DeLong Smackdown Watch: Brad Setser

Brad Setser agrees with Jeff Faux that China's exports to the United States must be cut--but for very different reasons:

Brad Setser: DeLong’s position – that the US needs to position itself as a friend of China’s economic development -- is an appealing one. But it is also one that I suspect glosses over some big issues. Both the US and Europe... have done their part to support China’s development over the past few years. US imports from China have increased from $100 b in 2001 to $280b in 2006.... Eurozone imports from China have gone from 62b euros in 2002 to something like 130b euros, maybe a bit more, in 2006.... Both the US and Europe have supplied a lot of demand for Chinese goods over the past few years. The risk of a protectionist backlash is no doubt rising. But so far, the US hasn’t taken any policy actions that have really crimped the expansion of China’s exports – which is what I think worries DeLong.

Nor for that matter has the US government done much – if anything -- to help in the US whose living standards have been adversely affected by China’s export success. DeLong and Jeff Faux would both agree that tax cuts for the have-mores whose assets are worth even-more thanks to large financial inflows from China doesn’t count....

Since 2001, China’s exports have basically quadrupled, Chinese productivity has shot up, the set of products that China produces has expanded dramatically and the external purchasing power of the RMB has fallen. If China’s government stopped intervening and allowed the RMB to rise, the ratio between China’s market GDP and its PPP GDP to rise to a level more typical of other emerging economies with comparable levels of development. China’s government has had a policy of, in effect, subsidizing the use of Chinese labor for the production of goods for export.... China subsidizes – through its exchange rate intervention – the global consumption of Chinese goods, which leaves producers in other poor countries whose governments don’t offer a comparable subsidy at something of a disadvantage.

Chinese exports have increased from about around $265b in 2001 to about $1,000b in 2006 – and are poised to rise to $1,250b in 2007. Now you can argue that this policy of holding down the external purchasing power of China’s workers has worked. Real living standards in China are growing strongly.... China is a far richer place today than it was a few years ago....

But China’s policy of buying dollars (and to a smaller degree euros) also means that China is sinking a growing share of its national wealth into a set of assets that are almost certain to depreciate over time.... The sums involved are not trivial. China is now running a current account surplus of around 10% of its GDP. That implies that about 20% of China’s annual savings... is being invested in assets that are likely to depreciate.... China’s government effectively now has a policy of both holding China’s current living standards down and sinking a fairly large share of China’s savings into assets that are sure to lose value.... The capital losses could destroy the PBoC’s formal capital: borrowing in RMB, even at an artificially low rate, to buy depreciating dollars isn’t a winning financial strategy....

When the time comes for China to realize the losses that are now accumulating quietly on the PBoC’s balance sheet (and soon on the balance sheet of the state foreign investment company), I doubt China’s leaders will say, “you know, these losses were really incurred years ago, when we decided to sink a lot of Chinese savings into depreciating dollars in order to encourage our export sector and make it attractive for foreign firms to locate investment in China. We shouldn’t blame the US for the fact that China’s investments in the US haven’t done well. We were the ones who over-paid for US assets.”

I suspect China’s leaders will be somewhat less magnanimous. They will argue that the losses... [stem] from the failure of the US to adopt the policies needed to maintain the value of Chinese investment in the US....

I worry that at some point, China will conclude that investing so much of its savings in the non-tradable part of the US economy isn’t the best way of building Chinese wealth, and the flow of funds will stop. If that process is gradual, it will be for the best--but it if it is sudden, well ... a lot of US workers now employed in the non-tradables sector will need to shift into tradables production, pronto. DeLong:

In this alternative scenario, the U.S. has to move about ten million workers out of currently-favored sectors--construction, home-equity-credit financed consumer expenditures, and so on--into export and import-competing manufactures. How much structural unemployment does such a sectoral shift require, and how long does the structural unemployment last? Other countries have to shift up to forty million workers out of export manufactures into other industries, and to generate demand for the products of those industries...

If that process isn’t smooth, I rather suspect the US won’t say, “You know, we got an awful good deal from China for all these years. Rather than complaint about the costs of the transition that followed the end of Chinese financing, we should thank China for selling us so many goods at such generous prices, lending us so much on such generous terms, and for helping keep the profits of US firms up for so long by underpricing its labor.”...

DeLong has in the past argued that the US should aim to try to replicate its post-war success at creating a liberal international economic order. The new liberal international economic order though would extend beyond the US, Europe and a few islands in East Asia. It would in effect, draw in the big population centers of the Asian land mass as well. That is a very appealing vision--one that I think is very widely shared. By the party of Davos. But not just by the party of Davos.

I worry, though, that the conditions that allowed the US to construct a liberal international order after World War 2 no longer exist.... In a sense right now, rather than having a Marshall plan, where the US--at the time the US public sector--financed the reconstruction of Europe on very generous terms while opening its markets to European goods (creating the conditions that allowed Europe to repay the US loan), we have something that looks like a Marshall plan in reverse. Or maybe half the Marshall plan--China doesn't seem to have given much thought to how the US will pay it back.

China’s public sector is, as a matter of policy, providing subsidized financing to the US. The reverse comes because China, still a very poor country, is financing the still very rich US. Bretton Woods 2 is very, very different from Bretton Woods 1.

I am convinced the post-war analogy doesn’t quite fit. But I also don’t have a better one to suggest.

Comments

[christofay]

When Mr Delong says that the home construction, home finance segment of the economy needs to make the economic transition, he's letting off the elite segments of the economy. Excessive trading/excessive risk taking is fine, another day at the track. We're great at inventing finer and finer pieces of paper to trade. When the rot in home finance spreads from the marginal borrowers to the mid market, the govt will rescue the big banks, too big to fail, but no rescue for the borrower that was lead to believe all was fine.

[Chris M.]

Let's not forget that half of Europe was occupied by the Soviet Union and the other half needed the USA to protect it.

[anne]

The problem must be mine, because I do not find a general problem in the American-Chinese trade pattern or the Chinese development path. There are always structural problems to be described and dealt with, from selective lack of a Chinese safety net to need for increasing concentration on domestic demand, but I find the American gains from trade and low interest rates and Chinese gains from investment significantly and continually helpful for both economies.

What then am I missing?

[Ponzi Q. Globalization]

Just repeat the comforting mantra: it's the only path to prosperity, it's the only path to prosperity, it's the only path to prosperity...

----------------------
"China's so-called economic 'miracle' comes at a terrible human cost -- rural migrants living in the cities experience some of the worst abuse in the work place," said Catherine Baber, Deputy Asia Pacific Director at Amnesty International.

"They are forced to work long stretches of overtime, often denied time off even when sick, and labor under hazardous conditions for paltry wages," she added.

http://news.yahoo.com/s/nm/20070301/wl_nm/china_migrantworkers_dc_1
------------------------------

And, if things continue as they are, the bargaining position of American labor will be similar and these wonders will come to American workplaces near you! Ah, the wonders of globalization!

[bakho]

As China develops its own infrastructure and continues to expand its economy, its domestic investment opportunities should increase. It seems inevitable that, the Chinese economy will reach a point where it is capable of accepting a far larger share of its own investment capital. Starting size matters and a much larger US economy expanding at a slower rate can absorb more investment than a smaller Chinese economy expanding at a more rapid rate. As the Chinese economy scales upward and gains ground relative to the US, this starts to change.

[anne]

Brad DeLong with wonderful clarity of sight recognized the astonishing economic gains in India and China before almost any development economists, while from the beginning of broader recognition complaints have come over gains that were a century in coming. I cannot imagine why.

Why do the grumblers about development in China, India, Brazil, South Africa, ... not ask what fiscal-structural protections and compensations America can make? We complain about China, and never mention allowing for strengthened protecting American health care provision or unions. Freeing public college-university tuitions is unmentioned.

[Ponzi Q. Globalization]

"We complain about China, and never mention allowing for strengthened protecting American health care provision or unions. Freeing public college-university tuitions is unmentioned."

Globalization has effectively defanged unions. Do you think that American businesses will promote unions out of the goodness of their hearts? Do you think the wealthy want to pay more of their hard-earned monies so the hoi-polloi can afford school? Why do they need educated compatriots? The work can always be done in China or elsewhere.

The ability to boot a man or woman out of his or her job because the work can be sent overseas is real power. And this power has, is, and will be used to prevent any changes to 'the system' that would not be to the benefit of those with power.

[John Emerson]

Anne, if the various sort of compensatory programs softening the blow of free trade had been put into effect, I wouldn't be saying some of the things I've been saying. They weren't put in place, and I'm now wondering whether they even could have been. Globalization puts a lot of pressure on tax revenues and puts murderous pressure on unions in industries which can be offshored.

My understanding is that in a China-dominated world American and European ideals like equality, political participation, and civil liberties will look increasingly quaint, and they're already under heavy pressure. China does have a tradition of equality, but it seems to be in abeyance now, and the other two are completely foreign concepts.

I am not completely sure of this, but it seems that because of their dollar reserves, the US can no longer afford to offend either China or Saudi Arabia. The Saudi leverage is more toxic at the moment, but I can imagine the Chinese squeezing us pretty hard at some future date.

[Bupa]

Uhmm, Brad, Max Sawicky is also jumping into the fray with a post directed at you: http://maxspeak.org/mt/archives/002888.html#more. Dean Baker jumps in on the comments section with a plea that if the Chinese won't allow the yuan to appreciate against the dollar the Fed should intervene in the FX markets to ensure the dollar depreciates against the yuan. Barkley Rosser tries to slap that down but also manages to say that Brad DeLong is whining. Don't shoot the messenger.

[anne]

Thank you for the fine responses; I am thinking.

[anne]

"Both the US and Europe... have done their part to support China’s development over the past few years."

Yes; thank you for pointing to the absurdity of this comment. Possibly it is the arrogance of Brad Setser that is so annoying, in thinking that we are suddenly graciously running a development clinic for China when China has set a development path that almost no analyst beyond Brad DeLong found hopeful early on or even understood.

Though we need to be using negotiation to continually re-define trade relations with China, we have gained amply from trade with China and what China has accomplished needs to be properly credited.

[david]

to defend Brad, of course it is not out of charity that we buy chinese goods, but if the west would have raised tariffs to protect domestic producers, probably both sides would have been worse off. and one principle of political economics is that if losses are concentraded on one group and gains widely distributed ( as it is in trade), the possibility of protectionist policy rises. We could argue that we resisted protectionism and that's the good job we did

[Walt]

Anne, the issue is not that Chinese policies have been bad for China and the United States, is that they are not permanenty sustainable. If China adjusts them slowly, then even that won't matter. But if China is forced to adjust them suddenly, then the resulting dislocations in the world economy would be large.

[bigTom]

I think there are very real "non-linear" risks in the inevitable blame game to come. As stated it is likely that those who have accumualted so much depreciated currency will feel they have been robbed, with the obvious resentment towards us. And again as stated, losers on our side -which seem to mainly be on the labor side will blame the rapidly developing economies, and the supporters of current policies on our side.
A concern on my part, is that if inequality, and especially perception of inequality of opportunity becomes too great, you open the door for an American Hugo Chavez type figure.

[Ponzi Q. Globalization]

"possibility of protectionist policy"

What is a 'protectionist policy'?

Dean Baker thinks we're super protectionist now. Is getting all anal about intellectual property a form of protectionism? Is limiting the 'importing' of highly paid professionals a form of protectionism?

How about subsidizing research into certain technologies? Larry Summers wants to do this with biotech. What's the difference whether you 'distort' the holy market by subsidies or by tariffs? I'm sure there are technical differences but isn't it still a sin? After all, money is still going where it wouldn't go in the unfettered market.

For many protectionism seems to be whatever is not in the interests of multinational corporations and investment banks.

Right now that Goldman Sachs banker guy is pushing the agenda of Goldman Sachs by saying protectionism is a threat to prosperity. What protectionism? Whose prosperity?

I shouldn't get too upset. Hank is just doing his job and protecting the interests of his class. I read his Wikipedia bio. Seems like a decent guy. Of course, he's worth $700,000,000. There's nothing wrong with that but this kind of money has to skew your views on things. Especially, things having to do with making money off of existing money.

[hari]

Let's look at political economy of PRC:

It's centrally directed by a central committee (not entreprenuers!);

Financial leverage was pre-requisite for PRCs economic development (since 1980s);

Democratic centralism + free market capitalism has literally changed PRC;

Now, there's experimentation with popular
sovereignty (far from urban centres);

Nixon's opening visit gave PRC the idea of opening up to the West (ie. USA);

Conclusion: PRC has given rise to a unigue form of centralized capitalism under monolithic communist party.

Future trends:
PRC will graduuate into G-7 + 1 ( with India); may be Brazil and Russia will too.

If globalization was supposed to bring about such dynamics in free flow of capital and labour (ie.innovation) then Clinton and Rubin opened up a pandoras box of global economic contradictions ( which not even Brad anticipated!).

[leo]

Someone already correctly pointed out that American workers might not be willing to wait till workers in China achieved the same economic status -- especially if the price was a continuing collapse in American economic security.

The assumption of course, is that there'll be a meeting somewhere in the middle: the economic security of our workers will go down and their's will go up.

But one of the profound errors made by Brad and his ilk is to totally detach the political from economical -- or at the very least to argue a sort of 'golden pot at the end of the rainbow' process where bustling factories in China by default will translate -- at some point -- in greater freedom and democracy on Main St.

This of course is a complete article of faith rather than fact or analysis.

But the 600 pound gorilla in the room that seems to be ignored is not that we'll be pulling the Chinese up in the "freedom count" but that they'll be pulling us down.

In an environment of prolonged economic stagnation, it's easy to imagine more authoritarian political forces appealing to those very workers that Brad & Co. seem happy to write off.

If this is the best liberal Democrats can promise, why wouldn't American workers turn elsewhere for alternatives?

So to make a long story short, what the 'free-traders' in the house are promoting might sound nice (at least to them) but unfortunately our liberal democracy might not survive it.

[Ponzi Q. Globalization]

"In an environment of prolonged economic stagnation, it's easy to imagine more authoritarian political forces appealing to those very workers that Brad & Co. seem happy to write off."

These workers are not being written off by Brad & Co. Economists *CARE* and they show this caring by asserting that American workers will move up the ladder and do the higher-level work the Chinese are too stupid to do.

It seems that God Almighty himself has assigned to the citizens of each nation a set of talents. The divine talent assignment results in the following. All of America gets to do the high-level intellectual work while all of China (and elsewhere) does the less demanding intellectual and the very demanding manual labor.

I mean if this isn't the case then the American worker is in for a big reduction in his or her standard of living. Jiminy Crickets the rest of the world is so much poorer and so much bigger than the U.S. that we'd be positively eff'd if this wasn't the case! It would take decades for everyone in the world to rise to our current level. If ever.

However, economists assure us that we in America will all benefit from this globalized single-labor pool so the divisions of labor mentioned above must be true.

[bsetser]

Wow anne -- Have i descended so far "Arrogant"?

I wasn't implying that we bought Chinese goods as a favor to China. We bought em because they were cheap and well made. They were cheap in part b/c of China's peg and the resulting reserve growth and cheap (i.e. low rate, given the risk) financing of the US.

My argument was the one david made -- look at what has happened over the past few years. Both the US and Europe have taken in lots of Chinese goods and not closed their markets. Net exports have contributed positively to China's growth and so on.

But i also don't think the costs of this system -- both to workers in the US who make manufactured goods and who aren't going to go back to college (college is great, but it isn't the answer for fifty year olds) and to those in China who eventually will get hit with the bill for subsidizing US (and european) consumption of their goods -- can be ignored. is China really better off spending a ton of money subidizing US consumption of Chinese goods? Or would it be better off subdizing Chinese consumption of chinese goods? Does it subsidize US consumption of its goods because it is rational, or because the costs of that subsidiy can be hidden for a long time (they are only realized when the RMB rises/ local rates rise)?

We need to ask some difficult questions.

Incidentally, you might note that i didn't include India in my post. Why? Because india runs a current account deficit, not a surplus. And india has much stronger consumption growth than China .. I am not at all opposed to development. I do though worry about the unbalanced nature of China's current development -- and who will be blamed for the losses China eventually will incur on its large loans to the US.

Finally, Dr. DeLong certainly has been a staunch defender of open trade with China, even if China's exchange rate is misaligned. But the argument that holding your exchange rate down makes sense as a development strategy comes mostly from Mike Dooley (at another UC0 -- together with Peter Garber and David Folkerts-Landua of DB.

Dr. DeLong -- I wouldn't want China to cut its exports. But I do think the rate of growth in Chinese exports does need to slow, and china needs to rely far less on net exports to generate growth than it has over the past few years.

[david]

@ ponzi Q.

got me, protectionism is not very well defined....

[anne]

http://www.ft.com/cms/s/cb1955ca-b533-11d9-8df4-00000e2511c8.html

April 25, 2005

China's Alternative to Revaluation
By Lawrence Lau and Joseph Stiglitz

Western pressure has been mounting on China to revalue the renminbi, from hardening rhetoric in the US Congress to recent calls by the Group of Seven leading industrialised nations for more flexibility from China. However, there is currently no credible evidence that the renminbi is significantly undervalued, and an adjustment in its exchange rate at this time is neither warranted nor in the best interests of China or global economic stability.

The two symptoms of undervaluation are a large multilateral trade surplus or high inflation. China's measured trade balance has been in slight surplus (a surplus no doubt exaggerated by over-invoicing of exports and under-invoicing of imports); but with the volatility of oil prices and the international economy more generally, this could quickly be reversed. And while China's trade surplus has grown, China's multilateral surplus is far from the world's largest.

America blames China for the bilateral trade deficit; but America's trade deficits are a result of its huge fiscal deficits and the fact that Americans do not save. America's defence that it is doing the world a service by consuming vastly beyond its means is self-serving and rings hollow: US fiscal policies and low savings have become the fundamental source of global imbalances.

China has experienced large capital inflows (beyond foreign direct investment), but these are symptoms of speculative pressures that have been so destabilising throughout the developing world. It would be a mistake - and only a temporary palliative - to reward the speculators by appreciating the currency.

Some in China would revalue the currency not because they believe there is a fundamental economic problem, but to get the Bush administration off their backs. But currency appreciation is not likely to reduce significantly the US balance of payments deficit with China or the world. Because the prices China pays for imports would be lowered, and because of the high import content of China's exports to America - as much as 70-80 per cent - even a 10 per cent revaluation would have miniscule effects. Moreover, China should receive some comfort from having joined the World Trade Organisation: there are the beginnings of an international rule of law. A unilateral imposition by the US of import duties would most likely contravene WTO rules; it is hard to call a country that has adopted a fixed exchange rate system a currency manipulator.

If China were to contemplate a revaluation, it should consider as an alternative the imposition of a tax on its exports. Export taxes are generally permitted under WTO rules. Indeed, China has already moved in a limited way in this direction on textiles. There are several reasons voluntary imposition of a tax on its exports may be preferable to a renminbi revaluation. Both would have similar effects on Chinese exports - they would make them appear more expensive to the rest of the world. Because of this similarity, an export tax would provide an empirical answer to the question of whether a revaluation would work. But it would do this without some of the significant costs attendant on revaluation.

One of the advantages of an export tax is that, unlike a revaluation, it would not lead to financial losses for Chinese holders of dollar-denominated assets, such as the People's Bank of China or commercial banks and enterprises....

[anne]

http://www.nytimes.com/2006/10/03/opinion/03stiglitz.html?ex=1317528000&en=a39150307a637eda&ei=5090&partner=rssuserland&emc=rss

October 3, 2006

How to Fix the Global Economy
By JOSEPH E. STIGLITZ

THE International Monetary Fund meeting in Singapore last month came at a time of increasing worry about the sustainability of global financial imbalances: For how long can the global economy endure America's enormous trade deficits — the United States borrows close to $3 billion a day — or China's growing trade surplus of almost $500 million a day?

These imbalances simply can't go on forever. The good news is that there is a growing consensus to this effect. The bad news is that no country believes its policies are to blame. The United States points its finger at China's undervalued currency, while the rest of the world singles out the huge American fiscal and trade deficits.

To its credit, the International Monetary Fund has started to focus on this issue after 15 years of preoccupation with development and transition. Regrettably, however, the fund's approach has been to monitor every country's economic policies, a strategy that risks addressing symptoms without confronting the larger systemic problem.

Treating the symptoms could actually make matters worse, at least in the short run. Take, for instance, the question of China's undervalued exchange rate and the country's resulting surplus, which the United States Treasury suggests is at the core of the problem. Even if China strengthened its yuan relative to the dollar and eliminated its $114 billion a year trade surplus with the United States, and even if that immediately translated into a reduction in the American multilateral trade deficit, the United States would still be borrowing more than $2 billion a day: an improvement, but hardly a solution.

Of course, it is even more likely that there would be no significant change in America's multilateral trade deficit at all. The United States would simply buy fewer textiles from China and more from Bangladesh, Cambodia and other developing countries.

Meanwhile, because a stronger yuan would make imported American food cheaper in China, the poorest Chinese — the farmers — would see their incomes fall as domestic prices for agriculture dipped. China might choose to counter the depressing effect of America's huge agricultural subsidies by diverting money badly needed for industrial development into subsidies for its farmers. China's growth might accordingly be slowed, which would slow growth globally.

As it is, however, China knows well the terms of its hidden "deal" with the United States: China helps finance the American deficits by buying treasury bonds with the money it gets from its exports. If it doesn't, the dollar will weaken further, which will lower the value of China's dollar reserves (by the end of the year, these will exceed $1 trillion). Any country that might benefit from China's loss of export market share would put its money into a strong currency, like the euro, rather than the unstable and weakening dollar — or it might choose to invest the money at home, rather than holding more reserves. In short, the United States would find it increasingly difficult to finance its deficits, and the world as a whole might face greater, not less, instability.

Nothing significant can be done about these global imbalances unless the United States attacks its own problems. No one seriously proposes that businesses save money instead of investing in expanding production simply to correct the problem of the trade deficit; and while there may be sermons aplenty about why Americans should save more — certainly more than the negative amount households saved last year — no one in either political party has devised a fail-proof way of ensuring that they do so....

[anne]

Now, look to Lau and Stiglitz and consider an American economic policy that supported ease of union organization, employer subsidy support for catastrophic health care insurance, federal-state revenue sharing to dramatically reduce tuition for public colleges-universities, federal-state infrastructure development (both hard and soft infrastructure and with a green emphasis).

[G. Chalton]

Hey Brad. Jeff has replied to you again at TPM and he's vewy vewy angry.

[anne]

Would the spending be possible to introduce the sorts of programs that could significantly ease pressures on middle class households? Well, we are directly spending $14 billion a month on the tragedy of Iraq and looking to a $622 billion defense budget for 2008. Spending on Iraq is ofter given as $8 billion a month, but that has not been the case since fiscal 2005. The question is what are we to afford.

Heck, we still cannot get a decent minimum wage bill from the Senate.

[Ponzi Q. Globalization]

"Jeff has replied to you again at TPM and he's vewy vewy angry."

Here's an excerpt...

"Having run out of arguments, DeLong downshifts to ad hominem attacks, calling me “nationalistic…China-bashing…” And, finally, racist: “drum-beating about the threat from powerful, different-looking people from across the ocean.” Very incisive rebuttals, professor."

http://www.tpmcafe.com/blog/coffeehouse/2007/mar/01/dodging_the_question#comment

Did the Prof. really resort to such name calling? I hope not. Depressing if true.

[anne]

Brad DeLong argued several years ago that development economists were continually frustrated by the lack of sustaining robust growth in poor countries. As I mentioned, Brad was already intrigued by the idea that China had a model that was turning about ideas on what might be successful in development. I agreed then, and continue to.

The need for a "modest" Brad Setser, then, is to understand the strength of the Chinese model and not simply argue that it is exploitative rather than competitive in a mutually healthy or potentially mutually healthy vein.

[anne]

Please, Brad DeLong is a gem and was fair and generous as can be in questioning a set of trade and development suppositions.

[Ponzi Q. Globalization]

"Please, Brad DeLong is a gem and was fair and generous as can be in questioning a set of trade and development suppositions."

I haven't read the exchange so I don't know what DeLong or Faux said except for this last post by Faux. I hope it isn't an accurate characterization of what DeLong wrote. I'll have to read the exchange tonight.

One thing I do know is that I was accused of racism by someone on this very blog because I disagreed with his neoliberal views. If you knew me, you would find this accusation quite amusing.

Also, I have seen other anti-globalization posters be accused of racism and xenophobia on various blogs. Why? Is the pro-globalization argument so weak? As much as I disagree, I don't think it is.

This name calling is quite disgusting. We all slip into it from time to time so I suppose I shouldn't get too upset even if someone like DeLong does it (not that I'm saying he did!).

[Ponzi Q. Globalization]

"I understand the temptation: a little economic nationalism and a lot of China-bashing--drum beating about the threat from powerful, sinister, different-looking people from across the ocean and their agents at Goldman Sachs--adds some high-octane explosive power to what is otherwise watered-down political soup."

http://www.tpmcafe.com/blog/coffeehouse/2007/feb/28/simple_arithmetic

Seems DeLong has resorted to calling Faux a racist. Or maybe 'xenophobe' is more accurate.

I take it as a positive. The neolib globalization cheerleaders are getting desperate.

[Sonia]

Much of the argument in this tread has been data free. A look at data over the postwar period suggests that recent trends represent continuation of long run trends.. A look at the data suggests that the relative decline in manufacturing employment in recent years is not importantly the result of China’s growth or of the China’s currency policy. An examination of relative wages in manufacturing and the service sector over the post war period suggests that cheep imports are not a major factor depressing manufacturing wages. Rather recent trends are more likely primarily the result of long run trends in productivity, unionization, returns to education health care costs and the social acceptation of winner take all.. The relative decline in manufacturing employment to private service employment has been going on for at least forty years at approximately at roughly 3-5 percent per year at least since 1960 (BLS Employment and Earnings Payroll data). Increasing productivity rather than imports is probably the major factor driving declining manufacturing employment in the post war (II) period. Similarly changes in earnings for production workers are most likely the result of many factors of which import competition is a minor factor. The ratio of manufacturing weekly earnings to weekly earnings in the private service sector increased from the mid 1960s through the 1970’s by roughly 1 to 2 percent per year (perhaps in part as a result of the Vietnam war), increased slightly in the 1980s and has declined slightly since then. Manufacturing weekly wages are still considerably higher relative to service wages than in the 1960s and most of the 1970s. Dealing with slow growth in real median earnings will require some structural shifts in social policy. The increasing cost of health care both because of the major increase in what can be provided and because of increased relative costs has crowded out wages across the board. Anne’s suggestion of federal catastrophic insurance is one positive approach though it doesn’t deal with the cost of care for chronic illness. Increased private costs for college education needs to be addressed through better targeting of education subsidies, a look at the efficiency of delivery and perhaps increased subsidies for efficiently provided education.

[wetzel]

"we have gained amply from trade with China . . ." - anne

Who are 'we'?

[dale]

Anne,
Regarding your comment above: "understand the strength of the Chinese model and not simply argue that it is exploitative rather than competitive in a mutually healthy or potentially mutually healthy vein."

here's a question of genuine interest.
Can the workings of an authoritarian regime (Chinese Communist Party) show us anything positive about new developmental paths? Can authoritarianism in any way be part of a "mutually healthy" relationship?

I know there's a difference between benevolent authoritarians and malevolent authoritarian regimes- but still- the great questions of human development seem to me to be dependent upon discovering democratic and collaborative ways of relationship. I struggle to understand what can be learned from the workings of an authoritarian revolutionary party trying to accelerate the captialist development of China- supposedly to create the objective conditions for socialism.

[anne]

Sonia, has quite an excellent comment to be considered in depth.

Wetzel, when I note that we have gained from the development of China, India, Brazil, South Africa, I mean "we" collectively though worker dislocations are always troubling. Simply think of what is shelved through Trader Joe's or Whole Foods from Kenya to Peru, think of where interest rates have been for a decade, think of how many of us on a campus have international economic relationships apart from being directly involved in business, and there is business besides.

Dale, China appears to me to have become increasingly less authoritarian socially in the course of economic liberalization. The essense of development for China however, which can apply as well for Mexico is offering trade for technology transfer and stressing education.

The thread of comments are excellent, and I am thinking.

[allenmn]

Stiglitz is right, but once again folks are not seeing the Chinese endgame. By draining the hinterlands of China, returns to agriculture are rising in China, possibly for the first time in a century. Gee less labor available might lead to the use of capital to increase production instead of more people!?! Shocking news. And industrial production can soak up those former peasants and make everybody richer.

Chinese advantages: all you bribe your way into polluting, cheap labor, sort of stable economic development policies. American advantages: expensive workforce, tight pollution standards, high first world taxation.

Now on to the main event. As I have foretold all those years back on this blog and it's predessor- China has a plan to switch gradually from the dollar to resource based assets that will provide resources destined only to be available to *China*, not on the free market. Subsequent deals have proven that is exactly what China is doing. Who cares how many dollars they have parked *temporarily* in the national accounts if they are already offset into long term coal, ore, and food import contracts with others in the world. How 'bout that for laying off your foreign currency risk? Darfur's oil, Iranian natural gas and oil, Malaysia rubber products, you name it and the Chinese are buying it. The only question is still when does the emperor have no clothes and the dollar begin to die. five years? Ten years? This year? That is still the five trillion dollar question.

All of the financial speculation is a fine symptom of the death of the dollar, now when the rest of the world stops taking them we will be bankrupt. so China is a blip on the radar of the rest of the world with regard to the end of US power and the end of the dollar.

When the troops leave Bagdad, it starts.

[Ponzi Q. Globalization]

Sonia,

It's hard to believe that the transfer of production from America to China and elsewhere has such little effect on the wages of those Americans put into competition with the foreign workers. One wonders why 'American' multinationals bother to produce anything abroad if the cost savings are so minor. Maybe the executives of these 'American' multinationals are doing it out of kindness. Maybe they want their former American workers to get better 'higher-level' jobs. Bonuses and shareholders be damned!

Sonia, Are you sure it's the data speaking and not the interpreter?

[anne]

http://www.nytimes.com/2007/03/01/washington/01cnd-poll.html

March 1, 2007

Poll Shows Majority Back Health Care for All
By ROBIN TONER and JANET ELDER

A majority of Americans say the federal government should guarantee health insurance to every American, especially children, and are willing to pay higher taxes to do it, according to the latest New York Times/CBS News Poll.

While the war in Iraq remains the overarching issue in the early stages of the 2008 campaign, access to affordable health care is at the top of the public’s domestic agenda, ranked as far more important than immigration, cutting taxes or promoting traditional values. Only 24 percent said they were satisfied with President Bush’s handling of the issue, despite his recent initiatives, and 62 percent said the Democrats — not the Republicans — were more likely to improve the health care system.

Americans showed a striking willingness in the poll to make tradeoffs for a better health care system, including paying as much as $500 more in taxes a year and forgoing future tax cuts. But the same divisions that doomed the last attempt at creating universal health insurance, under the Clinton administration, are still apparent. Americans remain divided, largely along party lines, over whether the government should require everyone to participate in a national health care plan, and over whether the government would do a better job than the private insurance industry in providing coverage....

[anne]

Sonia is being quite clever, for looking to Japan or Australia or Sweden or France there is every reason to argue that wages can be supported as trade and international investment proceeds, but the support must be purposeful and in several dimensions.

[dale]

And the trade regimes themselves must be supportive of democratic, regulatory, New Deal type international development.

[anne]

Dale:

"And the trade regimes themselves must be supportive of democratic, regulatory, New Deal type international development."

Precisely the need for intense continual negotiation.

[Bruce Wilder]

It has taken me a week, but Brad Setser's obsession with the PBoC's balance sheet undermines his credibility with me.

There's this bit of nonsense: "The capital losses could destroy the PBoC’s formal capital: borrowing in RMB, even at an artificially low rate, to buy depreciating dollars isn’t a winning financial strategy.... "

The PBoC doesn't have to borrow in RMB; it can print the stuff, if it wants to.

And, if the PBofC's dollar accumulation depreciates in RMB terms, so what? A rise in the value of the RMB, which the PBoC can print, is all to the good.

Beyond all of that, the PBoC's dollar reserves are always exchangeable for U.S. real assets. China's long-run strategy includes building extensive multinational enterprises, in order to capture distributional and scale rents; the dollar reserves will remain useful, and only "depreciate" in real terms, if the U.S., itself, is overcome with high inflation.

[MQ]

Yeah, Brad seems to look at the PBoC as an ordinary investor instead of a national central bank. The PBoC can print money, and has different goals than a standard investor.

And the U.S. will always be a large and (by world standards) relatively wealthy country. Unless the U.S. Fed lets internal inflation get out of hand, it's hard to see a scenario where having lots of U.S. currency won't be worth a lot, regardless of the dollar exchange rate with other countries. Granted, one could do better in such a case by having the more valuable foreign currency, but the dollars will still be quite useful.

[MQ]

Brad Setser, that is.