Wednesday, March 17, 2010

Paul Krugman, Dishonest Protectionist, Ctd.

In response to an avalanche of criticism re: his most recent (and mostly-recycled) column on China's currency policies, Paul Krugman has taken to his blog to craft a very long defense of his unrealistic, dishonest and potentially-devastating proposal to impose a 25% tariff on all Chinese imports unless China immediately appreciates its currency, the renminbi (RMB), by an unspecified-but-large amount.  Krugman's admittedly "wonkish" response is far too long (and boring) to reprint here, and some very smart folks have already rebutted some of its more detailed points on monetary policy.  Nevertheless, I have a few quick comments about Krugman's latest work that I think warrant mention:
  • Despite several online criticisms of his ahistorical recollection of the US-Germany currency situation in 1971 (and an admission from a former student that he used to teach this issue correctly), Krugman's new entry completely ignores the plain fact that his original historical and theoretical justification for his aggressive unilateralism was fraudulent.  Move along, folks, nothing to see here.
  • In response to his critics' claims that appreciation of the RMB would not lead to a significant change in the US trade deficit, Krugman states: "we have lots of experience with currency depreciations – and they have invariably led to a rise in exports and the trade surplus."  He cites "the smaller East Asian nations in the aftermath of the 1997-1998 crisis, or Argentina after 2001, or even the United States after 2005," and then asks "Is China really uniquely exempt from the rules that apply to everyone else?"  However, Krugman very conveniently omits historical examples that argue against this "experience": most notably Japan's massive appreciation of the Yen vs. the Dollar in the 1970s and 1980s, which resulted in - oh yeah! - Japan maintaining a very large bilateral trade surplus with the United States.  Maybe "the rules" don't apply to China because there aren't really any simple "rules" on this issue at all, huh?
  • Of course, we have even better proof that RMB appreciation might not affect the US-China trade balance: the 20% RMB appreciation in 2006-2008 that resulted in an expanding US-China trade deficit.  Yet Krugman feebly attempts to explain away this glaring flaw in his theory by stating "don’t make too much of the lack of an obvious relationship between Chinese currency movements over the past few years and the trade balance.  China is an economy in the process of rapid transformation – exactly the circumstances in which a real exchange rate that makes sense one year may be way off base just a few years later."  So Krugman wants us to disregard as "way off base" very recent data on China trade/currency, yet only a few paragraphs earlier he wants us to accept as perfectly representative of China older data from different countries?  Why on earth would that be appropriate?  Oh, right, because the Asia/Argentina/US data support his position, while the China (and missing Japan) data totally undermine it.  Shameful.
  • Krugman also fails to even acknowledge evidence submitted by Dan Ikenson and others that (i) because Chinese value-add is only 30%-50% of a "made in China" product's total US customs value, the US-China trade deficit isn't very representative of the actual bilateral economic relationship; or (ii) because 1/2 to 2/3 of a Chinese product is comprised of imported foreign inputs, RMB appreciation will actually make those inputs less expensive and thus improve China's global competitiveness.
  • Most importantly, Krugman still refuses to discuss the massive harms that his 25% tariff would impose on American businesses and families.  In fact, he doesn't devote even one of his almost-1300 words to the tariff's harmful domestic effects (and this is a blog entry, so it's not like he had space constraints).  For him, this painful tariff is just a super-awesome negotiating tool, the only downside of which is Chinese anger.  (Even more bizarrely, Krugman acknowledges that the tariff will divert lots of trade from China to other exporting countries, and maybe even cause some "resourcing" of domestic production.  I guess that's all supposed to magically and instantaneously occur without any costs to US importers and consumers, huh?  Rrrriight.)
To his credit, however, Krugman finally seems to implicitly admit the real reasons for his Ahab-esque pursuit of China: RMB appreciation is necessary to pursue his dream of massive monetary stimulus.  He says: "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." (Emphasis mine.)  Translation: the Fed must stop farting around, start listening to me and go buck-stimulus-wild in order to save the planet (and justify my Keynesian liberaltopia)!   But, as the mere trillions in "mini-stimulus" have proven (to him, at least), Krugman-style SUPER-STIMULUS and its attendant dollar devaluation can't work as planned if the RMB is pegged to the dollar.  Instead, it'll produce even bigger and even more unstable "global imbalances."  So China must appreciate the RMB now, or else Krugman's dream can't be fulfilled.

Now who's with him!?!?  (Cue the crickets.)

No comments: