Here’s a letter that I sent to the New York Times – the third letter in response to yesterday’s Krugman column:
Paul Krugman notes that Chinese Prime Minister Wen Jiabao “accused other nations of doing what China actually does, seeking to weaken their currencies ‘just for the purposes of increasing their own exports’” (“Taking on China,” March 15). This charge of hypocrisy is likely justified.
Nevertheless, why should we non-Chinese complain about this Chinese policy? We get more for less.
Does Prof. Krugman complain about companies such as Apple and 3M working diligently “just for the purposes of increasing their own exports” – that is, sales? Such efforts might or might not prove to be good for these companies, but surely those of us who are simply customers of Apple and 3M (and of their competitors) benefit unambiguously.
Sincerely,
Donald J. Boudreaux
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So Don – would you support a deliberate strong dollar policy? Do you want the Treasury to intervene in currency markets to keep the dollar strong? I can't understand why you're so comfortable with a market intervention that makes our imports cheaper and exports more expensive when the Chinese do it, but (presumably) you'd be opposed by the same policy if we did it.
Daniel: What do you mean by 'intervene in currency markets to keep the dollar strong'?
If you mean 'fix the monetary base' – that is, a policy of sound money, then, yes, I'm all in favor of that means of keeping the dollar strong.
Active deflationary policy, however, would be lousy policy – not because of any consequences such a policy would have on international trade but because it would screw up prices and, hence, all markets.
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, in Krugman's mind we're not customers of the Chinese, but competitors to them. He's half right.
If Apple got a government subsidy that its competitors did not receive, wouldn't the resulting advantage be especially undesirable for Apple's competitors?
I mean, it's one thing to say “the Chinese people subsidize our consumption” – in my analogy, that's like saying that income-tax-payers subsidize my consumption of Apple products (assuming I didn't pay income tax). If I'm just a customer of Apple, great. But if I'm a competitor, not so great.
Americans are both customers and competitors of the Chinese, and so we can both enjoy *and* decry subsidized prices.
Or at least, that makes sense to me.
Hmmmm Sir Don,
Are you actually suggesting that we all draw back and look at it from an individual level, whereby when my company produces goods to sell and they actually go out of the warehouse door it is an act of exporting? And, you suggest I do that for profit? Oh God forbid! And, I make the best product I can in order to increase my exports and sales? Lord God almighty, you are a heretic!
Yes, I understand your post was about more than that. But, that is what jumped out at me foremost.
LOL, I love it, and it is why I came to read, learn, and stay for more. In general, what I read here matches, or is compatible with, what I live on my street level. you guys talk over my head a lot, but once in awhile I catch on.
Dear Don,
I think Krugman's vision is very useful for teaching economics since it provides us with compelling examples of the delusions of some economists… These examples are appropriate counterexamples to test their fallacies.
You avoid the question here. Fixing the price of some commodity or basket of commodities, as a monetary policy, is worth discussing, but Daniel clearly isn't discussing it. Chinese monetary policy doesn't operate this way. It buys dollars with Chinese currency below a market price, thus effectively giving Chinese currency away to U.S. citizens buying Chinese imports. Equivalently, it gives U.S. citizens discount coupons redeemable anywhere in China and taxes its own citizens to finance the discounts.
You understand this policy, because you describe it correctly as a freebie for U.S. consumers. I agree that it's a freebie for U.S. consumers, but how could this centrally authorized freebie not distort market prices? It does distort markets, doesn't it? Maybe the distortions look good to me now, but what happens when the freebies stop? Doesn't the cessation of price manipulation lead to an economic disequilibrium? What happens then?
If I want to borrow cheaply to expand my business, I might like cheap credit from the Fed too, for as long as it lasts, but at some point, the Fed recognizes that cheap credit moves too much resource organization too far down the production chain, so it stops the flow. Then I realize that I've invested poorly at the lower rate. That's the Austrian theory, right?
So if I buy lots of Chinese goods, if I build a retail store selling Chinese imports, if I build a whole chain of these stories, if I build a supply chain to keep the stores stocked, only ultimately to find the Chinese withdrawing their export subsidies, what happens to me then?
I hear, incredibly, that the Chinese will never stop subsidizing exports to the U.S., because they “need” U.S. consumers to buy their exports. This reasoning seems ridiculous on its face. Why can't the Chinese consume their own produce? If they need something from us in exchange for it, that's one thing, but if they're only buying entitlement to our tax revenue with their dollar surplus, won't they stop when they believe that we've over-promised the tax revenue?
I think the Chinese should stop buying entitlement to U.S. tax revenue, right now. I'm not the least bit willing to pay the taxes needed to finance the mountainous pile of Treasury securities now floating on remarkably low interest rates with no place to go but up. Seriously, I much prefer a Treasury default to the higher taxes, and I'll be doing everything I can in the future, which admittedly isn't much, to see the default rather than the higher taxes.
If the Chinese want my advice, they should stop lending me money, 'cause I'm the deadbeat from hell, and I won't think twice about breaking every promise my Congressman ever made to them.
“To found a great empire for the sole purpose of raising up a people of customers may at first sight appear a project fit only for a nation of shopkeepers. It is, however, a project altogether unfit for a nation of shopkeepers; but extremely fit for a nation whose government is influenced by shopkeepers.” — Adam Smith
Mr. Boudreaux, You don't want to criticize the government of the People's Republic of China for trying to dominate international industries. You are quiet on the subject of intellectual property theft in China; Eg: business software, music, movie dvds etc. (I think)
What about Google in China? No, not the hacking of the Google servers to gain knowledge of every user. Specifically, the situation of Baidu taking dominance in the Chinese search “market” by allowing users to “deep link” sites for the purpose of pirating music. Is this something to ignore? Is this something to condemn? If condemned, then what action should be taken?
Deep Link article: http://www.theregister.co.uk/2008/09/13/baidu_i...
Whats with this ever changing comments protocol? I went from old hand to nicky new guy?
What do you want from us, or what does this disqus thing want from us? It's like the freaking census.
I will not tell disqus how many toilets I have, period. Thank you.
Prof. Boudreaux,
You wrote,
“Such efforts might or might not prove to be good for these companies, but surely those of us who are simply customers of Apple and 3M (and of their competitors) benefit unambiguously.
But what is not good for the suppliers cannot be good for the consumers, for profit is the compass of the market, and, as Martin Brock said, above, “profit measures the value added to productive inputs.”
What is unprofitable for the suppliers is “unprofitable” for the consumers.
DG Lesvic: “What is unprofitable for the suppliers is “unprofitable” for the consumers.”
Can you explain what this means?
Suppose Apple and 3M make incredibly poor sourcing decisions – decisions which make them profitable in the short run but ultimately cause them to fail. Aren't consumers better off in the long run when poor decision makers are forced to exit a market?
For what it's worth, I cannot believe Walmart, Apple, and 3M are making poor sourcing decisions when they take advantage of lower production costs in Asia. These are very smart companies. I'm confident they weighed the risks before they make important sourcing decisions. Martin Brock's question:
“… only ultimately to find the Chinese withdrawing their export subsidies, what happens to me then?”
seems a little naive to me. Successful giant global corporations such as Apple, 3M, and Walmart do not get regularly get blindsided, as he suggests they might. Further, the export subsidies China may be providing are a very small part of the retail prices paid by the customers of these companies.
John,
The fact that what was a good decision for the short run turned out to be a bad decision for the long run is a conflict between the short and the long run, not between suppliers and consumers.
They both profit by the decision in the short run and suffer from it in the long run.
The harmony of interests between suppliers and consumers is not fully understood even in the Austrian School.
For my explanation of it, see
http://econotrashtalk.org/#The_Myth_of_the_Admi...
DG Lesvic: “What is unprofitable for the suppliers is “unprofitable” for the consumers.”
Can you explain what this means?
Suppose Apple and 3M make incredibly poor sourcing decisions – decisions which make them profitable in the short run but ultimately cause them to fail. Aren't consumers better off in the long run when poor decision makers are forced to exit a market?
For what it's worth, I cannot believe Walmart, Apple, and 3M are making poor sourcing decisions when they take advantage of lower production costs in Asia. These are very smart companies. I'm confident they weighed the risks before they make important sourcing decisions. Martin Brock's question:
“… only ultimately to find the Chinese withdrawing their export subsidies, what happens to me then?”
seems a little naive to me. Successful giant global corporations such as Apple, 3M, and Walmart do not get regularly get blindsided, as he suggests they might. Further, the export subsidies China may be providing are a very small part of the retail prices paid by the customers of these companies.
John,
The fact that what was a good decision for the short run turned out to be a bad decision for the long run is a conflict between the short and the long run, not between suppliers and consumers.
They both profit by the decision in the short run and suffer from it in the long run.
The harmony of interests between suppliers and consumers is not fully understood even in the Austrian School.
For my explanation of it, see
http://econotrashtalk.org/#The_Myth_of_the_Admi...
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