China’s is Not Borrowing from the United States

While Greg Mankiw is a late comer to this controversy, he has some very smart things to say.

I would not argue that Chinese policy is incapable of affecting the real exchange rate. In a world of imperfect capital mobility, Chinese policy can affect international capital flows and thus the real exchange rate that equilibrates trade in goods and capital. But I am skeptical that their policy intervention is adverse to broad American interests. What the Chinese are doing, to boil it down to its essence, is buying U.S. government bonds (and some other American assets). The U.S. government is in the business of selling these bonds. There is no good reason to object when a willing buyer steps into the market … The more difficult question is whether the Chinese are acting against their own self-interest by saving so much and investing in foreign assets.

Greg directs our attention to the larger issues, which relate to the fact that the Chinese have a high national savings rate while we have a very low national savings rate. I do have a few small quibbles with his close:

Before you say, “They are stealing our jobs,” let me point out two things. First, while some jobs are lost to import competition, other jobs are gained because of lower interest rates and greater investment spending that capital inflows finance. Second, the U.S. unemployment rate is now low by historical standards. Based on either theory or evidence, the canonical political refrain of “jobs, jobs, jobs” makes little sense in this debate.

The (ab)use of “unemployment rate is now low by historical standards” strikes me as a poor way of judging whether we are near full employment or not. With that said – I tend to look at these issues in terms of long-term effects so let me agree with Gregs premise that “jobs, jobs, jobs” is not part of the debate as to the long-run impacts of our pathetically low national savings rate versus the high savings of China. The other quibble comes here: “greater investment spending that capital inflows finance”. We are not investing a lot as a nation. OK, what little we are investing is financed by borrowing from abroad. But that’s precisely the point about our low national savings rate. Which is why I like Greg’s opening:

Suppose the U.S. President were to propose the following policy: “My fellow Americans, I have just asked the Congress to increase taxes on all of us. After they pass my tax increase, I will instruct the Treasury to lend the additional tax revenue to the government of China.”

Greg thinks Americans would oppose this proposal. But let’s try a little rewriting based on the real situation:

My fellow Americans, I have asked Congress to set current taxes at a level to cover our austere budget proposals. This way we won’t have to continue borrow from the government of China placing our children and grandchildren in their debt.