China has become a major financial and trade power. But it doesn’t act like other big economies. Instead, it follows a mercantilist policy, keeping its trade surplus artificially high. And in today’s depressed world, that policy is, to put it bluntly, predatory. http://www.nytimes.com/2010/01/01/opinion/01krugman.html?hp
Paul Krugman also made a recent blog post regarding China. He cites a Dec 22 IMF paper, Global Imbalances: In Midstream?; note the graphics beginning on page 24.
“Doesn’t act like other big economies.”. Well, it acts like Japan did. IMO China follows a 1960’s Japanese development policy almost to the letter. The only difference I see is the degree of innovation – Japan innovated significantly in the way of manufacturing process & brand building. China, not so much. Korea followed the same model importing production machinery chiefly from Japan. Japan is a country of 140 million. Korea 60 million. China 1400 million. No way! It destroys the basis of the industial revolution – valuable labor. An imbalance arises because developed world demand for economical labor outstrips developing world demand for developed world technology, quality of life and standard of living (health care, pollution control, etc.). And as Michael Pettis says, “its not just the currency”. There is a difference in understanding of property rights. Intellectual property being a uniquely western concept totally foreign to feudal societies. I have talked to Stormy about this. The question, why the divergence? Is it because moneyed interests (SOE) have captured the Party in the same way that moneyed interests (Wall Street gypsies in nice suits) have captured both US parties? Wish I could give you both barrels, but I’m writing on my phone.
Now, that everyone has a chance to whale on those dirty Chinese, throw out your atiquated economic theories and deal with real life.
I studied history before I got hooked on economics. Hey, every single successful country or area in the world practiced mercantilist policy. All, not one or two or 2999, but every single one.
The only true thing that can be said about economics is that it is excellent material for mental masturbation and that keeps economists from screwing in the streets and scaring the horses.
Indeed the us practiced merchantilism from 1824 until the 1930s. This was what the nullification movement during the Jackson admin was about. Lincoln was a strong supporter of the protective Tarrif, as were all admins until FDR. Note of course that from 1840 to 1900 the us went from being a bunch of semi-disconnected markets to a uniform one as the railroads and the telegraph moved the country together. For example the transcontnental railroads could use only US steel for their rails. In addition there was a $29/ton duty on rails in the 1880s. The us was not big on intellectual property until it had a lot of it, recall that the textile industry was built in the US by luring the experts to the US from Britian for high pay. Dickens did not get many royalties from his novels in the US becase the case came before and Irish judge who had no use for a Brit.
horse shttt Not to whale (sic) on the Chinese too much but they have their own long & checkered history – which I don’t know so well but I’m sure Mr Hu does – and if you had read to the end of the book you would know what mercantilist policy does. Every time. Either he’s captured by SOE’s or he’s afraid of that history which may befall him himself – or both. OTOH it may just be all you can expect from a people who for 60 years hadn’t read more than 1 little red book. More importantly is the US’s inability – not just unwillingness which may also be the case – to affect any change. But that’s a subject which is beyond a simple comment to a blog post.
Krugman, for all his brains, doesn’t seem to get the fact that China is too powerful for us to control or even influence. All the criticism will roll off its back if it doesn’t agree with it and it apparently doesn’t. Like other still living in the past Americans Krugman seems to think we can tell China what to do. We can’t. Period. We can only live with what THEY want and lump it. The times they are a changin’.
Tangentially related: Now the US is all screwed up about “terror cells” in Yemen. So….what are we going to do? Invade and occupy another Muslim nation? This is so stupid one can hardly believe it, but where Islam is concerned Americans are the dumbest of the dumb. I fear it will be a long time and trillions more dollars wasted on futile wars before we might get the point and give up.
We’re is slugs. I’ve been waiting like in a first snowflake contest for the last 9 years for him abandon free trade that Clinton borrowed from the republicans and back the protectionists. It looks like the tribe is turning againt free trade — perhaps to throw a bone to their base in the trade unions. Heaven knows why hotel workers, construction workers, truckers, or other unions that provide services for the U.S. market based in the U.S. are against free trade.
Flip answers aside, and regardless of “mean”-spirited chuckling, what we have happening is quite serious for everyone, not just Americans or Europeans. Globalization as designed has failed, is failing, miserably. becoming a mal-shaped monster…
I find Margery’s flippery mindless and thoughtless. Margery aside, who now will step forward and defend globalization as it has unfolded, guided by the sure hand of the WTO.
Who now will step forward and tell us that new, marvelous jobs will replace those now fleeing American shores?
Who now will defend the claim that globalization will make China less authoritarian?
Who now will defend rapid industrialization that gives no thought to the environment. Here we are. The WTO’s rules have nothing to say to Copenhagen. The rules governing international commerce claim quite simply: All is well as long as environmental regulations apply equally to all companies–foreign or domestic–working within a country.
Brad Setser claimed that China could not manipulate its currency indefinitely–too much hot money; yet the game goes on.
The Chinese are agreat people and they are telling us that we should not presume to dictate to them what or what not they should do. OK.
What we can do is slap a net import limit ( 5 % net imports vs exports) on imports from their country. That is not telling them what to do. That is telling them what we can do. We can even allow them to decide what the product mix is. Won’t that frost the shorts of the MNC’s. They will be at each others throat in the morning, trying to establish American manufacturing facilities.
Same with Germany, Japan, S Korea. It is a time of a national emergency and the times call for drastic action.
You’ll have to continue waiting for more snowflakes. Free trade isn’t without its problems, but over the long run free trade policies increase national income. The problem is that politically free trade is going to be an increasingly hard sell if supporters of free trade don’t find a way to redistribute that increased national income. I believe Krugman once wrote about the need to save free trade from some of its strongest ideological supporters. For example, free trade is often wrongly sold as a jobs creator…it isn’t.
Sorry slugs, but you did roll over and jump on the global warming regulation band wagon. It seems arbritrary that you would roll on one item and stick with the other.
The problem is that politically free trade is going to be an increasingly hard sell if supporters of free trade don’t find a way to redistribute that increased national income.
This is not the way the free market works. Anyway the dems are marginalizing themselves into a corner. They paid off their public employees with the stimulous bill and now they want to pay off the uninformed wants of their private sector union cohort. So the Obama economic policy seems big on trying to pay off their base. And you call this a thinking man’s policy? The economics of payoffs — the Chicago school.
And of course it will does us no good and not really hurt the Chinese, but will anger them greatly, to our ultimate cost. When you really have no cards to play you better fold. “Drastic action” usually backfires.
Here we go again. First a police unit, then a few troops, then a batallion, then a division, then another stupid war on Islam far from our shores costing billions and billions. God the STUPIDITY.
My “flippery” probably gets your goat because it is true. This is a typical reaction to the news that China can’t be told what to do, and if we try to “retaliate” we will end up the bigger loser. That’s called IMPOTENCE, my friend, and re China, the US is impotent. Sorry to tell you this.
A nice little symbol of the changed relationship was the Brit convicted of drug smuggling in China. China sentenced him to death. The UK including Brown pleaded for mercy. The Chinese ignored them and executed him. The British froth at the mouth. The Chinese remind the Brits that in the 19th century Britain shoved opium onto the Chinese market for profit and when the Chinese tried to prevent it the Brits went to war, invaded and forced the Chinese to buy their opium. China has a LONG memory and MANY grievances. Now that it is the coming world power some of these may be revenged. China, I would guess, it not done with the Japanese and the Rape of Nanking yet, as well as other such things.
This is a bit cryptic unless you’re referring to supporting a carbon tariff on imported goods from countries that do not accept some kind of cap-and-trade agreement. If so, then you’re off base. Even the WTO recognizes that such a tariff would not be anti-free trade and simply corrects a market failure.
This is not the way the free market works.
The point of trade is not to validate some ideology, it’s to make us wealthier. Under most normal conditions free trade increases national income, but it does not guarantee an equitable distribution of that larger national income. Some people are made worse off by free trade and politically that problem has to be addressed. You can either address it by taxing some of the benefits from free trade and redistributing it to those who lose out from free trade, or you can watch free trade contract as politicians react to protectionist pressures. I believe the former approach is better.
I’m not sure where you’re getting this business about Obama being against free trade. My recollection is that during the campaign he was loudly criticized by many protectionists within the Democratic party for being too much of a free trader. Remember the incident with one of Obama’s advisors and the Canadians, eh? In any event, political views on free trade tend to reflect geography more than political party. Democrats and Republicans on the coasts tend to be free trade while Democrats and Republicans in the Old Confederacy and in the rust belt tend to be protectionist. In that regard it’s a lot like immigration. Both political parties have significant factions on each side of the issue.
Well then, I make it Ross Perot – one. MacroEconomists – zero.
It’s pretty clear that if the disparity in costs/living standards between the paries is high enough, free trade is NOT a win-win situation. Economists can either give up their essentially religious belief that things are otherwise. Or they can continue to be wrong … which probably won’t bother them much. Anyone who finds being wrong troubling isn’t going to last long in economics.
The question is what to do about it. There is probably a simple answer, but I doubt simply slapping a tarrif on everything that moves is it. Start a trade war? Bad idea. When your TV or PC or automobile ECU dies, you’ll want a replacement. Guess what. The US doesn’t make some of those things any more and doesn’t have the tooling or properly skilled workers to start making them quickly. And there is the not so small matter of all that money we owe to the folks we are planning to tarrifize. Do we seriously think our creditors will not use that trove to try to make us wish we’d never heard of tarrifs?
Fortunately, the Chinese need a reasonably healthy US almost as much as we do, so a rational, not too painful solution is probably possible. The question is who can work that solution out. The free market can do it, but I suspect that it going to be like having a root canal without anesthetic. So if plan A — a trade war is out. And plan B – let nature take its course is out. What’s plan C?
Nice to see the question asked, codger. And the pain and dislocation is already playing out in China as part of the price, something I do not want to import.
Too much first level reaction in the thread I think, but perhaps necessary. I would ask:
1. Margery, The US getting its ‘comeuppance’ is a point not especially useful here. I think Washington, multi national co., and Krugman already know, and some sort of ‘revenge’ for past misdeeds does not help my children and grandchildren cope with the changes. While overall attitude and history matter, what is your trade policy alternative in light of China’s ablity to be somewhat immune from US actions, how do multinational companies play a role in those relations, etc. How does the US fold in this poker game according to your metaphore? I also don’t think you would be so sanguine if you included Tibet as part of this metaphor. The Chinese, as humans, are probably as able to commit atrocities as any group in the US. So simply to leave this as an ‘aha’ moment is not very valuable.
2. Cantab, ‘free traders’ made the rules in the WTO to enhance free flow of capital. Currently, China is also helping multi nationals’ profits, and did an end run around the rules by standing what we thought was economics to our advantage on its head through a differnt trade system that seems to suit their history. And picking on unions is a joke in the modern world. Move on please, the world is not a simple bifurcated set of realities…is there any policy you might consider as pro-active? Or is there no problem?
3. I fail to see how this question is bashing China at AB. I tend to look at asking as pretty rational question here. New trade agreements within Asian countries have just been signed, and many tariffs remain individual to each country’s domestic industry. Indonesia for one has actually voiced some major concerns, but not loud enough to impact the agreements.
4. I also do not think China’s mercantilist policies are new, but why bring it up as a point except as a major failure of theorist’s of the last thirty years who sold us a faulty outlook for our own advantage as a people. Also, for this year much of the ‘growth’ in production is attributed to the stimulus package in China. The Chinese system of trade has its own weaknesses and contradictions…what are they? What place do we have in this system from my point of view, not Goldman Sachs!
5. About 40% of ‘trade’ value are actually product moving from country (factory) to country (another factory) in a chain of production. What does this mean for a set of national responses?
6. How does something like ‘project 863’ in China figure in a US response?
Tariffs are imposed by many countries. One tariff (steel production) can be argued as productive or not, but one tariff is not a trade war. Perhaps it is my lack of imagination, but I don’t see a trade war in the picture.
Marco Polo, The complexities are there to be pointed out, so thanks. And conversation with Stormy is always valuable. I think one issue is not to talk past each other in a thread format anyway…how would you frame the issue?
Let me start off by surmizing that economists think that the effect of trade on any given country is something like:
G = G0 + K*N
Where G is GDP, G0 is GDP without trade, N is the fraction of GDP devoted to trade, and K is a magic number unique to each nation pair engaged in trade that describes the benefit from free trade. They assert that K is always posititve. Or at least that the sum of all Gs for any given country must be positive even if a few Ks are negative.
Is that possible? For it to work, we have to assume that some components of G0 have more value when traded than when consumed at home. That’s not impossible. it’s plausible that country A might have more Mangos than it needs and country B might be swimming in Maple Syrup. They can trade. Curiously, they will both have fewer calories available because of the cost of shipping. But they will have more diversity in their diet and one guesses that is a benefit. But it’s likely not a huge benefit. And what about country C whose citizens desire both mangos and maple syrup, but produces neither have nothing to trade that countries A and B desire. Their best bet is probably to export guest workers that displace local labor in A and B and ship mangos and syrup home.
Not so great. We now have increased unemployment in A and B and the prices of mangos and syrup will likely go up since C is now consuming them.
Now throw in the effect of IOUs and leveraged IOUs and futures markets in mangos and syrup.
What you have here is a true witches brew. It’s enormously complicated and surely has all sorts of potential problems. What happens when mango rot cuts supplies? Or when some dude corners the syrup market selling imaginary syrup (Google Tino De Angelis)? Or when one of the countries defaults on its IOUs?
I’m not arguing against trade or free trade. I’m merely pointing out that economists and politicians almost certainly don’t understand the subject very well. Certainly not well enough to assert that free trade is everywhere and always a good thing. Not that not knowing squat will stop them or even slow them down.
That’s not impossible. it’s plausible that country A might have more Mangos than it needs and country B might be swimming in Maple Syrup. They can trade. Curiously, they will both have fewer calories available because of the cost of shipping.
I don’t know of any non-Marxist economist who thinks that is the basis for gains from trade. It is not about exporting “surplus” goods. The argument for free trade is entirely “supply side” based in that it pushes out potential world GDP. They will end up with more calories, not less. And that third country with neither mangos nor maple syrup could specialize in transporting goods, so they too will end up with more calories. Setting aside some narrow arguments in the footnotes, free trade tends to increase total worldwide production. That is the argument for free trade; it is not an argument about finding ways to dump surplus production onto some other poor sucker. The problem with free trade is that while trade increases total worldwide benefits, there is no guarantee that the benefits will be uniformly distributed. Worse yet, there will be actual losers. This is just Stolper-Samuelson 101: http://en.wikipedia.org/wiki/Stolper%E2%80%93Samuelson_theorem
If we had a social safety net that redistributed the benefits from free trade, then I don’t think we would be having a lot of these discussions about globalization.
The problem I have with Krugman’s critique is that while it accurately describes what China is doing, what Krugman skated over is that China is only doing what the standard macro textbooks recommend. For example, in most garden variety recessions a country with a floating exchange rate (e.g., the US) should pursue monetary policies to pull itself out of recession. This is not controversial and was worth a Nobel Prize http://en.wikipedia.org/wiki/Mundell-Fleming_model. But this strategy is also a beggar-thy-neighbor policy as well. So it’s kind of a strange argument to criticize China for doing exactly what most textbooks would recommend. And Krugman also recommends that the US pursue what amounts to a beggar-thy-neighbor policy. The problem is that most of these beggar-thy-neighbor prescriptions assume that the entire worldwide economy is not in recession. The assumption is that some economies will be up while others are down. Standard models don’t really know how to handle a case in which all economies are highly correlated.
I disagree with much of your criticism. First I think it IS useful to remind Americans that they cannot always run things the way they want. Very useful since so many don’t really understand that. I hardly intended to suggest that “revenge” would help your heirs, etc. I wanted to point out that China has stored up scores that it may wish to settle. Simply a fact. I don’t think there is a “trade policy” the US can institute that will solve its China problem, unless China likes it and I doubt it will. Again, why do Americans always think they can “fix” things? Other nations have long had to “lump” our actions. We may begin to have to do so re China’s actions. I really don’t think I would compare Tibet to, say, Vietnam or Iraq. PS What amazed me recently was Krugman’s critique of China ending with no suggested solution, when he usually is full of solutions to problems he discusses. I am not sure he completely understand that the shoe is now on the other foot. (How long now have Americans been telling the Chinese to let the yuan appreciate? with no effect?).
This is one of the craziest statements made lately! “If we had a social safety net that redistributed the benefits from free trade, then I don’t think we would be having a lot of these discussions about globalization. “
Why? We already have an extensive social safety net! What 2slugs means, I think, is even more of a social safety net. In this I disagree! Because every time we add more then more is requested. Moreover, much of the goal has been achieved and that is to raise the level of those not as lucky as we, and not necessarily us. Human nature is hard to change.
Why do we always ignore that 2,ooo Lb gorilla in the foreign trade discussions? Trade for oil? I still believe we are concentrating on the wrong trade issue. Why are we not talking about the Oil Cartel?
***I don’t know of any non-Marxist economist who thinks that is the basis for gains from trade. It is not about exporting “surplus” goods. The argument for free trade is entirely “supply side” based in that it pushes out potential world GDP. They will end up with more calories, not less. ***
Sound to me like you/they are invoking the fair trade fairy. My guess is that she is off somewhere clubbing with Santa Claus, the Easter Bunny, the Happy Medium, the Prudent Investor and other mythical creatures. Not only is she unlikely to be using her magic wand much, she’s probably going to have a hell of a hangover if she keeps on ordering those drinks with umbrellas in them.
Why, other than blind faith, do economists assume that the whole is substantially greater than the sum of its parts when free trade is involved, but not when free lunchers invoke the appropriately named Laffer curve?
Let me clarify. I am on the side of free trade, I am not against it. And I agree that free trade has, by and large, raised the standard of living for those not as lucky as we are. Indeed, that’s one of the consequences of the Stolper-Samuelson theorem; unskilled workers in 3rd world countries come out as winners. That’s not a trivial benefit even if it is one that is often overlooked by a US-centric perspective. My point is that free trade does create clear losers as well as clear winners and unless we expand the social safety net free trade policies will not be politically viable over the longer run.
What 2slugs means, I think, is even more of a social safety net. In this I disagree! Because every time we add more then more is requested.
Yes, we need more of a social safety net. But if expanding the social safety net means more is demanded, then by your logic I suppose we should conclude that shrinking the safety net should result in less being demanded. Peculiar reasoning to say the least. Let me help you out. Expanding global trade is what creates new demand for an expanded social safety net. And if free trade means anything it means that the benefits from free trade must be large enough to fully compensate the losers and there will still lbe benefits left over. The problem with your position is that you don’t want to compensate the losers from free trade. That’s not only morally untenable, it’s politically shortsighted because the end result will be an broad reaction against globalization in general, and that will make everyone worse off.
Because it’s not a 2,000 pound gorilla. Maybe a 20 pound dog at worst. Just how much of the price of a barrel of oil do you think represents cartel rents? Give us your estimate.
Why, other than blind faith, do economists assume that the whole is substantially greater than the sum of its parts when free trade is involved, but not when free lunchers invoke the appropriately named Laffer curve?
It’s not “blind faith,” it’s math. Free trade is based on opportunity costs. Assuming that over the long run all economic resources are employed, there is an opportunity cost in making something domestically that could have been made at less cost by a foreign producer. I doubt that you practice economic autarky in your day-to-day life, so why would you apparently recommend it as a matter of macroeconomic policy?
The Laffer Curve is completely different. The Laffer Curve trades off between income effects and substitution effects. It’s not that the Laffer Curve is flat out wrong, the problem is that the we are nowhere near the range of marginal tax rates under which the theory would have any bite. If we were at the old 90% marginal tax rate, then the effects of the Laffer Curve would be pretty strong. But the relative elasticities of the income versus substitution effects are such that in today’s world the Laffer Curve is just irrelevant.
make that two times as much as we produce. (US production around 8mbpd, consumption 18mbpd. A small amount of consumption is petrochemicals that are re-exported).
Not sure why I got that wrong as I know better. I blame it on the truly prodigous amount of snow I am slowly digging out from under — 27 inches and still snowing. Snow thrower has (prudently I think) gone on strike. Oh well, I’d still rather shovel snow than mow lawns. Looks like it’ll be a while before I even see the lawn again.
2. Cantab, ‘free traders’ made the rules in the WTO to enhance free flow of capital. Currently, China is also helping multi nationals’ profits, and did an end run around the rules by standing what we thought was economics to our advantage on its head through a differnt trade system that seems to suit their history. And picking on unions is a joke in the modern world. Move on please, the world is not a simple bifurcated set of realities…is there any policy you might consider as pro-active? Or is there no problem?
I have not started on this one yet. I think that economics in general is a giant optimization problem. A principal of optimization is that once you find and optimal point you can’t improve upon it by adding restrictions. Adding restrictions can only rule out an optimization point of but never enhance it. The trick is to apply this general principal to particular problems. It just takes some work.
The Laffer Curve is completely different. The Laffer Curve trades off between income effects and substitution effects. It’s not that the Laffer Curve is flat out wrong, the problem is that the we are nowhere near the range of marginal tax rates under which the theory would have any bite.
It does not do any of that stuff. The laffer curve is something that you draw on a napkin for the benefit of an idiot that can’t comprehend a case were lowering taxes will increase government revenue.
And since when should the role of the tax system be to maximize the government’s tax revenue?
Ah Com’n slugs. You can do better than that. You want an equation that “proves” that lateral forces can result in time travel or increased rainfall, or transform Twinkies into gold. I can do that. As can you. You just have to not be too fussy about assumptions and/or transformations.
If it looks like blind faith, and acts like blind faith, it’s probably blind faith.
BTW, you want to explain to me how it is that Mexico, Turkey and the Philippines are prospering through their concentration in producing goods and services that have lower costs than those in the US, EU and East Asia? AFAICS, they are exporting workers because this unrestricted free trade stuff is largely high proof hogwash. Perhaps you can produce the math that demonstrates that I’m wrong and also explains why their citizens seem to be unable to find work at home.
(BTW, I agree with you about the Laffer curve. There may be domains where it works as the free lunchers assert. But I don’t think they are very common. High tax rates do not, so far as I can see, inhibit economic activity much unless there are few or no tax favored investments. Perhaps if one is really careless about which economic activities receive favorable tax treatment …)
***The problem I have with Krugman’s critique is that while it accurately describes what China is doing, what Krugman skated over is that China is only doing what the standard macro textbooks recommend. ***
I think the real rap on China is not that they are managing their economic affairs to their own benefit. It’s that they are so damn good at it.
I should say that I’m not against China growing their economy at the expense of the economies of the developed countries. Indeed, should we prevent economic growth in China, we will surely end up looking at nuclear war. But it really is necessary for the developed countries to manage their affairs wisely as well. “China” (and India and Brazil and …) need to leave us a little growth. And on our part, we need to quit borrowing from overseas to finance consumption rather than investment. Redistributing wealth and shutting down our out of control military industrial complex would be a good idea as well, but those are not primarily trade issues.
I’m sure there many ways to frame the issue, but I’ll take just this one approach which is in no way comprehensive.
40 yrs. of mercantilist Asian development policy has forced western multi-nationals horizontal. That is to say several entities, not necessarily even within the same corporate structure, handle the SAME part of production. Importantly, production itself, the very centerpiece of the vertical corporation, can be seen as just one more functional component and out-sourced to more efficient providers. (Example: GM ca. 1950 vs. Dell Computer ca. 2000). This ability to out-source is a way in which to turn cost centers into profit centers. In that sense Chinese export manufacturing can be seen as just another branch of the modern western multi-national. There are a number of advantages; quicker implementation of improvements in process, greater incentive for improvement, and above all it reduces the labor component of production. However, in a horizontal company one business component cannot subsidize another. Each must be capable of standing alone. When production is out-sourced,and commoditized, margins on production can only carry the cost of production and in some industries scarcely that. What seems to be left in the lurch is R&D. Who will fund R&D?
Our western financial sector has proven itself singularly unprepared to do so or to be of any assistance to “mainstreet” or to wealth creation; and prefers toake poor investments in already liquid capital instruments of no intrinsic value. And the eastern financial community holds assets in those same instruments and refuses to fund the real needs of those creating the wealth – education, health, work place safety, etc.
The benefits of globalization have been squandered. Reform requires re-directing that malinvestment (and downsizing finance).
Increasing govt revenues is a supposed byproduct of the Laffer Curve and is not the primary gist. The primary point about the Laffer Curve is that it is supposed to push out the supply curve by making leisure more expensive…that’s the trade-off between the income effect elasticities and the substitution effect elasticities. That’s why it was called “supply side” economics. The argument that it would somehow pay for itself was an additional claim that grew out of the primary claim about pushing out the supply curve. The revenue maximizing business was actually old ground covered by Mirrilees several years before Laffer ever came along. Emmanuel Saez has picked up and improved on Mirrilees’ work and estimates the revenue maximizing marginal tax rate at somewhere in the neighborhood of 65%. The Laffer Curve in today’s environment is pretty much irrelevant on all counts. We are nowhere near the Laffer tipping point (even Art Laffer agrees on this point) and a steeply vertical aggregate supply curve is not exactly our principle concern right now. In fact, pushing out the aggregate supply curve in the midst of a liquidity trap (which implies a locally upward sloping aggregate demand curve) is the last thing you want to do. It’s a policy that might have made sense 30+ years ago, but is beyond stupid in today’s environment.
The argument for free trade assumes that economies are operating at full employment, and by “full employment” I mean something like the NAIRU rate of unemployment. The whole point of free trade rests upon the assumption that all resources are fully employed and by reallocating tasks through free trade it is possible to increase total output. There is nothing in free trade literature that says free trade is optimal under every condition. The world is in deep recession everywhere, which is an aggregate demand problem and not an aggregate supply curve problem, which is what free trade addresses. If the goal is to maximize US employment, then protectionist policies make a certain amount of sense; however, those policies come at a steep long run price. Over the long run economies do tend to operate at something like full employment, and under those conditions a country stands to gain quite a bit under free trade. And given how difficult it has been to build a free trade world I don’t think we want to institute protectionist policies just for short run advantages. It’s a steep price to pay. And as I said, protectionist policies wouldn’t really address the underlying issue today, which is weak worldwide aggregate demand. Free trade creates some structural unemployment as people are displaced out of various industries. The best way to handle structural unemployment is with a safety net that helps people find new skills, new jobs, relocation assistance, etc. In other words, we would want to see structural unemployment as a kind of supply side problem. But today’s recession is a cyclical problem and is due to weak aggregate demand. The solution to weak aggregate demand is to have the govt soak up excess savings through infrastructure investment, state & local funding, and unemployment compensation.
One of the problems with free trade discussions on many economic blogs is that people don’t bother to sort out the different problems and end up lumping cyclical unemployment due to a global recession along with structural unemployment due to globalization and free trade shocks. Different problems require different solutions.
Criticism of Chinese policy now has shifted from “stop it because we don’t like it” to “stop it because it is not good for you.” I think the Chinese are not minded to follow our advice about what is good for them. That they will decide for themselves. Incidentally here is a Brit article on China and its reaction to UK anger about the execution of a Brit. Some Brits are waking up to the fact that China is powerful enough to be calm and unmoved:
The argument for free trade assumes that economies are operating at full employment, and by “full employment” I mean something like the NAIRU rate of unemployment.
It seems to me that comparative advantage still works in recessions . This happens since you just take the relative production costs within a country and compare it to other countries and if you they are not equal you have the basis for profitable trade.
The laffer curve has tax rates on the horizontal axis and government revenue on the vertical. Its an empirical relationship. The role of theory is to explain why the curve is the way it is — but its not part of the curve.
Protectionism does not have a great record of protecting jobs in this country. The last time we tried a major protectionist bill the unemployment went to over 25 percent. The Smoot-Hawley Tariff Act of June 1930 raised U.S. tariffs to historically high levels. The original intention behind the legislation was to increase the protection afforded domestic farmers against foreign agricultural imports. Massive expansion in the agricultural production sector outside of Europe during World War I led, with the post-war recovery of European producers, to massive agricultural overproduction during the 1920s. This in turn led to declining farm prices during the second half of the decade. During the 1928 election campaign, Republican presidential candidate Herbert Hoover pledged to help the beleaguered farmer by, among other things, raising tariff levels on agricultural products. But once the tariff schedule revision process got started, it proved impossible to stop. Calls for increased protection flooded in from industrial sector special interest groups, and soon a bill meant to provide relief for farmers became a means to raise tariffs in all sectors of the economy. When the dust had settled, Congress had agreed to tariff levels that exceeded the already high rates established by the 1922 Fordney-McCumber Act and represented among the most protectionist tariffs in U.S. history.
The Smoot-Hawley Tariff was more a consequence of the onset of the Great Depression than an initial cause. But while the tariff might not have caused the Depression, it certainly did not make it any better. It provoked a storm of foreign retaliatory measures and came to stand as a symbol of the “beggar-thy-neighbor” policies (policies designed to improve one’s own lot at the expense of that of others) of the 1930s. Such policies contributed to a drastic decline in international trade. For example, U.S. imports from Europe declined from a 1929 high of $1,334 million to just $390 million in 1932, while U.S. exports to Europe fell from $2,341 million in 1929 to $784 million in 1932. Overall, world trade declined by some 66% between 1929 and 1934. More generally, Smoot-Hawley did nothing to foster trust and cooperation among nations in either the political or economic realm during a perilous era in international relations.
According to Dr. Stiglitz, the developed nations gain $3 from trade for every aid dollar spent. The U.S. provides less aid than any other developed nation on a per capita basis (20th among O.E.C.D.) So it seems that U.S. citizens benefit more from world trade and currency considerations than any other nation. This seems supported by the simple fact that the U.S. standard of living has remained comparatively high even though consumption out paces production for decade after decade. So, accusations of China “manipulating” anything are hypocritical enough in a the current sense; but even worse when history is applied to this comparison. During the period when the U.S. had an advantage of low labor costs (1920s), mercantilism was not only the standard but was enabled by producing goods for Europe during WW1. And by 1929, after our version of mercantilism had run its course, the poverty rate had risen to 71% (before the crash!). The Chinese have instead done more to eliminate poverty than any nation in modern history. So why do U.S. economists continue with this linear hypocrisy?
The labor values that allowed “the economy that roared” were the result of a vast effort of manipulation. The central dynamic was to continue agricultural production levels that were apt during the war, for 2 growing seasons after the war’s end. This at a time after the USDA had established agencies to facilitate production increases to meet demand in anticipation of the war; but it proved to be easier to increase production, dramatically; than it was to simply restrict production. By 1921 there was a collapse of prices. By 1929 (before crash), the average farm income had dropped to 25% of what it was 10 years earlier (real). And then of course things got worse from there (after crash). As agricultural values fell the National Association of Manufacturers were pushing forward their “yellow dog campaign”. Labor union participation fell sharply. The supply of labor which had been ample during the war due to unprecedented immigration levels was then in a state of extensive oversupply with the addition of the returning soldiers, and with vastly fewer opportunities in agriculture. By 1929 (before crash), 71% of the U.S. population was living below the poverty line.
And to this day, we are unable to admit what really caused the Great Depression. Which is why there is so much folly regarding our current circumstances, which, have similar origins. But via much more urbane tactics, now farm subsidies have eliminated the need for gluts, and subsidies allow labor values to be controlled globally while simultaneously creating trade dependencies. And in the U.S. the cost of labor is more a recruitment concern that must be balanced against consumption levels (the Viet Nam era shows what happens when the working poor are not kept poor). But somehow we manage to ignore so much of this. We have nearly removed the word “exploitation” from the vernacular here in the States. And now we are accusing the Chinese of Mercantilism!!!
No, you’re just wrong. There’s a reason why they called it “supply side” economics and not “tax revenue maximization” economics. Go pick up any old macro textbook from the late 70s or early 80s and you will find the Laffer curve concept somewhere in the chapter on aggregate supply curves. You’re just confused.
In a recession you are operating below the production possibility curve, so the case is probably ambiguous. Just rambling off the top of my head, I suppose you might be able to constuct some kind of nonparametric Data Envelope Analysis (DEA) approach to compare the relative “efficiency” gaps between output loss due to a recession versus output losses due to foregone comparative advantage gains.
The benefits of globalization have been squandered. Reform requires re-directing that malinvestment (and downsizing finance).
By now it’s pretty clear that the finance sector’s contribution to GDP growth was overstated. The reality is that finance isn’t big enough to support two global financial centers. We can’t have both New York and London trying to be the financial capitals of the world. The world just isn’t big enough. This is likely to be a bigger problem for the Brits because finance was an even bigger source of GDP growth for them than it was for those of us on the other side of the pond.
I see it more in the terms of the financial sector’s utility and the symbiotic relationship of connecting savers & investor being overwhelmed and subverted by an overlarge sector which is then only parasitic as evidenced by the need for poison pills etc. which are used to defend against the ANTI-investment of that parasite. It destroys value while it claims to enhance shareholder value. i.e.Enhancing shareholder value only moves FV forward at a discount to become NPV & feed the parasite.
Just how much of the price of a barrel of oil do you think represents cartel rents?
My guess is $50-$60 per barrel but this depends on what country your looking at and the market price for oil, and if you want to consider sunk finding cost.
China nixed Cap N Trade thus guys like Krugman are frustrated because they see China (get this) as preventing the government from getting more power. As result Krugman and his political allies want to rattle trade restrictions at the Chinese. The Chinese will rattle their dollar holdings back at us – its theater, nothing will come of it.
No, you’re just wrong. There’s a reason why they called it “supply side” economics and not “tax revenue maximization” economics.
The laffer curve is not part of supply side economics. Rather its pedologcal device used to convince left wing dolts that when taxes are too high you can increase tax revenues by lowering tax rates.
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China has become a major financial and trade power. But it doesn’t act like other big economies. Instead, it follows a mercantilist policy, keeping its trade surplus artificially high. And in today’s depressed world, that policy is, to put it bluntly, predatory.
http://www.nytimes.com/2010/01/01/opinion/01krugman.html?hp
Comments at Mark Toma’s are useful.
Paul Krugman also made a recent blog post regarding China. He cites a Dec 22 IMF paper, Global Imbalances: In Midstream?; note the graphics beginning on page 24.
Macroeconomic effects of Chinese mercantilism
December 31, 2009
http://krugman.blogs.nytimes.com/2009/12/31/macroeconomic-effects-of-chinese-mercantilism/
It’s not just industries of developed economies taking the hit from China. India is not immune:
China mauls India’s industry
January 2. 2010
http://www.thenational.ae/apps/pbcs.dll/article?AID=/20100102/BUSINESS/701029942/1005
“Doesn’t act like other big economies.”. Well, it acts like Japan did. IMO China follows a 1960’s Japanese development policy almost to the letter. The only difference I see is the degree of innovation – Japan innovated significantly in the way of manufacturing process & brand building. China, not so much. Korea followed the same model importing production machinery chiefly from Japan. Japan is a country of 140 million. Korea 60 million. China 1400 million. No way! It destroys the basis of the industial revolution – valuable labor. An imbalance arises because developed world demand for economical labor outstrips developing world demand for developed world technology, quality of life and standard of living (health care, pollution control, etc.). And as Michael Pettis says, “its not just the currency”. There is a difference in understanding of property rights. Intellectual property being a uniquely western concept totally foreign to feudal societies. I have talked to Stormy about this. The question, why the divergence? Is it because moneyed interests (SOE) have captured the Party in the same way that moneyed interests (Wall Street gypsies in nice suits) have captured both US parties? Wish I could give you both barrels, but I’m writing on my phone.
Now, that everyone has a chance to whale on those dirty Chinese, throw out your atiquated economic theories and deal with real life.
I studied history before I got hooked on economics. Hey, every single successful country or area in the world practiced mercantilist policy. All, not one or two or 2999, but every single one.
The only true thing that can be said about economics is that it is excellent material for mental masturbation and that keeps economists from screwing in the streets and scaring the horses.
Indeed the us practiced merchantilism from 1824 until the 1930s. This was what the nullification movement during the Jackson admin was about. Lincoln was a strong supporter of the protective Tarrif, as were all admins until FDR. Note of course that from 1840 to 1900 the us went from being a bunch of semi-disconnected markets to a uniform one as the railroads and the telegraph moved the country together. For example the transcontnental railroads could use only US steel for their rails. In addition there was a $29/ton duty on rails in the 1880s. The us was not big on intellectual property until it had a lot of it, recall that the textile industry was built in the US by luring the experts to the US from Britian for high pay. Dickens did not get many royalties from his novels in the US becase the case came before and Irish judge who had no use for a Brit.
horse shttt Not to whale (sic) on the Chinese too much but they have their own long & checkered history – which I don’t know so well but I’m sure Mr Hu does – and if you had read to the end of the book you would know what mercantilist policy does. Every time. Either he’s captured by SOE’s or he’s afraid of that history which may befall him himself – or both. OTOH it may just be all you can expect from a people who for 60 years hadn’t read more than 1 little red book. More importantly is the US’s inability – not just unwillingness which may also be the case – to affect any change. But that’s a subject which is beyond a simple comment to a blog post.
Krugman, for all his brains, doesn’t seem to get the fact that China is too powerful for us to control or even influence. All the criticism will roll off its back if it doesn’t agree with it and it apparently doesn’t. Like other still living in the past Americans Krugman seems to think we can tell China what to do. We can’t. Period. We can only live with what THEY want and lump it. The times they are a changin’.
Tangentially related: Now the US is all screwed up about “terror cells” in Yemen. So….what are we going to do? Invade and occupy another Muslim nation? This is so stupid one can hardly believe it, but where Islam is concerned Americans are the dumbest of the dumb. I fear it will be a long time and trillions more dollars wasted on futile wars before we might get the point and give up.
It will be amusing to see how the US adjusts to its new impotence. What kind of hysteria will the discovery of impotence bring on? LOL
We’re is slugs. I’ve been waiting like in a first snowflake contest for the last 9 years for him abandon free trade that Clinton borrowed from the republicans and back the protectionists. It looks like the tribe is turning againt free trade — perhaps to throw a bone to their base in the trade unions. Heaven knows why hotel workers, construction workers, truckers, or other unions that provide services for the U.S. market based in the U.S. are against free trade.
Flip answers aside, and regardless of “mean”-spirited chuckling, what we have happening is quite serious for everyone, not just Americans or Europeans. Globalization as designed has failed, is failing, miserably. becoming a mal-shaped monster…
I find Margery’s flippery mindless and thoughtless. Margery aside, who now will step forward and defend globalization as it has unfolded, guided by the sure hand of the WTO.
Who now will step forward and tell us that new, marvelous jobs will replace those now fleeing American shores?
Who now will defend the claim that globalization will make China less authoritarian?
Who now will defend rapid industrialization that gives no thought to the environment. Here we are. The WTO’s rules have nothing to say to Copenhagen. The rules governing international commerce claim quite simply: All is well as long as environmental regulations apply equally to all companies–foreign or domestic–working within a country.
Brad Setser claimed that China could not manipulate its currency indefinitely–too much hot money; yet the game goes on.
Guest, you got it. As one who was among the foremost advocates of that global model I’ll tell you we are all asking those questions today
The Chinese are agreat people and they are telling us that we should not presume to dictate to them what or what not they should do. OK.
What we can do is slap a net import limit ( 5 % net imports vs exports) on imports from their country. That is not telling them what to do. That is telling them what we can do. We can even allow them to decide what the product mix is. Won’t that frost the shorts of the MNC’s. They will be at each others throat in the morning, trying to establish American manufacturing facilities.
Same with Germany, Japan, S Korea. It is a time of a national emergency and the times call for drastic action.
Cantab,
You’ll have to continue waiting for more snowflakes. Free trade isn’t without its problems, but over the long run free trade policies increase national income. The problem is that politically free trade is going to be an increasingly hard sell if supporters of free trade don’t find a way to redistribute that increased national income. I believe Krugman once wrote about the need to save free trade from some of its strongest ideological supporters. For example, free trade is often wrongly sold as a jobs creator…it isn’t.
Sorry slugs, but you did roll over and jump on the global warming regulation band wagon. It seems arbritrary that you would roll on one item and stick with the other.
The problem is that politically free trade is going to be an increasingly hard sell if supporters of free trade don’t find a way to redistribute that increased national income.
This is not the way the free market works. Anyway the dems are marginalizing themselves into a corner. They paid off their public employees with the stimulous bill and now they want to pay off the uninformed wants of their private sector union cohort. So the Obama economic policy seems big on trying to pay off their base. And you call this a thinking man’s policy? The economics of payoffs — the Chicago school.
And of course it will does us no good and not really hurt the Chinese, but will anger them greatly, to our ultimate cost. When you really have no cards to play you better fold. “Drastic action” usually backfires.
http://news.yahoo.com/s/ap/20100103/ap_on_re_eu/eu_britain_yemen
Here we go again. First a police unit, then a few troops, then a batallion, then a division, then another stupid war on Islam far from our shores costing billions and billions. God the STUPIDITY.
My “flippery” probably gets your goat because it is true. This is a typical reaction to the news that China can’t be told what to do, and if we try to “retaliate” we will end up the bigger loser. That’s called IMPOTENCE, my friend, and re China, the US is impotent. Sorry to tell you this.
A nice little symbol of the changed relationship was the Brit convicted of drug smuggling in China. China sentenced him to death. The UK including Brown pleaded for mercy. The Chinese ignored them and executed him. The British froth at the mouth. The Chinese remind the Brits that in the 19th century Britain shoved opium onto the Chinese market for profit and when the Chinese tried to prevent it the Brits went to war, invaded and forced the Chinese to buy their opium. China has a LONG memory and MANY grievances. Now that it is the coming world power some of these may be revenged. China, I would guess, it not done with the Japanese and the Rape of Nanking yet, as well as other such things.
http://en.wikipedia.org/wiki/Opium_Wars
Cantab,
jump on the global warming regulation band wagon.
This is a bit cryptic unless you’re referring to supporting a carbon tariff on imported goods from countries that do not accept some kind of cap-and-trade agreement. If so, then you’re off base. Even the WTO recognizes that such a tariff would not be anti-free trade and simply corrects a market failure.
This is not the way the free market works.
The point of trade is not to validate some ideology, it’s to make us wealthier. Under most normal conditions free trade increases national income, but it does not guarantee an equitable distribution of that larger national income. Some people are made worse off by free trade and politically that problem has to be addressed. You can either address it by taxing some of the benefits from free trade and redistributing it to those who lose out from free trade, or you can watch free trade contract as politicians react to protectionist pressures. I believe the former approach is better.
I’m not sure where you’re getting this business about Obama being against free trade. My recollection is that during the campaign he was loudly criticized by many protectionists within the Democratic party for being too much of a free trader. Remember the incident with one of Obama’s advisors and the Canadians, eh? In any event, political views on free trade tend to reflect geography more than political party. Democrats and Republicans on the coasts tend to be free trade while Democrats and Republicans in the Old Confederacy and in the rust belt tend to be protectionist. In that regard it’s a lot like immigration. Both political parties have significant factions on each side of the issue.
Chinese recession? What recession? A slight slowdown only:
http://www.bloomberg.com/apps/news?pid=20601068&sid=aSzFogU0jP3Y
The US can only look on in awe.
The extent of the stupidity in numbers.
http://www.thenation.com/doc/20090608/comerford?rel=hp_picks
Why do we do this to ourselves? I know why, but will not belabor the obvious.
Well then, I make it Ross Perot – one. MacroEconomists – zero.
It’s pretty clear that if the disparity in costs/living standards between the paries is high enough, free trade is NOT a win-win situation. Economists can either give up their essentially religious belief that things are otherwise. Or they can continue to be wrong … which probably won’t bother them much. Anyone who finds being wrong troubling isn’t going to last long in economics.
The question is what to do about it. There is probably a simple answer, but I doubt simply slapping a tarrif on everything that moves is it. Start a trade war? Bad idea. When your TV or PC or automobile ECU dies, you’ll want a replacement. Guess what. The US doesn’t make some of those things any more and doesn’t have the tooling or properly skilled workers to start making them quickly. And there is the not so small matter of all that money we owe to the folks we are planning to tarrifize. Do we seriously think our creditors will not use that trove to try to make us wish we’d never heard of tarrifs?
Fortunately, the Chinese need a reasonably healthy US almost as much as we do, so a rational, not too painful solution is probably possible. The question is who can work that solution out. The free market can do it, but I suspect that it going to be like having a root canal without anesthetic. So if plan A — a trade war is out. And plan B – let nature take its course is out. What’s plan C?
Nice to see the question asked, codger. And the pain and dislocation is already playing out in China as part of the price, something I do not want to import.
Too much first level reaction in the thread I think, but perhaps necessary. I would ask:
1. Margery, The US getting its ‘comeuppance’ is a point not especially useful here. I think Washington, multi national co., and Krugman already know, and some sort of ‘revenge’ for past misdeeds does not help my children and grandchildren cope with the changes. While overall attitude and history matter, what is your trade policy alternative in light of China’s ablity to be somewhat immune from US actions, how do multinational companies play a role in those relations, etc. How does the US fold in this poker game according to your metaphore? I also don’t think you would be so sanguine if you included Tibet as part of this metaphor. The Chinese, as humans, are probably as able to commit atrocities as any group in the US. So simply to leave this as an ‘aha’ moment is not very valuable.
2. Cantab, ‘free traders’ made the rules in the WTO to enhance free flow of capital. Currently, China is also helping multi nationals’ profits, and did an end run around the rules by standing what we thought was economics to our advantage on its head through a differnt trade system that seems to suit their history. And picking on unions is a joke in the modern world. Move on please, the world is not a simple bifurcated set of realities…is there any policy you might consider as pro-active? Or is there no problem?
3. I fail to see how this question is bashing China at AB. I tend to look at asking as pretty rational question here. New trade agreements within Asian countries have just been signed, and many tariffs remain individual to each country’s domestic industry. Indonesia for one has actually voiced some major concerns, but not loud enough to impact the agreements.
4. I also do not think China’s mercantilist policies are new, but why bring it up as a point except as a major failure of theorist’s of the last thirty years who sold us a faulty outlook for our own advantage as a people. Also, for this year much of the ‘growth’ in production is attributed to the stimulus package in China. The Chinese system of trade has its own weaknesses and contradictions…what are they? What place do we have in this system from my point of view, not Goldman Sachs!
5. About 40% of ‘trade’ value are actually product moving from country (factory) to country (another factory) in a chain of production. What does this mean for a set of national responses?
6. How does something like ‘project 863’ in China figure in a US response?
Tariffs are imposed by many countries. One tariff (steel production) can be argued as productive or not, but one tariff is not a trade war. Perhaps it is my lack of imagination, but I don’t see a trade war in the picture.
Marco Polo,
The complexities are there to be pointed out, so thanks. And conversation with Stormy is always valuable. I think one issue is not to talk past each other in a thread format anyway…how would you frame the issue?
Let me start off by surmizing that economists think that the effect of trade on any given country is something like:
G = G0 + K*N
Where G is GDP, G0 is GDP without trade, N is the fraction of GDP devoted to trade, and K is a magic number unique to each nation pair engaged in trade that describes the benefit from free trade. They assert that K is always posititve. Or at least that the sum of all Gs for any given country must be positive even if a few Ks are negative.
Is that possible? For it to work, we have to assume that some components of G0 have more value when traded than when consumed at home. That’s not impossible. it’s plausible that country A might have more Mangos than it needs and country B might be swimming in Maple Syrup. They can trade. Curiously, they will both have fewer calories available because of the cost of shipping. But they will have more diversity in their diet and one guesses that is a benefit. But it’s likely not a huge benefit. And what about country C whose citizens desire both mangos and maple syrup, but produces neither have nothing to trade that countries A and B desire. Their best bet is probably to export guest workers that displace local labor in A and B and ship mangos and syrup home.
Not so great. We now have increased unemployment in A and B and the prices of mangos and syrup will likely go up since C is now consuming them.
Now throw in the effect of IOUs and leveraged IOUs and futures markets in mangos and syrup.
What you have here is a true witches brew. It’s enormously complicated and surely has all sorts of potential problems. What happens when mango rot cuts supplies? Or when some dude corners the syrup market selling imaginary syrup (Google Tino De Angelis)? Or when one of the countries defaults on its IOUs?
I’m not arguing against trade or free trade. I’m merely pointing out that economists and politicians almost certainly don’t understand the subject very well. Certainly not well enough to assert that free trade is everywhere and always a good thing. Not that not knowing squat will stop them or even slow them down.
VtCodger,
That’s not impossible. it’s plausible that country A might have more Mangos than it needs and country B might be swimming in Maple Syrup. They can trade. Curiously, they will both have fewer calories available because of the cost of shipping.
I don’t know of any non-Marxist economist who thinks that is the basis for gains from trade. It is not about exporting “surplus” goods. The argument for free trade is entirely “supply side” based in that it pushes out potential world GDP. They will end up with more calories, not less. And that third country with neither mangos nor maple syrup could specialize in transporting goods, so they too will end up with more calories. Setting aside some narrow arguments in the footnotes, free trade tends to increase total worldwide production. That is the argument for free trade; it is not an argument about finding ways to dump surplus production onto some other poor sucker. The problem with free trade is that while trade increases total worldwide benefits, there is no guarantee that the benefits will be uniformly distributed. Worse yet, there will be actual losers. This is just Stolper-Samuelson 101: http://en.wikipedia.org/wiki/Stolper%E2%80%93Samuelson_theorem
If we had a social safety net that redistributed the benefits from free trade, then I don’t think we would be having a lot of these discussions about globalization.
Chinese Mercantilism: Beggar Thy Neighbor Policy
The problem I have with Krugman’s critique is that while it accurately describes what China is doing, what Krugman skated over is that China is only doing what the standard macro textbooks recommend. For example, in most garden variety recessions a country with a floating exchange rate (e.g., the US) should pursue monetary policies to pull itself out of recession. This is not controversial and was worth a Nobel Prize http://en.wikipedia.org/wiki/Mundell-Fleming_model. But this strategy is also a beggar-thy-neighbor policy as well. So it’s kind of a strange argument to criticize China for doing exactly what most textbooks would recommend. And Krugman also recommends that the US pursue what amounts to a beggar-thy-neighbor policy. The problem is that most of these beggar-thy-neighbor prescriptions assume that the entire worldwide economy is not in recession. The assumption is that some economies will be up while others are down. Standard models don’t really know how to handle a case in which all economies are highly correlated.
I disagree with much of your criticism. First I think it IS useful to remind Americans that they cannot always run things the way they want. Very useful since so many don’t really understand that. I hardly intended to suggest that “revenge” would help your heirs, etc. I wanted to point out that China has stored up scores that it may wish to settle. Simply a fact. I don’t think there is a “trade policy” the US can institute that will solve its China problem, unless China likes it and I doubt it will. Again, why do Americans always think they can “fix” things? Other nations have long had to “lump” our actions. We may begin to have to do so re China’s actions. I really don’t think I would compare Tibet to, say, Vietnam or Iraq. PS What amazed me recently was Krugman’s critique of China ending with no suggested solution, when he usually is full of solutions to problems he discusses. I am not sure he completely understand that the shoe is now on the other foot. (How long now have Americans been telling the Chinese to let the yuan appreciate? with no effect?).
This is one of the craziest statements made lately! “If we had a social safety net that redistributed the benefits from free trade, then I don’t think we would be having a lot of these discussions about globalization. “
Why? We already have an extensive social safety net! What 2slugs means, I think, is even more of a social safety net. In this I disagree! Because every time we add more then more is requested. Moreover, much of the goal has been achieved and that is to raise the level of those not as lucky as we, and not necessarily us. Human nature is hard to change.
Why do we always ignore that 2,ooo Lb gorilla in the foreign trade discussions? Trade for oil? I still believe we are concentrating on the wrong trade issue. Why are we not talking about the Oil Cartel?
***I don’t know of any non-Marxist economist who thinks that is the basis for gains from trade. It is not about exporting “surplus” goods. The argument for free trade is entirely “supply side” based in that it pushes out potential world GDP. They will end up with more calories, not less. ***
Sound to me like you/they are invoking the fair trade fairy. My guess is that she is off somewhere clubbing with Santa Claus, the Easter Bunny, the Happy Medium, the Prudent Investor and other mythical creatures. Not only is she unlikely to be using her magic wand much, she’s probably going to have a hell of a hangover if she keeps on ordering those drinks with umbrellas in them.
Why, other than blind faith, do economists assume that the whole is substantially greater than the sum of its parts when free trade is involved, but not when free lunchers invoke the appropriately named Laffer curve?
CoRev,
Let me clarify. I am on the side of free trade, I am not against it. And I agree that free trade has, by and large, raised the standard of living for those not as lucky as we are. Indeed, that’s one of the consequences of the Stolper-Samuelson theorem; unskilled workers in 3rd world countries come out as winners. That’s not a trivial benefit even if it is one that is often overlooked by a US-centric perspective. My point is that free trade does create clear losers as well as clear winners and unless we expand the social safety net free trade policies will not be politically viable over the longer run.
What 2slugs means, I think, is even more of a social safety net. In this I disagree! Because every time we add more then more is requested.
Yes, we need more of a social safety net. But if expanding the social safety net means more is demanded, then by your logic I suppose we should conclude that shrinking the safety net should result in less being demanded. Peculiar reasoning to say the least. Let me help you out. Expanding global trade is what creates new demand for an expanded social safety net. And if free trade means anything it means that the benefits from free trade must be large enough to fully compensate the losers and there will still lbe benefits left over. The problem with your position is that you don’t want to compensate the losers from free trade. That’s not only morally untenable, it’s politically shortsighted because the end result will be an broad reaction against globalization in general, and that will make everyone worse off.
CoRev,
Because it’s not a 2,000 pound gorilla. Maybe a 20 pound dog at worst. Just how much of the price of a barrel of oil do you think represents cartel rents? Give us your estimate.
VtCodger,
Why, other than blind faith, do economists assume that the whole is substantially greater than the sum of its parts when free trade is involved, but not when free lunchers invoke the appropriately named Laffer curve?
It’s not “blind faith,” it’s math. Free trade is based on opportunity costs. Assuming that over the long run all economic resources are employed, there is an opportunity cost in making something domestically that could have been made at less cost by a foreign producer. I doubt that you practice economic autarky in your day-to-day life, so why would you apparently recommend it as a matter of macroeconomic policy?
The Laffer Curve is completely different. The Laffer Curve trades off between income effects and substitution effects. It’s not that the Laffer Curve is flat out wrong, the problem is that the we are nowhere near the range of marginal tax rates under which the theory would have any bite. If we were at the old 90% marginal tax rate, then the effects of the Laffer Curve would be pretty strong. But the relative elasticities of the income versus substitution effects are such that in today’s world the Laffer Curve is just irrelevant.
make that two times as much as we produce. (US production around 8mbpd, consumption 18mbpd. A small amount of consumption is petrochemicals that are re-exported).
Not sure why I got that wrong as I know better. I blame it on the truly prodigous amount of snow I am slowly digging out from under — 27 inches and still snowing. Snow thrower has (prudently I think) gone on strike. Oh well, I’d still rather shovel snow than mow lawns. Looks like it’ll be a while before I even see the lawn again.
Rdan,
2. Cantab, ‘free traders’ made the rules in the WTO to enhance free flow of capital. Currently, China is also helping multi nationals’ profits, and did an end run around the rules by standing what we thought was economics to our advantage on its head through a differnt trade system that seems to suit their history. And picking on unions is a joke in the modern world. Move on please, the world is not a simple bifurcated set of realities…is there any policy you might consider as pro-active? Or is there no problem?
I have not started on this one yet. I think that economics in general is a giant optimization problem. A principal of optimization is that once you find and optimal point you can’t improve upon it by adding restrictions. Adding restrictions can only rule out an optimization point of but never enhance it. The trick is to apply this general principal to particular problems. It just takes some work.
Slugs,
The Laffer Curve is completely different. The Laffer Curve trades off between income effects and substitution effects. It’s not that the Laffer Curve is flat out wrong, the problem is that the we are nowhere near the range of marginal tax rates under which the theory would have any bite.
It does not do any of that stuff. The laffer curve is something that you draw on a napkin for the benefit of an idiot that can’t comprehend a case were lowering taxes will increase government revenue.
And since when should the role of the tax system be to maximize the government’s tax revenue?
***It’s not “blind faith,” it’s math. ***
Ah Com’n slugs. You can do better than that. You want an equation that “proves” that lateral forces can result in time travel or increased rainfall, or transform Twinkies into gold. I can do that. As can you. You just have to not be too fussy about assumptions and/or transformations.
If it looks like blind faith, and acts like blind faith, it’s probably blind faith.
BTW, you want to explain to me how it is that Mexico, Turkey and the Philippines are prospering through their concentration in producing goods and services that have lower costs than those in the US, EU and East Asia? AFAICS, they are exporting workers because this unrestricted free trade stuff is largely high proof hogwash. Perhaps you can produce the math that demonstrates that I’m wrong and also explains why their citizens seem to be unable to find work at home.
(BTW, I agree with you about the Laffer curve. There may be domains where it works as the free lunchers assert. But I don’t think they are very common. High tax rates do not, so far as I can see, inhibit economic activity much unless there are few or no tax favored investments. Perhaps if one is really careless about which economic activities receive favorable tax treatment …)
***The problem I have with Krugman’s critique is that while it accurately describes what China is doing, what Krugman skated over is that China is only doing what the standard macro textbooks recommend. ***
I think the real rap on China is not that they are managing their economic affairs to their own benefit. It’s that they are so damn good at it.
I should say that I’m not against China growing their economy at the expense of the economies of the developed countries. Indeed, should we prevent economic growth in China, we will surely end up looking at nuclear war. But it really is necessary for the developed countries to manage their affairs wisely as well. “China” (and India and Brazil and …) need to leave us a little growth. And on our part, we need to quit borrowing from overseas to finance consumption rather than investment. Redistributing wealth and shutting down our out of control military industrial complex would be a good idea as well, but those are not primarily trade issues.
I’m sure there many ways to frame the issue, but I’ll take just this one approach which is in no way comprehensive.
40 yrs. of mercantilist Asian development policy has forced western multi-nationals horizontal. That is to say several entities, not necessarily even within the same corporate structure, handle the SAME part of production. Importantly, production itself, the very centerpiece of the vertical corporation, can be seen as just one more functional component and out-sourced to more efficient providers. (Example: GM ca. 1950 vs. Dell Computer ca. 2000). This ability to out-source is a way in which to turn cost centers into profit centers. In that sense Chinese export manufacturing can be seen as just another branch of the modern western multi-national. There are a number of advantages; quicker implementation of improvements in process, greater incentive for improvement, and above all it reduces the labor component of production. However, in a horizontal company one business component cannot subsidize another. Each must be capable of standing alone. When production is out-sourced,and commoditized, margins on production can only carry the cost of production and in some industries scarcely that. What seems to be left in the lurch is R&D. Who will fund R&D?
Our western financial sector has proven itself singularly unprepared to do so or to be of any assistance to “mainstreet” or to wealth creation; and prefers toake poor investments in already liquid capital instruments of no intrinsic value. And the eastern financial community holds assets in those same instruments and refuses to fund the real needs of those creating the wealth – education, health, work place safety, etc.
The benefits of globalization have been squandered. Reform requires re-directing that malinvestment (and downsizing finance).
Cantab,
Increasing govt revenues is a supposed byproduct of the Laffer Curve and is not the primary gist. The primary point about the Laffer Curve is that it is supposed to push out the supply curve by making leisure more expensive…that’s the trade-off between the income effect elasticities and the substitution effect elasticities. That’s why it was called “supply side” economics. The argument that it would somehow pay for itself was an additional claim that grew out of the primary claim about pushing out the supply curve. The revenue maximizing business was actually old ground covered by Mirrilees several years before Laffer ever came along. Emmanuel Saez has picked up and improved on Mirrilees’ work and estimates the revenue maximizing marginal tax rate at somewhere in the neighborhood of 65%. The Laffer Curve in today’s environment is pretty much irrelevant on all counts. We are nowhere near the Laffer tipping point (even Art Laffer agrees on this point) and a steeply vertical aggregate supply curve is not exactly our principle concern right now. In fact, pushing out the aggregate supply curve in the midst of a liquidity trap (which implies a locally upward sloping aggregate demand curve) is the last thing you want to do. It’s a policy that might have made sense 30+ years ago, but is beyond stupid in today’s environment.
VtCodger,
The argument for free trade assumes that economies are operating at full employment, and by “full employment” I mean something like the NAIRU rate of unemployment. The whole point of free trade rests upon the assumption that all resources are fully employed and by reallocating tasks through free trade it is possible to increase total output. There is nothing in free trade literature that says free trade is optimal under every condition. The world is in deep recession everywhere, which is an aggregate demand problem and not an aggregate supply curve problem, which is what free trade addresses. If the goal is to maximize US employment, then protectionist policies make a certain amount of sense; however, those policies come at a steep long run price. Over the long run economies do tend to operate at something like full employment, and under those conditions a country stands to gain quite a bit under free trade. And given how difficult it has been to build a free trade world I don’t think we want to institute protectionist policies just for short run advantages. It’s a steep price to pay. And as I said, protectionist policies wouldn’t really address the underlying issue today, which is weak worldwide aggregate demand. Free trade creates some structural unemployment as people are displaced out of various industries. The best way to handle structural unemployment is with a safety net that helps people find new skills, new jobs, relocation assistance, etc. In other words, we would want to see structural unemployment as a kind of supply side problem. But today’s recession is a cyclical problem and is due to weak aggregate demand. The solution to weak aggregate demand is to have the govt soak up excess savings through infrastructure investment, state & local funding, and unemployment compensation.
One of the problems with free trade discussions on many economic blogs is that people don’t bother to sort out the different problems and end up lumping cyclical unemployment due to a global recession along with structural unemployment due to globalization and free trade shocks. Different problems require different solutions.
Criticism of Chinese policy now has shifted from “stop it because we don’t like it” to “stop it because it is not good for you.” I think the Chinese are not minded to follow our advice about what is good for them. That they will decide for themselves. Incidentally here is a Brit article on China and its reaction to UK anger about the execution of a Brit. Some Brits are waking up to the fact that China is powerful enough to be calm and unmoved:
http://www.timesonline.co.uk/tol/comment/columnists/dominic_lawson/article6973985.ece
Slugs,
The argument for free trade assumes that economies are operating at full employment, and by “full employment” I mean something like the NAIRU rate of unemployment.
It seems to me that comparative advantage still works in recessions . This happens since you just take the relative production costs within a country and compare it to other countries and if you they are not equal you have the basis for profitable trade.
The laffer curve has tax rates on the horizontal axis and government revenue on the vertical. Its an empirical relationship. The role of theory is to explain why the curve is the way it is — but its not part of the curve.
2slugs, I think you just made my case for give them something and they will ask for more!
Codger, our snow disappeared within one day, Christmas day! There are some bennies to living belos that old Mason Dixon line.
Protectionism does not have a great record of protecting jobs in this country. The last time we tried a major protectionist bill the unemployment went to over 25 percent.
The Smoot-Hawley Tariff Act of June 1930 raised U.S. tariffs to historically high levels. The original intention behind the legislation was to increase the protection afforded domestic farmers against foreign agricultural imports. Massive expansion in the agricultural production sector outside of Europe during World War I led, with the post-war recovery of European producers, to massive agricultural overproduction during the 1920s. This in turn led to declining farm prices during the second half of the decade. During the 1928 election campaign, Republican presidential candidate Herbert Hoover pledged to help the beleaguered farmer by, among other things, raising tariff levels on agricultural products. But once the tariff schedule revision process got started, it proved impossible to stop. Calls for increased protection flooded in from industrial sector special interest groups, and soon a bill meant to provide relief for farmers became a means to raise tariffs in all sectors of the economy. When the dust had settled, Congress had agreed to tariff levels that exceeded the already high rates established by the 1922 Fordney-McCumber Act and represented among the most protectionist tariffs in U.S. history.
The Smoot-Hawley Tariff was more a consequence of the onset of the Great Depression than an initial cause. But while the tariff might not have caused the Depression, it certainly did not make it any better. It provoked a storm of foreign retaliatory measures and came to stand as a symbol of the “beggar-thy-neighbor” policies (policies designed to improve one’s own lot at the expense of that of others) of the 1930s. Such policies contributed to a drastic decline in international trade. For example, U.S. imports from Europe declined from a 1929 high of $1,334 million to just $390 million in 1932, while U.S. exports to Europe fell from $2,341 million in 1929 to $784 million in 1932. Overall, world trade declined by some 66% between 1929 and 1934. More generally, Smoot-Hawley did nothing to foster trust and cooperation among nations in either the political or economic realm during a perilous era in international relations.
According to Dr. Stiglitz, the developed nations gain $3 from trade for every aid dollar spent. The U.S. provides less aid than any other developed nation on a per capita basis (20th among O.E.C.D.) So it seems that U.S. citizens benefit more from world trade and currency considerations than any other nation. This seems supported by the simple fact that the U.S. standard of living has remained comparatively high even though consumption out paces production for decade after decade. So, accusations of China “manipulating” anything are hypocritical enough in a the current sense; but even worse when history is applied to this comparison.
During the period when the U.S. had an advantage of low labor costs (1920s), mercantilism was not only the standard but was enabled by producing goods for Europe during WW1. And by 1929, after our version of mercantilism had run its course, the poverty rate had risen to 71% (before the crash!). The Chinese have instead done more to eliminate poverty than any nation in modern history. So why do U.S. economists continue with this linear hypocrisy?
The labor values that allowed “the economy that roared” were the result of a vast effort of manipulation. The central dynamic was to continue agricultural production levels that were apt during the war, for 2 growing seasons after the war’s end. This at a time after the USDA had established agencies to facilitate production increases to meet demand in anticipation of the war; but it proved to be easier to increase production, dramatically; than it was to simply restrict production. By 1921 there was a collapse of prices. By 1929 (before crash), the average farm income had dropped to 25% of what it was 10 years earlier (real). And then of course things got worse from there (after crash).
As agricultural values fell the National Association of Manufacturers were pushing forward their “yellow dog campaign”. Labor union participation fell sharply. The supply of labor which had been ample during the war due to unprecedented immigration levels was then in a state of extensive oversupply with the addition of the returning soldiers, and with vastly fewer opportunities in agriculture.
By 1929 (before crash), 71% of the U.S. population was living below the poverty line.
And to this day, we are unable to admit what really caused the Great Depression. Which is why there is so much folly regarding our current circumstances, which, have similar origins. But via much more urbane tactics, now farm subsidies have eliminated the need for gluts, and subsidies allow labor values to be controlled globally while simultaneously creating trade dependencies. And in the U.S. the cost of labor is more a recruitment concern that must be balanced against consumption levels (the Viet Nam era shows what happens when the working poor are not kept poor). But somehow we manage to ignore so much of this. We have nearly removed the word “exploitation” from the vernacular here in the States. And now we are accusing the Chinese of Mercantilism!!!
Cantab,
No, you’re just wrong. There’s a reason why they called it “supply side” economics and not “tax revenue maximization” economics. Go pick up any old macro textbook from the late 70s or early 80s and you will find the Laffer curve concept somewhere in the chapter on aggregate supply curves. You’re just confused.
Cantab,
In a recession you are operating below the production possibility curve, so the case is probably ambiguous. Just rambling off the top of my head, I suppose you might be able to constuct some kind of nonparametric Data Envelope Analysis (DEA) approach to compare the relative “efficiency” gaps between output loss due to a recession versus output losses due to foregone comparative advantage gains.
The benefits of globalization have been squandered. Reform requires re-directing that malinvestment (and downsizing finance).
By now it’s pretty clear that the finance sector’s contribution to GDP growth was overstated. The reality is that finance isn’t big enough to support two global financial centers. We can’t have both New York and London trying to be the financial capitals of the world. The world just isn’t big enough. This is likely to be a bigger problem for the Brits because finance was an even bigger source of GDP growth for them than it was for those of us on the other side of the pond.
I see it more in the terms of the financial sector’s utility and the symbiotic
relationship of connecting savers & investor being overwhelmed and subverted by an overlarge sector which is then only parasitic as evidenced by the need for poison pills etc. which are used to defend against the ANTI-investment of that parasite. It destroys value while it claims to enhance shareholder value. i.e.Enhancing shareholder value only moves FV forward at a discount to become NPV & feed the parasite.
Just how much of the price of a barrel of oil do you think represents cartel rents?
My guess is $50-$60 per barrel but this depends on what country your looking at and the market price for oil, and if you want to consider sunk finding cost.
China nixed Cap N Trade thus guys like Krugman are frustrated because they see China (get this) as preventing the government from getting more power. As result Krugman and his political allies want to rattle trade restrictions at the Chinese. The Chinese will rattle their dollar holdings back at us – its theater, nothing will come of it.
No, you’re just wrong. There’s a reason why they called it “supply side” economics and not “tax revenue maximization” economics.
The laffer curve is not part of supply side economics. Rather its pedologcal device used to convince left wing dolts that when taxes are too high you can increase tax revenues by lowering tax rates.
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