own currency if you wish. If we want a weaker dollar, then we should make it weaker.

    I don’t think Wen is calling for US deflation. If he is, I strongly disagree with his views. I doubt he would criticize us if we had the same 2.5% inflation rate China has, but instead our (core) inflation is lower that China’s

    mcmikep, Thanks.

    statsguy,

    You said;

    “This, I’m afraid, is a conservative position – not a libertarian one. One of the hallmarks of libertarians is distrust of government power – be they democratic or conservative. You don’t need to be a conspiracy theorist to distrust government power, _particularly_ in the area of military action. Indeed, especially in the area of military action.”

    Either you are mistaking my point, or engaging in bizarre logic. I was merely stating a fact. I agree with you that the war was unjustified, so I don’t see how my comment relates to libertarianism. Yes, the intelligence was wrong. My point is that most people in Washington seemed to believe the intelligence. Being a libertarian doesn’t mean you must believe in conspiracy theories. It does suggest you should distrust government. And those who were skeptical of the intelligence were correct. But that certainly doesn’t proved that those on the other side were just pretending to believe there was a problem. Government officials are wrong at times, and not always because they are lying.

    I simply stated a fact about the Clintons. I never said the Clintons were right. How does that make me a non-libertarian? (And to be honest I don’t care whether people consider me a libertarian or a fascist or a Marxist, as long as they correctly understand my views.

    Chris, I can’t agree with you on WWI. That was a tragic mistake that led to WWII.

    Kevin, I think he meant action by the US was justified in all cases. But again, I don’t agree with Chris on WWI. And as you say the cold war wasn’t really a war (or the parts of it that were, like Vietnam, were often unjustified.)

  53. Gravatar of Kevin Donoghue Kevin Donoghue
    18. March 2010 at 07:36

    Scott, I don’t doubt that Chris meant that action by the US was justified in all cases. However in the cases he mentioned the US was not the aggressor. (Maybe the revolutionary war is arguable, but the civil war, WW1 and WW2 were all started by the eventual losers.) So they don’t help his argument. Iraq was a war of choice.

  54. Gravatar of Doc Merlin Doc Merlin
    18. March 2010 at 08:44

    Everyone is talking about china’s FX peg, and honestly, that is very minor compared to the effect of them not having strong environmental protections, subsidizing raw materials, and having a very low red tape building environment.

    Krugman can keep blaming the peg, but the peg really isn’t that big of a deal, IMO. More importantly, is that the cost of energy, labor, materials, business taxes etc is much lower in parts of China.

  55. Gravatar of ssumner ssumner
    19. March 2010 at 05:48

    Kevin, OK. In my view the big mistakes were made in 1990-91, when we invited Saddam into Kuwait and then kicked him out, but left him in power. I am not sure what we should have done back then (other than discourage him from invading Kuwait) but I do know that what we did do made no sense.

    The economic sanctions were also a huge mistake. Somehow we kept getting everything wrong. I am no expert on foreign policy, and don’t claim to have any good ideas in that area.

    Doc Merlin, I agree the FX peg is a red herring. But those items you mention don’t affect the size of the trade surplus, just as low wages don’t give a country an advantage in international trade.

  56. Gravatar of Paul Krugman als Schulhofrowdy « Aus dem Hollerbusch Paul Krugman als Schulhofrowdy « Aus dem Hollerbusch
    19. March 2010 at 07:18

    […] den Wert des Renminbi drückt. Eine Aufwertung würde nur kurzfristig Erleichterung verschaffen “” Scott Sumner erinnert hier an die Geschichte des japanischen Yen: I seem to recall that back around 1970 the US government kept insisting that the Japanese trade […]

  57. Gravatar of vimothy vimothy
    20. March 2010 at 02:22

    “This is a non-sequitur”

    Not really. The point is that China and Germany both reduce the income and increase the output of their trading partners. This is deflationary. Since exchange rates will not move, there is no solution–just a continual drag on AD.

    Of course, when I say “peg”, I am referring to currency manipulation also. I’m pretty sure that goes for Krugman as well.

  58. Gravatar of ssumner ssumner
    20. March 2010 at 14:52

    Vimothy, I simply don’t agree that China reduces the income of its trading partners–that is one of the points of my post. Nominal income in the US is determined by the Fed, not China, and real income is determined by a combination of the Fed and the slope of the SRAS curve. I don’t see China determining nominal or real income.

  59. Gravatar of CrisisMaven CrisisMaven
    29. March 2010 at 15:55

    The most ridiculous proposition is when economists who couldn’t diagnose a bubble building and bursting right in front of their eyes can with surety pinpoint the exact percentage of how much the Chinese currency is “undervalued”! You have some good points on this China bashing in that post (not that I think China is the center of free markets nor do I believe it is very stable economically, however, if its currency were undervalued it would cost them dearly in overcharged IMPORTS prices and it would befit the US trade policy best to see that their own industries become more competitive rather than shielding them once more and leaving them ever more vulnerable. Krugman citing 1971 as an example is either obliviousness bordering on Alzheimer’s or outright deceit: the dollar waned back then because Nixon debased it to such an extent he had to take it off the gold standard – axactly the time when the disaster that’s playeed out now began and he should know, he’s old enough, he knows the money aggregate curvs from the St.Louis Fed and he has no excuse as a scientist when bandying such propaganda.

  60. Gravatar of ssumner ssumner
    30. March 2010 at 05:53

    CrisisMaven, I agree about China and I agree that the 1971 analogy was very weak.

  61. Gravatar of The China Bashers Will Never Be Content | Aktiebloggar.se The China Bashers Will Never Be Content | Aktiebloggar.se
    14. June 2010 at 10:19

    […] renminbi [yuan] is up 7.5% over the past six months and fully 20% over the past five years."And as Scott Sumner pointed to before, the yen have increased fourfold in value relative to the U.S. dollar since the 1970s (in nominal […]

  62. Gravatar of The China Bashers Will Never Be Content | Austrian Economics Blog The China Bashers Will Never Be Content | Austrian Economics Blog
    15. June 2010 at 21:25

    […] as Scott Sumner pointed to before, the yen have increased fourfold in value relative to the U.S. dollar since the 1970s (in nominal […]

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