OK, Krugman really is a mercantilist

One of the supposed great triumphs in economics was the development of an intellectual argument for free trade and against the "mercantilist" doctrines of the day which emphasized the belief that wealth consisted of the money in the government's treasuries. Unfortunately, mercantilist beliefs never quite died, and we see Paul Krugman resurrecting them in his recent column on "making things."

Krugman touts the recent rise in manufacturing employment to the falling dollar and Obama's industrial bailouts, and he may be right. After all, if the government forces Americans to pour resources into certain economic sectors, we should not be surprised when those sectors, at least on paper, are doing better. However, the economic analysis should not be aimed at output, per se, or even employment. No, we in economics, we look at the opportunity cost of the policies that are spurring manufacturing growth to see if they are making us poorer.

Henry Hazlitt, in his classic "Economics in One Lesson," noted that the difference between "good" and "bad" economics was the following:

"The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economsit sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups."

Indeed, one of the constant themes in Krugman's columns has been that only the short-term effects matter. I never have seen him even ask the larger question of whether or not certain policies move resources from lower-valued uses to higher-valued uses, or if we see the opposite occurring.

From what I can read in this column, Krugman really believes that a government can bring an economy into prosperity through financial tricks such as money debasement and industrial subsidies. He writes:

...one potential disaster has been avoided: the U.S. auto industry, which many people were writing off just two years ago, has weathered the storm. In particular, General Motors has now had five consecutive profitable quarters.

America’s industrial heartland is now leading the economic recovery. In August 2009, Michigan had an unemployment rate of 14.1 percent, the highest in the nation. Today, that rate is down to 10.3 percent, still above the national average, but nonetheless a huge improvement.

I don’t want to suggest that everything is wonderful about U.S. manufacturing. So far, the job gains are modest, and many new manufacturing jobs don’t offer good pay or benefits. The manufacturing revival isn’t going to make health reform unnecessary or obviate the need for a strong social safety net.

Furthermore, the GM and Chrysler bailouts, he claims, gave us "net" benefits:

...there’s the matter of the auto industry, which probably would have imploded if President Obama hadn’t stepped in to rescue General Motors and Chrysler. For those companies would almost surely have gone into liquidation, closing all their factories. And this liquidation would have undermined the rest of America’s auto industry, as essential suppliers went under, too. Hundreds of thousands of jobs were at stake.

Yet Mr. Obama was fiercely denounced for taking action. One Republican congressman declared the auto rescue part of the administration’s “war on capitalism.” Another insisted that when government gets involved in a company, “the disaster that follows is predictable.” Not so much, it turns out.

Not surprisingly, Krugman is taking a very narrow approach: the bailouts helped the unions, and with government help, GM is making a comeback, so the move by the government must have been a net benefit to the economy. The problem is that there is a much larger picture that we need to understand.

At the time of bankruptcy, GM and Chrysler were hopelessly in the red. In economic terms, consumers saw them as moving resources from higher-valued to lower-valued uses. Just because the Obama administration declared that GM was to be viable again did not make the consumers' judgment wrong; it just forced consumers and taxpayers to put resources into GM that they would not have made voluntarily.

No doubt, the shuttering of GM and Chrysler would have caused hardships in Michigan, Indiana, and Ohio, but those also are the states (especially Michigan) that have shown themselves to be hostile to capital investment and reasonable business practices. Like New York, Michigan's government actively has driven firms out of the state or tried to regulate them to death, and when the results of their actions become apparent, those same governments then demand that taxpayers from elsewhere bail them out.

We also see manufacturing "growth" in subsidized "alternative or green" energy sectors, yet all of the firms in those sectors basically are wards of the state. The excuse to subsidize them has been that we must keep them alive while they "innovate" and experiment with new capital and ways to deliver their products, yet historically subsidized industries generally have lagged behind those that did not need or seek government largess.

Then there is the situation with the dollar, a currency that Krugman claims must be further debased. He writes:

First, what’s driving the turnaround in our manufacturing trade? The main answer is that the U.S. dollar has fallen against other currencies, helping give U.S.-based manufacturing a cost advantage. A weaker dollar, it turns out, was just what U.S. industry needed.

Yet the Federal Reserve finds itself under intense pressure from the right to make the dollar stronger, not weaker. A few months ago, Paul Ryan, the chairman of the House Budget Committee, berated Ben Bernanke for failing to tighten monetary policy, declaring: “There is nothing more insidious that a country can do to its citizens than debase its currency.” If Mr. Bernanke had given in to that kind of pressure, manufacturing would have continued its relentless decline.

This falls into the Keynesian prescription that government through the monetary authorities can inflate us into prosperity. Now, I have no doubt that Krugman partially is correct; debasing the dollar does make American exports more attractive while raising the costs of imports. I'm even willing to give him the argument that if the Federal Reserve System actually were to end its current policy of deliberate inflation, American manufacturing exports might even fall.

Yet, that is not the larger issue. The larger issue is whether or not entrepreneurs will be able to have the freedom to invest and direct resources from lower-valued to higher-valued resources, and seek investment projects that are economically sustainable.

Subsidies require that government cannibalize healthy sectors in order to prop up unhealthy sectors. That is the bottom line in economic analysis here, yet Krugman continues to insist that if the unhealthiest of manufacturers like GM and Chrysler are kept afloat by government intervention, that the overall effect MUST be good. After all, Michigan's rate of unemployment is falling.

In Krugman's world, there is no such thing as opportunity cost, especially if the economy is in what he calls a "liquidity trap." Yet, economic laws are immutable, and they apply to a world of scarcity, and not even the august Princeton University economics faculty can change that simple fact.

I'm sure that more than two centuries ago, Krugman would have been welcomed by the mercantilists and monetary cranks. Today, it seems that the economic faculties of our most prestigious universities once again are open to those very things Adam Smith and others debunked. I guess that is why these faculty members often refer to themselves as "Progressives."

Those Chinese Commies, er, Capitalists, Finally Got Us!

When I was a young person, America was taught to fear the communists. The U.S.S.R. had missiles pointed at us, Castro's Cuba was 90 miles from Key West and the Cubans were set to invade any day, and China's Maoist commies were helping the North Vietnamese in our war in Vietnam. (I remember the Cuban Missile Crisis when I was in fourth grade.) As a girl I used to date told me when I questioned whether or not we should be in Vietnam, if we let the commies win there, then they would take over country after country until they got to us.

Well, history has a funny way of working out things. The U.S.S.R. and its satellites went out of business (complete with a going-out-of-business sale in which I bought some Really Neat Stuff). Vietnam is liberalizing its economy and its society, and the Mao Suits that American Limousine Leftists loved to wear have long been replaced by real clothes, just as China has become a productive country, as it throws of the shackles of communism.

However, where once we saw a Chinese commie hiding behind every bush and tree, Paul Krugman (who usually sees a Republican hiding behind every bush and tree) now sees a Chinese Currency Manipulator hiding behind every bush and tree. Oh, the humanity! Will we ever be free from the Present Dangers from those nations of the East?

Krugman's fear is based upon one of his usual themes: China's government is deliberately underpricing its currency, the renminbi, which makes Chinese goods cheaper relative to goods that are dollar-denominated. Krugman writes:

The consequences of this policy are also stark and simple: in effect, China is taxing imports while subsidizing exports, feeding a huge trade surplus. You may see claims that China’s trade surplus has nothing to do with its currency policy; if so, that would be a first in world economic history. An undervalued currency always promotes trade surpluses, and China is no different.

And in a depressed world economy, any country running an artificial trade surplus is depriving other nations of much-needed sales and jobs. Again, anyone who asserts otherwise is claiming that China is somehow exempt from the economic logic that has always applied to everyone else.

In other words, Krugman asserts that China is engaging in a "beggar-thy-neighbor" policy, but Americans (unlike the heroic Japanese) are too timid to challenge China as it supposedly becomes wealthy at our expense. Now, in case you don't recognize the logic here, Krugman is making the arguments that were put forth by the Mercantilists four centuries ago, with many of their arguments successfully refuted by Adam Smith in 1776.

Yet, bad ideas continue to stay around. While Krugman makes his claims on the basis of Keynesianism, in truth, that "economic theology" had its roots in Mercantilism and John Maynard Keynes even praised that group in his book, The General Theory.

Now, I do realize that simply screaming "Mercantilist!" does not win any real arguments, although this brief space is not appropriate for laying out every wrongheaded notion of the Mercantilist doctrines. However, I need to point out that when Krugman declares that somehow China is at least partially responsible for our current economic downturn because of its currency policies, he conveniently forgets that the U.S. Government under the Bush administration pushed the housing bubble, and then the Obama administration proceeded to try to prop up failed banks, the housing market, and producers (Government Motors being Exhibit A) as a sop to Wall Street contributors and American labor unions. By forcing the diversion of trillions of dollars of resources to those firms and sectors that cannot stand up on their own, President Obama and his minions are aggressively and deliberately blocking the recovery.

Of course, it is more fun to blame the Chinese commies capitalists. After all, aren't they the ones who caused the housing bubble in the first place by saving lots and lots of money, which somehow made its way here and was foolishly diverted into the U.S. housing market? (Oh, that's another conspiracy theory by the Usual Suspects. Yeah, those commies finally got us. Mao himself must have hatched the plot and is laughing from Hell.)

As for blaming any subsidies that China has for its "clean energy" programs for our current situation, I must admit that such an accusation is quite rich. Doesn't the U.S. Government provide huge subsidies to "clean energy" and has not Krugman called for the government to do so in the mistaken belief that we can spend and subsidize ourselves into prosperity? I mean, from where do the subsidies come? They MUST come from the remaining healthy (or less-ill) portions of the economy. Despite the Krugman-Keynesian-Chartalist beliefs that wealth is generated by the Federal Reserve System, transfer payments ultimately must come from REAL assets, not paper ones.

One must remember that for Krugman, the end of production is, well, production. If World War II created "prosperity," then China is creating its own version of prosperity by making it more difficult for the Chinese consumers to purchase those goods that they have been making. Instead of acknowledging the basic economic truth that the end of production is consumption, Krugman is claiming that the way for us to have a recovery is to subsidize our own industries, manipulate our currency (or place economic sanctions on China, which can be interpreted as an act of war), and then we will be fat and happy.

I doubt it. We are dealing with basic economics here. Creating what clearly would be a trade war would be yet one more step in destroying not only our economy (or, what is left of our economy), but also creating havoc in the rest of the world. Yeah, punish the Chinese; that will make us all rich.

Is China the New "Predator"?

From about 1980 until the mid-1990s, Japan was the Great Peril to the United States, at least from what the politicians, the unions, and their supporters were telling us. Today, the Great Bogeyman is China which, according to Paul Krugman, is engaging in "predatory trade policy."

Why does he say predatory? Krugman explains:

Right now, China is following a policy that is, in effect, one of imposing high tariffs and providing large export subsidies — because that’s what an undervalued currency does. That should be a violation of trade rules; it might in fact be a violation, but the language of the law is vague on the subject. But leave aside the fine print of the law for a moment: what China is doing amounts to a seriously predatory trade policy, the kind of thing that is supposed to be prevented by the threat of sanctions.

I have no intention of debating Krugman on what China might be doing, and that would include "undervaluing" its currency. It seems to me that China is doing what the old Mercantilists advocated hundreds of years ago.

Furthermore, I don't doubt that producers around the world resent the Chinese trade strategy. Nonetheless, from an economic point of view, China is not making itself wealthier by pursuing these policies. If there are victims, they are the Chinese people themselves.

It is one thing to say that such a policy can be disruptive to world trade and certainly make life more difficult for manufacturers in other countries, but it is quite another to claim that the Chinese policies will make China better off any more than export subsidies given by the U.S. Government are good for the U.S. economy. In fact, the actual effect is to make U.S. consumers better off, but at the expense of Chinese workers.

Peter Schiff, in this speech given in 2009, laid out this point, noting that right now, the Chinese are working, but we Americans get the goods, paying for them with green pieces of paper. Obviously, this is not a relationship that will continue, and sooner or later, as Schiff notes, the Chinese are going to be able to "keep their stuff."

When I think of predatory actions, I think of one group of people taking something from others, and not paying for it. Think of the U.S. invasion of oil-rich Iraq or the police in this country committing literal highway robbery in the name of "asset forfeiture." Now, THOSE actions are predatory in every sense of the word.

However, China is not invading our country (sending goods here that we purchase voluntarily is NOT an "invasion"), nor is it engaging in anything close to acts of war, yet Krugman calls for economic sanctions against China. That is ridiculous. While I don't support what the Chinese Government is doing, I believe that its Mercantialism actually is more harmful to China than it is to other countries.