China's Policies Do Matter

Tuesday, 25 October 2011 07:58 By Paul Krugman, Krugman & Co. | Op-Ed
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Chinas Policies Do Matter

(Image: CartoonArts International / The New York Times Syndicate)

I thought I should offer a brief note about one of the arguments people make against the government’s focusing on Chinese currency manipulation — namely, the claim that China doesn’t really compete head to head with American manufacturing, so that a rise in the renminbi wouldn’t help.

I’d argue that this is wrong on three levels.

First, the notion that there’s no head-to-head competition is false. There have been quite a few stories in the press lately about manufacturing moving back to the United States from China. The labor costs will always be much higher in America, but other advantages, especially logistical, can make even labor-intensive production worth doing at home.

Second, there are real effects for the United States if production moves, say, from China to Mexico. To an important extent, global manufacturing is carried out by regional complexes — an Asian complex

centered on Japan and China in effect competes with a North American complex in which labor-intensive stuff is done in Mexico or Central America.

Most important, however, is that you really need to think of this as a global adding-up issue. If China and other currency manipulators run smaller trade surpluses, who will be the counterparties? Emerging economies that compete more directly with China than the United States does are by and large not in liquidity traps — in which conventional open-market operations have lost traction because short-term rates are close to zero — and indeed are facing inflationary pressure.

So any Chinese appreciation, while it directly tends to raise the net exports of emerging economies, will probably show up in matching appreciation in their currencies, setting in motion a series of domino effects that end up pushing the adjustment onto economies that are in liquidity traps, namely those in the United States, Japan and Europe.

The bottom line is that Chinese currency policy does indeed matter for manufacturing in the United States.

Commodity Prices Redux

Remember commodity prices?

Not too long ago, the usual suspects were pointing to rising commodity prices as evidence that runaway inflation was just around the corner. Commodity prices were Exhibit A in claims that Ben Bernanke, the chairman of the Federal Reserve, was “debasing the dollar”; Paul Ryan, the Republican chairman of the House Budget Committee, called for monetary policy that would stabilize the price of a basket of commodities (and therefore require deflation in America whenever China experienced a boom, but hey, never mind).

So it’s instructive to look at what has happened to commodity prices recently. According to data from the Thomson Reuters index over the past five years, commodity prices have fallen sharply this year. They’re still above their levels at the bottom of the global slump, but that’s hardly surprising. What may be surprising is that they’re just about where they were in 2007, before the big 2007-2008 run-up.

Over a four-year period, then, it turns out that the Bernanke Fed has just about stabilized commodity prices — not that this is a good goal, but it is what has happened.

So will people like Mr. Ryan admit that the dollar has not in fact been debased? Will they look at the recent plunge and conclude that maybe we need more expansion, not tightening? Will they admit that their favorite “experts,” who saw the commodity bulge last year as a harbinger of hyperinflation, don’t know anything? Is the Pope Jewish?

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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 2011 The New York Times.

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