Krugman makes two powerful arguments against “taking on China”

Ryan Avent did a pretty good job of demolishing Paul Krugman’s recent foray into protectionism.  But he didn’t have time to address all the problems, as Krugman has 3 recent posts and one full NYT column.  In these posts, Krugman seems to make not one, but two powerful arguments against the very policy he favors.  Let’s start with a slightly more recent post where he makes a Keynesian argument that protectionism is OK under certain conditions:

If you think in terms of models, however, you know that the case for free trade is profound, but also conditional: it depends, among other things, on having sufficient policy levers to achieve more or less full employment simultaneously with free trade. Without that, the picture is very different. As Paul Samuelson wrote long ago,

“With employment less than full and Net National Product suboptimal, all the debunked mercantilist arguments turn out to be valid.”

So what I’ve been saying about China comes out of the same model I’ve been using to make sense of our broader economic problem. That doesn’t mean I’m necessarily right about the policy, since we are talking about political economy rather than straight economics. But if you just start yelling “Protectionist!”, you’re demonstrating that you don’t understand what economics is about.

Where does one start?  At least Krugman’s argument isn’t quite as simplistic as Samuelson’s.  Krugman argues protectionism might be justified if you lack “sufficient policy levers.”  Samuelson is making a very different argument—that protectionism is justified any time unemployment is anything less that “full.”  That’s probably at least 50% of the time!  And not just some of the discredited mercantilist policies, all of them.  This includes every single trade idea ever propagated by people like Pat Buchanan, including his argument for tariffs on countries whose people have yellow skin, and free trade with countries full of people with white skin.  Yes, they are all suddenly valid—most of the time.

Of course Krugman’s too smart to believe this nonsense, and so is Samuelson.  But why quote a Samuelson passage that makes him look like a fool?  The guy’s dead, and can’t even defend his reputation.

Krugman says there’s an argument for protection if a country has no macroeconomic policy levers.  But elsewhere Krugman insists that the US has not just one, but two levers.  Unfortunately (from his perspective) we chose not to use them.  We chose not to do the needed $1.3 trillion fiscal stimulus, or raise the inflation target to something higher than 2%.  But he’s right, we have sufficient levers, we just chose not to use them.  This is a very powerful argument against protectionism, although Krugman doesn’t seem to realize it.

Krugman’s outraged that people are calling him a protectionist for advocating trade barriers against China in order to reduce American unemployment.  Perhaps it would help if he talked about more than one country.  Over the past 12 months Russia’s trade surplus is about 85% as large as China’s and Russia has 1/10th China’s population.  When you go after the favorite target of American protectionists on the grounds it will save America jobs, people are going to regard the argument as protectionist.  Especially when the logic of your argument (only if insufficient policy levers are available) actually argues against trade barriers.

In his NYT column, Krugman seems even more populist in an essay entitled “Taking on China”:

They deny that they are deliberately manipulating their exchange rate; I guess the tooth fairy purchased $2.4 trillion in foreign currency and put it on their pillows while they were sleeping. Anyway, say prominent Chinese figures, it doesn’t matter; the renminbi has nothing to do with China’s trade surplus. Yet this week China’s premier cried woe over the prospect of a stronger currency, declaring, “We cannot imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs.” Well, either the renminbi’s value matters, or it doesn’t — they can’t have it both ways.

Yes, you can’t have it both ways.  So does Mr. Krugman think that a much stronger yuan would have no effect, and would fail to stem the tide of Chinese exports?  Or does he think that it would work, that it would throw millions of desperately poor Chinese workers out of work?  He doesn’t say, but doesn’t the logic of his argument point to the latter interpretation? 

Some of my more nationalistic readers might say; “So what if Chinese lose their jobs, it’s American jobs that matter.”  But Krugman’s a liberal, and liberals are supposed to believe every person’s welfare is equally important, and indeed that the poor are those in most need of assistance.  I doubt Krugman would favor abolishing US humanitarian aid on the grounds that it would help US taxpayers.  Admittedly the Chinese trade issue is somewhat different from foreign aid.  Nevertheless, in all the things I’ve read Krugman write about China, I’ve never gotten the sense he really understands that China is a very poor country, much poorer than Mexico.  If you are going to raise the specter of mass unemployment in a country without a safety net, don’t you think it would be appropriate to say one or two things about what that means?  About why you favor “taking on China” despite the appalling humanitarian disaster it would cause?  But all we get is silence.  In the very next paragraph Krugman moves on.  He’s done his job, catching the premier in a logical error, there’s no need to consider the impact on the Chinese themselves.

It’s always important to recall that there are real people behind abstract entities.  I loved it when someone renamed the “War on Drugs” as “The War on Drug-Using Americans.”  I wish people would stop talking about “taking on China” and instead talk about “taking on the Chinese people.”  It would make it easier to see what the real issues are.

Krugman concludes the post mentioned above as follows:

All Geithner did here was signal to the Chinese not to worry, U.S. officials will keep making excuses for China’s behavior and doing nothing, regardless of provocation. Remember, this statement comes after China blatantly reneged on earlier promises about the exchange rate. They must take us for fools — because we (or at least some of us) are.

If I was writing for the NYT, here’s what I would have said:

By reappointing Bernanke and leaving several Fed seats empty for over a year, Obama signaled to the Fed not to worry.  US officials and economists keep making excuses for the Fed, despite their blatant disregard of their dual mandate for price stability (defined as 2% inflation) and high employment.  They must take us for fools — because we (or at least some of us) are.

Yes, it’s possible that China could prevent massive unemployment with a major stimulus push.  But of course that begs the question of why we don’t do the same.


Tags:

 
 
 

15 Responses to “Krugman makes two powerful arguments against “taking on China””

  1. Gravatar of marcus nunes marcus nunes
    2. October 2010 at 09:56

    This was a letter that Don Boudreaux wrote recently to the NYT:
    “In his op-ed on U.S -China trade relations and the allegedly undervalued renminbi, Stephen Roach notes that “President Obama, in a private meeting with Prime Minister Wen Jiabao, was reported to have made it very clear that the United States is, indeed, prepared to take forceful actions if China doesn’t budge on this critical issue” (“Cultivating the Chinese Consumer,” Sept. 29).

    Translation of Mr. Obama’s threat to the Chinese Prime Minister: “If you don’t stop abusively taxing your citizens in order to grant unjust privileges to your favorite industries, we will more-abusively tax our citizens in order to grant unjust privileges to our favorite industries.”

    Sincerely,
    Donald J. Boudreaux

  2. Gravatar of Joe Calhoun Joe Calhoun
    2. October 2010 at 12:53

    Scott,

    It is amazing to me too that Krugman and other alleged liberals seem to have no problem advocating policies that are harmful to poor people. And it isn’t just poor foreigners since a lot of the Chinese products that Krugman insists should cost more than they do now are bought by poor Americans. Is a balanced trade account so important that it should be achieved on the backs of the world’s poor?

    I also wonder how Krugman can be so blind as to ignore the other countries with which we run trade deficits. What about Canada or Germany or Saudi Arabia or Venezuela or Mexico? I hesitate to call it xenophobia because that doesn’t fit but why China? And while we’re at it, why Japan before China? And it isn’t just Democrats either; plenty of Republicans voted for the Levin bill. Why is it the only area of bipartisan agreement seems to be a dislike of Asians bearing cheap goods? Who, by the way, seem perfectly (well mostly) happy to accept ever depreciating (well mostly) dollars in exchange for real things? Personally, I think we should keep doing that until the Chinese cry uncle and put a stop to it.

    Personally, I favor complete unilateral free trade but if you are going to make the protectionist argument don’t you need to be consistent? And what the heck is up with Krugman? Didn’t he make his name in trade economics? If so, he can’t possibly believe the stuff he’s writing, can he? And if he does can we do a recall on the Bates and the Nobel?

    I also wonder if Krugman and the others who are pressuring the Chinese to raise the value of the Yuan really believe that their rhetoric only affects the value of the dollar in relation to the Chinese currency? Since the Bush administration, successive Treasury Secretaries have basically told the world we want a cheaper dollar. They may say “we want a higher value for the Renminbi” but the market hears “we want a cheaper dollar”. O’Neal, Snow, Paulson and Geither may not have convinced the Chinese to revalue the Yuan but the foreign exchange market has had no problem revaluing the dollar lower against almost everything else. If the Bush Treasury or the Fed had stabilized the dollar at some level short of $150 oil (or $1000 gold or $1.6 euros or whatever your favorite metric) where would the economy be right now?

  3. Gravatar of John Papola John Papola
    2. October 2010 at 17:12

    I think Krugman might honestly have an unhealthy obsession with Keynes. One has to wonder if, at some point, he won’t shave his beard, grow out a combed mustache and adopt a British accent. Maybe he should move to Cambridge.

    What are we to make of the merits of the nobel prize when an economist who wins it for his trade theories adopts, lock stock and barrel, Keynes defunct mercantile views on national self-sufficiency.

    http://www.mtholyoke.edu/acad/intrel/interwar/keynes.htm

    What a fraud.

  4. Gravatar of scott sumner scott sumner
    2. October 2010 at 17:54

    Thanks Marcus, That’s a good letter. Geithner said no trade war recently, so I doubt Obama’s threat will do much.

    Joe, Those are good points. The Krugman of Pop Internationalism was much better. And you are right, lots of other countries have huge surpluses, often much bigger relative to their population. And lots of other countries have accumulated big stocks of foreign reserves, something he makes sound sinister.

    John, There sure are an increasing number of similarities to Keynes. The weird thing is that he still has some new Keynesian views. So his policy recommendation here doesn’t match his theoretical framework, as the US still has several policy levers to boost AD. So his own theory says we should not do protection, then he advocates it anyway.

  5. Gravatar of Richard W Richard W
    2. October 2010 at 18:13

    I believe you are right to disagree with Paul Krugman on this issue. However, I don’t think the argument that it will harm poor Chinese workers is a good one. Not because they do not matter because clearly an appreciated RMB would harm some.

    Although China on a per capita basis is a poor country most of the poorest have no connection to the export sector. They are already poor and an appreciated RMB is not going to make them poorer. The ones who would lose out are in the most prosperous areas enjoying an implicit subsidy from the rest of the poor in China. However, I agree American tariffs and protectionism would be a terrible idea.

    Although Paul Krugman would say everything changes if the exchange rate can’t adjust. It is difficult to believe that it is the same person who is calling for tariffs who was mocking others for failing to understand Ricardo.

    http://web.mit.edu/krugman/www/ricardo.htm

    This is an interesting one as well.

    http://www.pkarchive.org/global/pop.html

  6. Gravatar of Jon Jon
    2. October 2010 at 20:51

    China conducts monetary policy different than most. Its important to understand the operational distinctions of what China does because

    1) Those distinctions mean that Chinese policy does not fit the usual textbook models
    2) Prior examples such as the Japan-US trade imbalance are not dispositive.

    What’s different? The BOC effectively issues two currencies. One is a traditional currency used as the medium of exchange, unit of account, and store of value, and impacts the price-level of China. The second are bonds, issued by the BOC directly.

    Here is how China works the system: Yuan are used to Purchase Dollars on public forex markets, shifting the exchange-rate between the two countries. Now ordinarily, this sort of activity has no real-effects. It can only serve to stabilize nominal expenditures in a country with respect to another country. This arises because the transaction is inflationary for the Yuan.

    This is where China begins acting differently. They issue an equivalent amount of Rmb dominated bonds to mop up the Yuan created by the first transaction. The result is that rather than the exchange policy being driven by equal weakening of one currency and strengthening of the other, the Chinese stabilize the exchange-rate principally by raising the value of the Dollar against ALL currencies by increasing the transactional demand for dollars on the forex market.

    Meanwhile by draining the newly created Yuan they avoid creating the corresponding inflationary forces within China that would otherwise neutralize the currency intervention.

    So in short, there is a technical reason to treat China differently. Its not because they are pegging exchange-rates (lots of countries do that). Its because of their two fisted operation and concordant trade imbalances. They are the only country with both attributes.

  7. Gravatar of malavel malavel
    3. October 2010 at 02:32

    Currency manipulators really are the worst of the worst. I say we take off, and nuke the whole country from orbit. It’s the only way to be sure.

  8. Gravatar of Michael Carroll Michael Carroll
    3. October 2010 at 07:22

    “But Krugman’s a liberal, and liberals are supposed to believe every person’s welfare is equally important, and indeed that the poor are those in most need of assistance.”

    This is probably the most unserious thing I have read in months. The poverty of China shouldn’t merit any more concern that the poverty of Brazilians, South Africans, Indians or other emerging countries that can’t or won’t manipulate their own exchange rates.

  9. Gravatar of scott sumner scott sumner
    3. October 2010 at 11:06

    Richard, Krugman has a zero sum game model where any gain in jobs here is offset by a loss in jobs in China. So it is a net loss for the Chinese people. The coastal areas are richer, but most of the factory workers in those areas are migrants from poorer inland areas.

    That Ricardo essay is great, I can’t even imagine Krugman writing something like that today.

    Jon, Even if all that is right, it has no bearing on my argument. Any deflationary effect of the Chinese policy on the US can be offset by the Fed. Indeed Krugman’s own model implies this.

    The bottom line is that the Chinese government buys lots of foreign bonds. This might well lead to an equally big Chinese CA surplus even under normal conditions with a freely floating rate.

    malavel, Even nukes are too good for um.

    Michael, You said;

    This is probably the most unserious thing I have read in months. The poverty of China shouldn’t merit any more concern that the poverty of Brazilians, South Africans, Indians or other emerging countries that can’t or won’t manipulate their own exchange rates.”

    Most unserious thing? Then you need to read Krugman’s blog more often. In Krugman’s model trade balances are a zero sum game when in a liquidity trap. He wants the Chinese to revalue because he thinks it will increase jobs here, and decrease jobs in the rest of the world. So even if I talked about “all foreign workers” rather than Chinese workers, I could have made exactly the same point. And most foreign workers are much poorer than the average American worker.

    And the countries you mention aren’t stuck in a liquidity trap, so they aren’t hurt by Chinese trade policies.

    BTW, he’s wrong, it’s not a zero sum game. A higher yuan would reduce world AD, and lead to a net reduction in jobs worldwide.

  10. Gravatar of StatsGuy StatsGuy
    3. October 2010 at 18:58

    The argument about impoverished Chinese is one-sided. It implies that the world is fixed in its current state, and the US has two choices – devalue the dollar, or keep it high. Keeping the dollar high is better for poor people in china. (I’m not clear if _you_ think so, or you are merely saying that Krugman should think so – you seemed to indicate such a belief in the past, though in the past I recall you agreeing that poor chinese might be better off if with a higher value Yuan to increase their purchasing power – so what is your position, are Chinese poor better off with a lower Yuan and less purchasing power, or vice versa? Likewise, poor Americans vis-a-vis the dollar and the glorious junk it can buy at WalMart)?

    In fact, the real problem is that China is using currency policy as a mechanism to address its own socioeconomic problems, rather than deal with them through internal policy actions. You might argue that China simply doesn’t have the institutional capacity to deal with its poor without using an undervalued currency. I suspect that if China was denied the ability to suppress its currency (if, for instance, the US instituted capital controls and pegged the Yuan), China would rapidly discover heretofore unknown institutional capacity.

    I also suspect Team Obama was inclined to agree with you, and (just like Team Bush) gave China extra time to get its house in order. But lately, it seems clear that China really isn’t interested in moving away from the current paradigm because – hey, it’s worked, right?

    The China debates feel like deja-vu. I remember in 1997, when HK was moving over, there were huge debates about software piracy in China. China promised to crack down… 13 years ago. Some surveys suggest that they’ve finally made some strides in the last 3 years, although sources disagree. From the outside, it’s hard to tell how much of this is China being unable to follow through on commitments, vs. not really wanting to follow through and simply using stall tactics.

    http://www.chinadaily.com.cn/china/2010-05/11/content_9831976.htm

  11. Gravatar of scott sumner scott sumner
    4. October 2010 at 06:17

    statsguy, You said;

    “The argument about impoverished Chinese is one-sided. It implies that the world is fixed in its current state, and the US has two choices – devalue the dollar, or keep it high. Keeping the dollar high is better for poor people in china. (I’m not clear if _you_ think so, or you are merely saying that Krugman should think so”

    I strongly disagree. Both the US and the poor of China would be much better of if we were to depreciate the dollar. What I oppose is a stronger yuan.

    I would like to see China do major free market reforms, stop accumulating so much foreign exchange, open up their capital account, float the yuan, etc. The reforms would make income more equal, just as the free market reforms of the 1980s made income more equal. Indeed I’d like to see all countries do more free market reforms. Of course this wish should have nothing to do with US trade policy toward China.

    I wouldn’t worry too much about piracy–China will be a huge boon to US high tech companies in future years.

  12. Gravatar of libfree libfree
    4. October 2010 at 15:44

    Scott,

    This isn’t something I completely understand so correct me if I’m wrong. In order to revalue their currency, wouldn’t they need to stop buying dollar denominated financial assets? Wouldn’t that cause us problems financing the Federal debt?

  13. Gravatar of scott sumner scott sumner
    5. October 2010 at 06:14

    libfree, Yes, but the problems probably wouldn’t be very large. Others would buy it.

  14. Gravatar of Don’t worry about this disaster [The Economist] | DreamInn Don’t worry about this disaster [The Economist] | DreamInn
    6. October 2010 at 14:15

    [...] Sumner made this point not long ago, but contained within this paragraph is a troubling inconsistency. Mr Krugman is [...]

  15. Gravatar of Don’t worry about this disaster – Economics - Don't worry about this disaster - Economics -
    6. October 2010 at 14:43

    [...] there seems to be a growing consensus that pressure must be placed on China. But how?Scott Sumner made this point not long ago, but contained within this paragraph is a troubling inconsistency. Mr Krugman is [...]

Leave a Reply