Paul Krugman skillfully dissected many arguments for protectionism and industrial policies in the book Pop Internationalism. Now he seems to have fallen prey to many of these misconceptions. But first let me acknowledge that there is a semi-respectable argument that can be made against countries running large trade surpluses in a world economy that is stuck at the zero rate bound. I don’t agree with that argument (monetary policy isn’t really out of ammo), but I can see why someone like Krugman might find it appealing. I seem to recall him explicitly making this point in earlier posts. But with each new column, the arguments seem cruder and more simplistic:
And in a depressed world economy, any country running an artificial trade surplus is depriving other nations of much-needed sales and jobs. Again, anyone who asserts otherwise is claiming that China is somehow exempt from the economic logic that has always applied to everyone else.
Here he seems to have shifted his ground. No longer is a liquidity trap required, now merely a “depressed economy” is required for Chinese trade surpluses to depress aggregate demand in the rest of the world. I know of no respected macro model that supports this claim. And I’m guessing that for most of the rest of my life Krugman will consider our economy to be “depressed,” whether interest rates are zero or not.
Some background: If discussion of Chinese currency policy seems confusing, it’s only because many people don’t want to face up to the stark, simple reality — namely, that China is deliberately keeping its currency artificially weak.
The consequences of this policy are also stark and simple: in effect, China is taxing imports while subsidizing exports, feeding a huge trade surplus. You may see claims that China’s trade surplus has nothing to do with its currency policy; if so, that would be a first in world economic history. An undervalued currency always promotes trade surpluses, and China is no different.
I have no idea what this means. The standard argument is that trade surpluses (actually CA surpluses) are caused by excesses of domestic saving over domestic investment. Now it may be true that a government can cause that to happen by purchasing vast quantities of foreign exchange. And arguably China has done that. But every country in history with a trade surplus? Is the Swiss trade surplus also some sort of government conspiracy? Or might it reflect an imbalance between private saving and private investment in Switzerland? Unless Krugman wants to tautologically define “undervalued currencies” as currencies in countries with trade surpluses, I can’t imagine what point he is making.
BTW, if he intended a more sophisticated argument that currencies were undervalued any time the country’s government purchased foreign exchange, that argument would be equally fallacious. It is quite possible for every country in the world to buy foreign exchange, but clearly every currency can’t be undervalued. Krugman’s smart, so I probably misread him. Tell me what he meant in the comment section.
So what should we be doing? U.S. officials have tried to reason with their Chinese counterparts, arguing that a stronger currency would be in China’s own interest. They’re right about that: an undervalued currency promotes inflation, erodes the real wages of Chinese workers and squanders Chinese resources. But while currency manipulation is bad for China as a whole, it’s good for politically influential Chinese companies — many of them state-owned. And so the currency manipulation goes on.
Nice try, but I’m afraid the export sector is dominated by private firms, whereas the state-owned enterprises dominate the domestic economy.
Clearly, nothing will happen until or unless the United States shows that it’s willing to do what it normally does when another country subsidizes its exports: impose a temporary tariff that offsets the subsidy. So why has such action never been on the table?
Krugman’s made it clear that trade surpluses always represent undervalued currencies. There are no exceptions in all of world history. And undervalued currencies are export subsidies (again in his view, not mine.) So is he saying the “normal” thing to do is to put tariffs on every single country that has a trade surplus? Or on any government that buys foreign exchange?
Aside from unjustified financial fears, there’s a more sinister cause of U.S. passivity: business fear of Chinese retaliation.
Consider a related issue: the clearly illegal subsidies China provides to its clean-energy industry. These subsidies should have led to a formal complaint from American businesses; in fact, the only organization willing to file a complaint was the steelworkers union. Why? As The Times reported, “multinational companies and trade associations in the clean energy business, as in many other industries, have been wary of filing trade cases, fearing Chinese officials’ reputation for retaliating against joint ventures in their country and potentially denying market access to any company that takes sides against China.”
Similar intimidation has surely helped discourage action on the currency front. So this is a good time to remember that what’s good for multinational companies is often bad for America, especially its workers.
Sinister? I feel like I’m reading Pat Buchanan here. In all of economics there is no more discredited theory than the view that “dumping” hurts the importing country. I thought Bastiat had disposed of that fallacy 170 years ago. What’s even more ironic is that the Chinese are accused of dumping green products. Think about it. Krugman’s already suggested we might want to put barriers on Chinese products because they emit so much CO2, now he’s suggesting that we should put tariffs on Chinese green products, thus raising their price and discouraging the rest of the world from installing solar panels. Once you start looking at the world from a left-wing perspective, it seems there is no end to the number of reasons you can find to abandon free trade.
What would really be bad for American workers? It would be to make the same mistakes we made in 1930. To mindlessly lash out at foreigners because we are too lazy or too stupid to tell our own Federal Reserve to boost NGDP.
Krugman has told the Fed to get moving. I wish he’d stick to that message.
PS. Ryan Avent was even less impressed than I was, and found lots of other problems.