Open Letter to Robert Samuelson

by Don Boudreaux on October 8, 2011

in Myths and Fallacies, Seen and Unseen, Subsidies, Trade

Mr. Robert Samuelson, Columnist
Washington Post
Washington, DC

Dear Mr. Samuelson:

You argue that we Americans are harmed by foreign subsidies that lower the prices of our imports (“Our one-sided trade war with China,” Oct. 7).  But why?  Why are we harmed by these lower-priced imports if (as I know you agree) we benefit from imports whose prices are lowered by natural market forces?

In both cases, some U.S. workers lose jobs.  And in both cases, not only does Americans’ cost of living fall, but, also, opportunities are thereby opened in America for the creation of new industries and new opportunities that would otherwise be economically out of reach.  In America, absolutely nothing about jobs lost to imports whose prices are made lower by foreign subsidies distinguishes them from jobs lost to imports whose prices are made lower by natural market forces.

If you’re skeptical of my claim, ask first: Would you oppose the successful private efforts of a Chinese physician to invent an inexpensive pill that safely and completely cures people of cancer?  I’m sure not, despite the fact that such a pill would destroy many American jobs – from those of physicians to hospital orderlies.  Now ask, would you oppose the successful efforts of the Chinese government to subsidize the invention and production of such a pill for export to America?

The logic of your position is that such subsidies would hurt Americans and, therefore, Uncle Sam should retaliate with measures to protect us from the scourge of such a low-priced cancer-curing pill.

But honestly, would Americans really be made better off by retaliatory tariffs that prevent us from buying this pill – or that force up the price of this pill to levels sufficient to protect the jobs of oncology physicians, nurses, and other health-care workers?  If you (rightly) suspect that the answer is no, then you should realize that your case for retaliatory trade restrictions against whatever goods Beijing might now subsidize for export is without merit.

I attach, fyi, a just-published paper of mine that answers in the negative the question “do foreign subsidies justify retaliatory protectionist measures?”

Sincerely,
Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA 22030

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{ 93 comments }

Kirby October 8, 2011 at 5:23 pm

Don, my father put forth an interesting point about China: When they buy stock in American companies, they control in some measure the decision-making of those companies, and we don’t want China to control large parts of American industries, or else we would be vulnerable to Chinese imperialism and a host of other bad things that would arise.

Don Boudreaux October 8, 2011 at 5:26 pm

That’s indeed an argument, but it is one that is quite distinct from the argument that Samuelson here makes – and, indeed, separate from the argument made by most people now clamoring for Uncle Sam to “punish” the Chinese (by punishing U.S. consumers) for the allegedly low-priced renminbi.

I deal with with your father’s argument in my book and, I’m sure, I’ve dealt with it hear at the Cafe and elsewhere. And I’m sure I’ll address it again.

Andrew_M_Garland October 8, 2011 at 6:39 pm

Buying stock in US companies with assets and businesses in the US is called investing in US productivity. When China does that, they are strengthening the US.

The Chinese would need to own a large fraction of a US company to affect its actions. Then, it would have to mismanage that company to have an ill effect on the US. This would lead to losing Chinese capital and influence. That is not an effective plan.

Competitors to the mismanaged company would step in to provide the services needed. In the unlikely event that China could cause a disruption of a US industry, that would certainly become known. Then, the US based assets are entirely under the control of US agencies, and could be seized from the Chinese criminal enterprise.

China would be (and probably is) better off buying a public relations campaign than buying and ruining US companies.

MWG October 8, 2011 at 8:33 pm

Your father’s major mistake is to group people into collectives. Do you think if individual Chinese investors purchase a US company their one united motive is to ‘glorify’ the Chinese state? Is Chrysler doing the bidding of the italian government? Does Jaguar serve the people of India? How about Mercedes, BMW?

The only difference between the self serving motives of individual US investors and their foreign counterparts (Cninese, German, British, etc…) is place of origin? If you think ‘the Chinese’ are a collective that live to serve the state, you’ve obviously never met anyone from China.

Methinks1776 October 8, 2011 at 5:46 pm

Does anyone else find it weird that the very same people who argue in favour of subsidies for the poor and the middle class also argue that Chinese subsidies hurt America?

vikingvista October 8, 2011 at 5:48 pm

Very good observation.

Stone Glasgow October 9, 2011 at 1:43 am

It’s not really much more unusual than believing that when China inflates its currency, it is invisibly taxing its citizens and making the products they produce cheaper for Americans.

This is like claiming that higher taxes in America will make our industries better able to produce higher quality goods at a lower cost. It is bizarre to claim that taxes and inflation cripple private industry’s attempts to innovate and improve their products (true), and at the same time claim that the same actions in China will have the opposite effect.

Dollars and RMB are just mediums of exchange and units of account. If one prison is using Marlborough and another is using Lucky Strike, a flood of new cigarette money, or additional confiscation and abuse by guards will not improve a prison’s efficiency in creating pruno and shanks made for export to other prisons. A shank is still a shank, the change in value is driven by the relative wealth of traders, not the value of their money.

Exports become more appealing to rich nations not because the value of money has changed, but because the exporting nation has become poorer; its average quality of life reduced, relative to the richer nation. Just as a man brought from 1960 to the present era would be willing to work long hours in exchange for an average modern lifestyle, so too are men living in oppression and poverty in the third world.

vikingvista October 9, 2011 at 5:20 am

Nice cigarette analogy. And you are right, that it makes absolutely no difference whatsoever what the relative nominal values of USD to RMB ever happen to be. However, the means by which those relative values change do affect how resources are distributed, which is what puts a smile on a counterfeiter’s face.

Stone Glasgow October 9, 2011 at 6:45 am

Yep.

Kirby October 8, 2011 at 5:49 pm

Nope. Socialism only works with seclusion, because it causes all products to become uncompetitive with free markets, and GDP and resources flow out of the country to better employers and stronger markets. Also, idiots are idiots. Thus, both beliefs are caused by a third factor.

Don Boudreaux October 8, 2011 at 5:54 pm

Excellent point, Methinks.

Consistency is not among statists’ strong suits.

Kirby October 8, 2011 at 6:01 pm

as far as I understand, it is consistiency: They believe in two principals relevant to this:
When foreign companies are subsidised, they outperform domestic competition
When domestic competition is outperformed, it slowly is forced to cut workers, some of which will then become permanantly unemployed, lowering GDP and increasing unemployment.

From this, subsidizing the poor is equivalent to rehiring people that were fired because of foreign competition, which somehow repairs the ‘damage’ done by subsidized competition. At least, that’s what I make of it.

Economic Freedom October 9, 2011 at 1:51 am

When foreign companies are subsidised, they outperform domestic competition

The US Postal Service is subsidized, yet no one would claim that it “outperforms” FedEx or UPS. In fact, the latter two are doing great, and the USPS is going broke.

When domestic competition is outperformed, it slowly is forced to cut workers, some of which will then become permanantly unemployed, lowering GDP and increasing unemployment.

When an industry becomes uncompetitive with some other industry (foreign or domestic) for any reason — including a simple shift in consumer tastes — employment will certainly shrink in that industry, but investments will shrink in that industry, too, because its uncompetitiveness will reduce its profitability. Question: So where will those investments now go? Answer: they will go into some other, more competitive industry that promises higher profits. As investments in those new competitive industries expand, new businesses in those competitive industries will appear; as new businesses appear, they will hire new employees — including many of those laid off previously.

One thing you definitely do not want to do is to pay people to remain unemployed by giving them subsidies. That will only delay someone who was laid off from the original uncompetitive industry from making the decision to accept work in the new, expanding one.

Greg Webb October 8, 2011 at 7:24 pm

Neither are logic or coherence. My impression is that strengths of statists are personal attacks, non sequiturs, straw man arguments, overly emotional ramblings, and prevarications.

Stone Glasgow October 9, 2011 at 1:20 am

They think subsidies make us richer at the expense of other nations, so if other nations do the same thing they must be hurting us, too.

Jonathan M. F. Catalán October 8, 2011 at 6:05 pm

I feel, though, that this letter only explains half the story. Sure, we are better off with a cheaper pill that cures cancer. However, if such a pill were to threaten to leave the entirety of the United States jobless then the pill would simply be unaffordable. So, your example only follows as long as the range of impact of job loss is low enough to be ignored.

The other half of the story, of course, is what happens to those who become unemployed. And the answer is that they find a new job in the division of labor. The fundamental scarcity that besets our world is that of human labor, and that is because man always has ends to choose between — that is, human action never ceases; there is never a point in time that man ceases to act. As a result, there is always opportunity for man to mix his labor with producers’ goods and the original means of production to produce consumer goods — there is always work to be found.

So, not only does the division of labor give us the benefit of cheaper goods, but it can never leave us without employment, because the range of possible employments is limited only by human creativity.

Don Boudreaux October 8, 2011 at 6:30 pm

Five words: the principle of comparative advantage.

vikingvista October 8, 2011 at 7:32 pm

Why do you think that the current distribution of kinds of employment is the best for either country? Can you picture any change in employment patterns that might be considered good?

Jonathan M. F. Catalán October 8, 2011 at 9:34 pm

Vikingvista,

I don’t understand your questions. Who said that the “distribution of kinds of employment” is “best” for either country? And, how could I envision positive changes in employment “distribution”? I’m not a central planner.

vikingvista October 9, 2011 at 5:16 am

“how could I envision positive changes in employment “distribution”? I’m not a central planner”

Cripes. More evidence that Don was right. It seems the word “distribution” needs to go the way of “forsooth”, “nunnery”, or the dodo bird.

Stone Glasgow October 9, 2011 at 6:53 am

“The pill would simply be unaffordable.”

If machines are tomorrow invented that cost $1 and run on sunlight, duplicating the labor of all humans on earth, are they too expensive?

dsylexic October 9, 2011 at 1:35 am

“However, if such a pill were to threaten to leave the entirety of the United States jobless then the pill would simply be unaffordable.”

given that we are nowhere close to abolishing scarcity/tradeoffs and thereby abrogating the laws of economics,this argument is unnecessary.
cheap imports occur only if the benefits outweigh the losses.this is automatic.there need no be big govt overseer to ensure it is so.

Jonathan M. F. Catalán October 9, 2011 at 10:46 am

Did you read the rest of my post, by any chance? People seem to think I’m arguing against Don — I’m not, I’m adding to the argument what he’s missing.

dsylexic October 9, 2011 at 11:13 am

i get your overall point.and i am aware of your positions from your mises.org articles.so dont get me wrong. i merely singled out an unreasonable point you made

Don Boudreaux October 9, 2011 at 11:18 am

I must here agree with dsylexic (although I genuinely appreciate, Jonathan, your support of my overall point). Barring elimination of scarcity – or barring some process that pushes scarcity into the recesses of human reality so firmly that individuals have their desires satisfied merely by wishing to have their desires satisfied – the principle of comparative advantage guarantees that no such invention could possibly “leave the entirety of the United States jobless.”

Dan J October 9, 2011 at 7:02 am

Excuse me for my ignorance, but your opening paragraph cannot even be entertained save the idea of ‘impact’ on employment. But, not in the sense of any single product or service affecting all industries and causing massive unemployment.
‘impact’ on employment over time throughout many industries due to comparative advantage ( or reassignment) or by all of the huge dynamics of national economies and the worlds economies? Ok.
There is so much going on, that any long term negative impact on one region from another regions innovations is likely to be self inflicted.
Seems silly, even for sake of mental exercises.

Michael E. Marotta October 8, 2011 at 6:39 pm

In 2003-2004, we cared for my wife’s parents before they passed away. They provided us with a home (previously one of their rental properties) and more vehicles than we could drive. Thus, my labor as a freelance writer was subsidized. I could accept lower rates offered by frugal editors and publishers, thus causing unemployment among higher-priced writers who were not subsidized by their in-laws.

So, who gets to stick their nose in my business?

Consider the “govco” model of government and the people of China have agreed to divert profits from one operating division into another wholly-owned subsidiary.

We might point to the history of conglomerates that tried this and failed, but it remains the corporation’s right to try it once more. Otherwise, we would be forced to demand that R&D and even traditional cost centers such as shipping and receiving pay for themselves up front, lest Company A which owns a laboratory or a fleet of trucks, be accused of subsidizing the costs of production.

Of course, government subsidies cross the “power-market” barrier and are ineffecient allocations of resouces. Subsidies are losses. But, OK, if the people of China choose to do this, why get involved in something that is none of your business?

Yes, I understand the nature of China’s government, but, ultimately, every government depends on popular supprt (or popular apathy).

Dan J October 9, 2011 at 7:08 am

Or massive suppression……. China has become very good at the ability to squash uprisings before they get started. Rabble rousers are quickly silenced and the tool of negative reinforcement has been very effective.

Patriotic American October 8, 2011 at 7:06 pm

[Re-shoring] Ugly new term, but apparently the new thing; it refers to companies moving production back to America from China. The fact that such stories are being heard is support for those (including me) demanding action on the renminbi, because they show that there is indeed a margin at which changes in Chinese dollar costs move production back to the United States, and hence that the undervalued renminbi directly costs US jobs, as well as having the indirect effects I’ve written about recently.

http://krugman.blogs.nytimes.com/2011/10/08/re-shoring/

Any idiot knows communist China is fighting for keeps. It’s funny how everyone here sides with the communists.

MWG October 8, 2011 at 8:19 pm

Fighting for keeps of what exactly?

When you go to the grocery store and exchange you hard earned $s for cheap food have you been beat by the grocer?

Don Boudreaux October 8, 2011 at 8:22 pm

Pray tell, Mr./Ms. Patriotic American: How are Americans harmed if the Chinese government forces its citizens to subsidize the consumption of Americans? How, exactly, are we harmed if the Chinese ship more, rather than fewer, of their resources – in either raw form or as embodied in final goods and services – to us in America?

Patriotic American October 8, 2011 at 8:28 pm

How are Americans harmed if the Chinese government forces its citizens to subsidize the consumption of Americans?

Easy. The communists get richer while we get poorer.

MWG October 8, 2011 at 8:41 pm

Sooo… the Chinese are getting richer by subsidizing our purchases?

kyle8 October 8, 2011 at 11:13 pm

It is all just a lie to get you to go along with giving certain special interest protection from competition, thus sticking it to the average consumer.

There is no evidence that free trade harms employment in the aggregate, just the opposite, it causes the economy to grow.

Some certain industries which are inherently uncompetitive will be harmed, but so what? That’s just business.

J. W. October 9, 2011 at 1:16 am

Part of my laptop broke and I bought a replacement part from someone in China for a third what I would have spent buying from an American seller ($6 instead of $18). I did not become poorer, but richer, because the part was worth more to me than the money that I paid.

“We” (by which I suppose you mean Americans in the aggregate) became richer, too, by $12, because we got an $18 part for $6 and we still have the part that I chose not to purchase.

I’m not sure whether the person from whom I purchased is a professed ideological communist. In any case, he became richer (assuming the $6 was worth more to him than the replacement part), but “we” certainly did not become poorer.

Economic Freedom October 9, 2011 at 1:18 am

Easy. The communists get richer while we get poorer.

How do we get poorer by being offered less expensive products? Don’t cheaper products leave consumers with more disposable income in their wallets that they can then spend and invest in ways they couldn’t before?

dsylexic October 9, 2011 at 1:37 am

LOL.yes,truth is lies and night is day.and what about american communists.some of them get poorer too by your definition.hooray.some good out of it then

muirgeo October 9, 2011 at 8:36 am

“Easy. The communists get richer while we get poorer.”

Look at their replies. Notice any lack of reference to the real world economy? They’ll go on for hours about how good our trade policy is for you as long as they are able to mentally confine the discussion to the inside of a Walmart.

J. W. October 9, 2011 at 7:48 pm

I described an actual exchange that took place in “the real world economy” and explained why my purchase of a relatively inexpensive good from someone in China did not make “us” get poorer.

Methinks1776 October 9, 2011 at 4:01 pm

Easy. The communists get richer while we get poorer.

So, when the evil rich subsidize the sainted poor it makes the rich richer and the poor poorer?

Don Boudreaux October 9, 2011 at 4:28 pm

You have no earthly idea what you’re talking about. If nations were made richer by government-doled-out subsidies, then the secret to economic nirvana would be revealed and sub-Saharan Africans – along with all the citizens of Latin American banana republics – would be rich while citizens of Hong Kong would be poor.

kyle8 October 9, 2011 at 6:39 pm

And Japan would not have had a lost (2) decade(s). And Jimmy Carter would have been our most successful president.

Observer October 9, 2011 at 1:49 am

I thought your question was answered yesterday.

GMU was going to have an adjunct professor come in a teach Macro to you I can ever recall that couldn’t do the math

gregworrel October 8, 2011 at 9:24 pm

No one here is siding with the Chinese. When I negotiate a purchase I consider it a success if I get something cheaper than I otherwise might have. U.S. consumers are getting Chinese goods cheap. This is a win for us. The Chinese are giving away the store. You do not seem to recognize a win when you see one. Neither does Krugman.

muirgeo October 9, 2011 at 8:38 am

To hell with the global economic meltdown… Greg got a good deal on a piece of plastic fromWalmart… Life is good.

kyle8 October 9, 2011 at 6:40 pm

And millions of low income people also get good deals because of free trade. Why do you hate poor people?

gregworrel October 9, 2011 at 10:35 pm

So now China and Walmart are responsible for global economic meltdown? I thought it was hedge fund managers, wall street firms, and George Bush. Or maybe what you really think is all the stupid Americans buying pieces of plastic at Walmart are to blame. If only we were all as enlightened as you. Then we would really see global economic meltdown.

vikingvista October 8, 2011 at 11:35 pm

You should worry less about specific kinds of employment, and more about consumers.

Job security cannot be a characteristic of a healthy economy. The ability to change and find jobs can. Government efforts to promote the former come at the expense of the latter.

Chucklehead October 9, 2011 at 12:41 am

Furthermore, jobs are not the property of the government, employee, or employer. They are directed by the end consumer.
If you have to use force, you are either doing it the wrong way, or you shouldn’t be doing it at all.

vikingvista October 9, 2011 at 5:23 am

Excellent point. Keep your eyes on the consumer, and you will see that they are the regulators of employment. Nobody ever destroyed an economy by selling its people what they want.

Dan J October 9, 2011 at 7:16 am

Keep your eyes on the consumer, and you will see that they are the regulators of employment.-VV

I like and believe to be a true statement. They make fine regulators of products and services, also. Some bumps and potholes along the way, but so long as the consumer isn’t complacent by supposed govt nannies over regulating, those bad products will be weeded out just as quickly

muirgeo October 9, 2011 at 8:31 am

“Any idiot knows communist China is fighting for keeps. It’s funny how everyone here sides with the communists.”

Well they are free market libertarians and even their principles will be sold if the price is right. Well actually they don’t sell anything. They just stop making their old principles and purchase lower cost principles on credit and think they are better for it.

brotio October 9, 2011 at 5:14 pm

and even their principles will be sold…

Muirpocrite. You are the only regular patron of the Cafe whose principles are for sale.

You constantly rail against corporatism and corporate welfare, and then insist that exceptions must be made for ADM, Chrysler, GE, GM, SolarReserve, and Solyndra. If one of your priests says it’s good for Gaia, or good for Democrats, you suddenly decide that a little corporate welfare isn’t so bad, after all.

You constantly rail that CO2 is dangerous to Mother Gaia and that we must reduce our CO2 output, but if it takes several tons of CO2 to get you to Italy, Alaska, or Mexico for one of your lavish vacations, then Miami is just going to have to deal with rising sea levels.

You constantly rail about profits in health care, but you make such exorbitant profits in health care that those CO2-spewing vacations across the globe are routine, and if little Jimmy’s vaccinations get in the way of those vacations, then little Jimmy can just deal with Rubella.

Greg Webb October 9, 2011 at 7:42 pm

Any idiot knows communist China is fighting for keeps. It’s funny how everyone here sides with the communists.

LOL! The Communist Party of China is fighting to stay in power, and it very much fears another revolution once economic hardship sets in when China’s export-driven economy falls apart just like it did for so many other Asian Tigers including Japan. Consequently, the Communist Party of China is willing to subsidize the businesses making goods for export. And, American consumers benefit by getting quality goods for a better price while American producers are forced to find more efficient and effective ways of serving American consumers.

Hemo_jr October 8, 2011 at 7:17 pm

The argument goes this way: Subsidies drive competitors out of business, while with natural market forces, competitors have a better chance of matching efficiencies and competing in the market place. Once competitors are out of business, subsidies can be removed and predatory prices can be instituted.

That is the difference between subsidies and natural market forces.

vikingvista October 8, 2011 at 8:17 pm

“subsidies can be removed and predatory prices can be instituted”

Those who plan on trying this would do well to look at the history of others who have tried.

MWG October 8, 2011 at 8:21 pm

“Once competitors are out of business, subsidies can be removed and predatory prices can be instituted.”

Great…now if you can cite some examples where this has actually happened, you might have a legitimate concern. I’ll give you the advantage of any examples that don’t even include the Chinese.

Don Boudreaux October 8, 2011 at 8:24 pm

Indeed so, MWG. History is bereft of such actual examples.

More to the point, though, such concerns are not the ones featured by Samuelson in the column that prompted me to write my open letter to him.

dsylexic October 9, 2011 at 1:39 am

there is the another nonsense propagated by Joan Robinson -of monopsony. other than the govt(using force or laws to crowd out),there is no example of monopsony.

Emerich October 8, 2011 at 8:17 pm

Luv ya Don.

steve October 8, 2011 at 9:50 pm

Don- You use a made up example that does not and will not exist. Would this still work if we were talking about things we are actually making now, say autos or aspirin? Is there a time issue? Could US workers be out of work for a long time before the new industries that will take their place are created. What happens to those displaced workers? What if Tyler’s Great Stagnation idea is correct?

Steve

kyle8 October 8, 2011 at 11:16 pm

If you are really so concerned about american businesses and american jobs then why are you not concerned about the real culprit in causing the loss of jobs? Government regulation and over taxation.

Those two things are far more responsible for any loss of jobs than trade has ever been.

Sam Grove October 9, 2011 at 12:03 am

Yes, foreign trade is one of the current scapegoats for our economic woes.

steve October 9, 2011 at 6:57 am

I run a small corporation. While I always find regulations annoying, I have not seen a sudden change in regulations I have to deal with. I have seen a number of local small businesses shut down when they could not keep up with the lower prices form overseas. To date, they have not been replaced with anything new. I think that in the long run we are probably better off for this, but in the short run it is tough on the local economy. I also dont know how long the short run will last.

Steve

Economic Freedom October 9, 2011 at 4:48 pm

To date, they have not been replaced with anything new.

The businesses that were seen have gone out of business because of competition. While consumer demand for their products may have switched to lower-priced foreign imports, investment dollars have also been withdrawn from those uncompetitive domestic industries and channeled into more competitive industries, including domestic industries. Those domestic industries now receiving new investment dollars can hire back many of those originally laid off from foreign competition — that’s actually where new employment opportunities come from. But unless you’re tracking investment dollars, these new job opportunities will remain unseen.

There are four things that can interfere with this self-correcting process of the labor market: (i) minimum wages, (ii) union wages, (iii) unemployment benefits, and (iv) a general unfavorable business climate concerning impending new taxes and new regulation known as “regime uncertainty.”

#(i) should be abolished entirely; #(ii) should be separated from government entirely; #(iii) should be re-privatized entirely; #(iv) requires an overhaul of the current administration in Washington and a SCOTUS ruling against impending new regulations, taxes, and penalties, such as Obamacare.

By doing all of the above, the US could very quickly achieve full employment. Even just doing some of the above could reduce unemployment significantly.

John Dewey October 9, 2011 at 5:21 pm

Steve: ” I have seen a number of local small businesses shut down when they could not keep up with the lower prices form overseas. To date, they have not been replaced with anything new.”

Do you mean that those local businesses have not been replaced with anything new in your locality? or in the U.S.?

If you mean the former, then I would look first to the laws, regulations, and other government burdens of your locality which are inhibiting business formation.

If you mean the latter, then I have a very different opinion. The Purchasing deaprtment in my large corporation receives proposals every week from new or relatively new businesses which were created to serve the needs of our industry and others.

dsylexic October 9, 2011 at 1:41 am

actually,it is the trade which is acting as a balance against the tough regulatory love of the govt.are you saying,it would be awesome if people had to buy inefficient,expensive stuff only because they are america made,but at the same time be unable to innovate,invest or take risks due to the stifling regulations which are increasing? should we swing axes at both feet at the same time?

Stone Glasgow October 9, 2011 at 2:21 am

Samuelson claims that an “undervalued” RMB is a subsidy to Chinese manufacturing. How can the inflation of the RMB be a subsidy? How can one claim that printing more Chinese currency is helpful to Chinese businesses?

vikingvista October 9, 2011 at 5:25 am

Well, it is helpful to a tiny minority of businesses frequented by the Chinese central bank or their government clients–but only at the expense of all the others.

Stone Glasgow October 9, 2011 at 7:11 am

The small fraction of businesses that enjoy “first use” of new RMB doesn’t exist; the new RMB are primarily used to buy US treasury bonds, and the rate is falling, causing RMB to deflate at about 5% per year vs other currencies.

vikingvista October 9, 2011 at 4:49 pm

I think you’ll find that the Chinese central bankers are quite well to do, and enjoy spending their money on businesses of all sorts. Additionally, the US Treasury doesn’t accept RMB, much to the joy of the Chinese banks that perform the exchange service. And finally, US Treasuries count as chinese central bank assets. Even if they reinvest Treasuries as they come due now, and no matter how they depreciate (since they cost the central bank nothing to begin with), it constitutes considerable puchasing power in the future, whether directly or through other government agencies.

In other words, it very much resembles any other central bank in spite of different policy goals.

Martin Brock October 9, 2011 at 8:36 am

The Chinese monetary authority doesn’t print more Chinese currency for just any purpose. It prints currency strategically to advance a particular policy, i.e. it’s a central economic planner. The authority prints RMB to purchase dollars, to keep the price of the dollar in RMB above the level it would reach without this policy.

If you have dollars, this policy effectively creates money and gives it to you as a gift but only if you use the money to purchase goods produced in China. Chinese authorities pursue this policy to attract investment in productive organization producing goods attractive to U.S. consumers, because the U.S. economy is more developed.

Chinese authorities want the Chinese economy to advance along the same trajectory that the U.S. economy has already followed. That’s the point of the policy and the rationale for the central plan. If you believe that central economic plans can work as designed without all sorts of harmful consequences, intended or otherwise, then the Chinese policy possibly makes sense to you.

I rather expect all sorts of malinvestment to occur as result of the Chinese policy, and I expect this malinvestment to harm lots of people ultimately, both inside and outside of China. Various state policies in the U.S. interact with the Chinese policy and typically compound these harms.

But I’m certainly not advocating a retaliatory tariff. A retaliatory tariff is just another central economic plan and would likely make things even worse. Assuming that a retaliatory tariff would help assumes that central economic planners actually know enough to devise a helpful policy, but they don’t.

vikingvista October 9, 2011 at 7:20 pm

I would just add that it makes no sense to single out the Chinese for currency manipulation, or gift giving (to those in close economic proximity to the bank). All of the world’s currencies are manipulated by their central banks in very much the same ways. The Chinese no more “refuse to let their currency float” than any other central bank in the world.

Methinks1776 October 10, 2011 at 7:01 am

Why, Switzerland has recently pegged the Franc to the Euro in order to debase its currency.

vikingvista October 10, 2011 at 10:40 am

Euro users should be outraged!

muirgeo October 9, 2011 at 8:44 am

“How can one claim that printing more Chinese currency is helpful to Chinese businesses.”

Hmm…. I’m thinking one could compare their 9% increases in GDP to our 0.1% increases and maybe also follow employment trends in each country…. those sort of things might be helpful for understanding how one makes such and such claims about such and such things.

Dan J October 9, 2011 at 3:27 pm

Still, china is a nation going from nothing to something. Like any region that had millions living in abject poverty, without running water, etc.,… It is easy get positive stats compared to a mature economy.

Observer October 10, 2011 at 8:15 am

all where does this rule appear in the rule book?

we have massive unemployment of skilled workers

China has massive unemployment of unskilled workers

we ought to get a far bigger bang for our buck by putting a skilled worker to work than China should by putting an unskilled worker to work

in addition, the so called Phillips curve” is false

Just Another Mike October 9, 2011 at 2:45 pm

Doesn’t this make the case for a policy of lower federal spending, instead of tariffs. This would eliminate a vehicle of manipulation of the RMB by making Federal debt more scarce.
I’m not a Macro or Monetary policy wonk so please explain any holes in my logic.

Martin Brock October 9, 2011 at 8:12 am

If the Fed decides to encourage “green energy” by making very low interest, very long term loans to manufacturers of solar cells and electric cars with lithium ion batteries, largely oblivious to the ultimate profitability of the manufacturers, then I expect to find lots of these cheap solar cells and electric cars, and I expect people to buy them. What’s the problem?

Of course, the cost of lithium ion batteries for my laptop might skyrocket, because the Fed doesn’t hand out cash to manufacturers of these batteries, and these manufacturers must compete with the electric car manufacturers for the raw materials. Is that a problem?

At some point, the Fed decides to stop handing out cash to green energy companies, and these companies must start repaying their loans, but they can’t, because they aren’t profitable without someone handing them cash continually.

By this time, manufacturers of lithium ion batteries for laptops have practically disappeared. The dissolution of bankrupt electric car manufacturers permits these manufacturers to reappear, but potential manufacturers hesitate to reenter the business, because they’re unsure of the Fed’s future policy.

Eventually, a market emerges without the influence of the green energy subsidies, but in the meantime, many factors of production are unemployed or underemployed as they seek to reorganize within this new market.

Is any of this a problem?

Martin Brock October 9, 2011 at 8:19 am

Yes, a central monetary authority creating money to encourage particular producers at the expense of other producers can harm people. It doesn’t harm all people alike. It harms some people and harms others at various times, and it creates more harm than good on balance, but some people always benefit.

A central monetary authority creating money to bid down the price of its currency relative to other currencies can have this effect as much a central monetary authority creating money to bid down the price of lithium ion batteries in electric cars relative to the price of lithium ion batteries in laptop computers.

Martin Brock October 9, 2011 at 8:19 am

Correction: It harms some people and benefits others at various times …

athena clark October 9, 2011 at 8:40 am

Perhaps if China had a FLOATING CURRENCY you might have a point.

Don Boudreaux October 9, 2011 at 8:42 am

With respect, I believe that you miss my point.

vikingvista October 9, 2011 at 7:24 pm

In what sense does any other currency float, that the RMB does not? Do you think the FOMC’s decision to purchase a certain quantity of Treasuries constitutes a free market in USD’s?

Martin Brock October 9, 2011 at 9:09 am

Absolutely nothing about jobs lost to imports whose prices are made lower by foreign subsidies distinguishes them from jobs lost to imports whose prices are made lower by natural market forces.

This statement is nonsense, and I can hardly believe you assert it here. The malinvestment encouraged by the subsidies distinguishes the former from the latter. Duh.

If the U.S. subsidizes one U.S. industry, like “green energy”, to move jobs into this industry, or if it subsidizes producers in Mississippi to address some perceived problem in the wealth of this state, you tell a different story. What’s the difference? The national border? You’re always telling me in other contexts that the national border doesn’t matter.

It’s one thing to say that retaliation is counterproductive. It’s quite another to say that foreign subsidies don’t matter.

Don Boudreaux October 9, 2011 at 9:14 am

Read my attached article, Martin. I deal there with precisely the objection you raise.

By ‘indistinguishable,’ I mean that, FROM THE PERSPECTIVE OF AMERICANS, jobs lost to genuinely more efficient foreign producers are no different – no less real, no less distressing for the workers who lose them, and no less effective at freeing up domestic resources for other tasks – than are jobs lost to subsidized imports.

Martin Brock October 9, 2011 at 9:38 am

I can’t even agree with “from the perspective of Americans”. At some point, the malinvestment affects Americans, unless I believe that Chinese central planners really can accelerate development in both China and the U.S. with their policy. I don’t believe it.

Where Chinese producers are genuinely more efficient, they don’t need a central monetary authority intervening between them and their foreign customers by handing currency to the customers. They don’t need a central monetary authority at all. They can create their own money (bills of credit, promissory notes) as needed.

Yes, Americans lose jobs for other reasons as well, but this fact is irrelevant. Jobs lost to foreign subsidies free up domestic resources, but the U.S. cannot develop new modes of a production, that can persist without the subsidies, at an arbitrary rate. If it could, foreign subsidies would be a wonderful thing, and we’d wish for all foreign economies to become as centrally planned and mercantilist as possible. Does this wish really make sense?

Suppose the rest of the world, where 95% of the population lives, is producing all sorts of stuff with all sorts of subsidies engineered by central planners, and the other five percent of us here in the U.S. are buying lots of this stuff, if it happens to suit us. This arrangement can only benefit us?

What happens when the foreign central planners change their plans and move their subsidies around? Since market forces don’t determine economic organization, these regime changes must happen all the time.

When technological progress destroys jobs by increasing productivity, the situation is very different, because technological progress is essentially irreversible. No central planner removes technological progress from the equation at his clueless whim. Technological progress is not subject to regime uncertainty (except for patent monopolies and the like).

Don Boudreaux October 9, 2011 at 10:08 am

Again, read my attached paper.

And keep in mind that the chief, overwhelming argument of the protectionists clamoring for passage of the currency bill isn’t that Chinese subsidies distort markets; these people aren’t championing greater general-equilibrium efficiency of the global market. Rather, their chief argument is that Chinese subsidies “destroy” some American jobs, period. And Samuelson, in his article, chiefly rides with that concern.

That is, the argument – made by Samuelson and others – is not that Chinese subsidies make the global economy less efficient that otherwise and, therefore, harm Americans. It’s that Chinese subsidies “destroy” some American jobs, period. And it’s in THIS way that domestic jobs “destroyed” by subsidies doled out by foreign governments are no different than are domestic jobs “destroyed” by natural market forces.

nailheadtom October 9, 2011 at 9:53 am

So what’s with the fixation on the Chinese anyway? The gas in my car is from Canada, that’s where the car itself was actually assembled, the oranges in the refrigerator are from South Africa and the apples from New Zealand, the tomatoes and cucumbers were grown in Mexico and I’m listening to music over the internet from Croatia. Is this all wrong? How do I know what foreign product is “unfairly” subsidized and should be kept out of my hands? When I’m listening to Balkan turbo-folk, aren’t I shutting out some deserving American recording artist like Lady Gaga?

steve October 9, 2011 at 11:31 am

“Jobs lost to foreign subsidies free up domestic resources, but the U.S. cannot develop new modes of a production, that can persist without the subsidies, at an arbitrary rate. If it could, foreign subsidies would be a wonderful thing, and we’d wish for all foreign economies to become as centrally planned and mercantilist as possible.”

Approaches what I have ben trying to say. In the ideal, it is a good deal for the US when other countries subsidize their industry. What really happens in practice? Does the past guarantee the future? We may have more resources freed up, but do they really have an outlet, and when will it occur?

Steve

John Dewey October 9, 2011 at 8:26 pm

Steve,

First, the burden of proof that a free market will not work must be on those who would restrict freedom. What right does my government or you or anyone else have to tell me that I cannot buy goods from Chinese manufacturers at the prices they offer them?

Would you justify trampling on my freedom because I cannot guarantee you that what has happened for centuries – the creation of new enterprises and jobs – will not continue to happen?

Second, the less impeded are markets, the much more likely it is that all workers will find economic well-being. History has demonstrated this to be true.

Third, why care what other nations do with their industries? We really have no leverage to change that other than by harming our own consumers.

Finally, many industries in the U.S. are also subsidized. Rather than complain about what other nations do, I suggest that U.S. protectionists do something about the government they can change.

Economic Freedom October 9, 2011 at 5:45 pm

a just-published paper of mine that answers in the negative the question “do foreign subsidies justify retaliatory protectionist measures?

Good paper. Thanks for posting it.

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