China's Economy Not Looking So Hot

Tuesday, 04 January 2011 08:23 By Paul Krugman, Krugman & Co. | Op-Ed | name.

China
A resort in Sanya, China. Consumers in China have enjoyed their new spending power, but prices are rising. ( Photo: The New York Times)

These days, China seems to play much the same role in American public discourse that Japan did two decades ago.

We Americans look at our own economic follies — which are immense — and then at the Chinese and their expanding economy, and ascribe to them all the virtues of foresight and determination that we lack.

But Japan’s conventional monetary policy failed in the 1990s and the nation got stuck in a deflationary trap. The Chinese are also making mistakes, their policy makers subject to the same confusion and inability to make hard choices that everyone else is.

China’s current macroeconomic policy will someday be the basis of a cautionary tale. Basic economics says that when they decided to undervalue the renminbi, the Chinese put themselves under inflationary pressure, and sure enough, inflation is rapidly becoming a serious problem in that nation.

China’s economy has been growing at a fast pace and banks are widely lending money; the resulting increases in the costs of labor and materials are reflected in rising consumer prices.

In fact, the government announced in August that consumer prices were 3.5 percent higher than a year ago.

But domestic political considerations seem to be ruling out all options for reasonable responses to this problem, including the revaluation of the renminbi.

The Chinese won’t increase the value of their currency because that would hurt politically influential exporters. And while the government announced on Dec. 25 that it was immediately raising interest rates — for the second time in a little over two months — it had been reluctant to make this move because raising rates would hurt influential real estate developers.

Let Truthout send our best stories to your inbox every day, for free.

The government is also trying to impose quantitative limits on credit, but powerful borrowers are able to circumvent the new rules.

Attempts to impose price controls on some agricultural commodities will inevitably come apart at the seams unless policy makers do something about the underlying pressures of accelerating inflation.

It’s an edifying spectacle.

Now, schadenfreude should not lead to any complacency on the part of the United States; China may be corrupt and unable to make sensible short-run choices when it comes to dealing with inflation, but the United States outdoes China in terms of our fundamental inability to deal with long-term problems.

Still, it’s worth remembering that all paragons have feet of clay. 

 © 2010 The New York Times Company

Truthout has licensed this content. It may not be reproduced by any other source and is not covered by our Creative Commons license.

Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008.

Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including "The Return of Depression Economics" (2008) and "The Conscience of a Liberal" (2007).

Copyright 2010 The New York Times.

All republished content that appears on Truthout has been obtained by permission or license.

Last modified on Tuesday, 04 January 2011 09:00