A Krugman in Wolf's Clothing

Paul Krugman's jihad against China continues and he now enlists the help of Martin Wolf, who claims that China and Germany are "uniting" in their nefarious plan to "impose deflation." Yes, Krugman has decided to continue his theme that "Mercantilism" is the proper path to prosperity, which means that wealth really is created when governments manipulate the system.

Today, he insists that not only are his views correct, but that they fall within the very scope of the laws of supply and demand. For a guy who insists that the laws of economics are turned upside down during depressions and that "none of what you learned in Econ 101 applies," I find it curious that suddenly these laws really matter. (Well, they matter when Krugman says they matter and their application is seen to be to his advantage.)

I think a larger view is in order here. Krugman has claimed elsewhere that the real culprit in the bubble was Chinese savings, and now the dastardly Chinese are giving us the one-two punch with its pegged exchange rates. Furthermore, by doing so, China supposedly is preventing our government from properly engaging in policies of inflation! What's a Nobel Laureate to do?!?

Furthermore, he likens the Chinese currency policies to the policies pushed by Latin American countries in the 1950s. In his own words:

As I read this debate, one thing that’s truly amazing is the way China defenders are recapitulating some old fallacies from, of all places, Latin America. Back in the 50s it was common for Latin economists to insist that getting realistic exchange rates wouldn’t solve their persistent balance of payments problems because imbalances were “structural” — now we’re hearing the same thing about China, with the only difference being that this time it’s a surplus, not a deficit, that is supposedly immune from the usual rules of supply and demand.

Hmmm. As I recall, the Latins were overvaluing their currencies relative to the U.S. Dollar, creating what were called "dirty rates." (Indeed, that has been a staple of Third World countries, not to mention the old Communist Bloc during the Cold War.)

I also remember that Americans accused Japan of undervaluing the yen during the 1980s, and that was the reason for the huge trade surpluses in Japan's balance of payments accounts. In the end, the Japanese spent their surpluses on U.S. real estate. (I remember the hysteria fueled by the politicians and the media when Japanese investors purchased the Rockefeller Center, as though the Japanese were going to tow those buildings back to Japan.) That little venture, as one might recall, turned out badly for the Japanese, as real estate prices plummeted, along with the value of Japan's stock market. (Can someone spell "m-a-l-i-n-v-e-s-t-m-e-n-t-s"?)

For all of the Mercantilist fallacies pushed by Krugman, we have to remember that to Krugman and Keynesians in general, production is done for its own sake. Lawrence Reed noted this fallacy in his wonderful article in the April 1981 Freeman, "7 Fallacies of Economics." The fourth fallacy, "production for its own sake," has this gem, which I think perfectly applies to Krugman:

A bad economist who falls prey to this ancient fallacy is like the fabled pharaoh who thought pyramid-building was healthy in and of itself; or the politician who promotes leaf-raking where there are no leaves to be raked, just to keep people “busy.”

When Reed wrote those words, few people had heard of Paul Krugman. However, if one wishes to better understand Krugman's economic worldview, read "7 Fallacies of Economics," and you will find that nearly everything the Nobel Laureate writes falls into one of the categories listed in that piece.

I hate to say it, but the Chinese are not the source of our problems, no matter what Krugman, Martin Wolf, the New York Times, and our politicians might be saying. The problem has been the massive malinvestments that defined the economies of the USA and Europe, malinvestments that Krugman and our government insist need to be kept going.

However, the more we try to prop up the unhealthy portions of the economy at the expense of those portions that are healthy, the worse things will become. The Austrians understand this in spades, but the "wise" Keynesians are clueless. So, like Wolf and Krugman, they look elsewhere for blame instead of looking in the mirror.