Krugman's Nixonian Anti-Chinese Screed

Paul Krugman has gone to great lengths to blame China for the current economic depression that the USA and other nations are suffering. Yes, it those dastardly Chinese saved too much; they hold down the real value of their currency; they don't charge enough for their goods, and on and on and on.

In today's NYT column, Krugman goes on another anti-China screed, although at least he does have some lucid moments. So, let us begin. Krugman writes:

The root cause of China’s muddle is its weak-currency policy, which is feeding an artificially large trade surplus. As I’ve emphasized in the past, this policy hurts the rest of the world, increasing unemployment in many other countries, America included.

However, as Don Boudreaux correctly points out, it seems that Krugman contradicts himself later. Krugman says:

But a policy can be bad for us without being good for China. In fact, Chinese currency policy is a lose-lose proposition, simultaneously depressing employment here and producing an overheated, inflation-prone economy in China itself.

One way to think about what’s happening is that inflation is the market’s way of undoing currency manipulation. China has been using a weak currency to keep its wages and prices low in dollar terms; market forces have responded by pushing those wages and prices up, eroding that artificial competitive advantage. Some estimates I’ve heard suggest that at current rates of inflation, Chinese undervaluation could be gone in two or three years — not soon enough, but sooner than many expected.

China’s leaders are, however, trying to prevent this outcome, not just to protect exporters’ interest, but because inflation is even more unpopular in China than it is elsewhere. One big reason is that China already in effect exploits its citizens through financial repression (other kinds, too, but that’s not relevant here). Interest rates on bank deposits are limited to just 2.75 percent, which is below the official inflation rate — and it’s widely believed that China’s true inflation rate is substantially higher than its government admits.

Rapidly rising prices, even if matched by wage increases, will make this exploitation much worse. It’s no wonder that the Chinese public is angry about inflation, and that China’s leaders want to stop it.

But for whatever reason — the power of export interests, refusal to do anything that looks like giving in to U.S. demands or sheer inability to think clearly — they’re not willing to deal with the root cause and let their currency rise. Instead, they are trying to control inflation by raising interest rates and restricting credit.

Boudreaux counters:

In short, Beijing keeps the value of the yuan too low by buying dollars with newly created yuan – a policy that Mr. Krugman correctly recognizes to be inflationary.

But as we read on to paragraph ten, we find Mr. Krugman singing an altogether different dirge. He there complains that Beijing now is “trying to control inflation by raising interest rates and restricting credit. This is destructive from a global point of view: with much of the world economy still depressed, the last thing we need is major players pursuing tight-money policies.”

If the “root cause” of the low value of the yuan is Beijing’s inflationary monetary policy – and if this policy harms, as Mr. Krugman says, both China and the rest of the world – why does Mr. Krugman scold Beijing for tightening its monetary policy?

That is a good question. Now, in fairness to Krugman, he is claiming that the proper course of action is for China's government to permit the value of the Chinese currency to rise against the U.S. Dollar, which would make Chinese goods more expensive for Americans.

Krugman reasons that such a policy would shrink China's trade surplus with this country, and that is true. For that matter, I believe that such a policy is more harmful to China than it is to the USA because that means the Chinese are holding dollars which are falling in value and the value of U.S. Government debt also is going to decline.

To put it another way, Americans get Chinese goods, and the Chinese get American paper. Krugman believes that is a better deal for China, and a really bad deal for this country.

Why? He claims that such policies reduce "aggregate demand" in the USA and jack up the rate of unemployment. However, if the end of production is consumption, then China's policy means that Americans are not having to pay the full freight for goods they get to use. (The Chinese at the same time are having to pay more for the goods they produce, which means that the government policy is making them poorer.)

Krugman's perspective is that of a Keynesian, and Keynesians get things backward. To a Keynesian, the purpose of production is, well, production. That is why Keynesians will claim that World War II "ended the Great Depression," because they look at GDP and the rate of unemployment and nothing else.

During World War II, Americans experienced high levels of deprivation that were every bit as serious as what they experienced during the Great Depression. Yes, everyone had a job and money in their pockets, but neither meant that much, as goods were rationed or difficult to find.

I don't support what the Chinese government is doing, but as I see it, the greater victims are the Chinese, not the Americans. China is not responsible for our near-10 percent rate of unemployment; U.S. Government policies from both the Bush and Obama administrations are responsible.

When Nixon faced a huge financial crisis in August 1971, his response was not to look inward, but instead to blame the rest of the world. Economically speaking, his administration was a disaster.

While Krugman recognizes that Nixon's policies of imposing price controls was futile, he never does seem to understand that if China imposes such controls on itself, that the Chinese will bear the brunt of the trouble, not Americans. But even here, I must admit to being puzzled. After all, during the California electricity crisis of a decade ago -- a crisis caused primarily by the fact that the state imposed price controls on the same of electricity -- Krugman claimed that price controls would result in more supply and lower prices.

So, if he holds to that same belief today, then I would think he would be applauding the latest actions of the Chinese government. Go figure.