Good Thing We Ignored Paul Krugman, Part 632

A couple days ago, Paul Krugman made a rather quiet admission: contrary to his previous histrionics, China's currency ain't a big deal anymore:

In 2010 an undervalued renminbi was a significant drag on advanced economies, including the United States. Since then, however, two big things have happened: relatively high inflation in China, and some appreciation of the renminbi against the dollar. As a result, the real exchange rate of China against the United States (based on consumer prices), has appreciated significantly:

At the same time. China’s surplus has come way down:

So this is an odd time to be making confrontation over China’s currency a centerpiece of your economic policy — unless, of course, it’s just bluster aimed at making voters think you’re tough.

I have no idea whether Mitt Romney's misguided stance on China's currency or the aforementioned facts really caused Krugman's views to change, but that's not important for tonight's purposes.  Instead, I just want to gloat examine this great transformation and the implications of Krugman's previous advice on the China currency issue.

As you may recall, in 2010 grousing about China's currency was pretty much a monthly affair for Krugman's New York Times column.  But he not only would rage about the dangerous "global imbalances" caused by Chna's currency, but also would demand that the United States adopt a severly protectionist stance in order to remedy the "problem":

In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.

I don’t propose this turn to policy hardball lightly. But Chinese currency policy is adding materially to the world’s economic problems at a time when those problems are already very severe. It’s time to take a stand.

When Krugman made this proposal, I and a host of other (smarter) people took to the interwebs to explain just how ridiculously awful the idea of an across-the-board 25% "currency tariff" was from a historical, legal and economic perspective.  We repeated those criticisms when he later expressed support for Senate legislation (which followed unfortunate passage of an almost-identical House bill) that would have directed the US Department of Commerce to treat currency undervaluation as a countervailable export subsidy, thereby opening the door to countervailing duties on Chinese - and other! - imports.  We even went so far as to explain that, even assuming that Krugman and others were correct that China's currency was horribly manipulated and causing dangerous global imbalances, basic economics dictates that the whole thing would work itself out, and that harmful protectionist tariffs were most definitely NOT needed to solve the so-called "problem."

So here's my basic question for Dr. Krugman - a man who, by the way, used to be one of the pre-eminent advocates for free trade:

Aren't you just thrilled that Congress didn't take your advice and open the permanent, pandora's box of currency protectionism to address a "problem" that, as you now freely admit, has fixed itself in under 2 years?

Seriously, just think of what would've happened if the Senate had bowed to Krugman's demands and passed the currency/CVD bill: we'd very likely have this messy new protectionist law on the books, leading to lord-only-knows-how-much litigation, economic harm and diplomatic tension between two of the world's biggest economies. 

Instead, the only thing damaged is Dr. Krugman's free trade and economic reputation.

Boy, did we dodge a bullet!

Umm, Yeah, About China's Dangerous Trade Imbalance

Right on the heels of the US visit of Xi Jinping, Chinese Vice President (and likely to replace President Hu Jintao as secretary-general of the Chinese Communist Party), comes news that one of the main indicators of supposed Chinese trade malfeasance - it's global trade surplus - has all but disappeared:

China's current-account surplus for 2011 shrank to $201.1 billion, from $305.4 billion in 2010. More important, as a ratio of gross domestic product, the current-account surplus fell to about 2.7%. That's close to a decade low and below the 4% threshold that suggests an exchange rate out of whack with equilibrium.

The argument in past years has been that the fall in China's surplus is cyclical, the result of the investment-heavy domestic stimulus that led to a surge in commodity imports, and recession in major trade partners that crimped exports.

But the International Monetary Fund seems to think there could be something more at work. The IMF now predicts China's current-account surplus will be 3.8% of GDP in 2013, way down from a forecast of 6.2% last September. Taken together with an unusual fall in the value of China's foreign-exchange reserves in the final quarter of 2011, it's a serious challenge to the argument that the yuan is undervalued....

In an election year, and with unemployment at 8.3%, the U.S. might still ratchet up the rhetoric on the yuan. But investors should prepare for China to start ratcheting down the pace of appreciation.

The IMF is already re-examining whether China's currency remains "substantially undervalued" because (i) "the yuan has appreciated more than 8% in the last year and the fund is developing a new method of assessing global currencies; and (ii) "the real effective exchange rate, based against a basket of currencies and accounting for inflation, is up almost 20% in the last three months on an annual basis and by over 8% in 2011."  I've already noted that the significant increase in the RMB's real effective exchange rate (and decrease in the same metric for the USD), and recently the nominal RMB-USD exchange rate went below 6.3 for the first time since the early 1990s.  Couple these facts with China's disappearing trade surplus, and the IMF's re-evaluation certainly appears warranted.

Meanwhile, the US trade deficit just reached a six-month high.  Hmmm....

Now, I'm certainly not saying that China's trade balance is some sort of magical indicator of the success, failure or legality of Chinese trade policy.  As I've repeatedly explained, trade balances - particularly bilateral ones - are increasingly unimportant in this regard.  However, a lot of "important" people - like a certain New York Times columnist and various campaigning politicians - have relied on China's trade surplus to justify their breathless calls for aggressive US protectionism to counter China's supposedly-pernicious trade practices.  Indeed, in many cases, China's trade balance is the only reason cited for their extremely provocative anti-trade proposals. 

So with this supposedly-critical metric, along with various indicators of the value of China's currency, now arguing against such unilateralism, will these pundits and politicians revise their positions?

Don't hold your breath.

SOTU Round-up

There's far too much good commentary on last night's Go America Pep RallyState of the Union Address for me to list it all here, but these are the ones that I liked the best (other than mine, of course):

• Cato's Sallie James briefly explains why the President's "competitiveness" theme is misguided and dangerous.  She even channels the Sane Paul Krugman of Yesteryear ("SPKY"): "When it became clear that President Obama would make 'competitiveness' a theme of his SOTU address, I looked forward to seeing Paul Krugman’s statement pointing out how much nonsense that is. Here he is, after all, in his excellent 1997 book, Pop Internationalism (MIT Press): 'International trade, unlike competition among businesses for a limited market, is not a zero-sum game in which one nation’s gain is another’s loss. It is [a] positive-sum game, which is why the word 'competitiveness' can be dangerously misleading when applied to international trade.' Sure enough, President Obama’s speech last night was peppered with references to 'the competition for jobs,' 'new jobs and industries take root in this country, or somewhere else,' 'the competition for jobs is real,' etc. And of course there was a healthy dose of the usual mercantalist obsession with exports."  I'd only add that this type of "adversary economics" - i.e., discussing the global economy as a war to be won against our trading partners - is nothing new for this President, and I've critiqued it many times on this blog.  No need to do it again tonight, but I'm sure I'll be hitting it again soon.

• Cafe Hayek's Don Boudreaux provides some must-read clarity for those poor, misguided soles out there who thought that Obama's "pro-business" and jibberjabber would be warmly welcomed by those who believe in and support free markets.  My favorite lines: 

"In a free market, businesses profit only by pleasing consumers. But a business that obtains special favors from government can profit without pleasing consumers. And it’s here that trouble starts. Consider Obama’s commitment to make America more 'competitive.' (He used variations of the word 'compete' nine times in his address as part of his argument that American firms and workers are threatened by their foreign counterparts.) 'Competition' sounds good. But businesses don’t like competition; they like protection from competition – along with subsidies, special tax breaks, and other government favors that relieve them from the need to cater energetically to consumer demands. So a pro-business president is prone to curry favor with businesses by shielding them from competition."

"Did you know that in the decade from 2000 through 2009, the total amount of foreign direct investment (FDI) received by China was $686 billion, while the total amount of FDI received by the U.S. was $1.8 trillion – by far the largest inflow of capital from foreigners received by any country on earth? America’s receipt of FDI dollars exceeded China’s by 162 percent. On a per-capita basis, the figure is even greater: The amount of FDI America received per person from 2000 through 2009 was ten times (!) greater than was received by China. So when Obama said in his speech on Tuesday night that 'We need to out-innovate, out-educate, and out-build the rest of the world,' he wrongly implied that America currently doesn’t do so well in the international economy. But it does – which is not to say that there isn’t a lot of room for improvement. The president is correct that tax and regulatory reforms – along with reining in Uncle Sam’s deficit spending – are in order. Especially welcome is his call to lower corporate tax rates. And if calling such reforms 'competitiveness policies' improves their chances of being implemented, I’m all for it. But let’s not be fooled into thinking that America’s current economic troubles are caused by America’s open participation in global trade."

• AEI's Phil Levy succinctly labels it A Disappointing Speech and - gasp! - also channels SPKY: "In advance of the president’s State of the Union speech, I wrote about the need for difficult choices and serious stances on trade and the deficit. I didn’t hear any of that in the address. On trade, the president’s positive agenda was largely limited to endorsing his minor reworking of the three-year-old free trade agreement with Korea. He also mentioned vague plans to rework the Colombia and Panama agreements (after only two years of inaction!). I heard no mention of seeking trade negotiating authority, despite the recent efforts of Senator Rob Portman (R-Ohio) to get it for him. Nor was there any initiative to advance the global trade talks that the president has repeatedly pledged to conclude. Instead, there was an unhelpful jingoistic refrain about international competitiveness and economic threats from abroad (see Paul Krugman for why this is misguided)."

• And speaking of SPKY, since all the cool kids seem to be quoting him, I guess I will too: "The view that nations compete against each other like big corporations has become pervasive among Western elites, many of whom are in the Clinton administration. As a practical matter, however, the doctrine of "competitiveness" is flatly wrong. The world's leading nations are not, to any important degree, in economic competition with each other. Nor can their major economic woes be attributed to "losing" on world markets. This is particularly true in the case of the United States. Yet Clinton's theorists of competitiveness, from Laura D. Andrea Tyson to Robert Reich to Ira Magaziner, make seemingly sophisticated arguments, most of which are supported by careless arithmetic and sloppy research. Competitiveness is a seductive idea, promising easy answers to complex problems. But the result of this obsession is misallocated resources, trade frictions and bad domestic economic policies."  Sadly, that was written in 1994, and SPKY is today little more than a collection of words on the InterTubes.  And even more sadly, our current President, despite all his talk of "winning the future" and dominating the 21st century, is, as deftly pointed out by the AmSpec's Phil Klein sounding a lot like his Democratic predecessor back in 1994.

• Finally, Judy Shelton of the Atlas Economic Research Foundation has an excellent op-ed on the problems with the President's approach to doubling exports and "investing" in the future.  She wisely notes: "The only way to increase real wealth is through productive activity that generates true gains in economic output leading to higher future living standards; if wages are going up while purchasing power is going down due to inflation caused by government deficit spending, the gains are illusory.  If you have faith that America can compete in the global marketplace without resorting to monetary artifice, you will not be quick to embrace a strategy that elevates government industrial policy over private sector decision-making and free-market outcomes."  Exactly.

Sunday Quick Hits

I'm just back from some business travel, and there's lots to mention, so let's get right to it:

• Ten months of Section 421 tariffs on Chinese tires produce nothing except higher domestic prices and increased imports from other countries.

• New Cato briefer: The Miscellaneous Tariff Bill: A Blueprint for Future Trade Expansion.

• New Heritage briefer: Targeting the Yuan: A Feel-Good but Futile Response.

• Op-ed: Why imports are a boon for the US economy (and another reason why Keynesianism is dumb).

• In response to Krugman's latest China currency column, monetary economist rightly asks if we can revoke PK's Nobel prize.

• Boeing-Airbus dispute: the EU strikes back.

• WSJ editorial board asks an obviously rhetorical question: does Obama or the USW run US trade policy?

• Yet another trade dispute over "green" subsidies: this time Japan goes after Canada's "feed-in tariffs" for renewable energy generation.  You were warned, people.  You were warned.

• Shocker: Dems' anti-china push is based on politics, not economics.

• Excellent NYT op-ed on how visa reform is critical to the future of US global competitiveness.  Me: something China is already doing, by the way.

• Journalist notices that US pols attack China's currency policies to "save American jobs," but they don't seem to care about those same jobs when they block Chinese investment in the United States.

• Breakthrough?  Iowa farmers starting to balk at taking government money.

That should keep you all busy for a while.

Sunday Quick Hits

Lots going on over the last week, and I'm traveling today, so let's just get right to it:

• Economist Ray Fair explains in detail why he believes that RMB appreciation will be a net negative for the US economy.

• Ever wonder why so many politicians campaign with impunity against free trade in Democrat primaries?  Well, this fun new survey suggests that they're just playing to their target audience. (Snicker snicker.)

• Chinese officials assert that American legislation (or administrative action) to attack China's currency policies through US anti-subsidy laws would violate WTO rules.  As I've already noted, they are probably right.

• In one quick little blog post, Paul Krugman finally admits that (a) he doesn't understand global trade rules; and (b) he just doesn't care about them.  Krugman disregarding the rule of law?  Shocking, I know!  Of course, he could've read this helpful blog entry and saved himself the embarrassment.

• The Bush Institute's Jim Glassman hosts an interesting video debate on "Doubling Exports - Rhetoric or Reeality?" between Cato's Dan Ikenson and Public Citizen's Lori Wallach.

• Speaking of Ikenson, he provides the "Charts of the Week" - maybe even the month - which clearly and concisely demonstrate just how critical import competition is for American families and businesses.

• And then Ikenson's colleague Dan Griswold unpacks the most recent US trade data to explain how - assuming you're a sane, apolitical person (I know, I know) - the stats argue against attacking China's currency.

• More on ObamaCare and America's global competitiveness: here's a handy listing of all the US companies that have announced tax hits (and the amount of the hit) because of the new US healthcare law.  Ouch.

• The Peterson Institute's Gary Hufabauer and Theodore Moran explain how the recently-passed American Jobs and Closing Tax Loopholes Act will destroy American jobs and hobble US exports.  They show that the legislation's "tax measures would cost $14 billion over 10 years for the foreign operations of US-based multinational corporations."  Awful.

• And speaking of awful American fiscal policy, Art Laffer explains how the seemingly-inevitable tax increases in 2011 (when the Bush tax cuts expire) will crush any US economic recovery, while Mark Calabria shows that Obamanomics is already doing a number on the struggling US labor market.  Oh, goody.

• Finally, the Atlas Institute's Tom Palmer explains free trade in under 3 minutes in the following video.  A little basic for readers of this blog, but a nice thing to share with family/friends who don't obsess about this stuff like I do.

The "Father of Supply-Side Economics" on US-China Currency and the Economic Crisis

The Heritage Foundation recently hosted an interesting event on "The Dollar, The Euro, and the International Monetary Order" with, among others, Nobel Prize-winning economist Prof. Robert Mundell (described by Heritage as "the academic founder of supply side economics").  NRO's Sean Rushton gives a nice rundown of Mundell's quite impressive bio here:

For those not familiar with the Nobel Laureate, Mundell has been a guiding force behind major economic expansions since the early 1960s. His work as a young man likely influenced the Kennedy administration to ignore its Keynesian advisers in favor of tax cuts and sound money, leading to the robust expansion of 1961–68. Mundell correctly predicted the inflationary disease of the 1970s and advocated the supply-side policy mix that spurred two decades of non-inflationary expansion in the 1980s and ’90s. Mundell’s writing on optimum currency areas was the basis for the euro’s creation in 1999, erasing exchange-rate barriers across the world’s second largest economy. And Mundell has been an important adviser to China for two decades, guiding its economy out of Communist infancy to become the significant financial power it is today.

The full video of the event is below, and Mundell's remarks start at about 1:15.  For those of you who don't have the time to watch, Rushton also helpfully summarizes most of Mundell's comments (emphasis mine):

Mundell argues the recent crisis had three distinct parts.

Part One was the real-estate bubble and subsequent bank-solvency crisis, which began in 2006. He says the bubble was generated primarily by the dollar’s fall after 2001, as U.S. monetary authorities made clear they wanted a lower dollar to improve exports. As the greenback dropped on foreign exchanges and against gold and other commodities, investors pursued the classic inflation hedge: They borrowed and bought hard assets, expecting to repay the debt with cheaper future dollars. Real estate, already roaring due to 1997’s expanded housing tax deduction, went into overdrive, goosed by subprime lending and mortgage securitization.

Part Two of Mundell’s analysis is the most intriguing and least understood aspect. He argues that, as the real-estate bubble burst, large quantities of fresh liquidity were demanded by the public and banks. In summer 2007, the world’s central banks supplied it and no liquidity crunch developed. But by summer 2008, spooked by rising inflation, the U.S. Federal Reserve failed to provide adequate cash, leading to dollar scarcity. Four key symptoms of tight money appeared within months: the dollar rose 30 percent against the euro; gold fell 30 percent; oil fell 80 percent; and the inflation rate dropped from 5.5 percent to negative levels. As a result, Mundell believes, Lehman Brothers collapsed, the stock market went into free fall, and a near-panic ensued. This phase was entirely preventable and constitutes one of the worst mistakes in Fed history, Mundell says. The crisis eased in early 2009, as the Fed upped the money supply, but the damage was done.

Part Three of Mundell’s analysis is the recession of 2008–09, with bailouts, rising unemployment, and skyrocketing deficits. He predicts decent growth this year, but believes unemployment will remain high and the recovery will be weak.

He says the U.S. must extend the Bush tax cuts and should also cut the corporation tax rate from 35 percent to 15 percent, to spur investment and recapitalize banks. Importantly, he says the U.S. should fix the dollar’s value against the yuan and the euro, thus creating an enormous common-currency area free of exchange-rate turbulence, which will prevent future debacles. It should be clear that Mundell sees a low and unstable dollar as culprit Number One in the crisis, and as the Bush administration’s biggest mistake.

Rushton omits the beginning of Mundell's lecture, but there's also a lot of good stuff in there too.  For one, Mundell essentially lays out (from 1:32:50 to 1:37:00) some reasons why a country like China would pursue a fixed exchange rate policy and what that country does with the foreign currency reserves that it might accumulate as a result of the peg.  As to the latter question, Mundell explains that China purchases US assets and debt (bonds, treasuries, etc.) with its dollars - something most of us already knew.  But it's Mundell's answer to the former question that I found most interesting.  In Mundell's opinion, the primary benefit of China's fixed exchange rate was/is not, as American currency hawks would have you believe, some pernicious international trade advantage, but rather domestic price stability.  Indeed, Mundell states that "China has had a better record of price stability since 1997 than any G-7 country, and they've done it... through a fixed exchange rate."  Interesting, huh?

The statements excerpted by Rushton above are also important, as they demonstrate Mundell's firm beliefs that (i) one of, if not the, biggest cause of the financial crisis was the significant US dollar devaluation undertaken by the Bush administration to improve American exports' global competitiveness; and (ii) the surest course to preventing future global meltdowns is pegging the US dollar, the Euro and the Chinese yuan (or RMB) and maintaining a strong, stable dollar.

So to summarize, Nobel Laureate, "father of supply-side economics," and presidential/Chinese economic adviser Robert Mundell is of the strong belief that (a) domestic price stability, not international export advantage, is China's primary reason for its historic RMB peg to the US dollar; (b) pursuing an export-driven weak dollar policy was and will be disastrous for the US economy; and (c) a fixed USD-RMB-EUR system would improve global trade and is the best way to prevent another collapse.

Now, I'm certainly not qualified to agree or disagree with Mundell's currency theories, but that's (once again) not my point.  Instead, it's more important for me to just keep showing all of the serious and divergent ideas out there about global currency issues, particularly those from well-respected monetary gurus showing very sound and sensible reasons for China's currency policies - ones that have nothing to do with conspiratorial allegations of predatory Chinese trade policies or breathless (and dangerous) demands that China appreciate the RMB.  These "other" ideas deserve wide circulation because they are a vital counterweight to the current demagoguery out there in the US-China currency debate.  When guys like Mundell speak up, whether you agree with them or not, they further undermine the ridiculous certitude of American currency hawks like Paul Krugman and Sen. Chuck Schumer that China is intentionally manipulating its currency in order to prey on US industries and steal American jobs, and that some sort of dramatic RMB appreciation (and weaker US dollar) will magically solve the US and global economic crisis.

And the lesson, as always, is: when someone tells you with utter certainty that China is through its currency policies preying on the American worker, or that a stronger Chinese yuan and weaker US dollar will definitely improve the American economy, just stop listening.

Piling on Krugman, and for Very Good Reason

Last night, I discussed the disingenuousness of Paul Krugman's repeated assertions that nations' use of carbon tariffs under domestic climate change regulations was legal under global trade rules and even sanctioned by the WTO.  Today, National Review's Jim Manzi piles on by focusing not on Krugman's false legal analysis, but instead his false logic:

[I]sn’t it obvious that the targeted countries might consider other reactions [to carbon tariffs] beyond either just joining the carbon-pricing regime or choosing to pay the tariff? What if they reacted with counter-tariffs, or set up an outside-the-tariff trading bloc with various resource-rich African and Asian countries, or reduced purchases of U.S Treasuries, or any of a thousand other ideas? Krugman has this to say:

To the objection that such a policy would be protectionist, a violation of the principles of free trade, one reply is, So? Keeping world markets open is important, but avoiding planetary catastrophe is a lot more important.

But if for the next century “planetary catastrophe” = an expected cost of 2 percent of economic output 100 years from now (and if avoiding this will likely cost more than this amount, even if such a program works), then maybe running the risk of inciting a global trade war isn’t such a great bet.

He goes on to describe the legality, but not the effectiveness, of such tariffs. Why do we think they will work, and not be met by aggressive counter-action? Here is the argument in its entirety:

Needless to say, the actual business of getting cooperative, worldwide action on climate change would be much more complicated and tendentious than this discussion suggests. Yet the problem is not as intractable as you often hear. If the United States and Europe decide to move on climate policy, they almost certainly would be able to cajole and chivvy the rest of the world into joining the effort. We can do this.

Maybe a direct, aggressive confrontation with countries representing several billion people and a good chunk of world economic output would work, and maybe it wouldn’t; but this is exhortation and wishful thinking in the place of analysis.

Manzi's statements are part 2 of his review of Krugman's NYT Magazine tome on climate change; that "2 percent" figure comes from part 1, which I highly recommend.  On the actual effectiveness of carbon tariffs, I mentioned last night that it's far from certain that carbon tariffs would eliminate "carbon leakage" (what little there would be) by inducing developing countries to join the climate change regulation gang.  So maybe that's why Krugman substitutes conclusory statements like those above for real, honest analysis on carbon tariffs' efficacy.

At this point, I think its safe to say that Manzi's economic and logical criticisms, combined with my legal and academic ones, leave Krugman with nary a leg to stand on.  Of course, something tells me that none of this will stop him from remorselessly continuing his current climate change obfuscation campaign.

Senate Fans of Carbon Tariffs May Have Changed Their Tune, but the Song Still Stinks

Given the current partisan makeup of the US Senate, any small group of Senators wields enormous influence over the legislative process.  With this fact in mind comes news that a group of ten Senators, led by Sen. Sherrod Brown (D-OH), have sent a letter to Sens. John Kerry (D-MA), Joe Lieberman (I-CT) and Lindsay Graham (R-SC), setting out their demands for the new Senate climate change energy green jobs legislation, which is set to be unveiled in the next week or so.  And unsurprisingly, one of the Senators' demands is for carbon tariffs:

Apply Border Measures To Prevent Carbon Leakage. An automatically triggered border measure is necessary to promote comparable action from other countries and prevent carbon leakage. To avoid undermining the environmental objective of the climate legislation, a WTO-consistent border adjustment measure, which the WTO has recognized as a usable tool in combating climate change, should apply to imports from countries that do not have in place comparable greenhouse gas emissions reduction requirements to those adopted by the United States. A border adjustment measure is critical to ensuring that climate change legislation will be trade neutral and environmentally effective.

It's already quite certain that the new Senate bill will include some form of "border adjustment measures" (aka carbon tariffs), so this letter isn't really changing anything in that regard.  But its substance is still worth exploring.  As you may recall, this is not the first such letter sent by Sen. Brown and his merry band of protectionists.  An almost identical list of Senators sent a similar letter last August demanding carbon tariffs provisions in the 2009 version of the Senate's cap-and-trade bill.  Last time, however, their sole justification for the measures was to ensure a "level playing field" for American manufacturers who would face significantly higher costs under the energy tax scheme.

Yet now, these rust-belt Senators have dropped their heartfelt concerns about protecting constituent industries and instead want carbon tariffs only to ensure that the law is "environmentally effective" by preventing "carbon leakage" (i.e., the offshoring of dirty, carbon-intensive manufacturing).  How eco-friendly of them.  Now, leaving aside for a moment that there is an increasingly large body of scholarship demonstrating that (a) carbon leakage isn't a significant threat, and (b) border measures actually won't prevent what little carbon leakage will occur, let's focus for a moment on the Senators' abrupt change in reasoning.  What on earth could have caused this conspicuous about-face?

Well, it appears that the Senators' rhetorical shift is - shocking, I know - a rather ham-handed attempt to keep their cherished carbon tariffs consistent with WTO rules.  As Cato's Sallie James explains:

[T]he almost convincing attempt by these senators to cloak their protectionism in green-speak about the need to ensure that climate legislation is environmentally effective. They will have to keep that up, too, if they are to stay on the right side of WTO law, which says there must be a clear link between a trade measure and an environmental purpose if the measure is to be at least prima facie legitimate.  Imposing border measures to address adverse competitiveness effects of domestic environmental regulations, in other words, probably won’t cut it. ([Sallie's paper] “A Harsh Climate” has more on why unilateral border actions may in and of themselves be inconsistent with WTO obligations.)

So last year, Senator Brown and his buddies from Ohio, Michigan, Pennsylvania, West Virginia and elsewhere were focused laser-like on maintaining their heavy-industry constituents' domestic competitiveness through carbon tariffs, but now they're only concerned with carbon leakage and the environment.

How convenient.

Pardon me if I'm not buying this green-change-of-heart from this gaggle of brown-state Senators.  But hey, you gotta give them a little credit: they're sure trying like the dickens to wish away the problems that carbon tariffs have under WTO rules.  Indeed, they've even gone so far as to pretend that the WTO has expressly sanctioned the measures' use.  Of course, as James explains, this is nonsense:

[R]elated to the issue of WTO legitimacy,  is the reference to the WTO “recogniz[ing]” border adjustment measures as “a useable tool in combating climate change.” This is disengenuous and possibly misleading rhetoric from the senators, because the WTO has done no such thing. There has been no formal ruling on this issue from any WTO judicial body, because no such cases have come before it. The WTO members as a group have not issued a proclamation on it, either. I suspect the senators are referring to a joint WTO/United Nations Environment Programme report that came out last year, but as I said in my paper, that report “merely summarizes the relevant provisions, precedents and existing literature on the question on WTO consistency–without reaching any prescriptive conclusion at all.” And the demand that this tool be “automatically triggered” may put it at odds with jurisprudence that says that certain administrative procedures–including the right for a WTO member to review and appeal any decisions made–must be followed (reference for the trade wonks reading this: I am referring to Shrimp-Turtle).

Looks like a serious tsk-tsk is in order here.  But hey, maybe the Senators' weren't being intentionally misleading about that WTO "recognition."  Instead, they may have just been parroting the undoubtedly-intentional fabrications of Paul Krugman, who has repeatedly cited the WTO-UNEP report as somehow providing the trade body's express approval of carbon tariffs.  Krugman has repeated this fiction several times on his blog (see, e.g., here and here) and did it again just two weeks ago in the Sunday New York Times Magazine.  As Sallie points out above, of course, Krugman's statements are both totally wrong and highly misleading, and her great paper on the subject calls carbon tariffs' WTO-legality into serious question.  And as I've noted recently, the Indian government's own analysis has also raised serious WTO concerns about carbon tariffs, and the Indians have openly threatened to challenge any law that includes the controversial measures.

Krugman, of course, fails to mention any of this.  But hey, it's not like he's really all that concerned about veracity these days, so maybe we shouldn't be too surprised by his misleading statements and glaring omissions.

That doesn't mean, however, that we can't update the ol' carbon tariffs scorecard because the new Senate letter included one new protectionist: Sen. Mark Warner (D-VA).  His inclusion here is really a shame.  I thought he had more sense than that.  Alas.

Also, there's news out of Europe that France and Italy are demanding carbon tariffs (in what exactly isn't really clear).  Their demands aren't likely to go anywhere, but back on the big list goes France, and Italy joins the protectionist party for the first time.  Bellissima!

Pro carbon tariffs - Sen. Max Baucus (D-MT); Sen. Ben Cardin (D-MD), Sens. Lindsay Graham (R-SC) and John Kerry (D-MA); Sens. Amy Klobuchar (D-MN), Arlen Specter (D-PA), Carl Levin (D-MI), Claire McCaskill (D-MO), Debbie Stabenow (D-MI), Kay Hagan (D-NC), Mark Begich (D-AK), Sherrod Brown (D-OH), Tim Johnson (D-SD), Al Franken (D-MN), Evan Bayh (D-IN), John Rockefeller (D-WV), Robert Byrd (D-WV), Robert Casey (D-PA) and Russ Feingold (D-WI); Sen. Mark Warner (D-VA); the US House of Representatives (in Waxman-Markey); France; Italy and Paul Krugman.

Voting present - the White House.

Anti carbon tariffs - the rest of the world.

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.)

Tuesday Quick Hits

Lots of hit-worthy stuff over the last few days:

• Well, that sure didn't last long.  Last week I expressed serious* concern about our beloved United States Trade Representative because he had uncharacteristically ditched his longstanding mercantilist rhetoric and was bizarrely evincing a rare moment of import-loving clarity.  Well, fear not, dear readers!  Ron Kirk was not - I repeat NOT - abducted by economically-literate aliens.  According to multiple news reports, after blurting a litany of scripted sanity, Amb. Kirk immediately slipped back into his import-hating fog, reflexively poo-pooing a bill that would unilaterally reduce tariffs on imported footwear: "Kirk told the [audience] that with respect to trade-related issues the administration’s focus is on increasing exports, not imports. 'It’s hard to look at our trade deficit and the openness of our economy and make a compelling argument to the American public that we don’t have enough imports'.... In addition, Kirk said, the administration believes that an effort to lower tariffs on imported footwear is more likely to be acceptable to Congress in the context of a multilateral agreement like the ongoing Doha round where the U.S. would get something in return. Given that the benefits of duty elimination would flow almost entirely to one country (which is undoubtedly China even though Kirk did not mention it by name), Kirk said, it would be politically difficult to persuade lawmakers to grant such a concession unilaterally."  Now that's more like it, Ambassador!  Of course, there's one tiny, technical problem with this statement: as even your basic college freshman knows, China would reap the second-most benefits from this bill.  The United States (particularly lower-income American families) would reap the biggest share of benefits (i.e., half of them) through lower prices for a basic necessity - shoes.  I guess Kirk wasn't kidding about not "focusing" on imports, huh?  (Clearly, the aliens have left the building.)

• Maybe, just maybe, American manufacturing isn't the pathetic loser that our politicians allege.  Courtesy of economist Mark Perry: "The Federal Reserve reported today that Industrial Production increased in February by 1.7% compared to the same month last year, the largest increase since the 2.2% gain in January 2008. The February gain followed a year-to-year increase in industrial production 0f 0.90% in January, marking the first time of two consecutive monthly gains since January-February of 2008, and reversing 21 months of negative annual growth from March 2003 to December 2009."  Well, whaddaya know.

• TPP, we shall see.  Cato's Sallie James has a great new paper out on the proposed Trans-Pacific Partnership agreement between the United States and Brunei, Chile, New Zealand, Singapore, Australia, Vietnam, and Peru.  Quick summary: "The first negotiating session of this group will meet this week, March 15–19, in Melbourne, Australia. While any positive move from the Obama administration on trade is welcome—especially in light of almost a year's worth of neglect at best and protectionism at worst—there were ominous caveats and concessions in the announcement for those who cared to look. Those murky details call into question the true value of this deal, especially when more valuable, signature-ready agreements are sitting in the hopper."  Sallie provides lots of good data/evidence to back up her claims (natch), so be sure to check out the whole thing.  And as I've already noted, I think she's probably being too kind. 

• The world and I share a common distaste for Paul Krugman's latest op-ed.  Apparently my humble criticism of Paul Krugman's latest journalistic malfeasance re: China's currency had some great company, e.g., here, here, here, here, here and here.  Heck, there's even a video-fisking!  Good to know.

• Obama might totally blow off Indonesia and Australia because of healthcare.  Rumors abound.  All I can say is, "Dude, seriously?" 

Paul Krugman, Dishonest Protectionist

New York Times columnist Paul Krugman published on Sunday his monthly column about China's dastardly currency policies.  The column repeats many of Krugman's earlier comments about global "imbalances" and market "distortions," as well as his not-so-subtle demand that the US Treasury Department label China a currency manipulator in its semi-annual report on the subject (not coincidentally due next month).  Now, I've already expressed some serious doubts about Krugman's thoughts and intentions on the China currency issue, so I won't get into that again because, unlike PK, I can't get away with recycling my work.  Instead, I want to focus on Krugman's new and bellicose policy recommendation for solving the China currency "problem":

Some still argue that we must reason gently with China, not confront it. But we’ve been reasoning with China for years, as its surplus ballooned, and gotten nowhere: on Sunday Wen Jiabao, the Chinese prime minister, declared — absurdly — that his nation’s currency is not undervalued. (The Peterson Institute for International Economics estimates that the renminbi is undervalued by between 20 and 40 percent.) And Mr. Wen accused other nations of doing what China actually does, seeking to weaken their currencies “just for the purposes of increasing their own exports.”

But if sweet reason won’t work, what’s the alternative? In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.

I don’t propose this turn to policy hardball lightly. But Chinese currency policy is adding materially to the world’s economic problems at a time when those problems are already very severe. It’s time to take a stand.

Yes, you read that right.  Former free trade guru and Nobel laureate in trade economics Paul Krugman just strongly advocated the unilateral imposition of 25% tariffs on all Chinese imports if China doesn't respond to US demands to appreciate its currency by 20%-40%.  Even I am shocked by this suggestion.  Not only does it mean that Krugman, who also recently advocated carbon tariffs as a way to force developing countries to impose development-killing climate change policies, finally needs to tear up his free trader card, but it also represents one of the more short-sighted and absurd lines of reasoning that he's ever produced (and that's saying a lot).

Indeed, by my count, Krugman's arguments for this 25% tariff fail from a historical, practical and economic perspective.

(1) Krugman completely distorts (or, to be kind, misreads) history.  As Dan Drezner points out, that US-Germany episode didn't quite unfold as Krugman claims:

It's certainly true that the dollar was overvalued back in 1971. What Krugman forgets to mention -- and see if this sounds familiar -- is that the Johnson and Nixon administrations contributed to this problem via a guns-and-butter fiscal policy. They pursued the Vietnam War, approved massive increases in social spending, and refused to raise taxes to pay for it. This macroeconomic policy created inflationary expectations and a "dollar glut." Foreign exchange markets to expect the dollar to depreciate over time. Other countries intervened to maintain the dollar's value -- not because they wanted to, but because they were complying with the Bretton Woods system of fixed exchange rates. Nixon only went off the dollar after the British Treasury came to the U.S. and wanted to convert all their dollar holdings into gold.

In other words, the United States was the rogue economic actor in 1971 -- not Japan or Germany.

So the US in 1971 wasn't the US of today - it was China.  Minor detail!  So much for that historical and theoretical justification for rampant, angry unilateralism, huh?

(2) Krugman is oblivious to geopolitical reality.  Why on earth does Krugman think that the Chinese response to a 25% US tariff will be a change in its currency policy?  If the last several years have proven anything re: China policy, it's that China will not be bullied into changing its domestic policies.  Indeed, when provoked or antagonized, the Chinese are pretty childish - almost always reacting with self-spiting stubbornness and/or direct retaliation (see, e.g., the Section 421 case on Chinese tires or the recent Google censorship case).  AEI's Phil Levy discusses this obvious reality here, and Krugman even mentions China's often-irrational recalcitrance in his new column when he discusses Chinese Prime Minister Wen Jiabao's angry response to recent accusations by US politicians (and op-ed columnists) about China's alleged currency manipulation.

So does Krugman really think that a 25% tariff will lead Wen to pipe down, fall in line and quickly appreciate the RMB?  If so, Krugman just hasn't been paying much attention.  Far more likely, China will attack US exports with equivalent unilateralist verve, and hello trade war!  (And I don't mean one of those fake "trade wars" that bad economics journalists have recently grown fond of writing about.  I'm talkin' about a knock-down-drag-out trade war.)

(3) Krugman's solution - and I can't believe I'm typing this - is economically illiterate.  Krugman speaks of US unilateral tariffs only in terms of their affect on China's exporters, and he speaks of Chinese retaliation to this US unilateralism only in terms of China dumping its US debt (something that he, correctly, doesn't think they really can do).  Yet nowhere does Krugman discuss the awful economic effects that a 25% tariff on all Chinese imports would have on the US economy, which, as Krugman himself admits, remains "deeply depressed."  As anyone with even a rudimentary understanding of international economics knows, such tariffs would just devastate American families and businesses because, among other things, (a) the United States imported almost $300 billion in Chinese goods last year, (b) almost 60% of all imports (not just Chinese) are capital goods and equipment used by US companies in order to remain globally-competitive, and (c) trade with China has been proven to dramatically benefit lower-income American families.  (Further proof that this ain't the 1970s anymore... thank goodness.)

Indeed, we have a great modern day test case for Krugman's awesome unilateral trade prescription in the recent 35% tariffs that the Obama administration imposed on Chinese tires under Section 421 of US trade law.  The results of those nasty tariffs were skyrocketing domestic tire prices (even with significant trade diversion) and severe supply shortages, with tire retailers and poor American consumers hardest hit.  And Krugman wants to repeat and amplify these protectionist harms by applying similar tariffs to all $300 billion in Chinese imports?  Unbelievable.

Now, coming from someone not versed in trade and economics, ignoring these "unseen" harms would just be stupid.  But for Paul Krugman - someone who obviously knows better - to not at least mention the obvious pain that his recommendations would impose on American businesses and families is the height of intellectual dishonesty.  It's a helluva lot different than his ignorance of the tariffs' historical reference or practical implications, and it's utterly reprehensible.

[UPDATE: A friend and former Krugman student chimes in: "Krugman's remedy is moronic. Among other things he conveniently forgets to disclose, the US was on the Breton Woods gold standard in 1971... so the 10% tax had a huge impact while keeping US interest rates locked. It wouldn't work that way now. In '71 the US was bearing the brunt of worldwide inflation, which is why Nixon scrapped the stupid [***] gold standard. All the 10% tax did back then was re-export inflation back to Germany. That wouldn't happen today. Krugman knows better. In fact, the class that I took from him was on this subject.  He did a lecture on this EXACT scenario.  So I'm a bit confused why he's being so dishonest here."  Me: I'm not.]

Drive-by Economics

Perhaps realizing that he hadn't filled his monthly quota for columns bemoaning Chinese monetary policy and mercantilism, Paul Krugman published yet another one on New Years Eve  - just under the December wire!  The details of Krugman's latest New York Times column need not be discussed in this blogpost, as it's pretty much identical to its October and November brethren, and I've already said my peace on those.  But Krugman's December China currency column still warrants mention here because in it he reaches a new low when covering a subject over which his expertise should be unquestioned - international trade.  In the middle of his column, Krugman unleashes this doozy (emphasis mine):

Meanwhile, that [Chinese] trade surplus drains much-needed demand away from a depressed world economy. My back-of-the-envelope calculations suggest that for the next couple of years Chinese mercantilism may end up reducing U.S. employment by around 1.4 million jobs.

Maybe because people ignored his October and November hysteria on China's currency policies, Krugman felt the need to amp it up a notch by putting a zany job-loss number in the middle of his monthly China regurgitation.  Maybe Americans just don't get too agitated by warnings of "global imbalances," and - let's face it - everybody knows that "jobs" are 2010's super-sexy-it-word.  I dunno.  But what I do know is that not a single word before of after the passage above explains how Krugman came to this eye-popping "back-of-the-envelope" statistic.  Indeed, we don't even know if he was using one of those small envelopes that come with grocery-store floral bouquets, or one of those huge envelopes that we lawyers use to serve confidential 500-page documents to our adversaries (hey, maybe it was the envelope in which his Nobel Prize Certificate was mailed).  Krugman never says.  Instead, he just spits out the stat and then keeps rambling on about China's mercantilism, the obvious wisdom of Keynesian economics, and, naturally, how he's smart and everyone else is stupid. (Duh.)

My only guess is that Krugman derived the "1.4 million" number using the flawed, completely debunked method - founded by the union-sponsored protectionists at the Economic Policy Institute - that mindlessly translates bilateral trade deficit figures into "lost job" numbers (down to the ridiculous decimal point!).  That would be a really bush-league move, even for Krugman, but who knows?  It's certainly simplistic enough for an envelope-doodle. But the fact that only Krugman knows how he came up with his new "statistic" exposes it as absolutely, completely worthless for public consumption or discussion.

Yet there it is, and I'm left wondering how many times I'm now going to have to hear (and rebut) this fake number - "1.4 million 'Merican jobs!" - over the next few months as politicians and career protectionists demagogue away on the evils of China's trade and currency policies.  Unfortunately, once these stats - especially those originating from a Nobel Laureate and liberal icon like Krugman - are irresponsibly strewn across the interwebs, they never, ever go away, regardless of their actual veracity.  (Indeed, those EPI numbers have been proven worthless for years now, and yet politicians still campaign on them.  Good ol' Public Choice Theory!) 

And considering how important and delicate the issue of US-China trade relations will be for 2010 and beyond, Krugman's nonchalant ejaculation of this fake statistic onto the pages of the New York Times and lord-only-knows-how-many other websites and blogs is the height of journalistic - and economic - malpractice.

But I guess at this point that I really shouldn't be surprised by any of this.  For years I'd read a stupid quote from a Krugman column on an issue other than international economics, and I'd say to myself, "Man, I wish this guy would just stick to trade and economics instead of this drivel."  But with columns like this, I can't even say that anymore.  He's officially unreadable on all fronts.  And considering the invaluable contributions that Krugman made to the free trade cause in the 1980s and 90s, that's a really, really depressing conclusion.

Currency and the Trade Deficit: Krugman v. Krugman

Nobel Laureate, and former Enron adviser, Paul Krugman is really worried about the US-China trade deficit and global trade imbalances more generally. He has now devoted two near-identical NYT op-eds to the issue, each essentially complaining that it's all China's fault.  Here's the latter Krugman column on the subject:

Despite huge trade surpluses and the desire of many investors to buy into this fast-growing economy — forces that should have strengthened the renminbi, China’s currency — Chinese authorities have kept that currency persistently weak. They’ve done this mainly by trading renminbi for dollars, which they have accumulated in vast quantities.

And in recent months China has carried out what amounts to a beggar-thy-neighbor devaluation, keeping the yuan-dollar exchange rate fixed even as the dollar has fallen sharply against other major currencies. This has given Chinese exporters a growing competitive advantage over their rivals, especially producers in other developing countries.

What makes China’s currency policy especially problematic is the depressed state of the world economy. Cheap money and fiscal stimulus seem to have averted a second Great Depression. But policy makers haven’t been able to generate enough spending, public or private, to make progress against mass unemployment. And China’s weak-currency policy exacerbates the problem, in effect siphoning much-needed demand away from the rest of the world into the pockets of artificially competitive Chinese exporters.

But why do I say that this problem is about to get much worse? Because for the past year the true scale of the China problem has been masked by temporary factors. Looking forward, we can expect to see both China’s trade surplus and America’s trade deficit surge....

Unfortunately, the Chinese don’t seem to get it: rather than face up to the need to change their currency policy, they’ve taken to lecturing the United States, telling us to raise interest rates and curb fiscal deficits — that is, to make our unemployment problem even worse.

And I’m not sure the Obama administration gets it, either. The administration’s statements on Chinese currency policy seem pro forma, lacking any sense of urgency.

That needs to change. I don’t begrudge Mr. Obama the banquets and the photo ops; they’re part of his job. But behind the scenes he better be warning the Chinese that they’re playing a dangerous game.

As Dan Drezner humorously points out, Krugman wrote the "exact same column" last month (that's nice work if you can get it).  In each case, he blames global macroeconomic imbalances on China's currency policy, and his recipe for reducing, or "re-balancing," the US-China trade deficit rests solely on the appreciation of China's currency against the dollar.  Such appreciation, so the theory goes, would make US goods relatively cheaper (especially as the Dollar declines against other currencies too) and Chinese goods relatively more expensive, and the trade deficit will magically shrink.  Presto!

For the time being, I'm going to put aside my doubts that the US-China trade deficit is the big problem right now.  I'm also not going to focus on the historical evidence (pointed out by me and a few others) that currency appreciation - including the RMB's - hasn't "cured" past trade imbalances.  Instead, let's just look at Krugman's theoretical argument that currency policy alone can "fix" the trade deficit.  Is that sound liberal economic theory?  Coming from a famous liberal columnist and Nobel Laureate in trade and economics, one would sure assume so.

Well, as my mom would say, you know what happens when we assume, now don't you?

A quick review of the literature calls Krugman's basic "currency-only" theory into question, even among liberal economists.  These folks say that currency policy alone cannot guarantee a change in trade balances.  Instead, they argue that any US government policy to reduce the trade deficit must involve a combination of currency depreciation and corresponding fiscal discipline.  Indeed, even Paul Krugman himself doesn't believe that currency policy alone can rebalance US trade.  Here he is in his 1997 treatise The Age of Diminished Expectations on the subject:

Unless we are prepared to raise domestic saving, which essentially means a sizable cut in the budget deficit, any attempt to reduce the trade deficit will come at the expense of higher interest rates and lower investment...

The orthodox recipe for reducing a trade deficit is to combine currency depreciation with fiscal austerity. The United States has been willing to try the first, but not the second. So we can legitimately ask whether it makes sense to try to do anything about the dollar until there are clear signs that a budget solution is in sight....

The textbook recipe for curing a trade deficit calls for a lower dollar combined with a lower budget deficit. If we have no intention of actually cutting the deficit anytime soon, then it's too soon to seek a lower dollar.

In other words, attempting to reduce the US trade deficit through currency policy is pointless - and maybe even very painful - unless the US government also stops spending with reckless abandon.  Yet twelve years after Krugman penned the above passage, he seems to have forgotten this economic "orthodoxy."  His op-eds make no mention of the necessary fiscal austerity that must accompany dollar depreciation (which is essentially what forced RMB appreciation is) in order to guarantee a rebalancing of the US trade deficit.  Instead, he blames China's undervalued currency, and by extension the overvalued dollar, for the US-China trade deficit and claims that RMB appreciation alone can achieve the trade rebalancing that America so desperately needs.  Indeed, Krugman today praises "cheap money and fiscal stimulus" and derides China's calls on the US to "curb fiscal deficits," despite the fact that he wrote a decade earlier that liberal fiscal policies would undermine any effects that currency changes would have on the trade deficit.  So what possibly could explain Krugman's curious change of heart?

It couldn't be that he's penned a boatload of columns (see, e.g., here, here, here and here) breathlessly imploring the government to print, borrow and spend money like Charles Barkley in a Las Vegas champagne room, could it?  No, that can't possibly be it because such a bush-league move not only would be disingenuous, but it also could lead a complicit White House to pursue policies that do nothing to change the trade deficit and instead create a devastating combination of "higher interest rates and lower investment." So I guess the economic "textbooks" must've changed since 1997, right?

Riiiiiight.

Germany Hates on Carbon Tariffs. Wunderbar.

Reuters reports on some interesting stuff out of Sweden, with Germany openly smacking down a French(shocking!) plan to impose carbon tariffs on imports from countries that have chosen not to cripple their economies with new laws on climate change (formerly known as "global warming," and "global cooling" before that):

Germany called a French idea to slap "carbon tariffs" on products from countries that are not trying to cut greenhouse gases a form of "eco-imperialism" and a direct violation of WTO rules.

...

Matthias Machnig, Germany's State Secretary for the Environment, told a news briefing on Friday that a French push for Europe to impose carbon tariffs on imports from countries that flout rules on carbon emissions would send the wrong signal to the international community.

"There are two problems -- the WTO (World Trade Organization), and the signal would be that this is a new form of eco-imperialism," Machnig said.

"We are closing our markets for their products, and I don't think this is a very helpful signal for the international negotiations."

European environment and energy ministers are meeting in Sweden to try to come up with a single vision of how the 27-member bloc will fight global warming, ahead of a major environment summit in Copenhagen.

...

The U.S. House of Representatives has already passed legislation that contains carbon tariffs. It would allow the United States to impose duties on imports of carbon-intensive goods such as steel, cement, paper and glass from countries that have not taken steps to reduce their own emissions.

Some say such tariffs could be a backup plan for Europe, should United Nations members fail to reach a deal in Copenhagen.

But Swedish Environment Minister Andreas Carlgren, whose country holds the rotating European Union presidency, said member states currently had no "plan B" beyond landing a deal in Copenhagen. He said there was as yet no official proposal on the table from the French regarding carbon tariffs. "We are absolutely against each try to make use of green protectionism," Carlgren told Reuters. "There should be no threat of borders, of walls or barriers for imports from developing countries."

French President Nicolas Sarkozy's office said last month such taxes could help create a "level playing field" for European companies competing with international firms from countries that have not put a price on carbon emissions.

EU Energy Commissioner Andris Piebalgs has said member states should keep the French proposal in mind, but also worries how such tariffs could be viewed by other countries.

...

"Eco-imperialism." I like it. Quite interesting that Germany and other European nations are publicly asserting that carbon tariffs would violate WTO rules. I wonder what Paul Krugman thinks of that news, considering that he boldly (and baselessly) asserted their WTO-legality a few weeks ago.

In reality, the issue of whether carbon tariffs violate WTO rules is sticky and unsettled, and any WTO panel decision would be highly fact-specific. Hence, Krugman's unqualified statements, as well as Reuters' synopsis of the issue in the full article, should (unsurprisingly) be ignored. It's just not that simple.

It does make me wonder whether the Euros are - at least in part - directing their comments toward the US and the carbon tariff provisions in Waxman-Markey (see below).

Speaking of that, I wonder how this news will go over here in the US. If I'm the GOP, I'm blasting from high heaven that not even our more "eco-enlightened" friends across the pond are comfortable with one of the key aspects of Waxman-Markey (the tariff provisions were inserted in the bill to sell it to rust-belt Dems in the House).

And it'll probably give the President a little more cover for his (welcome) statements opposing them. Assuming he still does oppose them, of course. (It's hard to keep track.)