China: Krugman, New York Times Editorial, Beltway Gang ALL Wrong re Currency Devaluation

Conventional academic economics is a disease.

Despite its pretensions and mathematical “certainties,” there is no branch of social science more dis-connected from its alleged subject matter than economics – and that is saying something, something not good.

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Conventional academic economics is a disease.

Despite its pretensions and mathematical “certainties,” there is no branch of social science more dis-connected from its alleged subject matter than economics – and that is saying something, something not good.

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So while especially disappointing, it’s not particularly surprising when usually UN-conventional economists – notably Paul Krugman of Princeton and, more importantly, the New York Times, and Nouriel Roubini of NYU, aka Dr Doom, one of the few academics who had even the vaguest inkling the disaster of Black September 2008 was coming – lapse into the orthodoxies they generally eschew.

Intriguingly enough, these conceptual slips often come in the area of global trade and balance of payments, where otherwise smart people like Krugman and Roubini are seemingly unable to break free of the stale platitudes they generally disdain when it comes to MOST issues of political economy:

in Roubini’s case, the “sub-prime” state of the US financial system as a whole, which he correctly warned about well before even the Bear Stearns collapse in March and, of course, Lehman Bros in Black September of 2008;

with Krugman, he’s on the mark regarding just about EVERY issue – lately, the IN-sufficiency of the Obama stimulus, which he correctly said at the time it passed Congress would NOT be enough to promote a sustainable recovery, and the economic [not just human] imperative of SERIOUS health care “reform,”

although he was a little late in realizing how significant a blockage the insane US campaign contribution “system” would be in achieving anything of real value.

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It was thus pretty disheartening to wake up on Monday, eager to read his latest clear sally against all things stupid in American political economy, to instead be blasted by his ill-mannered screed against China’s alleged currency manipulation, which is supposedly having such a bad effect on the weak efforts at global recovery.

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Tensions are rising over Chinese economic policy, and rightly so: China’s policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery. Something must be done.

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And on he went from there.

It was equally dismaying to read two days later a New York Times editorial – whose board, like Krugman, has generally been notable in making strong and convincing arguments against the babbling inanities that pass for “public discourse” in the US these days – taking the same sort of ill-informed line on the whole question of Chinese currency values:

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China’s decision to base its economic growth on exporting deliberately undervalued goods is threatening economies around the world. It is fueling huge trade deficits in the United States and Europe. Even worse, it is crowding out exports from other developing countries, threatening their hopes of recovery.

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And on THEY went, making more likely just the sort of international trouble they correctly warned against at the conclusion, namely that “this disagreement [can] escalate into a fight that no one can win.”

So what is the problem with this line – and why does it go back to the nonsense of conventional academic economics ???

Put bluntly, both Krugman and the Times editorial board are ignoring the central fact of the world political economy that has existed since the late 1940s: countries either sell to the US or they sell to countries that sell to the US.

Instead, they are simply following the inaccurate – but ubiquitous – conventional academic economics ASSUMPTION that world trade should somehow be “balanced” – that is, that every country should have its trade and overall payments be roughly “in balance.”

In fact, this flies in the face of not just the current world political economic set-up, but the entire history of world political economies that have existed, in various forms, since at least 1815 and the rise of the “second” British Empire, following its victory in the Napoleonic wars of the early 19^th century.

“Equilibrium”, however, is a KEY concept of conventional academic economics – no matter how non-existent it is in the real world – and they will do everything they can to POSIT equilibrium in ANY situation –

even if, as is the case with the current world recession in general and trade scene in particular, it is completely ir-relevant to what is actually happening.

Now most of the time, smart guys like Krugman / the New York Times Editorial Board / Roubini realize this, especially when it comes to DOMESTIC economies,

where it’s blatantly obvious equilibrium may be a “consummation devoutly to be wished,” but they recognize it for what it is: “a complete falsehood,” as Michael Corleone told the Senate in Godfather II.

But somehow, when it comes to issues of trade and the world political economy – especially one in the terrible shape it is today – they want to return to the emotional comfort of the dominant myths of their graduate school days,

and pretend an equilibrium they know is totally fictional in domestic political economy somehow really DOES exist on the global stage.

In fact, however, it NEVER has – the US, for example has run an overall balance of payments deficit since 1959, and an overall trade deficit since 1971, without any appreciable decline in the American standard of living –

and, given the American-centered nature of the world political economy since 1947, it never SHOULD.

Put bluntly, both the US and the rest of the world have benefited greatly from a global political economy that is fundamentally UN-balanced:

it is good for both America and every other country that the US run consistent payments and trade deficits, which will enable at least SOME countries to run payments and trade SURPLUSES –

which, by the way, are a) not the same and b) not necessarily good things in and of themselves, but that is a subject for another day.

In fact, there ARE some countries that MIGHT be hurt by China’s fierce determination to hold on to a particular value for its currency –

but they are certainly NOT developed economies like the United States and Western Europe, the Times’ editorial to the contrary.

Despite the rhetoric emanating from the US – but NOT other countries supposedly being hurt by the Chinese valuation, the reasons for which the Times can’t seem to figure out –

low-value-added Chinese exports TO the US and the rest of the developed world generally do NOT compete with high-value-added products coming from those countries,

for the simple reason that low-value-added products left the developed world a long time ago as a result of wage levels that are simply too high.

Put bluntly, almost all the manufacturing jobs that left the US for Mexico or China or any other low-wage country are NEVER coming back –

and to pretend they are is not just absurd and self-delusionary analytically, but misleading to Americans and dangerous to world economic peace.

The first three are pretty obvious. But why is this nonsensical obsession with Chinese currency valuations so inimical to world economic peace ???

Quite simply, because it pretends there’s a villainous motive behind perfectly “normal” economic practices the US itself a) has practiced for decades; and b) continually promotes in principle –

namely, the mobility of capital, which, as Karl Marx so eloquently pointed out, always seeks the lowest possible wages in order to get the highest possible profits.

In this context, the countries whose industries are most likely to be hurt by low Chinese currency valuations are not the US and Europe – whose consumers only benefit from the low prices of Chinese exports –

but places like Indonesia and Vietnam, whose manufactured exports compete directly with China, both in their home markets and third markets like the US and Europe.

These countries definitely could have a case against China, although many of them offset their problems with manufactured goods by making significant sales of raw materials to China itself.

But for significant and generally enlightened sectors of the American elite – like Paul Krugman and the New York Times Editorial Board, as well as the openly selfish host of K Street lobbyists swarming all over Capitol Hill –

to be making a big deal about “low” Chinese currency values being in any way problematic for either the US or global economy is patently absurd.

As we have noted, US consumers – practically more than any major economic “actors” in the world – in fact benefit significantly from low cost Chinese imports,

as would European consumers, if their more protectionist governments would let them in, which, at least so far, they remain reluctant to do, given the political power of whatever domestic manufacturers may still exist.

The problems with the US and, because the global political economy is American-centered, the world economies have little to do with China in general, and certainly NOTHING to do with the value of China’s currency.

Those problems have to do with the lies that America’s political / corporate / media / academic elites have been telling the American people and the rest of the world – and, for all we know, themselves – since at least the Reagan regime, exponentially multiplied, of course, during the age of Cheney / Bush.

And if the US is going to somehow manage to find a way out of the mess it’s in, it should stop blaming China, and admit, as Shakespeare put it, “the fault lies not in our stars, but in ourselves.”

But of course, that’s a lot harder than shifting the onus onto one of the few countries in the world that –

for all its admitted problems, above all in environmental / occupational / product safety, as well as freedom of speech and human rights –

has a political leadership that actually knows what it’s doing when it comes to economic policy.

As we put it in the matter of Lehman / Repo 105 and Goldman Sachs / Greece –

which are MUCH more to the point when it comes to America’s real difficulties –

“Welcome to the Lost Decades,” which are, unfortunately, only just beginning.

David Caploe PhD

Chief Political Economist

EconomyWatch.com

President / acalaha.com