Friday, March 19, 2010

Senators find China Bashing easier than Policy Making

Senators Lindsey Graham and Charles Schumer (Reuters called odd couple) are at it again. They are sponsoring a bill in Congress demanding that China adjust the exchange rate of their currency, Renminbi (RMB), to the dollar because, they claim, the “artificially” low rate is costing America jobs.

This time their arguments are bolstered by commentaries written by no less than Paul Krugman, Nobel winning economist, accusing China of mercantilist practices. Krugman as a columnist for the New York Times certainly has the soapbox to preach his version of global economics.

Fortunately, other equally credentialed, if not as well known, professional economists have stepped up to offer persuasive contrarian views exposing flaws in Krugman’s reasoning.

I found three conclusions particularly noteworthy in Stanford Professor Ron McKinnon’s rebuttal to Krugman. First, he points out that trade imbalance has nothing to do with currency exchange rates. A sudden increase in the RMB value to the dollar may actually increase and not lessen the trade imbalance.

McKinnon argues that fixing the exchange rate of 6.83 RMB to a dollar was essential to stabilizing China’s economy against the global economic downdraft caused by Wall Street. With a stable yuan, China was able to stimulate its economy replacing fallen export with huge boost in domestic consumption, which in turn meant increasing imports from China’s neighboring countries and thus stimulating those economies.

China has contributed to a fast worldwide recovery which would not have been possible without a stable yuan. McKinnon presents data to show that it is America’s “ultra-loose monetary policy” instituted since the 2008 crisis that is guilty of manipulation.

UN Conference on Trade and Development (UNCTAD) has come out in support of China’s control of the exchange rate. According to UNCTAD, China has done more than any other emerging economy to stimulate domestic demand in order to mitigate the crisis and urges China not to cave in to the western pressure.

Dr. David Caploe, Chief Political Economist of online EconomyWatch largely echo McKinnon’s analysis but in more quotable sound bites. He points out that the US has run overall balance of payment deficit since 1959 and overall trade deficit since 1971 seemingly without doing any harm to the American standard of living. “Put bluntly,” Caploe says, “Both the US and the rest of the world have benefited greatly from a global political economy that is fundamentally unbalanced.”

Graham and Schumer haven’t said how and what jobs would return to America if China were to bow to pressure and make a substantial and sudden adjustment in the exchange rate.

In fact it has been obvious to all of us that the jobs that went to China by way of Mexico, Taiwan or Korea left the US long ago and would never come back. Nor would we wish for those low paying jobs to come back because it would mean a collapse in the American economy as it currently exists and return to a third world standard of living.

However, bashing China has always been easier than proposing a carefully thought out roadmap that would create well paying jobs and protect the current standard of living. In fact the challenge of a real plan seems to be beyond even the capability of a Nobel Laureate like Krugman.

Caploe says, “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 the fault lies in ourselves.” He goes on to say, “But of course, that’s a lot harder than shifting the onus onto one of the few countries in the world that has a political leadership that actually knows what it’s doing when it comes to economic policy.” Ouch.

A more plausible argument for a stronger yuan is that it would make American exports more attractive but this argument doesn’t stand up to scrutiny either. China is already buying virtually all the lower-valued export such as agricultural products that America is selling. For higher-valued products, such as high tech equipment where the US has a comparative advantage, price has not been the issue. China has been willing to buy more than the US government is willing to sell under Washington’s anachronistic export control regulations.

Steve Forbes, publisher of Forbes magazine, reminds us, "We started in the 1970s to put pressure on Japan to change the value of the yen. The dollar today has fallen 75 percent against the yen, and we still have a trade deficit."

Maybe our problem is that we don't have leaders that can offer real solutions.
A shorter version appeared in the March 25 issue of the San Jose Mercury News.

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