Here’s a letter to the New York Times:
Paul Krugman accuses the Chinese government of harming America by (allegedly) keeping the value of the yuan artificially low (“Taking on China,” March 15). Because a low yuan allows Americans to get more for less from China, Prof. Krugman believes that the resulting reduced demand for American-made products promotes higher unemployment in the U.S.
Given Prof. Krugman’s beliefs, he should aim his mighty rhetorical artillery at a phenomenon whose impact on American labor is vastly greater than that of Beijing’s monetary policy – namely, applied science. Applied science – such as software engineering and industrial R&D – do far more than any low-priced foreign currency can ever hope to do to destroy American jobs.
If Chinese subsidization of U.S. consumption really is a problem, then labor-saving technologies are also a problem – but one immeasurably larger and more ominous than undervalued foreign currencies.
Sincerely,
Donald J. Boudreaux
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Is the Chinese government able to keep the yuan “artificially low” without causing inflation in the prices of Chinese-made goods and services? If so, how?
These seem fundamentally different – one is a distortionary state intervention into the market, the other is an advance in productivity and technology. Why do you think the reaction should be comparable?
The reason Krugman wants a tariff is not because it's a state intervention; it is because of the (alleged) effects of said state intervention.
So, if the outcome (lower prices, lost American jobs) is the problem, why should it matter what causes the outcome?
Chinese currency manipulation = lower prices, lost jobs
Improvement in technology = lower prices, lost jobs.
Invisible juju in the ocean = lower prices, lost jobs
Now tell me – why should we just worry about (1) and not (2) and (3)?
Because technology introduces temporary dislocations – overall it makes the economy more efficient. Manipulating currencies doesn't make the economy more efficient, and the job losses aren't dislocations over the course of restructuring. That isn't to say that I support his point about the surcharge (he doesn't even to be strongly supporting it – just throwing the prospect and possibility out there).
If lower prices and lost jobs are always great, I could turn the logic around and ask you whether you'd support a deliberate, distortionary strong-dollar policy. Would you?
long time reader, first time commenter. i support free trade, but when I am at the proverbial cocktail party, how do I respond to the complaint that jobs are lost because of it? I think one just has to accept it that lost jobs are part of life, but is there anything else that can be said?
Draw their attention to net job gains rather than gross job losses. Of course jobs are lost – they would be lost without free trade too. Sympathy should be directed towards efficient reallocation of resources that are dislocated by free trade – not against free trade itself.
Well, jobs are never lost; to say that they were lost is to assume that they are somehow the property of the holder of the job.
“Job loss” is a well understood term – you're being deliberately combative here. And you're not even being accurate about it.
A pilot may say “we are losing altitude” – does that assume that the pilot and the passengers of the plane own the span of three dimensional space that the plane has just descended through? Of course not. Give me a break, mommsen – please don't bait like this today.
It is in IMHO a rather stupid way to think. I don't “bait.” Do get off your cross.
“Lost jobs” explained: http://www.youtube.com/watch?v=brj2UkUPjCI
No, that was baiting. DK is right in this case; job loss is a well-understood term. Even Don and Russ write on this blog about US government policy that results in unemployment, so DK is arguing that CHINESE gov. policy is doing just that.
Now, I think in general, Don is right about the tariff causing problems in the long run and that we should just let the Chinese suffer the consequences of their own inflation, but does a government have a right to respond when another's failure in policy affects us here at home? I would say yes, sometimes.
I'm not hot for the Krugman prescription, but Don, technological innovation does not cause the type of destabilizing adjustments that a warped balance of payments are capable of, unless of course, you're some Real Business Cycle guy who wrongly believes in the explanation of technological shocks despite the lack of evidence.
So yes, it is prudent to be concerned about balance of payment issues without worrying about the technology and science on which you demand that Krugman focus.
–Pingry
–Pingry
Comparative advantage, whether it be caused by technological differences or the irrational need to give things away, does not hurt the US. The Chinese are who should be complaining.
If you were a Chinese citizen would you support a “deliberate, distortionary” strong-yuan policy right now?
I ask my question not to try to invalidate the distinction you draw between job loss due to currency manipulation and technology shocks, but to question whether there is an objective definition of distortionary monetary policy in a central bank controlled monetary regime.
Disagree with Krugman here. How is it not efficient to buy low? If we buy from the Chinese because the yuan is set low (artificially or not), how is this not a good thing? We, Americans, use our resources efficiently, the Chinese, buy setting the yuan low, are not using their resources efficiently. If that promotes higher unemployment, then so be it, but it will only do so until the new equilibrium is set.
I think Krugman is incensed at the Chinese policy only because the higher unemployment (and decreased tax revenues) hamper his ability to spend more tax revenues.
And I want to be clear I agree with Don on this talk about a tariff. I just don't necessarily agree that their currency manipulation doesn't present a problem.
Actually it wasn't baiting.
This is a completely nonsensical point. It has nothing to do with what Don and I have written.
It's as if Don and I were having, say, a debate about creationism and evolution and then you step in and discuss how gravity does not hurt anyone.
Yes, it's understood that comparative advantage is working in the background, but my point is that while science/technology and trade both tend to reallocate resources, a bloated balance of payments can do so in a very destabilizing way in the shortrun.
I'll admit something here before I take off:
Austrians are always talking about monetary policy distorting the structure of production by artificially manipulating nominal interest rates, resulting in a cascade of errors and liquidation of the malinvestment whose heterogenous capital is not suited for different uses.
Okay, fine, as you know, I am not a fan of ABCT, and we've pretty much beaten this topic to death.
So why then do said Austrians seemingly care less (sometimes practically defend) the actions of a foreign central bank which pretty much engages in the same practices?
After all, you must certainly extend your critique to a country which distorts the so-called “structure of production” by manipulating nominal exchange rates.
Because, whether a central banks targets the overnight nominal rate as its operating target, or the nominal exchange rate, it still intervenes with a chosen nominal anchor.
And in the case of China, they do both! And they can do so by strongly controlling international capital flows.
Anyway, this business of fluctuating interest rates from the Wicksellian real rate, irrespective of source (central bank or commodity standard) is a great argument against the very gold standard which many of Austrians demand.
–Pingry
I don't understand your last point. Can you elaborate?
The Chinese are essentially giving us free stuff based on your argument, right? There will probably be a day when the system of stealing from their population to give to foreign countries will come to a halt, but just as beneficiaries of government welfare systems, there is no incentive for us to bring them to that realization.
I completely concede that there are probably mis-allocations going on in the market, but there is no verifiable way to measure mis-allocation. There are significant factors in favor of moving many levels of production to such a populous country, and as Don as Russ have pointed out American Industrial production continues to expand. There will always be some relatively insignificant factor to blame.
Maybe Krugman should endorse banning Vending Machines? Think how many people are put out of work with Vending Machines……unmanned product distribution, how dreadful.
Don wrote:
“Applied science – such as software engineering and industrial R&D – do far more than any low-priced foreign currency can ever hope to do to destroy American jobs.”
Nonsense. I'm with you danielkuehn. Technological advancements create temporary dislocation in the economy, but most often result in more jobs with higher pay (albeit with higher skill levels required). The professor knows this, but in order to make his strained argument work, he leaves out the part that technology is a net job creator.
Dr. Boudreaux,
This is more of a refutation of a strawman argument. Protectionists don't mind technology because the production stays in the U.S. You need to demonstrate why it doesn't matter when production moves from one country to another to really address their concerns, which certainly can be done.
The professor knows this, but in order to make his strained argument work, he leaves out the part that technology is a net job creator.
So is trade.
If we are able to purchase cheaper goods from overseas, how does it matter to us WHY they are cheaper?
It just leaves more money in our hands to demand other things that are better produced locally.
But you should figure out a more illustrative way to explain it.
Does not the U.S. government engage in currency manipulation to make the dollar stronger or weaker?
I wonder if Krugman also thinks that the Sun is unfairly imposing savings on the Earth's economy and, like Bastiat's candlemakers, would advocate a law requiring the closing of all windows to stimulate our economy.
http://bastiat.org/en/petition.html
Well – I want to be clear I'm not entirely disagreeing with Don's point. The research shows quite conclusively that the too boogey men of populists – immigration and trade – destroy far fewer jobs than technological growth destroys. It definitely kills a lot of jobs. The whole point, though, is that it generates far more jobs than it destroys (not to mention the quality of those new jobs).
And this seems like it could be what you're saying too – I just want to make sure that's clear.
Think of it this way – would you support it if the U.S. government intervened in the market to have a strong dollar policy?
If not, why not? It's effectively the same as a cheap yuan, isn't it?
So would you support market interventions to keep the dollar strong? If not, why not? It's no different than a cheap yuan.
UNLIKE the technological change argument, this comparison does make sense. This is why it's so nuts to always hear Don arguing this.
Technological advancements create temporary dislocation in the economy, but most often result in more jobs with higher pay (albeit with higher skill levels required).
Access to low-wage manual labor in foreign countries creates temporary dislocation in the economy, but most often results in more jobs with higher pay, albeit with higher skill levels required.
China is giving us goods at prices that are lower than it would cost to make them domestically. If we paid people to make these products domestically, we would have higher costs.
That's a transfer of wealth to us, that frees up people and resources for education, technology, scientific research, etc.
Would you have us close the shutters and block out the sun by force of law, so that the candle makers would have more business? Placing tariffs on trade with China is no different.
To quote Bastiat: When a product — coal, iron, wheat, or textiles — comes to us from abroad, and when we can acquire it for less labour than if we produced it ourselves, the difference is a gratuitous gift that is conferred up on us.
What jobs are lost? Force them to be specific. Garment making? Molding plastic utensils? Making terrible motorcycles? These are the most tedious, most execrably boring jobs that anyone could ask for. Let China have them. Let's train our kids to be scientists, engineers, architects, artists, designers, managers, and leaders. Accepting the gifts of international trade means fewer Americans cursed to a life of drudgery.
Dang it MYSELF, you beat me to the punch.
I don't support such interventions any more than I would advise people to hand all their money away, but if someone insisted on doing so, I would not be opposed to other people accepting the gift.
I don't support having an agency that can “make the dollar strong” because that implies an agency that can make the dollar weak.
I'd rather the value of the currency reflect the strength of the economy rather than being a product of economic strategy.
Love that oceanic juju! Good shot, sir!
Please explain to me how a “deliberate, distortionary strong-dollar policy” would create lower prices. Where would you get the wealth to defend the dollar/create a stronger dollar?
Also, “Manipulating currencies doesn't make the economy more efficient” – sure it does. If you give me $10,000 today, sure it makes me more efficient (I made $10,000 more today than I did yesterday).
So you wouldn't want your government giving your dollars away, but you'd eagerly accept money taken from the Chinese populace by its government?
I'm not even a libertarian and that sounds bizarre to me.
There you go, Sam, plain, succinct, and dead on. Why the hell is that so hard for people to understand (rhetorical question)?
If you want me to speak on behalf of the Chinese people, then I advise they petition their government to refrain from currency manipulation, but I am not in that position. I'm not even in much of a position to advise my government in that regard.
What more can I say?
I advise against currency manipulation, but if China's going to inflate their currency, why should Americans refuse any benefit that arises from it?
I'm not sure what you are advocating. Are you suggesting that because the Chinese government is screwing the Chinese people, then our government should screw screw us to compensate?
I get you. I think we're both aligned on the impact of technology on jobs. I'm skeptical on Don's ultimate point, but I respect everyone who sees more merit in it than myself. I had to point out the flaw in Don's letter where he says that technology kills jobs period. If it were true, given the advancements of the last 50 or 100 years, we would be at 99.9% unemployment. This is not how the world works and he knows it.
I would favor the “where would we be without such job losses in history” counter, since without advances, we'd need more people doing things like working switchboards, which would drive up the costs so fewer people could afford telephones, and working in agriculture (90% did in Washington's time), etc. Advances made things more affordable, and in an environment where more things are more affordable, the lower overhead makes more different jobs possible.
I think you shift the goal post here. Lacking any intervention, whatever monetary system used is inherently “strong” compared to our current standards.
We still own the fruits of most of that production.
Well surely it's a complicated issue but right off Don compares actual increases in productivity (Silicon Valley) with trade policy that does NOT increase productivity (shipping capitol overseas to bypass cost production externalizes and taking advantage of communist workers). Basically Don supports policy that is an advantage to him but not for many American workers and is the equivalent of intergenerational theft.
But there is no need for me to make an argument. Don's defending policies that have brought the global economy to its knees. And he keeps defending it using flawed logic.
Stephen,
I have to disagree. Protectionists, i.e. people that think the economy's purpose is to create jobs love to protest against technology.
Unions fought against installation of robotics in auto plants. People hate Wal-Mart when they use supply chain technology and drive small inefficient retailers out of business.
It is just much harder to get the general population mad at a CNC machine. It is easy to blame our problems on the latest “them” (Japan, China, Mexico…)
I do not know why I am trying but here is a simple question.
What is the difference in your mind between?
1. a robot that is capable of doing everything that a US worker can do and does it for $1 per hour.
2. a worker that is capable of doing everything that a US worker can do and does it for $1 per hour.
*Assume because it is true that the worker in option 2 is happy to make $1 per hour because it is 10 times more than he/she could make back on the family farm.
Well surely it's a complicated issue but right off Don compares actual increases in productivity (Silicon Valley) with trade policy that does NOT increase productivity (shipping capitol overseas to bypass cost production externalizes and taking advantage of communist workers). Basically Don supports policy that is an advantage to him but not for many American workers and is the equivalent of intergenerational theft.
But there is no need for me to make an argument. Don's defending policies that have brought the global economy to its knees. And he keeps defending it using flawed logic.
Stephen,
I have to disagree. Protectionists, i.e. people that think the economy's purpose is to create jobs love to protest against technology.
Unions fought against installation of robotics in auto plants. People hate Wal-Mart when they use supply chain technology and drive small inefficient retailers out of business.
It is just much harder to get the general population mad at a CNC machine. It is easy to blame our problems on the latest “them” (Japan, China, Mexico…)
I do not know why I am trying but here is a simple question.
What is the difference in your mind between?
1. a robot that is capable of doing everything that a US worker can do and does it for $1 per hour.
2. a worker that is capable of doing everything that a US worker can do and does it for $1 per hour.
*Assume because it is true that the worker in option 2 is happy to make $1 per hour because it is 10 times more than he/she could make back on the family farm.
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