Time for Action Against China? 03/17/2010
In my last post, I cited Fallows's argument that the U.S. has benefitted from Chinese currency intervention: More consumption (i.e. higher living standards), cheaper rates of borrowing, and lower taxes (due to cheap borrowing). The flip side is lower exports, but that only really hurts a relatively narrow section of society. A minority of people are exporters, while all of us are consumers.
However, that was in the past. The recent economic crisis has made it clear to Americans that we need to save more and consume less in order to restore fiscal health. However, the only way to reduce both consumption and unemployment is to increase exports. That is why Obama is trumpeted exports in his State of the Union speech. But to increase savings and exports in America, somebody else has to increase consumption and decrease savings— because worldwide consumption is equal to worldwide savings. This is precisely the argument that Paul Krugman makes:
In normal times, you could argue that this policy [China's policy] provides benefits to the rest of the world, by reducing borrowing costs (although given what we did with those capital inflows, maybe not). But these aren’t normal times. We’re currently living in a world in which both central banks and governments are unable or unwilling to pursue sufficiently expansionary policies to eliminate mass unemployment; so it’s a paradox of thrift world, in which anyone who tries to save more reduces demand, reduces employment, and – because investment responds to excess capacity – ends up actually reducing investment. By exporting savings to the rest of the world, via an artificial current account surplus, China is making all of us poorer.
Krugman is basically saying that China, by soaking up dollars, is depressing liquidity at a time when a liquidity trap has been pushing rich countries into the worst recession in 80 years. Krugman fears deflation, which is what he is implying by saying that governments aren't pursuing sufficiently expansionary policies. His prescriptions—a countervailing duty on Chinese exports, make me a bit unsettled.
I worry about sparking a trade war with tariffs and I worry about inflation in America caused by a rise in the renminbi. But I do believe that much of Krugman's diagnosis is correct, and that the current path is unsustainable. If you're feeling wonkish and want more on this topic, watch a discussion between Krugman, Fred Bergsten, and Robert Scott here.
However, that was in the past. The recent economic crisis has made it clear to Americans that we need to save more and consume less in order to restore fiscal health. However, the only way to reduce both consumption and unemployment is to increase exports. That is why Obama is trumpeted exports in his State of the Union speech. But to increase savings and exports in America, somebody else has to increase consumption and decrease savings— because worldwide consumption is equal to worldwide savings. This is precisely the argument that Paul Krugman makes:
In normal times, you could argue that this policy [China's policy] provides benefits to the rest of the world, by reducing borrowing costs (although given what we did with those capital inflows, maybe not). But these aren’t normal times. We’re currently living in a world in which both central banks and governments are unable or unwilling to pursue sufficiently expansionary policies to eliminate mass unemployment; so it’s a paradox of thrift world, in which anyone who tries to save more reduces demand, reduces employment, and – because investment responds to excess capacity – ends up actually reducing investment. By exporting savings to the rest of the world, via an artificial current account surplus, China is making all of us poorer.
Krugman is basically saying that China, by soaking up dollars, is depressing liquidity at a time when a liquidity trap has been pushing rich countries into the worst recession in 80 years. Krugman fears deflation, which is what he is implying by saying that governments aren't pursuing sufficiently expansionary policies. His prescriptions—a countervailing duty on Chinese exports, make me a bit unsettled.
I worry about sparking a trade war with tariffs and I worry about inflation in America caused by a rise in the renminbi. But I do believe that much of Krugman's diagnosis is correct, and that the current path is unsustainable. If you're feeling wonkish and want more on this topic, watch a discussion between Krugman, Fred Bergsten, and Robert Scott here.
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