Krugman: Blame China for our economic ills

Paul Krugman received his Nobel Prize three years ago ostensibly for his contributions to theories of international trade. (He actually received it at the time because he was writing anti-Bush columns, and the Swedes were in the anyone-but-Bush mode. A year later, President Barack Obama would receive the Nobel Peace Prize, and we see what he has done with it: employ international death squads.)

Krugman writes:

...Senate leaders will...take up legislation that would threaten sanctions against China and other currency manipulators.

Respectable opinion is aghast. But respectable opinion has been consistently wrong lately, and the currency issue is no exception.

Why such drastic steps? Krugman spells out what he sees as the problem:

Ask yourself: Why is it so hard to restore full employment? It’s true that the housing bubble has popped, and consumers are saving more than they did a few years ago. But once upon a time America was able to achieve full employment without a housing bubble and with savings rates even higher than we have now. What changed?

The answer is that we used to run much smaller trade deficits. A return to economic health would look much more achievable if we weren’t spending $500 billion more each year on imported goods and services than foreigners spent on our exports.

There is much more in his column defending countries manipulating their currencies in order to make them weaker internationally, including a demand that the U.S. Government do the same. However, since China is "manipulating" its currency to do what Krugman demands we do, China must be the cause of the depression in the USA.

Krugman uses an interesting set of logical steps to reach this conclusion. (1) The government has tried to "stimulate" the economy, (2) the economy still is in a depression; (3) therefore, China must be at fault.

When the Indonesian economy collapsed in the late 1990s, mobs murdered ethnic Chinese merchants. I guess I am grateful that Krugman is not calling for the murder of others, but nonetheless when a Nobel Prize winning economist calls for trade barriers as a way to pull the USA out of a depression, he no longer is practicing economics.

If you ask where Krugman is calling for trade barriers, I think the following quote from his column provides ample proof of that:

In the last few days a new objection to action on the China issue has surfaced: right-wing pressure groups, notably the influential Club for Growth, oppose tariffs on Chinese goods because, you guessed it, they’re a form of taxation — and we must never, ever raise taxes under any circumstances. All I can say is that Democrats should welcome this demonstration that antitax fanaticism has reached the point where it trumps standing up for our national interests.

In other words, opposition to a new tariff on Chinese goods is said to be bad because it is "right-wing" to be against "new taxes." No matter that this would be exactly the kind of measure that would make things worse; no, opposition to a new tariff is bad because Krugman thinks it is a way to score points against "right-wingers."

Before Herbert Hoover signed Smoot-Hawley in 1930, a letter signed by 1,000 academic economists urged the president not to do it. Hoover did it anyway, and the results were tragic.

Today, America's best-known economist is demanding that the Obama administration erect new trade barriers in the wrong-headed belief that restricting trade will create new prosperity. This is beyond economics; it is madness, and it also is very sad, because if Congress carries out the policy that Krugman is demanding, we are going to see the economy quickly go downhill.

Captain Ahab Krugman and the Great Yellow Whale

I might be mistaken, but I believe Paul Krugman has a real fetish about China, pursuing the "new Yellow Peril" with the tenacity of Captain Ahab himself. Yes, THAT China, the China where factories turn out vast quantities of goods that make it to the shelves of Wal-Mart. (Krugman doesn't like Wal-Mart, either, so the fact that the company purchases Chinese-made goods makes it complicit with China's apparent dastardly plan to take over the World!)

In today's column, Krugman writes about an incident involving a Chinese trawler colliding with Japanese coast guard vessels, and then turns it into yet another scare story involving trade that I would hope a Nobel Prize winner (for his trade material) would not be writing. We need some reasoned voices, and I would have hoped that Krugman would have been one of those, but apparently we have someone who thinks a trade war would be good for the country. Yes, and Smoot-Hawley brought prosperity to America.

According to Krugman, after the China-Japan incident, China refused for a time to sell rare earth materials to Japanese companies, which highlighted the vulnerability the rest of the world has regarding these materials, given their importance in manufacturing different components. He writes:

On one side, the affair highlights the fecklessness of U.S. policy makers, who did nothing while an unreliable regime acquired a stranglehold on key materials. On the other side, the incident shows a Chinese government that is dangerously trigger-happy, willing to wage economic warfare on the slightest provocation.

Some background: The rare earths are elements whose unique properties play a crucial role in applications ranging from hybrid motors to fiber optics. Until the mid-1980s the United States dominated production, but then China moved in.

“There is oil in the Middle East; there is rare earth in China,” declared Deng Xiaoping, the architect of China’s economic transformation, in 1992. Indeed, China has about a third of the world’s rare earth deposits. This relative abundance, combined with low extraction and processing costs — reflecting both low wages and weak environmental standards — allowed China’s producers to undercut the U.S. industry.

In answer to the obvious question - How did the USA allow its own rare earth industry to falter? - Krugman writes:

You really have to wonder why nobody raised an alarm while this was happening, if only on national security grounds. But policy makers simply stood by as the U.S. rare earth industry shut down. In at least one case, in 2003 — a time when, if you believed the Bush administration, considerations of national security governed every aspect of U.S. policy — the Chinese literally packed up all the equipment in a U.S. production facility and shipped it to China.

Did the Chinese take these materials by force? No, they purchased them because conditions in the United States made it too costly to mine these resources, but instead of dealing with that fact, Krugman makes it sound as though the Chinese were engaging in something nefarious.

The mining of rare earths - like a lot of mining - is dirty and has a lot of environmental issues. American environmental law makes it very difficult to do some mining with any cost-efficiency, so we should not be surprised that the Chinese have managed to undercut what once was a profitable industry in the USA.

While Krugman does not make any real suggestions - other than "punish" China for not valuing its currency as high as Krugman says it should be valued - he is vague about the "solution" to this problem. Do we subsidize rare earth mining in this country? In other words, do we engage in these operations, paying union wages and other environmental costs, and do so by cannibalizing those industries that still are profitable? This is not an idle nor spurious question.

Does Krugman believe we should have tariffs against rare earth materials from China? That would have the same effect as a subsidy, and Krugman then would have to defend his position that tariffs somehow would make us "safer."

Unfortunately, Krugman finishes with some of the most naked hypocrisy that I have read. First, his own words:

So what are the lessons of the rare earth fracas?

First, and most obviously, the world needs to develop non-Chinese sources of these materials. There are extensive rare earth deposits in the United States and elsewhere. However, developing these deposits and the facilities to process the raw materials will take both time and financial support. So will a prominent alternative: “urban mining,” a k a recycling of rare earths and other materials from used electronic devices.

Second, China’s response to the trawler incident is, I’m sorry to say, further evidence that the world’s newest economic superpower isn’t prepared to assume the responsibilities that go with that status.

Major economic powers, realizing that they have an important stake in the international system, are normally very hesitant about resorting to economic warfare, even in the face of severe provocation — witness the way U.S. policy makers have agonized and temporized over what to do about China’s grossly protectionist exchange-rate policy. China, however, showed no hesitation at all about using its trade muscle to get its way in a political dispute, in clear — if denied — violation of international trade law.

Couple the rare earth story with China’s behavior on other fronts — the state subsidies that help firms gain key contracts, the pressure on foreign companies to move production to China and, above all, that exchange-rate policy — and what you have is a portrait of a rogue economic superpower, unwilling to play by the rules. And the question is what the rest of us are going to do about it.

Yes, this is the same Paul Krugman who has written elsewhere that the formulation of an industry based upon state subsidies and rules forcing individuals and businesses to purchase higher-cost "environmental-friendly" items would be good for the economy. Don't think for a second that the U.S. government does not do many of the same things, and this country hardly is a bastion of free trade.

And while I cannot heap praise on China for many of its oppressive domestic policies, nonetheless, the USA, with about a quarter of China's population, incarcerates many more people than does China. Yes, China, a country that had real death camps and gulags and summary executions does not imprison as many people, not to mention anything close to a percentage of its population, as the USA.

Furthermore, for all of the bellicosity that one may see in the trawler incident, China does not have troops scattered about the globe and other than Tibet, does not involve itself in "nation-building." I hate to say it, but China hardly poses a "threat" to the world economy and world peace. I wish I could say the same for my own country.

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.

Jeremy Warner Gets It Right On Krugman

Paul Krugman makes light of the recent article by Jeremy Warner in The Telegraph, but I think Warner is spot on. Here is Warner in his own words:

When the self-proclaimed "conscience of liberal America" and a one-time free trader to boot starts arguing for protectionism, you know that things have come to a pretty pass. But that's what's happened over the past week.

Paul Krugman, a Nobel Prize-winning economist, has taken to advocating a 25 per cent "surcharge" – he refuses to use the more descriptive term of "import tariff" – on goods from China as a way of bringing the Chinese leadership to heel over currency reform. So potentially dangerous and out of character is this idea that when I first read it, I assumed he was being ironic. But sometimes the cleverest of people can also be the most stupid, and he's now said it so often that you have to believe he's serious.

What he's advocating is trade retaliation so extreme that it would make the 1930s look like a stroll in the park. Contrary to Professor Krugman's naïve assumption that the Chinese would soon cave in and allow their currency to float if confronted by such hard-ball tactics, I am certain that nothing is more guaranteed to produce the opposite response.

Professor Krugman's suggestion mines a rich seam of populist US thinking and rhetoric which grows ever more vocal and worrying as the recession persists. What makes Krugman and other highly regarded economists who toe the same line so dangerous is that they give intellectual respectability to a fundamentally disreputable idea.

Unlike Krugman, who already has given us a fantasy version of what would happen if the USA were to retaliate against China for officially undervaluing its currency against the dollar. To be honest, I think Peter Schiff's recent comments were far more astute.

Warner makes some important and insightful comments here:

An outbreak of protectionism is just what the still-fragile economic recovery doesn't need. China makes an easy scapegoat for America's ills, but it is not the cause, nor would making it revalue its currency provide the solution. The debate is echoed in Europe, where Germany – an exporter second only to China – finds itself blamed for the eurozone crisis. If only Germany would make itself less competitive, if only Germany would save, invest and export less, then everybody else would be fine. The virtuous find themselves depicted as the villainous. If the argument were not so perverse, it would be laughable.

Let us briefly consider what would happen if Professor Krugman got his way and there was either a 25 per cent devaluation of the dollar against the renminbi or 25 per cent import duties. Almost overnight China would sink into a deep recession as exporters already operating on wafer-thin margins were plunged into insolvency.

American business, which relies heavily on China as the assembly plant of choice (guess where iPods are made), would also find itself deep in the mire. Even in the long term, the revaluation would scarcely be more helpful. Over time, Chinese wages would merely deflate relative to US ones to make exports competitive again.

For all of his "credentials," let us not forget that Krugman is a Keynesian who has no clue whatsoever what happens in a real economy. His world is the imaginary world of aggregates, GDP numbers, crude graphs, and no real people and certainly no real production. There is no such thing as consumption, only spending. And all good Keynesians know that no one has to produce anything, just print a bunch of money, and we'll all be rich!