Anyone familiar Paul Krugman's writings is aware of his dissatisfaction with China's currency policy. Here's an excerpt from a January 1st op-ed:
China has become a major financial and trade power. But it doesn’t act like other big economies. Instead, it follows a mercantilist policy, keeping its trade surplus artificially high. And in today’s depressed world, that policy is, to put it bluntly, predatory.
Here’s how it works: Unlike the dollar, the euro or the yen, whose values fluctuate freely, China’s currency is pegged by official policy at about 6.8 yuan to the dollar. At this exchange rate, Chinese manufacturing has a large cost advantage over its rivals, leading to huge trade surpluses.
Evan Osnos, the New Yorker's China correspondent, has found an official Chinese rebuttal to Krugman, written in the English edition of the Global Times:
Krugman wrote in his book, The Conscience of a Liberal, “It’s only in retrospect that the political and economic environment of my youth stands revealed as a paradise lost, an exceptional episode in our nation’s history.”
The paradise referred by Krugman is the period from the end of World War II to the 1970s, also the time when he was growing up. His nostalgia is touching, but shouldn’t affect our policy judgments.
It’s true that during this time the US economy grew rapidly, wage levels rose sharply and the gap between the rich and the poor was significantly reduced.
However, at that time billions of people worldwide had still not joined the wave of globalization. With globalization, the US has been forced into a very different kind of economy.
A general manufacturing industry can no longer survive there. When the US found that modern service sectors such as high-tech, communications and finance could not guarantee full employment, it was no longer possible to return to this earlier paradise.
Paul Krugman is like a doctor facing a patient with extensive cancer. He can diagnose the cause of what plagues the US, but he cannot provide a genuine cure.
Krugman’s prescription is not a question whether the Chinese want to accept it or not, but a question whether Americans want to accept or achieve it or not. We do not need to be too serious about the arbitrary judgments of popular economists.
Judging by today's eye-popping Chinese export figures, I don't expect this debate to end anytime soon.
Join the Conversation