Krugman on Deficit Spending and the Chinese

by Don Boudreaux on November 23, 2009

in Balance of Payments, Debt and Deficits, Stimulus, Trade

Here’s a letter that I sent few days ago to the New York Times:

Paul Krugman asserts that Beijing increases global unemployment by “siphoning much-needed demand away from the rest of the world into the pockets of artificially competitive Chinese exporters” (“World Out of Balance,” Nov. 16).  This nefarious outcome allegedly results from the Chinese depressing the value of the renminbi “by trading renminbi for dollars, which they have accumulated in vast quantities.”

Not quite.  The Chinese don’t hold lots of actual dollars; they hold lots of dollar-denominated securities.  This distinction is significant, and should be a relief for Mr. Krugman given his current fetish for massive deficit spending.  You see, when the Chinese buy dollar-denominated securities they return actual dollars to circulation. Because the largest seller of these securities is the U.S. government (which sells these securities to fund its massive deficit spending), many of the actual dollars that Mr. Krugman believes Uncle Sam must spend to save the economy come from the Chinese.

Would Mr. Krugman have the Chinese dramatically reduce their purchases of U.S. Treasuries?  His column today suggests that the answer is “yes” – but his frequent calls for more deficit spending suggest that the answer is “no.”  Awfully confusing.

Sincerely,
Donald J. Boudreaux

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  • Jacob Sulzbach
    After lurking around this wonderful blog for about a month now, I'm finally going to post a comment. Before I do I would like to commend you Don, for your exceptional ability to communicate in such a straightforward manner and get to the point in a hurry.

    My own interpretation of the thrust of Krugman's remarks in his article is that he is attempting to provide two things for the Obama administration: 1) An intellectual underpinning for the plea Obama has made openly for the Chinese to save less of America's money and buy more of what America produces with the exchange they generate from their export trade with the U.S., and 2. A scapegoat to hold accountable when the inevitable -- forgive me but I've got to believe even Krugman knows the real trouble we're in because of our debt -- economic consequences of nightmarish deficit spending will be driven home to an American public who will look to Washington first when they assign blame.

    I read the text of a speech Obama gave at about the time of the Pittsburgh summit in which he showed the very finest of coffee klatsch discourse in outlining the future direction of a new world economy in which the U.S. would learn to save as Asian consumption would rise in turn and, by an implied conclusion which only seemed to sit there without being stated, an eventual balance within the world economy would be achieved. What vision! The ability to see the future writ large in economic mega-trends and to communicate that understanding in such statesmanlike fashion. But the unavoidable conclusion is still that it will all work out once someone else gets their house in order. There was almost no mention of the need to address our own fiscal shortcomings.

    So here the U.S. is standing in front of the Chinese with our hats in our hands hoping they will continue to finance our runaway spending while simultaneously preparing to hold them accountable for the social outcomes we create ourselves. That is the logic I see in Krugman's article.

    I'll be back Don. Don't stop.
  • Barbarossa
    Our "runaway spending" doesn't matter, though, since it's merely an accounting identity. And our fiscal deficit has no bearing on our current-account deficit. So fret not, mein Freund.
  • Curious
    Our runaway spending does matter, because it is a form of redistribution of wealth.

    Of course the government doesn't need the Chinese or anybody else to "finance" it, but that's another story.
  • mac01
    It is also fair to say that the rest of the world's consumers benefit from the articificially low exchange rate because we are able to buy cheap Chinese goods.
  • Griff
    A good overview of the situation was provided by Saturday Night Live this week. http://www.youtube.com/watch?v=01vjlJZRw5Q
  • Curious
    The government spends first (the potential buyers of treasuries have to get dollars before they can spend them on treasuries) and sells treasuries second.

    Thus the government doesn't need to sell any treasuries, in order to spend.

    As far as the Chinese currency I agree with Don.
    Keeping the yuan pegged to the dollar is identical to China using the dollar as their currency. If that makes them artificially competitive, why not accuse, let's say, New Jersey of the same thing?
  • Krugman not being completely honest? Say it ain't so Don!

    And as usual, Kurgman left just enough wiggle room to cry out "Out of context" when someone calls him on his BS.
  • Mattyoung
    I think Krugman is consistent but wrong. He has consistently told public audiences that the dollar should no longer be a reserve currency. He has consistently advocated some slightly reckless easing to weaken the dollar. He has indicated that domestic savings should be the source of deficit spending. Her has maintained the nihilist line about currency.
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