I Invite Anyone Who Wishes to Inflict Upon Me Such “Diminishment”

by Don Boudreaux on November 16, 2011

in Seen and Unseen, Trade

Here’s a letter to Brett Decker, the editor of the Washington Times:

Interviewed about your new book on China, you were asked the following question: “You write that China’s growth is directly tied to our ruin.  Why is that so?  Why can’t both America and China prosper economically?” (“The Chinese century,” Nov. 16).   Your answer is that the Chinese are pursuing a policy that you call “the diminishment of the competition, most especially America.”

How, exactly, are we Americans ‘diminished’?  Is it through our better access to low-priced Chinese goods?  Would we be ‘amplified’ if, as you advocate, Congress imposed tariffs and other trade restrictions that raise the prices we as consumers pay for products such as cell phones and clothing?  Would be ‘elevated’ if we as producers must pay higher prices for inputs such as power-generating equipment and steel?

And is China strengthened by the taxes that Beijing extracts from the Chinese people to make computers, furniture, medical equipment, and other valuable ourputs more accessible to the American people?  Is the Chinese economy fortified by inflation of the renminbi – inflation that is inevitable insofar as Beijing keeps the exchange-rate of that currency artificially low against the dollar?

In short, please explain how the Chinese are enriched – and Americans ‘diminished’ – if Beijing forcibly removes from its own economy unusually large quantities of goods and inputs for shipment to our shores?

Sincerely,
Donald J. Boudreaux

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{ 38 comments }

nailheadtom November 16, 2011 at 9:52 am

“The Chinese Communist Party has co-opted the wealthy entrepreneurs and the middle class, who are satisfied with an authoritarian system that benefits them to the detriment of the other billion souls suffering in poverty there.”

Thank goodness nothing like that has ever happened in the US.

kyle8 November 16, 2011 at 3:21 pm

The problem is that the Chinese are moving toward greater economic freedom and prosperity, so they are happy with the progress.

In our case we are moving away from greater freedom toward more control. It is not pretty.

Nikolai Luzhin, Eastern Promises November 16, 2011 at 9:56 am

Don

In addition to all the ways counted out before, why do you never talk about the two long run killer apps of economics to China’s favor:

1) location theory, which tells us that as China grows ever larger, more economic activity will move to and toward it (we are seeing this force tear Europe apart now)

2) economies of scale, law of large numbers, etc.. as firms become larger in China (and grow with China) they get ever increasing efficiencies

There are no real benefits from China trade, as we have shown before, once one offsets all the costs, destroyed lives, social costs, etc., but even if there were, since you two not consider the two foregoing forces you thinking is “half baked”

Jon Murphy November 16, 2011 at 10:29 am

Once again, the “zero-sum game” myth makes its way into the American Public.

These people are doing more to destroy the global economy than any financial crisis.

Sam Grove November 16, 2011 at 11:17 am

There are diminishing returns to ever increasing scale. Large companies take on fat and become bureaucratic and sluggish.
That’s why many corporations send lobbyists to seek protecting regulation from the politicos

Nikolai Luzhin, Eastern Promises November 16, 2011 at 9:00 pm

no

diminishing returns are short run

we always have new technology and business models that jumps up to a larger scale

For example, we are down to really 2 large airline mfgs. in the West

Jon Murphy November 16, 2011 at 10:33 am

“Location theory, which tells us that as China grows ever larger, more economic activity will move to and toward it…”

Yes, insofar as the marginal benefits exceed or are equal to the marginal costs. However, that will not always be true. That is why you are seeing lots of manufacturing leave China and move to Vietnam and other SE Asia countries.

“economies of scale, law of large numbers, etc.. as firms become larger in China (and grow with China) they get ever increasing efficiencies [sic]”

Yes, again as long as marginal costs are less than or equal to marginal benefits. Also, I fail to see how cheaper Chinese goods are a problem. It means cheaper prices paid by American consumers and manufacturers, spurs competition, and encourages further efficiency, possibly/probably leading to cleaner technologies.

Andrew_M_Garland November 16, 2011 at 1:13 pm

China nearly bankrupt
via pjmedia.com/instapundit/131741/
11/15/11 – The Epoch Times
=== ===
[edited] Larry Lang is chair professor of Finance at the Chinese University of Hong Kong. He gave an unusual, closed-door lecture that he didn’t think was being recorded. He said that the Chinese regime is on the brink of bankruptcy, “every province in China is Greece”.

China has a reputation for being strong and prosperous. But, Lang gave a frank analysis of the Chinese economy and the censorship that is placed on intellectuals and public figures. “What I’m about to say is all true. But, we are not allowed to speak the truth under this system”.

(1)  The regime’s debt is about 36 trillion yuan (US $5.68 trillion). This totals Chinese local government debt (US $2.5 to $3 trillion) and the debt owed by state-owned enterprises (another US $2.5 trillion). Interest of US $312 billion per year will quickly unravel things.

(2)  The official inflation rate of 6.2% is fabricated. The real rate is 16%.

(3)  There is serious excess capacity. Private consumption is only 30% of economic activity. Lang said that beginning this July, the Purchasing Managers Index, a measure of the manufacturing industry, plunged to a new low of 50.7. This is an indication, in his view, that China’s economy is in recession.

(4)  The official GDP growth of 9% is fabricated. Lang’s data shows China’s GDP has decreased 10%. The bloated figures come from the dramatic increase in infrastructure construction, including real estate development, railways, and highways, accounting for up to 70% of GDP in 2010.

(5)  Last year, direct and indirect taxes on Chinese businesses were 70% of earnings. The individual tax rate sits at 81.6%, too high.

Once the “economic tsunami” starts, the regime will lose credibility and China will become the poorest country in the world.
=== ===

If China’s elite is not stealing from its people and is not fabricating its growth figures, then it will be the first totalitarian state in history to accurately report what is going on.

Consider that the US government has “invested” in many failed infrastructure projects, including a push to spend massively on high speed rail. These certainly benefit the political elite, without much benefiting the more common man.

kyle8 November 16, 2011 at 3:23 pm

This is not the first time I have heard dire warning from China. I think there is likely to be fire near that smoke.

Darren November 16, 2011 at 5:28 pm

It seems to me (just intuition) that there is a point at which any increased benefits from an economy of scale will flatten out, if not decline.

Nikolai Luzhin, Eastern Promises November 16, 2011 at 9:59 am

Don

BTW, De Long has great blog post up ending any need for future discussion of “Austrian” economics

Austrian Monetary Mental Mysteries for What I Hope Is the One Last Time…

http://delong.typepad.com/sdj/2011/11/austrian-monetary-mental-mysteries-for-what-i-hope-is-the-one-last-time.html

Could you turn this blog into a useful site, say reviews of hot dog stands and juke joints

Invisible Backhand November 16, 2011 at 10:58 am

From the comments:

“Austrian economics is not based on econometric data, statistics, correlations, analysis or observations of any kind. Instead, it is deduced using logic from the Axiom of Human Action (that human beings act based on choices), in the style of pure mathematics…”

“For this reason, arguing against an Austrian School explanation of something, like the Austrian Business Cycle Theory, is like arguing against Pythagoras’ Theorem; it is futile, because it has been deduced from an axiom. And where a mainstream School explanation contradicts an Austrian School explanation, the mainstream explanation must be incorrect…”

I would add the caveat that while the axiom of the pythagorean theorem is correct, the axiom of Austrian economics is handed down from above: “Every part of your theory must benefit the rich. Make it work.”

Andrew_M_Garland November 16, 2011 at 1:36 pm

In the DeLong article, Krugman’s argument relies on his thought-experiment about a baby-sitting co-operative.

=== ===
Krugman:  The best cure I know for the notion that a money-led expansion can’t be real is still the story of the baby-sitting co-op.
=== ===

So, Krugman doesn’t propose his position through “econometric data, statistics, correlations, analysis, or observations of any kind”, but merely through his own mental model. If Krugman has more convincing data, he should present it.

vikingvista November 16, 2011 at 2:26 pm

In Krugman’s defense, econometric data are less informative than mental models (at least rational ones); and actually econometric data are worthless without substantial economic theory to interpret it (and often worthless anyway).

Now that I’m behind Krugman, let me drive this dagger into his back–he personally doesn’t believe the defense I just gave him.

Steve J November 18, 2011 at 3:06 am

I would add the caveat that while the axiom of the pythagorean theorem is correct, the axiom of Austrian economics is handed down from above: “Every part of your theory must benefit the rich. Make it work.”

Change the word ‘rich’ in your statement to ‘smart, provident, and productive’, then I think you have a working argument.

Invisible Backhand November 16, 2011 at 10:45 am

For some reason edited out most of the answer to the question:

You write that China’s growth is directly tied to our ruin? Why is that so? Why can’t both America and China prosper economically?

The biggest hitch is China’s conviction that its time has come to be the top dog on the planet. The Chinese leadership encourages a theory of national manifest destiny that is based on racial superiority similar to Imperial Japan’s and Nazi Germany’s before World War II. It’s not enough for Beijing to grow and prosper and create a better society for the Chinese people. Don’t forget this is a tyrannical Maoist state run by thugs who believe in global revolution. They want to run the whole show, and in their minds that can only come with the diminishment of the competition, most especially America.

http://www.washingtontimes.com/news/2011/nov/15/the-chinese-century/?page=1

keddaw November 16, 2011 at 11:06 am

The only way a country deliberately hamstringing itself (decreasing prices to local producers and increasing import costs and incurring high inflation) harms any country it trades by is if it manages to out-compete foreign businesses and put them out of business, either through straight price manipulation or by eventual economies of scale. Should this happen the consumers lapping up cheap goods now may find their jobs disappearing to China as their companies shut up shop. Obviously there will always be a comparative advantage in some sectors, but that tends to be less well paid for the workers. What will actually happen is up in the air, but America is not being helped by (talk of) tariffs or subsidies to domestic producers.

Jon Murphy November 16, 2011 at 11:18 am

Let’s play a mental game, here.

For the sake of argument, let’s assume that the Chinese lower the prices of all their goods so low that no other manufacturer can compete and the go out of business. Having “won”, the Chinese government removes their subsidies and these firms, having monopoly power, raise their prices as high as they can go (as dictated by MC=MR).

What then?

Do the Chinese now control the entire field?

I think not.

Firms, realizing an opportunity, will enter into the market and force prices down again. The Chinese will then either have to rely on subsidies again, or face global competition.

So, China faces the prospect of either keeping very expensive subsidies going into perpetuity or face global competition.

So, which is more likely to occur? And which one will benefit us the most?

keddaw November 16, 2011 at 11:34 am

You have missed a fundamental point in monopoly power, which is that they can manipulate prices to keep out competitors without the government having to harm the country by currency manipulation. So it kinda depends on barriers to entry to the markets that the Chinese have a monopoly in, if they are high, or take a long time, then the producers themselves will impact the price. Remember the massive efficiencies of scale a monopoly operator would have.

Not that this is a likely outcome, a more recent and relevant example was the Japanese car industry which could only get going against Ford, GM and the Europeans because of trade restrictions and subsidies. Once they were large enough to stand on their own feet the government removed many subsidies (but kept tariffs against foreign cars – wtf?) and were then able to compete on quality, style reliability etc. A massive simplification, but the point is that once the Japanese industry reached sufficient size it didn’t drive out the competition it competed with them, and I see the same happening for many Chinese industries. All the while America and Europe (and Asia) will be creating new industries.

Jon Murphy November 16, 2011 at 2:05 pm

“You have missed a fundamental point in monopoly power, which is that they can manipulate prices to keep out competitors without the government having to harm the country by currency manipulation.”

You are correct, sir. However, with the argument being that currency manipulation by the Chinese is, effectively, price manipulation, I just substituted “country” for “company.”

If you’d like, I’ll repost the question with “company” in there?

keddaw November 17, 2011 at 4:36 am

Jon Murphy, companies can/will make a rational decision to decrease short term profits in order to force a competitor out the market in the knowledge that it will return to higher profits in the medium term (and much higher profits than if it allowed a competitor to remain and go from a monopoly to a duopoly). If a country does this through currency manipulation then the people (and other companies) will complain; if a company does it then shareholders will appreciate the long term value in the manoeuvre.

There is a huge difference between a country harming the many for the benefit of the few and a company harming short term profit for long term gain.

vikingvista November 16, 2011 at 2:21 pm

“they can manipulate prices to keep out competitors without the government having to harm the country by currency manipulation”

Instead they harm the country by forcing its population to pay higher prices for goods, be denied some goods entirely, and signal resources in their country to be directed into less productive ways (by being channeled into noncompetitive firms).

It’s not that governments don’t frequently do it, including the USA. But it is never good for the country’s economy, though almost always good for some small politically-influential special interest. It is actually worse for the country practicing it, than for anyone else–unless “anyone else” is in a country whose politicians decide to retaliate in kind.

Don November 16, 2011 at 11:21 am

What always sounds weird to me about these arguments is the implicit expectation that Americans are fat-and-happy sitting in their “sea” of Chinese goods. As if we aren’t putting these low-priced do-hickies to work make ourselves wealthier or, perhaps, that we are buying more double-moca-latte’s with the saved cash rather than investing in other things that pay dividends.

Personally, my wife and I are running a small business on the side that is only financially possible for us to do BECAUSE of the large scale production of electronic components in China and other Asian countries.

Is China a messed up place, you bet! Is it a “friend” to the US, almost definitely not. Is it’s policies of making products more accessible to the average American hurting the US economy, no freaking way!

And all this pales in comparison to the cost of an actual war with China.

‘… if goods don t cross borders, armies will….’ – Bastiat

Jon Murphy November 16, 2011 at 11:32 am

‘… if goods don’t cross borders, armies will….’ – Bastiat

Too right, mate. Look what happened when we cut off oil supplies to Japan in ’39.

SmoledMan November 16, 2011 at 11:43 am

The more people buy double mocha lattes, the more workers Starbucks can hire or open up new locations which means more barista jobs!

Andrew_M_Garland November 16, 2011 at 1:21 pm

Your statement is Intended as sarcasm, but entirely correct. What is wrong with people drinking lattes and working as baristas?

SmoledMan November 17, 2011 at 4:26 pm

Because I don’t worship an economy based on McJobs?

kyle8 November 16, 2011 at 3:26 pm

What is wrong from the increased productivity caused by all of that caffeine?

Leonardo T November 16, 2011 at 12:05 pm

just a comment: there’s no such thing as indigenous chinese entrepreneurs hacking their way up the global competition ladder. This class died out in the hands of central planners 20 years ago. The whole country is just a bunch of FDIs ready to pack up and SOEs ripe to be looted

tdp November 16, 2011 at 2:01 pm

Not to mention only 2% of our GDP is spent on Chinese goods, and only 11% of the manufactured products Americans buy are spent on Chinese goods. Plus, some absurd percentage of jobs lost here are lost due to technological innovation (that opens up jobs in more fields) rather than from free trade.

The facts to support free markets and small government are out there, but these is so much ignorance, so many preconceived notions, and so many entrenched politicians, bureaucrats, and special interest fat cats who will stop at nothing to benefit themselves at the expense of everyone else that none of this knowledge will ever be put to use.

Bret November 16, 2011 at 3:10 pm

I think Decker is saying that the diminishment will come when China basically takes over the world and ultimately controls all trade.

He’s making a political argument, not an economic one.

kyle8 November 16, 2011 at 3:27 pm

Wake me when that happens.

Jon Murphy November 16, 2011 at 3:29 pm

I wonder if anyone realizes these are the exact same arguments made about Japan just a few decades ago.

keddaw November 17, 2011 at 4:44 am

Except the Japanese growth was mainly founded upon technological innovation and productivity rather than cheap labour and currency manipulation. But Rising Sun does give a good view of the American psyche at that time (when the value of all real estate in Japan exceeded the value of the real estate in the US).

Nuke Nemesis November 16, 2011 at 5:23 pm

Can I safely say, in a non-technical manner, non-Marxists economists believe economic expansion increases the size of the pie? Economic growth does not necessarily come at the expense of others and is not a zero-sum proposition?

However, with China, we are dealing with a totalitarian government. The average citizen is a slave to the state. The Chinese military is not under control of the civilian government but represents a powerful political faction with it’s own goals. Needless to say, but I’m saying it anyway – the Chinese military is also the faction with the most guns.

The Chinese military is leveraging China’s economic growth to expand China’s global military power. All free nation’s are threatened by China’s expanding military, just as was the case with Germany in the 1930′s.

So perhaps “diminished” isn’t the correct word, but “menaced” or “threatened” may be. Then again, if we have to increase military spending to keep a balance of power, “diminished” may be correct, as more military spending means more money out of pocket from our citizens.

Nikolai Luzhin, Eastern Promises November 16, 2011 at 9:43 pm

Dear Jon

(does this Dear Jon letter mean you are leaving the list?)

now pray tell what law of economics says that “marginal costs” will exceed “marginal benefits”

The answer, my friend, is blowing in the wind. None

In fact, all the evidence from the study of cities show that cross fertilization of ideas more than offsets all inefficiences associated with size.

Because you’re a punk, here is Jay Z explaining why

Empire State of Mind

http://www.youtube.com/watch?v=0UjsXo9l6I8

Jon Murphy November 16, 2011 at 9:46 pm

“now pray tell what law of economics says that “marginal costs” will exceed “marginal benefits””

*facepalm*

Law of Diminishing Returns

Jon Murphy November 16, 2011 at 9:53 pm

Look, Nik, please, if you want to have a conversation, you’re going to have to at least read a econ book. Or take Econ 101.

This is not meant to change your mind at all, but you can;t keep making these incredibly stupid comments if you want us to take you seriously.

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