China should raise the price of Big Macs

Here’s Noah Smith at Bloomberg:

Instead, the U.S.’s best bet is to concentrate on a key Chinese government intervention that can be measured easily — currency manipulation. Though China no longer pegs its currency to the U.S. dollar, it still closely manages the yuan’s value and maintains an extensive system of capital controls. In recent years, China usually hasn’t had to intervene in order to keep its currency cheap, since the yuan has fallen:

But the threat of intervention is still there, which undoubtedly keeps a lid on the currency’s value. Meanwhile, measures like the Economist’s Big Mac Index show that the yuan is undervalued against the dollar by about 44 percent. This effectively provides a subsidy to all Chinese exporters, and a tax on U.S. goods sold in China, thus distorting the global economy and the patterns of world trade.

As his main goal in the trade war, Trump should push for a large upward valuation in the yuan, followed by a much freer float of that currency against the dollar.

Actually, that would be a disastrous policy for China, which (fortunately) they are unlikely to adopt.  The Chinese economy is already struggling with a slowdown due to a crackdown on debt and a looming trade war with the US.  A sharp revaluation in the yuan could easily push them into a depression.  Think about it.  A rising power in the East, with a history of being humiliated by Western powers, and with a prickly nationalistic public that is intensively resentful of these past actions, is pushed into depression by a combination of a rabidly anti-Chinese American administration and some really bad exchange rate advice by Western experts.  What could go wrong?

[BTW, even if the yuan were undervalued, which it isn’t, it would not constitute a “subsidy” to Chinese firms or a “tax” on US exporters.  Words matter.  Taxes and subsidies are inefficient because they drive wedges between the prices faced by buyers and sellers.  Undervalued currencies do not do this.  If you want to argue an undervalued currency is inefficient, you need a completely different argument centered on saving rates.]

So what’s my solution?  Simple.  Have the Chinese government order McDonalds to raise Beijing Big Mac prices by 44%.  Problem solved, no more undervalued currency.  Seriously, the Big Mac index tells us absolutely nothing about whether a currency is undervalued or overvalued.  If it did, then the Swiss and Norwegians should demand that the US massively revalue the dollar, so that Big Macs over here are as expensive as in Oslo and Zurich.  In fact, all the Big Mac index illustrates is the Balassa-Samuelson theorem, which says that lower wage countries tend to have lower price levels because their comparative advantage lies in non-traded goods.  (I.e. rich countries are much more productive at building complex products, but not much more productive at cutting someone’s hair or cooking Big Macs.)

Outside the Trump administration, I doubt you’d find many international economists who think PPP should determine the proper exchange rate between any two countries.  And even within the Trump administration they’d be more likely to use “trade imbalances” as an excuse for demanding that China revalue.  The problem, of course, is that China now has the most balanced trade of any major economy in the world, with a current account surplus estimated to be 0.5% of GDP this year and 0.3% next year.  So it’s not clear what sort of “distortions” Smith is referring to.  Many of the same people who a decade ago insisted that China needed to revalue because of its current account surplus (which really was large at that time) now seek out some other reason for demanding Chinese revaluation.  I guess cheap hamburgers are as good as any, as the importance of maintaining PPP and “balanced trade” are roughly equally invalid arguments.

There is one economy that does have a massive CA surplus, the Eurozone.  And to his credit, Smith does not advocate that we demand a sharp euro appreciation (which would also be a disaster—ciao Italia):

Trump has also turned his attention away from Europe, avoiding the mistake of getting into a harmful spat with allies he should persuade to form a trading bloc and a unified front.

This also caught my eye:

There’s no way to measure the amount of state interference that China is using to shut out foreign companies. And IP theft, by definition, happens in secret and is thus difficult to detect or to prove. China’s entire economy is centered around pervasive state intervention and skullduggery — even if it made some moves to change that model, the U.S. couldn’t verify that changes had really been made.

If it can’t be measured, how can we be confident that China’s entire economy is centered around this intervention and “skullduggery”?  You might say, “it’s obvious”.  No, it’s obvious that these things happen pretty often in China, but it’s not obvious how big a problem it is.  If it were, then Smith would be wrong in claiming we can’t measure it.  How do we know that the “center” of their economy is not growing rice, or building subways, or selling life insurance?  For instance, China’s goods imports are about 15% of their GDP.  The same is true of the US, but because the US figure is for both goods and services, I presume China’s total imports are actually a larger share of GDP than in the US.  So how important are their barriers to imports? Who knows?

I am not claiming that China has fewer trade barriers than the US, indeed I believe the opposite is true; my point is that the data doesn’t provide any way of knowing how much of this is anecdotal, and the extent to which China really is much more closed than other countries like the US.  Let’s not forget that the US also does lots of “skullduggery”, like “Buy America”.

Note that if Smith is right that it’s hard to measure this stuff, then Trump may be wasting his time.  How would we even know if they adhered to any trade agreement?  That’s why Smith suggests that we instead press for yuan revaluation.  But that won’t work either.  China could simply stop having a crawling peg with the dollar, and instead have a crawling peg with the euro, yen or pound.  When you have a crawling peg, it really doesn’t matter which currency you choose.  And there is near-zero chance that China will agree to set their exchange rate according to PPP.

Smith also seems confused about the implications of what’s often called the “China shock”:

And Chinese import competition has been much more harmful to American workers than competition from Mexico, Europe or any other country. Even some Democrats support pushing back against China.

He’s referring to a study that showed the import surge from China had depressed a number of industrial towns in the US.  But then he advocates a Chinese policy that would cause an even bigger China shock:

What would constitute a win in a trade war against China? A simple goal would be to get that country to cut tariffs on U.S. imports. Indeed, China’s leaders have already offered some tariff cuts, suggesting that they’re in a mood to deal. But although tariff cuts are good, they don’t form the bulk of China’s unfair trade practices. The government underwrites its industries in a variety of ways, from cheap loans from state-owned banks to energy subsidies to export subsidies. Costs are held down because of lax environmental regulations and low labor standards — China crushes independent labor unions, for example. The U.S. government could demand that the Chinese reduce subsidies, do more to protect the environment, or improve worker rights.

Chinese tariff cuts would cause the US to export more movies and food and high tech stuff to China, and also cause China to export more “mid-tech” industrial goods to America.  If you thought the China shock hurt America (I don’t), you should not advocate an even more open China, an even bigger China shock.  You should advocate they go back to Mao’s policies, when China was closed to the world and American workers were not “threatened” at all.  Of course I don’t worry about China shocks, and thus agree with Smith that fewer Chinese tariffs would be a good thing.

Some might argue that lower Chinese tariffs would reduce America’s trade deficit.  They won’t.  But what is true is that Trump’s policies are likely to raise our deficit.

At a deeper level, all of this focus on the domestic policies of other nations is deeply misguided.  I agree that better economic policies in China would benefit the US.  However that same argument is even more true of India, Africa and lots of other places, which buy far fewer US goods than they would with more sensible policies.  But that’s because with better policies they’d be richer, not because they would no longer be “cheating” at trade.  Since the time of Ricardo, we’ve known that factors such as subsidies, weak environmental laws and low wages do not give countries any competitive advantage of international trade.  Paul Krugman demolished all those arguments a second time back in the 1990s.  Read Pop Internationalism.

I hope this post doesn’t come across as too negative, but I get frustrated reading the same misconceptions about trade, over and over again.  In fairness, there are also things I agree with in Smith’s article:

That doesn’t mean a trade war with China is without downsides and risks. Chinese retaliation against U.S. agriculture has already forced many farmers to accept handouts from the government in order to stay afloat. Disrupting the cozy economic symbiosis that has developed between the U.S. and China will cause painful adjustment, and will also increase the risk of military conflict. If Trump decided to call off his trade war against China right now, it would certainly be a safe course of action.

He’s rightfully skeptical of the Trump approach, and opposes some of the current protectionist policies:

President Donald Trump’s trade war is less bad than it was just a short time ago. After some tense negotiations, the North American Free Trade Agreement has been replaced with a new, very similar arrangement, meaning the disruption to trade — and to U.S. relations with Canada and Mexico — will be contained. The agreement might even ease the damage from the president’s misguided steel and aluminum tariffs.

Unfortunately, China pushes people to advocate policies that are highly counterproductive.  Perhaps it’s partly due to the fact that China is an increasingly powerful and successful country that really does have lots of bad public policies, especially in terms of repressing free speech, minority rights, etc.  That’s frustrating—I really wish they had better policies (Ditto for Myanmar, Vietnam, Venezuela, Saudi Arabia, Russia, Cuba, Iran, Nigeria, and 100 other countries.)  But when I read the arguments for focusing our trade war on China, none of them make any sense.  Whether it be “undervalued currencies”, trade imbalances, or domestic policies that discourage US exports, you can always find much worse offenders than China.

So what’s my solution for bad Chinese policies?  Push China to high income status as quickly as possible and hope for the best.  It worked pretty well in the rest of East Asian, where it was tried. It may not work with the mainland, but going back to the 1930s is even less likely to work.


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34 Responses to “China should raise the price of Big Macs”

  1. Gravatar of Richard A. Richard A.
    9. October 2018 at 11:58

    The Trump administration is probably going to go after Japan too. Japanese protectionism over the decades has been highly exaggerated.
    Here is an article that compares protectionism between the US and Japan.

    https://www.bloomberg.com/view/articles/2018-09-27/a-japan-u-s-pact-looks-like-the-opposite-of-free-trade

  2. Gravatar of LC LC
    9. October 2018 at 13:46

    Thanks for the clarifying post. I was just trying to wrap my brain around this post by Dean Baker,also talking about trade deficit: http://cepr.net/blogs/beat-the-press/no-one-told-greg-mankiw-about-the-great-recession. His suggested solution is to devalue the dollar. Isn’t devaluing the dollar the same solution as having RMB appreciate? If so, how would that help, especially if Fed counteracted the perceived inflation problem? However, since Dean Baker is much smarter than I am, I must have missed something. What’s your take, Scott?

  3. Gravatar of ssumner ssumner
    9. October 2018 at 14:19

    Thanks Richard, And even if Japan has some “hidden barriers”, I doubt they explain much, and they are not something that is easily addressed in trade deals.

    LC, He’s reasoning from a price change. “Devaluation” means nothing. Devaluing with easy money does not reduce the trade deficit; devaluing with high saving public policies does reduce the trade deficit. What’s his plan?

  4. Gravatar of Christian List Christian List
    9. October 2018 at 14:38

    I like this post a lot. It explains the situation from your perspective, but without downplaying China’s authoritarianism and viciousness as much as in other posts. The downplaying is still there but not as much.

    Unfortunately, China pushes people to advocate policies that are highly counterproductive. 

    The more I think about it, the more I think that successful authoritarian states such as Russia and China are responsible for the increasing authoritarianism around the world. (Memo for me: best theory I ever had.)

    you can always find much worse offenders than China.

    But none of the other offenders is a serious challenger to American world hegemony. That’s the point that matters. The China of the today, as hegemon of the world of the future would create a very different world, and not for the better.

  5. Gravatar of mbka mbka
    9. October 2018 at 16:49

    Scott,

    “Note that if Smith is right that it’s hard to measure this stuff, then Trump may be wasting his time.”

    I think that this actually helps Trump’s vicious approach to China and in general, international politics. No matter what China does in alleviating perceived unfair practices, the US can always claim that some hidden factor or hidden data invalidates the policy change. I believe the entire purpose of the Trumpians is to create a kind of cold war with China. This interpretation btw also explains the soft stance on Russia – they want their backs clear to focus on China. They don’t want any kind of resolution, they just want to harm China. Witness recent news that the US puts clauses in its new trade agreements (NAFTA 2) that prohibit these countries from concluding future trade deals with China as a condition for the trade deal with the US. Witness noises just yesterday that any IMF bailout money for Pakistan should not be used to pay back Chinese loans. etc. It is brazen blackmail and clearly indicates that the entire purpose of this administration’s policy is to harm China.

    In the wider scheme, the US doesn’t seem to believe it can keep its position in a world where everyone obeys the same rules, hence the hostility to international rule-based order (that the US itself had helped create). That type of thinking btw also came out recently when the EU proposed zero tariffs on cars both ways and Trump immediately rebuffed the offer, because, says he, Europeans won’t buy American cars even then. So, fairness doesn’t matter to the Trumpster, he wants money for nothing (as he always has) because he thinks America is entitled to its post WWII position.

    In all fairness, it didn’t start with this administration. I remember before the Iraq war, the Bush administration made noises about going after China, and at some point Kissinger wrote some editorial on how the US should occupy the Middle East to control the oil supply of both Europe and especially China. So when they started the Iraq war, my first thought was, as bad as this is going to be for the Middle East, it is also going to be a disaster, and as a result it will actually benefit China because it will distract the US with a useless quagmire for a long time.

    And that’s exactly what happened. Iraq was of course a delayed-action overreaction to 9/11. Somewhat ironic, that maybe, maybe, islamist terrorism could be credited with allowing 15 more years for China to develop in a relatively undisturbed way.

  6. Gravatar of mbka mbka
    9. October 2018 at 17:00

    Christian List,

    “But none of the other offenders is a serious challenger to American world hegemony. That’s the point that matters.”

    as above, I completely agree.

    “The China of the today, as hegemon of the world of the future would create a very different world, and not for the better.”

    2 Years ago I would have agreed but not today. The US is dismantling its own creation, an incipient rule based world order, imperfect as it may have been, and supplants itself as some kind of arbitrary bully who just wants the best seat in the restaurant. While China just created a kind of Marshall plan for the rest of the world. Again, kinda ironic.

    Big picture: No country is beloved by other countries in the long run for some kind of emotional reasons. Countries have allies for transactional reasons, and countries are either loved or hated because of the externalities they create in the pursuit of their own interests.

    For example, Russia consistently creates negative externalities in the ruthless pursuit of its self interest. As a result, it has few friends, except transactional ones like Syria. The US by contrast, for a very long time, produced positive externalities in the otherwise ruthless pursuit of its self interests – supporting free trade, rule based order, world policing. This is why many have sided with the US for a long time – they got something out of US actions, even though they had to hold their noses sometimes.

    Trump now declares that he won’t be producing any more positive externalities for the rest of the world, and will focus exclusively on the ruthless pursuit of American self interest. As a result, America very soon won’t have any more friends at all. China, with belt and road, made at least a fig leaf attempt at creating positive externalities in the otherwise ruthless pursuit of its self interest…. See a pattern? This is not about morals btw. This is about, who supports whom and why.

  7. Gravatar of Joseph Calhoun Joseph Calhoun
    9. October 2018 at 17:01

    “Think about it. A rising power in the East, with a history of being humiliated by Western powers, and with a prickly nationalistic public that is intensively resentful of these past actions, is pushed into depression by a combination of a rabidly anti-Chinese American administration and some really bad exchange rate advice by Western experts. What could go wrong?”

    Change that from yuan to yen and I think we’re talking about the Plaza Accord. And yes it pushed Japan into something although I’m not sure I’d call it a depression.

  8. Gravatar of Benjamin Cole Benjamin Cole
    9. October 2018 at 20:45

    Believe it or not, I mostly agree with this post. China is too big and too opaque to make proclamations with certitude. So, most observers fall back on their biases and issue observations.

    Also, remember this: in the Far East (and in some regards, Germany), commerce is the offspring of a mating of business and government.

    The idea of international “free, “fair,” or “foul” trade is meaningless. Bring an umpire to the NFL game, and you will get equal insights.

    Accordingly, the “free trade” crowd is far too glib. There are serious questions about how economies develop and re-develop, and whether industries can develop without some government umbrellas—especially since other governments provide industry with umbrellas, galoshes and raincoats.

    “Dirigistes” is a great word. It also describes the economy of Singapore, btw.

    Can US factories compete with factories in dirigistes economies? Probably not.

    In Singapore or China, a company can get free land, free capital, and a permanent tax holiday if exporting (the VAT rebates). Some protectionism, but also free employee training, technical assistance, industrial park build-outs, special utility rates. And, possibly, labor repression in China. The policy of Singapore is to obtain current-account trade surpluses.

    I think the free traders have the blinkers on to pass over all the above, and say the results are fine and dandy. The way economies develop and re-develop is a fascinating topic. We are a long way from David Ricardo and mutton and grapes. Why is Singapore so successful?

    The US today has an auto industry, and makes the world’s best pick-up trucks. I doubt there would be any vehicles built in the US, if open borders had prevailed (protectionism in vehicles extends back to at least the Nixon days). Is having no vehicle industry really in US interests? I find that dubious proposition.

    Conversely, the USDA and federal subsidies nearly define Rural America (a pink-o wonderland), where roads, railroads, phone service, internet service, water and power systems, airports and more are cross-subsidized or built by the federal government, and corn growers drink (federally mandated) fuel-ethanol profits. And the US stands tall as a agriculture-products exporter. A lesson there?

    The US finances huge current-account trade deficits by selling assets or issuing debt. Very similar to early colonization models of…well, banana republics. Meanwhile, our foreign-policy appears to be made by multinationals and the US military has become a global guard service for multinationals.

    Yet Paul Krugman says Western macroeconomists have sacralized “free trade.”

    When a theory becomes a theology….

  9. Gravatar of mbka mbka
    9. October 2018 at 23:13

    Benjamin Cole,

    “a permanent tax holiday if exporting (the VAT rebates).”

    Pleeeeease! Not again! Just read up on how a VAT works. Once and for all. BTW all of Europe has VAT, mostly around 20%. For your reference, Singapore’s is 7%.

    “I doubt there would be any vehicles built in the US, if open borders had prevailed (protectionism in vehicles extends back to at least the Nixon days).”

    Building cars in the US dates back to at least Teddy Roosevelt :)

    The 25% tariff on pick up trucks sure helps US pickups to remain as technologically backwards as they are. Nothing wrong with a simple and cheap product but they don’t exactly evolve at warp speed either, thanks to being insulated from competition. And that is the fate of all protected industries: to stagnate.

  10. Gravatar of Benjamin Cole Benjamin Cole
    9. October 2018 at 23:53

    mbka–

    I no savvy what you say.

    In most VAT nations, exporters are exempted from the VAT tax. Those exporters make no contribution to the national infrastructure, national security, fire and police, public health, educational services and so on. Exporters piggyback, or freeload, on taxes paid by other industries and people. It is a hidden subsidy.

    If you think producing modern vehicles is a low-tech enterprise, I advise you look into the industry. Lots and lots of very smart people continuously observe auto production and how to improve it and the product.

    As far as I know, President Nixon was the first to begin protecting the US auto industry. Reagan did his share and specifically saved Harley-Davidson motorcycles. ROAR!

  11. Gravatar of Benjamin Cole Benjamin Cole
    10. October 2018 at 02:22

    Sad headline de jour regarding Beijing rulers….

    “China’s assault on Hong Kong’s freedoms threatens city’s global role
    Journalist’s de facto expulsion sends shivers through media, finance and business communities

    Keith B. Richburg
    Nikkei Asian Review
    October 10, 2018 14:00 JST

    Media representatives hold a letter expressing their concerns outside the government headquarters in Hong Kong on Oct. 8. © AP

    Since assuming sovereignty over Hong Kong in 1997 — and particularly since the “umbrella movement” pro-democracy protests four years ago — China’s Communist rulers have been moving steadily but unmistakably to assert total control over the former British colony, imposing their concept of “one country” at the expense of the promise of “two systems.”

    —30—

  12. Gravatar of mbka mbka
    10. October 2018 at 02:30

    Benjamin Cole,

    What I am saying is that
    – the VAT is a staggered end consumer sales tax that only applies to sales in that country or state. Same goes for other sales taxes, for example US state sales taxes: they only apply in-state. And they apply to domestic producers who sell locally, as well as international producers who sell locally. They’re all equal before the sales tax or VAT. So where is the subsidy? It’s a ridiculous claim.
    – the US produced cars just fine until Nixon
    – the production of US pickups may be high tech, the product isn’t, in part due to EPA exemptions and tariff production

  13. Gravatar of Todd Kreider Todd Kreider
    10. October 2018 at 02:56

    Scott wrote: “The Chinese economy is already struggling with a slowdown due to a crackdown on debt and a looming trade war with the US.”

    This is isn’t correct. China’s slower growth, down from years of an average of 9%, began several years ago in 2012 and was unrelated to a crackdown on debt and a looming trade war with the U.S.

    2012 7.8%
    2013 7.8%
    2014 7.3%
    2015 6.9%
    2016 6.7%
    2017 6.9%
    2018 6.8% <–trade skirmishes

    There has been no slowdown from 2015 and only a slight slowdown from 2014. China has a "struggling economy?"

  14. Gravatar of Todd Kreider Todd Kreider
    10. October 2018 at 03:54

    By the way, China’s GDP per capita (PPP) is at $18,000. By 2030, it will be:

    $34,000 if 6% growth Slovakia today (unlikely)
    $31,000 if 5% growth Portugal today (possible)
    $28,000 if 4% growth Russia today
    $25,000 if 3% growth Chile today

    Japan in 2030:

    $55,000 if 2% growth

    U.S. in 2030:

    $75,000 if 2% growth

  15. Gravatar of Richard A. Richard A.
    10. October 2018 at 06:04

    Scott,
    Hidden non tariff barriers are WTO illegal. If Japan is guilty of such practices, we could and should take them to the WTO. The fact that we don’t should be a tip off that such charges are nonsense. BTW, Trump is attempting to strangle the WTO.

  16. Gravatar of Craig Fratrik Craig Fratrik
    10. October 2018 at 06:08

    Speaking of good East Asian economic policies, there is an excellent EconTalk episode this week: Neil Monnery on Hong Kong and the Architect of Prosperity

  17. Gravatar of Christian List Christian List
    10. October 2018 at 11:19

    @mbka
    I think we agree that the authoritarian China of today will be even more dangerous with even more economic power. As I said: China and Russia are directly responsible for the fact that the authoritarianism continues to expand worldwide. Now I see more clearly than ever that Trump is a direct response to that. He fits exactly in this theory.

    While China just created a kind of Marshall plan for the rest of the world. 

    China supports authoritarian regimes worldwide with billions of dollars. Unfortunately, this is the opposite of the Marshall Plan, whose goal was, among other things, to curb the power of authoritarian regimes worldwide.

    People like Scott Sumner almost only see the economy, the values ​​and politics are almost completely forgotten. This extremely naïve behavior could hurt us extremely. The world of tomorrow can be a completely different place. The world is clearly heading in the wrong direction right now.

    P.S. Maybe I will answer your comment about Applegate in the next days or so. I do not know yet. But Tullius’s answer was already pretty good. I guess my answer wouldn’t be much different.

    @Benjamin Cole

    In most VAT nations, exporters are exempted from the VAT tax. Those exporters make no contribution to the national infrastructure, national security, fire and police, public health, educational services and so on. Exporters piggyback, or freeload, on taxes paid by other industries and people. It is a hidden subsidy

    Everything you write about this topic is wrong. Even I see that. It surprises me that you are so extremely dense about this simple topic. Don’t pull off another “E. Harding” please. What’s next? Stalin never invaded Poland?

  18. Gravatar of ssumner ssumner
    10. October 2018 at 16:11

    Christian, You said:

    “downplaying China’s authoritarianism and viciousness as much as in other posts”

    I’ve never downplayed Chinese human rights violations. I simply refuse to “upplay” them. It’s all in your overheated imagination.

    And aren’t you getting sick of the US playing the “hegemon” role? How about a world with no hegemon?

    You said:

    “China and Russia are directly responsible for the fact that the authoritarianism continues to expand worldwide. Now I see more clearly than ever that Trump is a direct response to that.”

    Did Russia put Trump in power? Why does Trump like Russia but hate China?

    mbka, I agree that this is about harming China, but I think they’ll find this harder to do than they assume.

    And don’t try to help Ben, it’s a hopeless cause. Take it from someone who’s wasted lots of time trying to do so.

    Joseph, Yes, there may be a point there, although I’d emphasize the persistent pressure on exchange rates. But that’s not to absolve the BOJ.

    Todd, I actually agree with your comment, but that’s not what I was talking about. I was referring to the recent fall in Chinese stocks, which (probably) reflects a current slowdown not yet in the data. I agree that past data does not reflect trade, and only slightly the credit crackdown.

    Richard, I think you mean China? In any case, I agree, but these things may be hard to prove.

    Thanks Craig.

  19. Gravatar of mbka mbka
    10. October 2018 at 16:42

    Christian List,

    “China supports authoritarian regimes worldwide with billions of dollars. Unfortunately, this is the opposite of the Marshall Plan, whose goal was, among other things, to curb the power of authoritarian regimes worldwide.”

    The Marshall plan was about not letting Europe be lured in the arms of the rising other superpower. But of course it had a massive humanitarian upside, a positive externality.

    Belt and Road is about bringing countries into China’s orbit, authoritarian or not. And it also has a large positive externality. And both the EU and the US are now compelled to compete with it.

    Also – in development economics it is now well documented that economic development often comes before democratisation. That’s no reason the regress from freedom and democratic values in already well developed nations, something we see now in many European countries.

    I don’t see how this is sparked by China or Russia. The proof is in the pudding: The Syrian refugees didn’t run to Russia. No one does. They ran to the EU and specifically, Germany. If that’s not a compliment and proof of what people really want, then I don’t know.

    Applegate: ? must have been someone else

    Scott,

    thanks, I think I’ll also give up on Benjamin Cole now.

  20. Gravatar of TheManFromFairwinds TheManFromFairwinds
    10. October 2018 at 16:48

    You joke, but in my native Buenos Aires we did exactly this! (under the prior populist government, of course). Clearly we are visionaries.

    https://www.pri.org/stories/2012-02-07/argentina-likely-manipulating-big-mac-prices-keep-inflation-seemingly-lower

    McDonalds ended up complying with the govt, but basically took off the Big Mac from the menu by hiding it in the dollar menu.

  21. Gravatar of Todd Kreider Todd Kreider
    10. October 2018 at 20:58

    ” I was referring to the recent fall in Chinese stocks, which (probably) reflects a current slowdown not yet in the data.”

    Ok, Scott! ha ha. I read “struggling economy” not “struggling stock market.” You just posted that a large drop in the U.S. stock market means nothing, which is of course [almost always] true.

  22. Gravatar of j r j r
    10. October 2018 at 22:35

    Scott,

    You said:
    “Outside the Trump administration, I doubt you’d find many international economists who think PPP should determine the proper exchange rate between any two countries.”

    If I understand the literature correctly, there is a a long-run tendency for PPP to converge, but that Balassa-Samuelson says that convergence won’t happen in goods with a high component of non-tradable factors.

    I happen to be going through the IMF’s most recent methodology paper on assessing external balances and exchange rates and notice that PPP does figure into their model, but interacted with other terms as a way of measuring the productivity of an economy. My understanding is that when PPP is out of alignment with the relative productivity of an economy, that may be a sign of REER mis-alignment.

    Am I getting this right? My ultimate question is this: In your opinion, is Smith committing a category error or is he simply under-estimating the amount of non-tradable factors that go into making and selling a Big Mac?

  23. Gravatar of Richard A. Richard A.
    11. October 2018 at 07:53

    Scott,
    I did mean Japan. Trump’s next target appears to be Japan. Unlike us, Japan has no tariffs on autos. The Trump administration is trying to resurrect the popular lie from the 80s that Japan has hidden non-tariff barriers on auto imports.

  24. Gravatar of Todd Kreider Todd Kreider
    11. October 2018 at 12:34

    “I was referring to the recent fall in Chinese stocks, which (probably) reflects a current slowdown not yet in the data.”

    As I thought, the Shanghai Index hasn’t correlated with GDP growth in the past few years that I can see and likely isn’t now either:

    2014: The Shanghai Index (SSE) increased 30% but GDP still the same at 7%

    2015: The SSE shot up 60% in summer then back to the January 1st level, GDP up 7%

    2016: The SSE was flat, GDP up 7%

    2017: The SSE was flat, GDP up 7%

    2018: The SSE fell 14% in the first half, GDP still growing at 7%

  25. Gravatar of SnoopBillTwinkle SnoopBillTwinkle
    11. October 2018 at 13:59

    The problem with China has nothing to do with their currency interventions (or so I think) but rather their poor record on human rights and their threat to the current hegemony. If America decides to withdraw from the South China Sea, it could lead to a military takeover of Taiwan. I’m also highly concerned about the status of the Ugyhurs, the Muslim group that has been persecuted by the CCP. Not to mention their authoritarism and illiberalism. I was disappointed in your characterization of China has having been bullied by Western Powers when they engage in highly illiberal policies themselves, such as the Great Chinese Famine and Tianeman Square Massacre.

  26. Gravatar of Christian List Christian List
    12. October 2018 at 07:25

    @Scott

    And aren’t you getting sick of the US playing the “hegemon” role? How about a world with no hegemon?

    America was there for Europe in one of its darkest hours. Without the US, Europe would be a fascist or communist colony. Europe is free because of the US hegemon not despite of it. I meet so many Americans (and even Europeans) from whom I hear this “the US should not be a hegemon”-nonsense.

    I think that’s because you lived too long under the American “protective bell”, the dome that provides freedom and prosperity. If you live too long under a cheese bell or a glass dome, you will eventually forget that the dome is even there, and think you can live without it but you actually can’t.

    When you look at history, there was never a time of prosperity in which there wasn’t a good hegemon. The periods without a benevolent hegemon were always times of war, chaos, and complete decline. Ages of darkness that I never want to experience in my life. You want your naive Phenicia, your Carthage but Phenicia and Carthage got burnt down to the ground several times.

    I’ve never downplayed Chinese human rights violations. I simply refuse to “upplay” them.

    Which is the same thing.

    Did Russia put Trump in power?

    No, that’s a liberal conspiracy theory, gladly taken up by the deep state. And the conspiracy theory is getting more and more extreme. Now they are doing this kafkaesque Dreyfuß affair. It would be funny to watch if it weren’t so kafkaesque and sad.

    @mbka

    I don’t see how this is sparked by China or Russia.

    In some countries it’s a direct influence by Russia and/or China. In Cambodia for example it’s China.
    In the case of Western countries it’s two things: Fear and admiration. Similar mechanisms lead to the rise of Fascism in the 1920s. People tend to forget that at that time the communists raged brutally in Russia and that there were powerful communist movements in Germany and Italy, directly controlled by Russia, some of which were about to take power, which would have led to very similar results.

    So let’s start with fear. Plausible fear of the authoritarian regimes abroad and weak governments at home, who often have not responded adequately, leads to the election of a strongman. Applebaum’s piece is an impressive example of this blindness and downplaying. As a result countries like Poland choose strongmen themselves. It’s really easy to understand.

    On the other hand, there are certainly people who admire autocrats in general and therefore pick their own strongman at home. The result is the same.

    They ran to the EU and specifically, Germany. If that’s not a compliment and proof of what people really want, then I don’t know.

    Yeah, they ran to the country where every immigrant gets free housing, free health care, free food, free heating, free electricity, and at least 400€ cash per person and month. Everything paid by the taxpayer. Generations of economists won’t be able to explain why those migrants moved to Germoney. It’s a real miracle indeed.

    Applegate: ? must have been someone else

    Sorry, I meant Applebaum.

    @SnoopBillTwinkle
    You are 100% correct.

  27. Gravatar of mbka mbka
    12. October 2018 at 23:23

    Christian List

    “Yeah, they ran to the country where every immigrant gets free housing, …”

    For the record I also disagree with the ridiculously generous handouts in some European countries, but it’s a fallacy to believe that this is the main motivator for immigrants. I’m a lifelong serial migrant into various countries, and believe me, what you want from a country is the following, in this order:

    – that they let you in
    – that they process your papers in reasonable time
    – that they don’t treat you much worse than the natives
    – rule of law in general
    – that you have opportunities to make it by yourself
    – that the natives don’t hate you

    The first 3 are obvious – if they don’t let you in or it all takes too long and the process is unpredictable, all other points are useless. Germany had all of the above in the migrant crisis. That’s why they ran to Germany. It is not hard to understand.

    All and any immigrants want to live on their own feet in dignity first. Whenever there are large handouts such as in Western Europe, they’re actually counterproductive – they prevent people from working when the handout is larger than expected income from work (often the case in Europe), and make people psychologically miserable. The worst is countries that prevent people from working and force refugees to remain on handouts.

    So I am pro immigration and anti handouts. Mind you, these handouts are the same as the ones that natives get, and the exact same issues arise with the natives. Therefore, I am anti handouts for the natives too.

    Note, the refugee wave from Syria was not a classic immigration wave. These people ran from a war. The economic refugees to Europe that the far right is wetting itself over in Europe, come from Eastern Europe: Ukraine and the like.

  28. Gravatar of Christian List Christian List
    15. October 2018 at 15:28

    mbka,

    but it’s a fallacy to believe that this is the main motivator for immigrants.

    No, it’s not. It’s one main motivator and the only explanation why they cross so many borders and pay thousands of Euros to human traffickers just to reach one specific country.

    I’m a lifelong serial migrant into various countries, and believe me, what you want from a country is the following, in this order:

    It might be what you want. There’s no „we“.

    Whenever there are large handouts such as in Western Europe, they’re actually counterproductive – they prevent people from working when the handout is larger than expected income from work (often the case in Europe), and make people psychologically miserable.

    This is true. In Europe the marginal tax rate for these people is about 80% to 100% or even more. That’s crazy. But it completely contradicts what you said before. You said these people are NOT here because of the handouts, remember?

    Note, the refugee wave from Syria was not a classic immigration wave. These people ran from a war.

    They ran pretty far. All the things you said above is true for Libanon and Turkey. But without the handouts. So they pay thousands of euros to human traffickers who bring them through at least half a dozen countries until they reach their land of milk and honey.

    The economic refugees to Europe that the far right is wetting itself over in Europe, come from Eastern Europe: Ukraine and the like.

    I doubt that. The focus of the far right seems to be on „asylum seekers“ from Asia and Africa.

  29. Gravatar of mbka mbka
    15. October 2018 at 22:33

    Christian List,

    most (probably 80%) of Syria refugees stayed in Lebanon and Turkey. And if the EU processing had been working as intended, many would have stayed in Greece too, or further down the road in Hungary and Austria. Germany in many ways was the only option for them, since they had been hushed away and channeled through by all the other countries that _should_ have taken them in, processed them, and redistributed them. Since these other countries and the rest of the EU ignored their duties, Germany decided to let them in to prevent more disaster. As a thanks Germany got blamed by the actual culprits like Hungary, Poland and the like, who took in no refugees, but still got outraged aplenty.

    Anyhow: is opportunity for a better life not a sufficient motivator for you, or overcrowded camps? Would you risk all the money you have, and drowning your kids in the process, to receive handouts in an unknown far away country which most people _walked_ to? This explanation makes _zero_ sense to me. NOT having your 15 year old drafted into an unwanted civil war, NOT staying in an 1 mio strong refugee camp in Turkey, and yes, having an opportunity to make an honest living, don’t you think these are humanely strong enough motivators?

    Related:

    “It might be what you want. There’s no „we“.”

    Why do you assume that other humans are somehow fundamentally different from yourself? I don’t.

    And I never said “we”.

    “The focus of the far right seems to be on „asylum seekers“ from Asia and Africa.”

    Exactly my point. The focus of the far right is to assume that Asian and African asylum seekers come for the money. The truth is that these asylum seekers actually come for asylum – from war. The ones coming for the money with no war at home come from Eastern Europe. They are apparently OK for the far right because, well, who knows? Maybe because they’re … white?

    If your assumption about “asylum seeker = handout seeker” is true, how come masses of people run from Syria and Libya, 18-ish and 6-ish million strong, throw in Afghanistan with pop 40-ish mio and that’s where most asylum seekers come from, countries with hot wars. Not from countries with no wars and far higher population such as Morocco, Algeria, Tunisia, Egypt, Ethiopia, to name a few African / “Arab” countries which in combination must have a population of 300 million. I don’t even mention Iran, pop 80 mio. No, most come from Syria, Libya, and Afghanistan. Entirely consistent with the concept that people primarily run _from_ war, and secondarily, _towards_ opportunity. Handouts have little to do with it, but politically yes it’s a nice concept to pander to the envy instinct of rich Westerners (“they take our handouts!”).

  30. Gravatar of Christian List Christian List
    17. October 2018 at 10:54

    mbka,

    And if the EU processing had been working as intended

    You say things like that a lot, in the Applebaum thread as well. But it’s just not true. The law is exactly the opposite. According to Dublin III (which is still in place, even in 2018) Greece was the country who should have dealt with them. That’s the European law until this very day, another settlement was never reached, and it’s even more true for 2015, and it’s even more true for Germany, because it even says so in the German constitution which was changed in the 90s for exactly the same reasons of today: Right wing parties on the rise, massive handouts, and “tourism” by asylum seekers. So don’t talk so much about “the rule of law”. Merkel and her partners never cared about the law at all. If they cared just 10% about the law 2015 would have never happened.

    is opprtunity for a better life not a sufficient motivator for you, or overcrowded camps?

    I understand them perfectly. Maybe I would do the same thing if I were in there place. But that’s not how the asylum laws work. That’s not how the EU should work. That’s not how a humane and effective refugee policy should work at all. I’m even in favor of spending a lot of money for them but you should do this as effectively as possible. But that’s not what’s happening, not at all. It’s the complete opposite: Ineffective spending and so much waste.

    most (probably 80%) of Syria refugees stayed in Lebanon and Turkey.

    Exactly my argument. If 80% can stay there, then 100% can stay there, too. Don’t make up silly arguments where 80% is fine but 20% more is not. It’s ridiculous.

    The truth is that these asylum seekers actually come for asylum – from war.

    The truth is that war does NOT entitle you to asylum in Germany. Another basic rule that Merkel broke in 2015.

    Not from countries with no wars and far higher population such as Morocco, Algeria, Tunisia, Egypt, Ethiopia,

    The countries of origin can change considerably from year to year. For example in 2015 Kosovo, Albania, and Serbia was in the top 5. What war was happening there in 2015? I must have missed that war. Now in 2018 Eritrea, Nigeria, Somalia are up there. Of course wars can play a very important role (nobody denies that) but again this has NOTHING to do with asylum according to the law. There’s always a war happing somewhere in the world, asylum laws are not built for that, at least not in Germany.

    Handouts have little to do with it,

    They have everything to with it. You don’t seem to get the distinction between push and pull factors. Leaving Syria to Turkey and Lebanon is 100% understandable and 100% push. That’s what a refugee does and who wouldn’t do it. But then about 20% seem to leave Turkey and Lebanon, are paying thousands of euros to human traffickers, cross at least half a dozen countries until they reach their desired lands of handouts. That’s pulling with handouts. Simple migration, in this case because of handouts. Of course there are many people from Syria (etc) who are coming to work, but as I said before: When you are in countries like Germany, you are in a handout trap, you face 80, 100, or 150% marginal tax rates, so it’s even completely understandable when a lot of people are sane enough to take the handouts for decades under such conditions. But that’s not helping anybody.

    I don’t know how this will play out in the end but please excuse me if I have doubts.

    The most cautious guess I have is that it’s a gigantic waste of money and resources. I bet that with only 1/6 to 1/3 of these resources, you could help 200-1000% more people directly in countries like Lebanon. Or even better: Make a charter city like Hong Kong in every country from Morocco to Afghanistan, from Egypt to Somalia to Nigeria. But please stop wasting all this time, and resources, and money.

  31. Gravatar of mbka mbka
    17. October 2018 at 18:37

    Christian List,

    ” According to Dublin III (which is still in place, even in 2018) Greece was the country who should have dealt with them. That’s the European law until this very day, another settlement was never reached”

    that’s what I keep on repeating, here and in the other thread. Germany alleviated issues created because Greece, and the countries on the Balkan route, failed to do their job. The ultimate root cause was of course that there was, and still is, no EU force to secure the EU borders – this is the greatest of all EU failures. There was too little European integration, rather than too much.

    The refugees stayed in Germany because all other EU countries refused to have them distributed there, which was, and is, the complement to the port-of-entry processing in EU law. Germany opened its borders to put an orderly end to the crisis by absorbing the refugees, and yes of course this was not what EU law had intended. It was done because of the failures of the rest. The alternative would have been disastrous, civil war-like situations in Greece and beyond. So Germany saved the rest of the EU and controlled the social side effects admirably – yes there was the Cologne disaster but for the scale of the matter, there were remarkably few problems.

    The political price the German government pays now is another matter, that’s because the common voter doesn’t really understand what happened, why it had to happen (“alternativlos”), nor do they much care for the common good, especially the common European good. They just care for their handouts.

    Then again, when you see how the Greens soared in Bavaria… it’s not all going AfD either. There is some hope.

  32. Gravatar of Christian List Christian List
    21. October 2018 at 10:46

    mbka,

    no EU force to secure the EU borders – this is the greatest of all EU failures.

    Another very common diversionary tactic that you can hear from Merkel as well. Everybody involved knows that any European border control is not allowed to send anyone back. They need to let everyone in as soon as the migrants speak the magic words. Europe got no border control. The problem is the laws, not the border control itself. European politicians don’t want to change the laws, so it makes no sense to waste billions of euros on “border control”.

    Germany opened its borders to put an orderly end to the crisis by absorbing the refugees,

    This isn’t solving anything, it’s just pulling more and more immigrants. The camps in Greece are more crowded than ever. Firstly, because Greece is extremely incompetent and corrupt, but more importantly, because states like Germany are still pulling like crazy.

    The alternative would have been disastrous, civil war-like situations in Greece and beyond.

    Statements like this may be common, but they are extremely dubious. It’s like you said: 80% of the refugees live in Turkey and Lebanon. There’s no civil war there, so why there would be one in Greece? There’s no indication for that. That’s just fake news, populism, and fear mongering of the worst kind.

    Merkel loves to lie in very similar ways. In August 2015, when the weather was warm and sunny, she created an urgency that was never there. In Hungary, a few hundred refugees were stranded at a train station. Merkel panicked and opened the borders and drew about 1.2 million people directly from Turkey via Greece. Then in March she suddenly tried to close the border in a deal with Erdogan. In the meanwhile the main routes trough the Balkans were already partly closed by Austria and the Visegrád Group. Frontex has nothing to do with this.

    nor do they much care for the common good, especially the common European good. They just care for their handouts.

    So they do have something in common with a lot of handout seekers from abroad. The question is why Germany should import even more of them. The rise of handout seekers in Germany is frightening. Normally, during an economic boom, the number of welfare recipients should fall sharply. Under Merkel, the number has increased from about 4 million to 6 million instead. Better don’t think about what will happen if Germany gets into an economic crisis.

    It’s also a bit understandable that there are Germans who get angry when they’ve worked 20-30 years, paid 20-30 years into the social security funds, and then they get the exactly the same handouts as asylum seekers who never payed into the system.

     Greens soared in Bavaria

    The Green Party is not much better than the AfD. The Green Party stands for ideology, anti-science, and massive intervention by the state in all areas. Basically, the core areas of AfD and Greens are identical. But the Green Party is much more dangerous because they are the favorite party of the rich, the academics, the civil servants, and the media. In short: It’s the trend party of the elite. This can not really be said about the AfD.

  33. Gravatar of mbka mbka
    21. October 2018 at 21:42

    Christian List,

    we’re plateauing on diminishing returns in the discussion. Ironically, I’d agree with much of your assessments of Merkel, pre-crisis (here and in the other thread). It is during the Greek and Syrian refugee crisis that she shone, in my opinion, merely by holding the ship steady, and this is where I admire her skills. Same for May, not much of a fan per se, but in this mess… merely surviving the bickering body politic and remaining the sight on a larger goal is a feat.

    Anyhow, this:
    “The Green Party is not much better than the AfD.”

    You must be joking. The Greens are a well-worn SPD replacement, have been around since the 1980s, have participated at all levels of government, and Germany is still standing. While the AfD went from a critical position on fiscal probity and the like, to rabid anti foreigner polemics and belittling the importance of the holocaust, in the space of a year or two. So while the Greens have moderated their ideology (Joschka Fischer, fer crying out loud!) to become more or less the establishment, the AfD has taken the exact opposite direction. It is far more dangerous.

  34. Gravatar of Christian List Christian List
    22. October 2018 at 08:25

    mbka,

    by holding the ship steady

    Our definition of “holding the ship steady” seems to be very different. She has made the worst election results for her party ever, and yet she did not resign. She admitted that she lost complete control over immigration, and has no real intention to change this ever. The EU, under her leadership, is as unstable and disunited as never before in its history. Just to name a few examples. So yeah, the ship is as steady as the Titanic right after hitting the iceberg.

    have been around since the 1980s,

    Exactly. The AfD is just 5 years old. The Green Party was pretty radical back then. To make a fair assessment you have to compare both parties when they are 5 years old. It’s pretty simple with the AfD: Either they become more moderate like other parties before them, or they go under. There’s no need for fear mongering.

    It is far more dangerous.

    As I said before: I find parties with real power more dangerous than parties with close to no power. The Green Party is the most trendy, most modern party that Germany got. And that is indeed very frightening because they have so strong anti-liberal tendencies. As I said before: On a more abstract level the Green Party is the politically correct anti-liberal party. Liberal in the European sense.

    With all the knowledge that we have, there should be a much better party. Unfortunately, a really good party does not exist, especially not in Germany.

    we’re plateauing on diminishing returns in the discussion.

    Yeah, you are right. Let’s leave it at that.

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