More on China bashing
My recent post on China elicited lots of comments:
1. Some argued that China steals far more jobs from the US than northern Europe, despite the bigger current account surplus in northern Europe. This argument seems based on a sort of crude mercantilist model that even Paul Krugman couldn’t stomach. If there is any respectable argument that CA surpluses steal jobs (and I doubt there is) it is based on the impact on world saving, not whether that particular country happens to sell lots of goods to the US. I could easily argue the opposite, that if we didn’t buy low tech goods from China, we’d buy them from other Asian countries. But if Germany didn’t sell turbines to China, the Chinese would buy those turbines from the US. That argument would also be bogus, despite is superficial plausibility. Again, in the Keynesian model it’s the impact on world saving that matters, nothing else.
2. A second argument was that the Chinese surplus reflected government policy decisions. They did acknowledge this was true of Norway, but suggested that a Sovereign Wealth Fund was a valid way of addressing the oil bonanza. But as this study of the Nordic countries shows, the high savings rates do reflect government policies:
The fiscal performance of the four leading Scandinavian economies, both prior to and during the Great Recession, has been outstanding. The headline budget deficits for all four economies peaked below three percent of GDP – compared with 11 percent of GDP in the US and the UK. The underlying budget balance – adjusting for the economic cycle – remained in surplus in three of the Scandinavian economies and was only slightly negative in Norway. The comparable US and UK deficits were nearly nine percent of GDP. Much of this success can be attributed to pro-market reforms, such as the introduction of fiscal rules, following the early 1990s Scandinavian economic crisis.
The northern European countries also tax consumption more heavily than savings. I don’t know all the details, but they have lower corporate taxes than the US, and some have no capital gains taxes, while others have no inheritance taxes.
3. I also find the rhetoric used by many commenters in the media and/or comment sections to be extremely repulsive. There’s a sort of “if we get tough with the Chinese they’ll bend to our will” theme. Replace ‘Chinese’ with ‘Africans’ and see how that sounds. In all of American history I can think of only one example where punitive trade barriers against foreign countries were appropriate; Japan and Germany during WWII. Otherwise sanctions usually make problems worse, not better. In WWII we wanted sanctions to hurt their economies, but that shouldn’t be our policy in anything but the most dire scenario.
4. I also got criticism for pulling the race card. I see a steady stream of criticism directed at East Asia, which is far greater than what’s directed at Europe. When I was young the rhetoric against Japan was on a completely different level of viciousness from what was directed at Germany, despite the fact that Germany also ran large deficits. So there is nothing new about the focus on China, despite Northern Europe’s much larger CA surplus. Many American protectionists claim that countries like Korea “cheated,” that they only got rich via mercantilist trade policies. This despite the fact that Korea ran persistent trade deficits during its high growth years (1970s and 1980s). Facts don’t matter, all that matters is that we perceive the East Asians to be untrustworthy, so they must be cheating at trade. Otherwise how could they be joining the developed world? Nor does the lack of trade barriers in Hong Kong and Singapore matter, critics will find some obscure way they indirectly intervene in trade, as if Western countries aren’t riddled with similar interventionist policies.
5. If we are going to put tariffs on countries whose reckless governmental policies are hurting the rest of the world, why not put tariffs on Greece and Italy? And how about the US? Doesn’t our global warming policy hurt the world? How about our decision to launch a war against Iraq? How about our reckless banking policies, which helped trigger a world-wide financial crisis? How about the Fed’s tight money policy? As David Beckworth points out, the Fed is a monetary superpower, whose actions affect the rest of the world much more than the policies of other central banks. Don’t we need to be “taught a lesson” just like the Chinese?
6. The only even semi-respectable argument against China’s CA surplus is the Keynesian paradox of thrift argument used by Krugman. What’s so comical about this situation is that the average “man on the street” China-basher would be totally perplexed by the claim that saving is bad. “You mean we are attacking the Chinese for being too thrifty, not following the foolhardy low-saving policies of our government?” Yup.
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10. November 2011 at 08:48
Great post Scott. Krugman I am fine with (point #6 makes intellectual sense although I think the policy implications he draws from it are way off base). But the comments on that post were disgusting. I thought you had to be exaggerating at first, but the tone of the “What me, racist?” comments actually made me likelier to believe at least some people have less than pure motives behind criticising Chinese policy.
Really, it’s as if they are straining to find some reason to hate China. Complaining about capital controls? The only people those capital controls hurt are the Chinese. Malaysia has capital controls and as far as I’m concerned, I don’t get an iota of any benefit from having to change my currency at government-mandated rates only within Malaysia’s borders.
Do people magically expect jobs to come back if China were to suddenly let its people invest overseas? The main reason low-value manufacturing jobs left the US is because it doesn’t make sense to pay someone USD20K a year to do things that someone elsewhere can do almost as well for half that salary or even less. No policy can magically overturn this difference in price levels.
10. November 2011 at 09:48
Isn’t the enormous harm that the totalitarian or at least dirigiste government of China does to its own people with massive forced saving in low return investments that they effect through their control of the banking sector and currency conversion a reason to oppose their CA surplus? Their government makes it such that their citizen have to save an enormous amount because all they can invest it in is their crony banks with horrible returns. Maybe the Scandinavian governments are doing that too, but those are free countries and democracies, so at least those policies have democratic legitimacy.
If we could conceivably care that a product was made with slave (not sweatshop) labor we might care that it was made with slave capital.
I understand that is a very different argument than saying that Americans are harmed by the Chinese CA surplus because at least in a narrow sense of material benefit, we are better off in this story.
10. November 2011 at 10:11
More excellent commentary from Sumner.
As to consumption taxes: If the world has a glut of savings, and may have for decades to come for socio-economic reasons, should we tax savings or consumption?
I have always favored consumption taxes, and saying so reinforces my sense of virtue and thrift. Now I am beginning to wonder.
10. November 2011 at 10:17
BTW, One-Eyed Man makes some interesting comments. The Chinese Communist Party does retain control over every aspect of life in China, and has majority of seats on the board of every publicly held Chinese company.
Like any ossified institution in power, the CCP will protect itself first, and then perhaps allow for the bona fide national interest or good to proceed. It will tolerate no threats to its power. That includes bona fide free markets.
We want to see China through our eyes and hopes. But China was there a couple thousand years before us (in the USA), and may be there a couple thousand years after us.
10. November 2011 at 10:33
Given that the Chinese savings rate reflects nothing more than thriftiness, it is indeed a wondrous coincidence how utterly stable their exchange rate vs USD happens to be. It’s a miracle how daily changes in their desire to save, just exactly happen to balance out volatility from trade and investment flows. And how foolish of them to announce an “official exchange rate” when the stability of the actual exchange rate is only a divine coincidence. It just makes them *look* like currency manipulators.
Seriously, Scott! This is the same BS that blew up the US automakers. Zero interest loans to subprime borrowers to buy monster trucks they don’t need. And like GM, it’s going to bite them in the ass, cause there’s no way we’re going to work for them at discount wages for the next 50 years. It’s barely even possible. It’s not like we invested any of that money in productive infrastructure.
Dear China (and Germany, Norway, Brazil and everybody else),
Thanks for all the stuff.
Uncle Sam
10. November 2011 at 11:02
Not about China bashing, but Megan McArdle has a good post:
http://www.theatlantic.com/business/archive/2011/11/the-financial-folly-of-fairness/248216/
————–quote—————-
The things that fix economic crises are not always intuitive. As Brad De Long himself once remarked to me, it is nearly impossible to bail out the financial system without also bailing out people who are long assets–aka financiers and rich people. But oh, how that flies in the face of our intuitions! It should be true that the most prosperous system is the one which severely punishes everyone who didn’t monitor the soundness of their investments. We feel, very deeply, that financial and economic efficiency should mirror our intuitive sense of justice. And probably it does, mostly, when you’re living in a hunter gatherer tribe.
But in a complex world where mistakes are easy and detecting them is not, I just don’t think this holds truet. The “just world” described above is not some bourgeois paradise; it is the western world during the Great Depression. It was not a better world for everybody; it wasn’t even a better world for anybody that I can think of. After it had finished punishing people who made stupid decisions, it went on to wreak brutal vengeance on a lot of people who had been quietly minding their own business. Bank runs can afflict the soundest banks, if depositors panic.
Life savings were wiped out overnight not because depositors hadn’t done a good job of choosing a sound bank, but because they’d happened to choose a bank which had credit exposure to other banks that had credit exposure to other banks that were unsound. Many of the most immiserated people were farmers who had quite innocently taken out the then-standard five year mortgages to invest in new farm equipment. Only back then, mortgages didn’t usually amortize–they were what we’d call “balloon mortgages” today–and the standard practice was to roll them over when the notes came due. And when farm prices fell and credit dried up, they couldn’t roll over those mortgages as they’d always done before, and they lost their farms. Then there were the people who had never had anything to begin with, and now had even less because unemployment shot up to 25% and they couldn’t get the daily casual labor they needed to feed themselves.
The solution to the problem turned out to be throwing money at it: going off the gold standard, devaluing, and guaranteeing everyone’s bank accounts. Oh, yes, there was moral hazard. There still is. What there aren’t, is bank runs that wipe out peoples’ life savings overnight, or an unemployment rate of 25%.
————-endquote——————-
10. November 2011 at 11:22
Oh, absolutely! The Norwegians are obviously suffering from every bit as much mal-investment led growth as China. It’s well-known that Norwegian government insiders have access to capital at below-market rates, thus financing uneconomic projects with the consequent losses to be funded at the expense of the consumption sector. Really, a more apt model for China than Norway’s small, open economy could scarcely be envisaged. In fact, the only possible way in which China could differ from Norway is skin color, and anyone who says otherwise should definitely be denounced as a racist. That’s such a convincing argument, it can’t possible fail to change minds. Keep up the great work!
10. November 2011 at 12:12
Scott,
It is nearly amazing that an economist would argue that low pegs against the dollar hurt us, even if true. These are advantages for us and bad for them. The bottom line is, we’re responsible for aggregate demand in our economy and our failure to stimulate it is the problem.
That being said, I am pleasantly surprised at how well freer trade policies have held up here in the US, considering the economic problems. We’re certainly seeing some rising opposition, but a few new freer trade bills were signed into law recently, and it didn’t even seem to make big news.
I see the glass as half-full on US trade policy for now.
10. November 2011 at 13:32
http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100013218/sorry-there-is-no-euro-break-up-plan-yet/
E-P calls for NGDP targeting in the euro zone:
“The EU must slow the pace of fiscal contraction and launch a monetary blitz to lift the south out of chronic depression. A 5pc nominal GDP growth target for euroland for as long as it takes would do the trick. I believe central banks have the capability to deliver such result.”
Will the ECB do so?
10. November 2011 at 13:48
Scott, I would make a few points.
1. Manufacturing jobs are not coming back. For most firms, it’s not a choice of use labor in the U.S. or use labor in China. It’s use machines in the U.S. or use labor in China.
2. It’s not just about jobs, it’s about the corporations as well. U.S. owned corporations are being hurt by predatory trade practices in China, just like they were hurt by predatory trade practices in Japan. Specifically, subsidized financing available to local firms and dumping. (Both of these also result in the shift of manufacturing (but not necessarily manufacturing jobs) to China. The U.S. should be much more proactive in fighting these types of policies.
10. November 2011 at 14:12
I have been thinking about the E-P article I just posted – calling for NGDP targeting in Europe.
That might work. I think, as does E-P, and he knows more about this than I do – I think it might just work
Lets say they do it and it does work – no collapse of the euro and no big crisis that would follow from that.
To me that is just amazing. That would mean, I think, that Scott would be the most important economist now alive – or at least the economist who has done the most amount of good.
And it would also show the power of the internet and all this connectivity. It took Milton Friedman many years to get his ideas on the Depression into the Wall Street Journal, and he only did so long after they could do any good. Scott and this blog will have had this tremendous influence – while the crisis is still going on.
To me this is just amazing. And wonderful.
10. November 2011 at 14:51
The best way to hurt China is to print greenbacks, hand it to the people with instructions to buy a lot of Chinese stuff with it. This way the US can buy up everything for free and China has no recourse but to mend the exchange-rate. Right now, they are the reverse Greece, a big pile of money, but no power over the exchange-rate. (by the way, as I understand, the big pile of dollars is the credit at the Chinese Central Bank, with as a debit tons of yuans to the exporters. So decreasing the value of dollars vs yuans will be painful)
10. November 2011 at 14:51
1. It’s American consumers that “steal” jobs from America by their decision to buy cheaper Chinese products.
2. China’s surplus might have something to do with their endless supply of cheap labor as well.
3. What about Basitiat’s motto that protectionism is where countries do to themselves what other countries try to do to them during wartime.
4. I think our attitude towards Asians has more to do with fear. Our fear is nothing new and mostly has to do with how large the populations of Asia are.
5. The Fed is hurting the rest of the world with it’s monetary policy. It’s difficult for us to weaken the dollar since it’s a safe haven and reserve currency, but our money expansions export inflation abroad.
6. The paradox of thrift is ridiculous and destructive. Growth only comes through savings and doctrines that discourage saving discourage technological progress and the adaptation of new productive techinques, both of which are dependent on the availability of capital.
10. November 2011 at 14:54
How is this even an issue on a econ blogosphere as sophisticated as ours? If a country is manipulating its trade competativeness, that is a *subsidy* to its trading partners. The way I always understood China’s currency system was that it effectively stole from Chinese workers and transfered the stolen wages into the treasury market. Isnt that good for the U.S.?Why would we stop them if we only cared about the U.S.? If it is actually true.
10. November 2011 at 18:06
Thanks Johnleemk.
OneEyedMan, You said;
“Maybe the Scandinavian governments are doing that too, but those are free countries and democracies, so at least those policies have democratic legitimacy.’
Yes, China’s no democracy, but I know quite a few Chinese people, and I don’t know any that favor US tariffs to help China.
Ben, Consumption taxes are still the way to go. We need more NGDP, not more consumption.
K, You are attacking an argument I never made. I concede the Chinese government saving is affecting the exchange rate.
Patrick. That’s a good post, but I was disappointed hearing her call for extended unemployment benefits on NPR. One could argue that 99 weeks is already too long.
Phil Koop, I’m sure the Chinese people thank you for proposing tariffs on Chinese goods to help them allocate resources more effectively.
Shall we put tariffs on all countries that have governments that mis-allocate resources? There seems to be a never-ending list of reasons for protectionism. What about the US?
Mike, Yes, the protectionists don’t have much power in DC, thank God.
JimP, That’s good to hear. But it’s hard to believe they’d suddenly switch from inflation to NGDP. Still, I hope you are right.
dtoh, You said;
“It’s not just about jobs, it’s about the corporations as well. U.S. owned corporations are being hurt by predatory trade practices in China, just like they were hurt by predatory trade practices in Japan.”
The US government does 10 times as much damage to our companies as the Chinese government or the Japanese government. So how about tariffs on the US? And it’s not true that Japanese polices are highly predatory–their economy is quite competitive, although they have informal trade barriers. But that’s very different from predatory pricing.
But even if I’m wrong your observation has no policy implications. No one thinks American corporations would be helped by tariffs on Chinese goods–that’s where their future profits lie. The US stock market would probably crash if a trade war broke out.
Jaap, But we should be trying to help China, not hurt it.
John, You might be right about fear of their population. There’s something going on that makes for a huge double standard between how we discuss Europe and how we discuss Asia.
Justin. Most people don’t understand international trade. that was true 200 years ago, and it’s still true.
10. November 2011 at 19:28
Scott: “K, You are attacking an argument I never made. I concede the Chinese government saving is affecting the exchange rate.”
What I’m saying is that if they were saving, then that wouldn’t have a volatility depressing effect on the exchange rate. It would just depress the rate. What’s (obviously) going on is that they are fixing their exchange rate (uncontroversial fact) and a side effect of that is that they can’t also independently control their rate of saving. They didn’t want or plan to buy over $3Tn of treasuries at abysmal yields. It was a necessary effect of fixing their exchange rate. And I’m not complaining about the impact on us. As said, it’s a subsidy to us, like GMAC 0% interest loans. And if we wanted to, it would be easy to collect that subsidy by slapping on a corresponding tariff. Either way the cost will be borne by Chinese workers/consumers. Why it’s good for them to be giving stuff to to us and Chinese exporters is beyond me.
11. November 2011 at 01:09
So what’s China going to do with all that money, besides distort whatever currencies they’re investing in?
Otherwise – I agree with this generally. China-bashing makes my head spin. I love the recent numbers out showing that most money spent in America on “Made in China” goods actually stays here, and Americans actually seem to get a better deal when trading with China than other nations do!
11. November 2011 at 03:21
China says more inflation required in US – without printing more money:
http://www.globalpost.com/dispatch/news/regions/asia-pacific/china/111109/china-economy-manufacturing-guangdong
11. November 2011 at 05:13
As I commented when you (Scott) wrote about this a couple of months ago, but will do so again to go with this post, while I am in general sympathetic to current account surplus countries, there is a difference between China and Norway, Japan (so it’s not a racist point) and Germany. That is that, by restricting its capital account, China prevents the US responding in kind if they so-wanted. Japan does not. If the US was not happy about Japan buying dollars and US treasuries, it could have neutralised that intervention by buying yen and JGBs. And indeed, as I have been pointing out for years, should have done given the inadequate size of the US foreign currency reserves. Of course the US did not, because its macroeconomic policy has been arrogant and incompetent, but it COULD have done if it wanted. By contrast, the US cannot do this today with China, because the US could not buy yuan or Chinese assets. My solution is what I call “reserves control”: http://reservedplace.blogspot.com/2008/10/just-say-no.html
11. November 2011 at 05:39
Can’t help but think about the comments that kept appearing on British blogs after the Icelandic banks failed. “At least this time the Vikings only took our money; they left the cattle and women.”
11. November 2011 at 11:53
Scott, mercantilism is not necessarily about running high trade surpluses in any particular time period, but about suppressing consumption to support future exports. Korea ran a trade deficit to support investment – that doesn’t mean they weren’t mercantilist.
12. November 2011 at 13:44
K, The evidence you mention has no bearing on cause and effect, just the technique they employ to make it happen. It’s still saving causing real exchange rates.
As an analogy, changes in the monetary base affect short term rates, even if the Fed targets rates and makes the base endogenous.
Edwin, I’m not sure what “distorted” currencies are.
Morgan, That’s very good news.
Rebeleconomist, You said;
“That is that, by restricting its capital account, China prevents the US responding in kind if they so-wanted.”
False, We can and should save more—that would reduce our CA deficit.
Nick, I didn’t know there was still resentment over that. Don’t forget the Nordics also did a lot of intermarraige, presumably without their genetic contribution Britain never would have been “Great.” 🙂
Statsguy, I have difficulty debating with protectionists if they keep redefining terms. Krugman insists a CA surplus is proof of evil behavior, of an undervalued currency. Others point to the “wrong” exchange rate relative to PPP. Others point to tariffs. The list is endless. And it’s all equally irrelevant to the US.
If they subsidized exports, my only response is “Thanks Korea, for my great Samsung TV.”
14. November 2011 at 08:01
To be the devils advocate (I am pro free trade with China), wouldn’t they say that China is a dictatorship and that our trade with China makes it stronger and thus more of threat to the USA? Germany is a democracy.
14. November 2011 at 11:46
Scott: If “The Chinese” were a single agent then it wouldn’t matter if you called it “saving” or “exchange rate manipulation.” They’d be doing it in their own interest and the impact would be pareto – and arguably welfare – improving. But they aren’t. “They” are a repressive government that is *manipulating* the exchange rate for the benefit of Chinese (and foreign) capital and at the expense of Chinese and foreign labour. This causes a Harberger triangle which is a loss to global economy as a whole. None of this has anything to do with saving.
“Krugman insists a CA surplus is proof of evil behavior, of an undervalued currency.”
It’s not. But a flatlining exchange rate *is* proof of price manipulation.
“If they subsidized exports, my only response is “Thanks Korea, for my great Samsung TV.””
You mean “thanks Korean workers.”
14. November 2011 at 18:43
Floccina, Rich countries tend to become democratic. If we favor democracy we should want China to be rich. And China is not now and never will be a military threat to the US. They are one of the least militaristic great powers in all of world history. They have no territorial ambitions beyond Taiwan.
K, If we are interestied in helping Chinese labor maybe we should see whether the Chinese workers favor US tariffs on Chinese goods. Yes, they aren’t completely free to speak their mind, but I know lots of Chinese and I am pretty sure how they’d answer off the record.
The real exchange rate is what matters in trade, not the nominal rate, and it has been rising sharply for nearly a decade. The Chinese exchange rate will continue to appreciate strongly over the years, and just like with Japan and Germany, it will make no difference in the CA surplus–which is driven by saving.
15. November 2011 at 12:03
Scott: Then stop “saving” and let the workers decide for themselves whether they want more garbage treasuries or more iphones/health care. If their preferences are currently truly represented by the Great Leader then even the miraculously stable exchange rate would be maintained.
16. November 2011 at 16:43
K, That’s fine with me, whatever the Chinese decide is fine with me. I just oppose trade barriers that would badly hurt poor Chinese workers, and also hurt the US.