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Unhelpful –

by Brad Setser
November 13, 2008

China has just increased its tax rebates on exports. While steps to support domestic Chinese demand help the world economy, steps by China – the country in the world with the largest current account surplus and (on a backward looking basis) still quite rapid export growth – to keep its exports up don’t.

Global demand is falling (Intel, Best Buy, Department stores sales are all telling the same story … ). Big importers can increase their market share through protectionism. Big exporters can increase their market share through export subsidies. Neither helps to address the real problem – the global shortfall in demand.

Monday’s excellent FT leader effectively argues — diplomatically — that the United States isn’t the only country that has lost a bit of economy and financial credibility over the past few years. It turned out that the US credit crisis wasn’t nearly as contained as the Fed and Treasury thought. And it turns out that the TARP isn’t really going to be used to buy troubled assets. But it also turned out that China never really carried through on its 2004 and 2005 and 2006 and even 2007 rhetoric that it planned to rebalance its economy.

Back in 2004 China’s leaders generally got the benefit of the doubt. Not necessarily about the quality of China’s economic data; as David Pilling notes, China’s data never has been all that credible. But most observers expected that China’s leaders would be able to deliver when they announced their plan to shift the basis of China’s growth away from exports and investment. Chinese policy makers generally had a pretty good track record of doing what they said they would do.

But four years after China indicated that it wanted to rebalance its economy, its economy looks more unbalanced than ever – its current account surplus is far far larger than in 2004, and investment accounts for a higher share of GDP than in 2004. The FT:

China’s growth to date has been phenomenal, but it was based on exports and investment, at the expense of consumption. China almost aimed to be a supersized South Korea: in 2005, capital investment made up more than half of China’s gross domestic product. The capital-intensity of its growth also meant profits grew strongly as a share of GDP. But employment growth has slowed since the 1980s, so workers have gained small benefit.

With an undervalued renminbi also making imports dear, the Chinese public has proved loath to spend. China has far too little dom­estic consumer demand. Where­as household consumption made up more than half of China’s GDP in the 1980s, it now contributes little more than a third.

In the absence of a domestic safety net, Chinese household savings have been as high as a quarter of disposable income. In addition, corporate and government savings have soared. Overall, China has been saving close to 60 per cent of GDP. This contributed hugely to the global savings imbalance. Some of the deepest roots of the current crisis lie in the plugging of western deficits with Asian savings.

The Chinese government recognises that it must build domestic consumer demand, but it is time for the leadership to put its money where its mouth is. Alas, the planned stimulus does not attempt to boost public and private consumption. It aims, instead, to keep the economy ticking over until it can start exporting again. This will not work.

Well said.

China never really adopted the kind of policies needed to reorient its economy in good times. And now — barring a program of direct Chinese subsidies for US and European consumption that bypasses the US and European financial sector — it looks like it will have to try to reorient its economy in bad times. It isn’t yet clear it can.

The failure to adjust when times were good is most obvious with China’s currency. China never let its currency move enough against the dollar back when the dollar was falling to generate a meaningful nominal appreciation of its currency against a basket of China’s trading partners. That was a mistake. It would have been far easier for China to adjust to a stronger RMB back when the both global economy and China’s domestic economy were strong that it is now. Ironically, the RMB’s current tight link to the dollar has produced a far larger nominal appreciation (against a basket of the currencies of China’s trade partners) than the period of controlled RMB appreciation against the dollar between mid 2005 and mid 2008 ever did.

Right now, the RMB is appreciating when both China’s domestic economy and the global economy is slowing. That isn’t helping China. But China’s policy makers made the bed they now have to sleep in. They could have allowed the RMB to appreciate meaningfully against a broad currency basket back when times where good. They didn’t. That constrains China’s options now that times aren’t as good. China will have a hard time explaining policy efforts directed at supporting its exports so long as it has a huge and growing trade surplus.

I certainly wouldn’t count the fiscal cost of larger VAT rebates on exports as part of China’s stimulus … it helps parts of China’s economy, but not the rest of the world.

42 Comments

  • Posted by DJC

    As James Fallow writing in The Atlantic noted: “every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China.” Why is it that there isn’t anyone in Washington DC that finds something drastically wrong with this situation? Under the “reserve currency status” of the US Dollar otherwise known as “Dollar hegemony”, the rest of the world finances an excessively high standard of living for the US consumer (ie. McMansions and gas-guzzler SUVs on every driveway).

    In exchange for fiat US Dollars printed in unlimited quantities by the Federal Reserve, the rest of the world transfers “real wealth” industrial and consumer products with the United States. In other words, the Chinese get to work for free, and Americans get to consume for free. There are signs that the rest of the world is tiring of US hegemony control of the global financial system.

    Normally, the Chinese are diplomatic in official government statements, but on October 24 Reuters reported that the People’s Daily, the official government newspaper, in a front-page economics commentary accused the US of plundering “global wealth by exploiting the dollar’s dominance.”

    To correct this unacceptable situation, the China People’s Daily called for Asian and European countries to “banish the US dollar from their direct trade relations, relying only on their own currencies.” And this step, said the official Chinese government commentary,”is merely a starting step in overthrowing dollar dominance”.

  • Posted by Twofish

    The primary responsbility of the Chinese government is to maintain the well being and stability of the Chinese economy just as the primary responsbility of the American government is to maintain the well being and stability of the US economy.

    Look at how relatively well China has done at maintaining the Chinese economy over the last year and how badly the US has done at maintaining the US economy, I wouldn’t be that quick to criticize Beijing for doing what people in China put them there to do.

    It is just unreasonable to expect that the Chinese government is going to do anything that they thing is going to hurt their constituency just as it is highly unreasonable to expect that the United States government is going to be particularly self-sacrificing.

  • Posted by bsetser

    China has global responsibilities now — as does the US. Neither has been particularly good at living up to those responsibilities.

    DJC — glad to see that you agree with me that China shouldn’t target the dollar in its fx policy and thereby reinforce dollar hegemony …

  • Posted by Twofish

    bsetser: The Chinese government recognises that it must build domestic consumer demand.

    Actually no. China needs to build domestic demand in order to make up for the shortfall in exports, but there is no reason that it has to be consumer demand.

    The stimulus package that is coming up relies heavily on massive infrastructure spending.

    Also given all of the trouble that the US economy is undergoing, it’s not at all clear to me that its the Chinese economy that is “unbalanced”.

    You are not going to get the Chinese government to do anything except if you can convince it that what you are suggesting is in its interests, and given the mess in the US economy, and given the mess in the US economy, any advice that is given has very little credibility. The reaction from Beijing is going to be “why the heck should we listen to you about how to run our economy?”

  • Posted by DJC

    The Winter of 2008-2009 will prove to be the winter of global economic discontent that marks the rejection of the flawed ideology that unregulated global financial markets promote financial innovation, market efficiency, unhampered growth and endless prosperity while mitigating risk by spreading it system wide.

    Those who do not learn the lessons of history are bound to repeat its tragedy. Neoliberal economists in the last three decades have denied the possibility of a replay of the worldwide destructiveness of the Great Depression that followed the collapse of the speculative bubble created by unfettered US financial markets of the “Roaring Twenties”. They fooled themselves into thinking that false prosperity built on debt could be sustainable with monetary indulgence. Now history is repeating itself, this time with a new, more lethal virus that has infested deregulated global financial markets with “innovative” debt securitization, structured finance and maverick banking operations flooded with excess liquidity released by accommodative central banks. A massive structure of phantom wealth was built on the quicksand of debt manipulation. This debt bubble finally imploded in July 2007 and is now threatening to bring down the entire global financial system to cause an economic meltdown unless enlightened political leadership adopts coordinated corrective measures on a global scale.

    To arrest the global financial meltdown, much can be learned from Keynes’s vision of how the international payments system should work to permit each country to promote a national full employment policy without having to fear balance of payments problems or to allow financial incidents in other countries to infect the domestic banking and non-bank financial systems.

    Another Great Depression can be avoided if world leaders would reconsider John Maynard Keynes’s analytical system that contributed to the golden age of the first quarter century after World War II. The undersigned and others have long advocated a new international financial architecture based on an updated 21st century version of the Keynes Plan originally proposed at Bretton Woods in 1944.

    This new international financial architecture will aim to create (1) a new global monetary regime that operates without currency hegemony, (2) global trade relationships that support rather than retard domestic development and (3) a global economic environment that promotes incentives for each nation to promote full employment and rising wages for its labor force.

    Paul Davidson
    Editor, Journal of Post Keynesian Economics
    Visiting Scholar
    Schwartz Center for Economic Policy Analysis,
    The New School, New York
    http://henryckliu.com/page174.html

  • Posted by Twofish

    bsetser: China has global responsibilities now — as does the US.

    No they don’t. The Chinese government has a responsibility to China. The United States government has a responsibility to the United States. You can pretend otherwise, but when decisions have to be made, self-interest will take over.

    Unless you have a situation in which people in Beijing elect the US President or people in Ohio elect the Chinese President, nothing else is going to work unless you change how the Chinese and American governments are selected.

    Now if those responsibilities start conflicting, then the solution is to get everyone in a room and then have them scream at each other until they come to some sort of deal.

    If the US wants the Chinese government to do something that is obviously not in the interest of said government, then it has to come up with a combination of persuasion or coercion to change those interests, and the US has a big problem since it doesn’t have the soft power to do persuasion or the hard power to do coercion.

  • Posted by don

    Excellent post. As I said a long time ago, China cannot be expected to alter its currency policies on its own. It will do so only if coerced. It will have U.S. multinationals on its side if such a time comes. Expect a lot of rhetoric about “free trade.” Never mind that China’s currency policies are bigger trade distortions than any present tariffs. BB lost all credibility in this area when he touted a study by Hufbauer et al, in testimony before Congress, on the size of the gains to the U.S. economy from trade. Any good trade economist (such as Dani R) knows the size of the gains cited in the study are outrageous.

  • Posted by observer

    DJC: As James Fallow writing in The Atlantic noted: “every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China.” Why is it that there isn’t anyone in Washington DC that finds something drastically wrong with this situation?

    Everyone acknowledges that there is something wrong with that situation. Question is what to do about it.

    Twofish: I wouldn’t be that quick to criticize Beijing for doing what people in China put them there to do.

    First of all, the Chinese government is not elected by anyone. The interests of the PRC government is not necessarily the same as the interests of the Chinese people.

    The government seems to be happy to keep Chinese people impoverished as long as they have huge forex reserves and the international power and prestige that comes with it.

    Twofish: The Chinese government has a responsibility to China. The United States government has a responsibility to the United States. You can pretend otherwise, but when decisions have to be made, self-interest will take over.

    It is this sort of thinking that got us into this mess. Everyone for themselves! Selfishness is human nature! This is nothing more than ideological BS.

    Ultra-nationalistic nonsense is just as dangerous as individual greed. maybe it is time to start thinking of ourselves as citizens of the world for a change.

  • Posted by bsetser

    2fish — the problem comes when china’s government tries to meet its responsibilities to its citizens (or people — no vote yet!) in ways that make it harder for the US government to meet its responsibilities to its citizens, and vice versa. when china tries to keep growth up by supporting domestic activity, it meets its responsibilities w/o causing difficulties for others. when it tries to keep growth up by subsidizing its exports or holding its currency down (and note that right now china isn’t holding its currency down v the euro or won which is what makes the situation difficult) it makes it harder for other governments to carry out their responsibilities.

  • Posted by Twofish

    observer: The Chinese government is not elected by anyone. The interests of the PRC government is not necessarily the same as the interests of the Chinese people.

    The Chinese government is not elected, but they can’t ignore public opinion. If they don’t provide economic prosperity, then they will lose power. They know this, and they act accordingly.

    observer: The government seems to be happy to keep Chinese people impoverished as long as they have huge forex reserves and the international power and prestige that comes with it.

    No. The Chinese government needs to maintain strong economic growth, otherwise they are looking at social revolution. International power and prestige are means to the Chinese government. They aren’t ends.

    observer: It is this sort of thinking that got us into this mess. Everyone for themselves! Selfishness is human nature! This is nothing more than ideological BS.

    It’s reality. There are situations in which human beings will act altruistically, but these are mostly in small group situations. What happens in real life is that concrete duties to people you see every day are end up being more important than abstract duties to people you don’t.

    observer: Ultra-nationalistic nonsense is just as dangerous as individual greed. maybe it is time to start thinking of ourselves as citizens of the world for a change.

    If you want to get anything done, you have to accept human beings as they are rather than as you would like them to be.

  • Posted by locococo

    Why should China give up the control (parts of) of US monetary base ? or ease it even ? And how did those USFedsters come about loosing it to this Party of people?

  • Posted by Twofish

    bsetser: the problem comes when china’s government tries to meet its responsibilities to its citizens (or people — no vote yet!) in ways that make it harder for the US government to meet its responsibilities to its citizens, and vice versa.

    In that case you get people in a room and have them scream at each other until you work out some sort of deal.

    The problem here is that the US right now as far as I can tell has no strategy for dealing with this crisis which makes “If you do this, I’ll do this” conversations difficult. Without a strategy, it’s not even clear that Chinese export rebates negatively affect the US.

    Personally, I don’t think that export tax rebates are going to have that much long term impact. They are a short term solution to limit the pain of the fall, but can’t see them doing much else. A tax rebate doesn’t help you if you aren’t making any money.

  • Posted by Freude Bud

    2fish: “The Chinese government is not elected, but they can’t ignore public opinion. If they don’t provide economic prosperity, then they will lose power.”

    An alternative to economic prosperity could be nationalism. The Chinese appear to have a hard time tamping down nationalist anger.

    I think it was Kissinger who first suggested that Wilhelms I and II felt more at the mercy of militaristic sentiment stoked by the yellow press at the time than contemporary governments with representative structures.

    It should not prove that hard to stoke nationalist anger should the powers that be in the Communist Party decide it suits their interests.

    Not that I think that will be the outcome; just a possible world is all.

  • Posted by bsetser

    see my next post — if these trends (falling imports and exports) are confirmed in q4, this is gonna get nasty fast

  • Posted by lark

    2fish: “The Chinese government has a responsibility to China. The United States government has a responsibility to the United States.”

    This is an argument for protectionism. Indeed I suspect that may be the outcome, given the failure of both parties to see beyond relative gain, to the deeper issue of interdependence.

    I don’t think Barack will go for protectionism as a first choice. But I think that it will become a viable option if no mutually beneficial accommodation can be reached.

    The issue is this: the Dems are accountable not only to Wall Street and CEO’s, but to the millions of American workers who have and who will lose their jobs. (Unlike Republicans, a very important point.) The imperative, perhaps as early as the inauguration, will be jobs, jobs, jobs.

    It’s possible that the Chinese don’t understand the magnitude of the political change that just happened.

    Note that lobbyist money has been rejected as a matter of policy from the overall transition process.

    This does not augur well for a continuation of the status quo with China.

  • Posted by observer

    Freude: An alternative to economic prosperity could be nationalism. The Chinese appear to have a hard time tamping down nationalist anger.

    The PRC government is actively stoking nationalist anger, not tamping it down. Didn’t they invent that self-destructive narrative of “national humiliation”?

  • Posted by lb

    everytime i read this unfolding US v China drama here or elsewhere, it feels like i’m watching another episode of Divorce Court.
    maybe this tax rebate increase is a mirror equivalent of Sir Hank’s proposal yesterday in which he wants the remaining TARP funds to go to loosening ‘consumer credit’, both just in time for the xmas season?
    both are either equally ignorant of what’s happening on the ground (see aim’s report of his Walmart field trip last post) or equally unhelpful responses to it.
    that is, if they both are not equally masking some other intentions beneath the surface…

  • Posted by observer

    Twofish: The Chinese government is not elected, but they can’t ignore public opinion. If they don’t provide economic prosperity, then they will lose power.

    They have to do no such thing. It takes a lot of suffering for people to rise up and topple governments. Inertia is a very strong force. All the PRC needs to do is to make sure too many people are not starving to death.

    Twofish: International power and prestige are means to the Chinese government. They aren’t ends.

    Your faith in the PRC government is touching but misplaced.

  • Posted by observer

    Twofish: It’s reality. There are situations in which human beings will act altruistically, but these are mostly in small group situations.

    This is ideological BS propagated by neoclassical economic theory. Behavioral studies have repeatedly contradicted these assumptions yet people continue to believe in it. In the real world, people’s motivations are not so easily classified as altruistic or selfish or anything else, but is driven by a complicated mix of motivations influenced by culture, personal factors, education etc.

    Twofish: What happens in real life is that concrete duties to people you see every day are end up being more important than abstract duties to people you don’t.

    How does this explain nationalism? Why should someone in California care about someone living in Arkansas but not in Tijuana or Vancouver?

    Twofish: If you want to get anything done, you have to accept human beings as they are rather than as you would like them to be.

    You have been indoctrinated to believe things about human nature that is at best crude and oversimplified, and at worst just plain wrong. Did you ever pause to question whether human beings really are as selfish as you believe or if it is more complicated than that?

  • Posted by glory

    “The Chinese government has a responsibility to China. The United States government has a responsibility to the United States.”

    “This is an argument for protectionism.”

    helloooo… prisoner’s dilemma! cooperate people :P and in that spirit, support for (expanding) SDR might be a nice signal that we’re all in it together! or as GWB sez, this sucker could go down :P

  • Posted by glory

    this unfolding US v China drama

    *clap, clap*

    places everyone! :P

  • Posted by Twofish

    lark: This is an argument for protectionism.

    It really isn’t. I don’t think that Smoot-Hawley type protectionism really is in the US national interest. I’d be interested in hearing arguments otherwise.

    The basic problem is that if you start putting in protectionist measures then all of the global supply chains start falling apart leading to job losses that you are trying to prevent. I haven’t heard any arguments as to how protectionism is going to save General Motors.

    lark: The imperative, perhaps as early as the inauguration, will be jobs, jobs, jobs.

    Precisely. Now explain how protectionism save jobs in the US, especially if it causes Honda and Toyota to pull out its plants, and Boeing to cancel orders.

  • Posted by Twofish

    observer: Didn’t they invent that self-destructive narrative of “national humiliation”?

    Nope. Invented in the late 19th century long before the Communists came to power.

  • Posted by Twofish

    observer: In the real world, people’s motivations are not so easily classified as altruistic or selfish or anything else, but is driven by a complicated mix of motivations influenced by culture, personal factors, education etc.

    True, but once you organize people into interest groups and political systems, these groups have dynamics that are independent of the individuals. If you don’t act in the economic interests of Michigan, it’s unlikely that you will be elected as a congressman from there.

    Note that group interests aren’t the same as selfishness. People can be very selfless toward a group that they feel to be a part of.

    observer: How does this explain nationalism? Why should someone in California care about someone living in Arkansas but not in Tijuana or Vancouver?

    Political indoctrination through state-supported school systems.

    Also it’s not necessarily the case that someone in California *does* care about someone in Arkansas over Tijuana and Vancouver. National identities are only one of several identities that explain behavior.

    But it’s likely that the President of the United States will care more about people in California than people in Vancouver since people in Vancouver don’t vote for him. Someone that puts the interests of people in Mexico over the people in the United States isn’t likely to be an American politician for very long.

    observer: Did you ever pause to question whether human beings really are as selfish as you believe or if it is more complicated than that?

    I just tell you want I see around me. People are very complicated. However, once people organize into interest groups, their behavior is much simpler. For example, politicians tend to be interested in power, since people who aren’t interested in power, don’t become politicians.

    One thing I do see a lot is that people don’t like to admit to themselves how selfish they really are so invent all sorts of rationalizations that explain their behaviors.

  • Posted by Twofish

    observer: They have to do no such thing. It takes a lot of suffering for people to rise up and topple governments. Inertia is a very strong force. All the PRC needs to do is to make sure too many people are not starving to death.

    No. Nationalism and public expectations in China are too strong. If the government can’t give the people jobs and money, then people will sweep the party aside and find someone that will.

    Not that I think this is a bad thing. It’s good to have scared politicians.

  • Posted by observer

    Twofish: True, but once you organize people into interest groups and political systems, these groups have dynamics that are independent of the individuals. [...] People can be very selfless toward a group that they feel to be a part of.

    The whole category of selfishness and altruism is completely bogus. It only works in a very small number of situations e.g. when your life is immediately endangered etc. And in financial markets because of the self-selecting group of people who work there. These are exceptions. In normal cases people’s motivations are complex and not easily categorized.

    If you want you can try to rescue the “selfish human nature” worldview by adding group selfishness etc but that is like trying to save a geocentric world view by adding epicycles. Ultimately it is more honest to accept that simplistic notions of people driven only by various types of selfish motives are false.

  • Posted by observer

    Twofish: But it’s likely that the President of the United States will care more about people in California than people in Vancouver since people in Vancouver don’t vote for him. Someone that puts the interests of people in Mexico over the people in the United States isn’t likely to be an American politician for very long.

    Yes and that’s because we live in a political system of nation-states. But this is a historical accident, and there is nothing inevitable or natural about it. There is no reason a thinking person should be tyrannized by artificial lines drawn on maps.

    Twofish: I just tell you want I see around me. People are very complicated. However, once people organize into interest groups, their behavior is much simpler. [...] One thing I do see a lot is that people don’t like to admit to themselves how selfish they really are so invent all sorts of rationalizations that explain their behaviors.

    As I commented before, it is not particularly helpful to view everything in artificial categories of “selfish” and “selfless”.

  • Posted by observer

    Twofish: Nationalism and public expectations in China are too strong. If the government can’t give the people jobs and money, then people will sweep the party aside and find someone that will.

    Maybe you are right. But remember this is the regime that survived the Great Leap Forward.

  • Posted by lark

    Of course if protectionist measures were put into place over a weekend, supply chains would fall apart.

    If they were phased in, with a scheduling algorithm which adjusted according to currency rates, Chinese export subsidies, and more, not so much.

    Economics is like comedy: timing is everything.

    A question has moved to the fore, in the wake of the wreckage caused by ‘free market’ ideologues and rightwing dominance: where are American jobs going to come from? DeLong has estimated on his blog that America will need 8 million jobs to make up for losses in real estate, finance, construction, etc.

    I think Chinese protestations that protectionism is not in America’s interest will fall on deaf ears, if the Chinese persist in export subsidies, currency manipulation, and the like.

    Americans have long argued that the Chinese economy should rely more on domestic consumption and less on exports. That’s been met with a shrug.

  • Posted by lark

    If I were in the Chinese govt, I would study the Great Depression carefully. America was in the ‘Chinese position’, a current account surplus country and export platform to the world.

    Our GDP in the G.D. fell on the order of 40%.
    Britain, on the other hand, in the ‘American postion’, had a GDP decline in the G.D. of less than 10%.

    The coming storm may well be more devastating for China then for the USA.

  • Posted by Twofish

    observer responds: Yes and that’s because we live in a political system of nation-states. But this is a historical accident, and there is nothing inevitable or natural about it. There is no reason a thinking person should be tyrannized by artificial lines drawn on maps.

    Those lines are indeed historical accidents, and there is nothing natural about nation-states, but if you ignore those lines, you are ignoring the realities of power, and ignoring realities is rarely a good way of changing things.

    Also once you have a group of people in power they tend to stay in power by telling stories that keep them in power.

    observer: And in financial markets because of the self-selecting group of people who work there. These are exceptions. In normal cases people’s motivations are complex and not easily categorized.

    We are doing political and economic analysis here, so a general discussion on how people behave is not terribly relevant. When people act in political or economic systems they don’t act “normally” and political and economic leaders certainly aren’t “normal” people.

    observer: Ultimately it is more honest to accept that simplistic notions of people driven only by various types of selfish motives are false.

    If you aren’t selfish and ruthless, you just aren’t going to find yourself in a position of economic or political power or stay there for very long. I know a lot of nice, kind, selfless people, but they are just not going to be running a government, a political party, or a corporation, precisely because they are nice, kind, selfless people that are going to get knocked over the first time someone ruthless and selfish comes around.

    The problem with socialistic systems is that everyone was supposed to be such nice kind gentle people, they ended up victims to blood thristy sociopaths. What you want are lots of selfish, ruthless people fighting each other so that no one gets too powerful.

  • Posted by Twofish

    lark: If they were phased in, with a scheduling algorithm which adjusted according to currency rates, Chinese export subsidies, and more, not so much.

    Nothing will go according to schedule, and you still need to explain how this is going to save jobs *right now*.

    lark: I think Chinese protestations that protectionism is not in America’s interest will fall on deaf ears, if the Chinese persist in export subsidies, currency manipulation, and the like.

    It’s not Chinese protests that you have to worry about, it’s American protests. I haven’t seen anyone explain how protectionism is going to save American jobs. How is protectionism going to save General Motors? And what about all of the workers that work in Honda plants? People that work in Best Buy? Longshoremen? Walmart?

    lark: Americans have long argued that the Chinese economy should rely more on domestic consumption and less on exports. That’s been met with a shrug.

    That’s because the Chinese concluded that Americans had no idea what they were talking about, and that seems to me to have been proven correct by recent events.

    I’m not against protectionism per se, and if someone can come up with a good argument as to how massive tariffs on Chinese goods will generate US jobs, they should make it. If it ends up hurting China then you get US and Chinese negotiators in a room screaming at each other.

    One issue here is that protectionism has been traditionally billed as a way to prevent job losses, and people aren’t losing their jobs right now because they are being shipped to China. To win this argument you have to explain how protectionism will *create* jobs, and again no one I know has made that case.

  • Posted by observer

    Twofish: Those lines are indeed historical accidents, and there is nothing natural about nation-states, but if you ignore those lines, you are ignoring the realities of power, and ignoring realities is rarely a good way of changing things.

    I didn’t say ignore those lines. I said there is no reason to be tyrannized by them.

    Twofish: If you aren’t selfish and ruthless, you just aren’t going to find yourself in a position of economic or political power or stay there for very long. I know a lot of nice, kind, selfless people, but they are just not going to be running a government..

    As I said before the whole categorization is completely bogus. Outside the NYSE, real people are neither “selfish” nor “selfless”. Or if you prefer they are usually both.

    Such simplistic assumptions about behavior won’t help you understand the world. It’ll help you defend ideological positions though.

  • Posted by MMcC

    From travel here, it appears that China’s infrastructure requires substantial investment – particularly outside the Shanghai/Beijing corridor – before people living elsewhere are going to have the kind of access to economic growth that stimulates consumer income and spending. Given the size of the place, it can’t be all that surprising that the government’s reflex is more infrastructure spending when some sort of stimulus is required…

  • Posted by Rien Huizer

    2fish, observer

    Good to see a discussion on behavioral economics here. I guss it all depends on what you want to use this reasining for. Mainstream theoretical economics (the kind some people call neoclassical when it is used ideologically by policimakers who ignore its necessarily reductionist nature) is a wonderful axiomatic structure and an excellent starting point for enquiry. The dichotomy mentioned in your discussion is also reductionist and not very useful in discussions on policy. Of course very few people are pathologically selfish and very few people are saintly altruistic. I think that twosif’s point that groups (where preferences are developed in ways members would consider “rational” (not in the technical sense, but in the sense that informed rational argument plays a role, even when autocrats state their preferences, because even an autocrat needs to delegate some implementation work) tend to adopt rational (and then usually “selfish”) policies because it is much easier to convince or impose behavior that “serves the interests (as defined ad hoc)” than forces the goup to make sacrifices that are perceived as not to benefit the members or even the leadership itself.
    Despite the fact that the rational choice movement in theoretical politics has basically failed to produce the kind of influence over applied politics that its economics cousin had over applied economics, there is no real alternative for what often is called “realism”. What 2fish attributes to the players in the US-China relationship (which contains elements of conflict as well as cooperation, a “marriage de raison”) seems to be right. The consequence is, of course that China will not give in to US demands and vice versa, as long as neither exceeds the boundaries of the marriage. Most threats and little provocations that we can observe are cheap in terns of US-China relationship (i.e. low cost) and quite valuable politically (high benefit) domstically. I guess the tax rebate is timely and will silence some of the criticism in the Pearl Delta. It also sets up the game, in a probing way, with the incoming adminsitration: will they ignore this (probably not if a moderate observer like Brad is unhappy about it) and, more interestingly, will the incoming administration find a response that prevents further erosion of the position re the CNY/USD rate, AND avoids overt protectionist (very expensive) policies as some Democratic groups may desire (very little benefit).

  • Posted by Twofish

    I’m try to be extremely practical in my views on human behavior. I don’t care too much about making ideological points as I do about predicting and influencing human behavior so that I can figure out what I should do to get what I want. In politics, people *do* behave rather simply. If you tell me about a Congressman’s district, I can pretty much figure out how he is going to vote on most issues. You then end up with the job of figuring out what to say to get as many people on your side as possible, and as few people on the other side as possible.

    I find it very unlikely that Obama is going to undertake much in the way of protectionism. He has assembled a huge coalition of very different people, and within his coalition of Wall Street bankers, Mid-West auto workers, California high tech workers, and Latino migrant farmers, you have lots of people that are very pro-globalization, pro-trade, and no one that I can see that would obviously benefit from tariffs or trade restrictions.

    It’s really important to realize how much the economy has changed since the 1980′s, and Obama won because he is speaking to the present and future rather than to the past. For example, in talking about jobs, jobs, jobs, Obama is not only talking to Michigan auto workers but also to Wall Street investment bankers that have been losing jobs by the tens of thousands in the last year. He has the huge and difficult job of keeping people in his coalition happy, and I don’t see how any sort of trade restrictions or China bashing is going to fit in any of this.

  • Posted by Rien Huizer

    Twofish,

    To your final paragraph:

    That means that you do not expect Obama to interact strategically when China does so? Suppose China decided to do something contrary to long standing (rational or not) demand like CNY/USD appreciation by announcing a steady depreciation back to 2004 levels (whether that would be fasible or not). Would the US remain mute?

  • Posted by sun bin

    you guys seem to have missed twofish’s point. i think what is fundamental and essential here is the issue of decentralized decision making (to the level of country) and that of free economy capitalism (that china been one self-tending free enterprise), and that china (and everybody else) looks after its own interest the best it could means the world will be less of a mess in total

    departure from this risk getting yourself into a stalinistic world economy

    http://sun-bin.blogspot.com/2008/11/china-unhelpful.html

  • Posted by satish

    2fish-if Usa undertakes a massive fiscal stimulus to create jobs which gives no retruns
    how will us pay its debt then in the future.

    i am just curious and i cant imagine how will they repay them back.

  • Posted by Anders

    There is an issue that should be adressed too and that is the demographic of China. The country will slowly (2015 and onwards)turn into a nation of pensioners as they retire in their early 40´ies and 50´ies. One could argue that China is “saving” to become a nation with a large group of pensioners that don’t produce and only consume. The US has a long tradition of immigration China does not and the Chinese one-child policy is still going strong so the Chinese demographics pattern is very difficult to change. I think this will help rebalance the world economy in the long run no matter if the Chinese goverment whats it or not and pensioners are not that revolutionary anyway so social uprising might not be the first choice in the not so distant Chinese future.
    This is no comfort now, but might be a reason why the Chinese goverment is not too keen on slowly growth just yet

  • Posted by df

    Japan and Germany are now in recession. Japan and Germandy are the models that China has chose to follow.

    CHina is sure to blame, so are Japan and germany.

    In fact, nothing has changed since the demise of the gold exchange standards and the good ol keynesian times :
    The blame is always put on the deficit countries even though it turns out surplus countries do absolutely nothing to end their surpluses.

    China will hit recession soon and that will serve it well.

    All in all, Europe might be the only continent relatively in balance. THe only problem is : will it stand united ?

    UK SPain Ireland have had the most massive housing booms and deficits. Germany has been the surplus country for long and has had no boom since the early 90′s …
    I kow little about eastern europe. I bet they must rely on exports, though no proof.

    I have long said China was doing nothing to rebalance its econoomy, just as the USA were doing nothing to fight preventively the coming debt deflation crisis.

    Everything happening now is just sad because it was self evident that it would happen this way, Data was there everywhere to tell the US and Chinese leaders beware of debt deflation crisis, rebalance your respective economies. But no one dared move first.
    And there we are.

    Collectively humans do not seem bright.

  • Posted by patfla

    > China has just increased its tax rebates
    > on exports

    This, along with rumors that the Chinese will again allow (engineer) the devaluation of the RMB, are more than reminiscent of the beggar-thy-neighbor policies enacted in the early thirties that allowed (ensured that) the Great Depression would become ‘Great’.

    For one (at that earlier time), the competitive withdrawals from gold convertibility. France was one of the first to do so and France (like other ‘early adopters’) saw output rise again sooner than late adopters. The US was one of the last countries to go off the gold standard.

    We’re back again (squarely) at a situation where production has grown enormously (China [and several other countries in E Asia]) and now vastly exceeds global demand (given that the debt-levitating US consumer has fallen back to earth).

    There was no orderly way to unwind this inequality at the time of the Great Depression. And so one of the most common of the traditional solutions imposed itself: war.