25 June 2010

Charlie Chan(nels) Dr. Keynes

I have argued more than once in the course of this endeavor that the Chinese government's economic decisions have been counter-productive as economic policy, although plausibly effective as warfare sans guns. Today's NY Times offers a double barrelled confirmation. First, some reporting from China.

So, the money quote:
These days, the workers are crucial for China's economy in another way: They must start buying the very products they manufacture, spending their paychecks on lipstick and lingerie, plastic lawn chairs and plasma television sets. Officials see them as the linchpin of China's move away from a lopsided economic model that relies too heavily on foreign consumption.

The government, likely being forced by the Foxconn mess as anything else, has finally figured out Econ. 101; trading with other countries only is beneficial if the trade is for physical goods (and possibly, a few services). China has used trade to simply collect foreign currencies, while denying the goods to its own people. As I pointed out in earlier posts, historically, foreign trade has been undertaken to sell surplus output to other countries, which in turn send back their surplus outputs. China's attempt to move goods to smaller markets overseas, only to collect paper bills, is ultimately foolish. They will pay the piper sooner or later. It looks like sooner. Despite what Econ. 101 teaches, comparative advantage makes sense only in a world of no monopolies, oligopolies, and manipulated currencies. Such a world does not exist today, nor did it when David Ricardo proposed the notion.

Speaking of manipulating currency, Dr. Krugman takes on that issue. Suffice it to say, he provides a bit more detail to my argument. In a nutshell, China treats currencies (other countries have done so, and will do so) like produced widgets, and strives to drive down its currency's value vis-a-vis others, principally the Almighty Dollar. This makes its exports cheap, and its imports expensive.

The two pieces dovetail nicely. The reporting shows that the government finally sees that exporting the bulk of its production is wasteful, and the analysis shows that the currency games only make sense if it were to continue to do that. Mao is reputed to have said, "Who cares if the west dropped a few nuclear bombs on china, a few hundred million chinese killed. We are china with a population of a billion, so we have a few hundred million to spare." That attitude, with the addition of nearly a United States worth of Chinese, no longer applies.

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