Home > Inflation, Trade > Krugman: Naive or a Political Hack?

Krugman: Naive or a Political Hack?

Now there is a question that answers itself.

If Krugman is such an expert on International Trade (that’s what his Nobel is in), then why does he want Obama to pursue policies that might cause another recession?

(Quick answer: so we can get more stimulus and increase government some more maybe?)

This is a good piece titled: Krugman’s Chinese renminbi fallacy

Paul Krugman is one of the international economists I most respect. He is a towering figure in the study of international trade. But his understanding of some international economic policy issues is, to put it generously, naïve. In fact, were the Obama administration to follow his policy advice, the world economy could encounter more serious difficulties, if not another recession, in the years ahead.

In 2010, Krugman suddenly found a new and passionate interest in China’s exchange rate policy. On 1 January, in his piece “Chinese New Year”, Krugman claimed that America had lost 1.4 million jobs because of the undervalued renminbi and, therefore, he endorsed trade protectionism against China. On 11 March, in another piece, “China’s Swan Song”, he advised the Treasury Department to name China as a currency manipulator. And on 12 March, at an Economic Policy Institute event, in Washington, he said that global economic growth would be about 1.5 percentage points higher if China stopped restraining the value of its currency and running a trade surplus.

So what would happen were the Obama administration to follow Krugman’s advice? First of all, it would delay, not accelerate China’s exchange rate policy reform.

In fact, some American politicians may be secretly hoping that China does not do anything. Many of them understand perfectly well that the revaluation of the renminbi will not bring jobs back to the US. If such a change in Chinese policy does happen, then they will have to find a new scapegoat for the double-digit unemployment problem. In the meantime, the Chinese government is reluctant to make any significant change under foreign pressure. This is why Krugman’s intervention would only make things worse.

Let’s imagine some scenarios in which Krugman gets what he asks for. The US Treasury Department names China as a currency manipulator and the Obama administration launches a trade war against China. If this were to happen, the most likely scenario is that China would then stick to its current exchange rate regime and retaliate with trade sanctions against America. This would reduce trade between the two countries and, more importantly, seriously damage investor confidence worldwide. A trade war between the two largest economies is a non-trivial event for the world economy. In face of a much more uncertain economic future, investors would scale back their investment plans and consumers would cut back their spending.

A trade war with China will bring on a World Wide Economic Collapse. Remember Smoot-Hawley (if your a product of a public school system, you probably don’t even know about it at all). The increase in Tariff will cause a firms inputs to skyrocket, which will lead to higher prices for EVERYTHING. That’s called inflation folks. Whether we like it or not, we are dependent on China for basic goods. The level of price inflation would destroy the US economy.

A less likely scenario is that China would be forced to appreciate the currency sharply by, say, 40 %. This is likely to cause significant difficulties for Chinese companies. Again, there could be two possible outcomes. The first is that Chinese companies would no longer be able to export because of sudden loss of competitiveness. The market vacuum newly made available by the exit of Chinese products would be taken up by products from other low-cost countries like Vietnam and India. American companies would not be able to compete with these countries. So this would not add new jobs in the US, but the inflation rate would move higher.

The second possible outcome is that China would continue to export to the US market, at higher prices but lower profits. This would push up inflation rates significantly in the US and force the Fed to tighten monetary policy quickly. Both steps could hurt the momentum of America’s recovery, which is still not yet on steady footing. New difficulties in the US and China, the two largest economies of the world, would impact global investor confidence negatively.

So why does Krugman want a revaluation of the renminbi? The answer is simple, because it makes for great talking points that Unions love! Remember Austan Goolsbee?

Categories: Inflation, Trade
  1. yttik
    March 28, 2010 at 19:14

    Uh oh. Looks like China has become too big to fail.

    • March 28, 2010 at 21:00

      It’s not so much “Too Big To Fail” as it is, we shouldn’t be telling other countries what to do, especially in Financial matters and especially not the country that IS financing all our profligate Congressional spending.

      Personally, I don’t know what China is going to do. I think they want to keep their people down, it makes them so much easier to control. But that will only work for so long, the renminbi will re-valuate sooner rather than later, so we (the US) needs to be ready for it. I think it would be painful even under the best economy, right now it’s utter suicide.

      Talking like that just to please the Unions is just utter stupidity. Unfortunately, Krugman has a habit of doing just that all the time. He had numerous articles, where he calls for the Fed to keep interest rates low and for the Fed to prop up a housing bubble, to ease the pain of the dot com and 9/11 recessions. Well he got his wish, which we are paying for now in spades.
      Krugman is technically correct, but he never tells the whole story. He only tells the story that is politically expedient. It’s even more dangerous, because he is looked to for academic support for many Liberals. Liberals love to appeal to authority and they usually appeal to Krugman, that was even before his Nobel.
      Again, it’s ironic that his Nobel is in Trade, since all the blunders he keeps making in his trade articles. He is political Hack, not economist anymore.

  2. PJ
    March 28, 2010 at 22:00

    Just wanted to quick stop in and let you know I appreciate your blog. And your comments at John’s. Pretty heavy today. Haven’t been commenting, but still read you…

    TL represents how I used to think. I can’t believe how much I’ve changed (TL would say for the worse) but I think I’m just more reality based. I love the idea of helping people, but then there are those people like my sister who is one of the best at gaming the system. And the generations of people who are enslaved by the system and don’t see a way out and little reason to look for one. But we can’t talk about that. If we talk about that, we are just mean and selfish. Maybe the mean and selfish are those who “need” the poor to feel good about themselves. I know there are those people with the attitude of “I’ve got mine, screw everyone else” (ironically, if my sister ever won the lottery, that’s how she’d be) but I think that’s a different conversation.

    Anyway, I MUCH appreciate you opening my mind and making me think about things ZH.

    • March 28, 2010 at 23:37

      Your welcome. I used to think like TL as well. But then I started reading and found out that most of what I thought was just wrong. I think we (the commentators here) were just honest enough to admit our mistakes. TL won’t ever admit he is or ever was wrong. I think that is the big difference.
      I love the idea of helping people too. But it’s important to remember that sometimes the best way to help someone is to let them figure it out on their own. The whole parable of teaching a man to fish argument.

  3. PJ
    March 28, 2010 at 22:15

    Just have to add one more thing… TL and others love playing the Ayn Rand card. Well, my sister is HUGE Ayn Rand fan – she’s the reason I read that loathsome book in the first place. My sister is a long term recipient of those social programs that TL loves so much. So there you go.

    • March 28, 2010 at 23:38

      I like Rand but I don’t agree with her 100%.

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