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?