Jeremy Wallace

Paul Krugman has been very difficult for a China scholar to appreciate fully in the past few months as he has relentlessly criticized the Beijing regime for its currency and trade policies that he describes as mercantilist, with no little justification. The solution to the difficulties seems to me to simply be to devalue the dollar, through policies such as the QE2 that Bernanke is supposed to be unveiling post-midterms. [footnote: Krugman seems not to believe in the efficacy of this policy.] This kind of inflationary policy would be effective, because it would force the Chinese to either (1) increase their interest rates to tamp down on Chinese domestic inflation (which they are already beginning to do) or (2) revalue the RMB for the same reason. Doing (1) is destructive to global demand, as rather than encouraging consumption, it encourages further savings. As we are in a “paradox of thrift” world, encouraging savings at the expense of demand makes everyone poorer. Door (2), on the other hand, would encourage Chinese consumption and employment opportunities in the rest of the world. [I’m not sure about the economics here, but is it possible that the fact that non-Chinese workers earn more and thus spend more leads to greater multiples of general demand increases as non-Chinese labor demand increases? Or given that non-Chinese labor tends to spend a larger share of income rather than save it a benefit?]

So, with the exception of slight differences in QE2’s expected benefits, I do not disagree with Krugman on the economics. On the other hand, I believe that his view on the politics is mistaken. Blaming China for US economic difficulties and calling for a trade war or leaning in that direction seems extremely dangerous. I often think about a counterfactual world where 9/11 didn’t happen. In that world, I think that the Bush administration is pushed to ramp up escalation with the CCP. China as strategic competitor becomes the justification for military purchases, every economic blip, etc. The relationship is fraught with peril. In that world, calling for a trade war might cause something far more deadly to happen. Now, we aren’t in that world, and so perhaps the chance of confrontation between China and the US are so small as can be ignored. However, I think that the 9/11 interlude is fading, and China will come be seen as the enemy, and language to moves us closer to that day and to that world, in my view, is dangerous.

The frustrating part about Krugman’s anti-China rhetoric for a China scholar is that he has been remarkably good on the economics throughout the crisis and has helped me understand what is going on. In particular, he discussions of how everything is upside down with interest rates at the zero lower bound have been excellent. The “paradox of thrift” argument is difficult to convey, as it is the opposite of what one’s gut says should be the case and offers radically different prescriptions than basic morality. Economics is not a morality play. Rhetorically, this makes economics more difficult than it should be. It is easy to be serious by talking about the need for cutbacks in lean times and what-have-you, but such moralizing only puts us further into the hole. [Worst of all possible worlds is believing in the benefits of government demand only when the Department of Defense is involved (Barney Frank’s “weaponized Keynesianism“), and in particular when killing foreigners is part of the plan.]