Sent to you by Joe via Google Reader:
Becker's analysis is impressive, but I hesitate to state with confidence that China would be better off to revalue its currency. As Becker points out, China has pegged its currency to the dollar at a rate of exchange that greatly undervalues its currency relative to ours. As a result China sells goods to U.S. producers and consumers at very low dollar prices and buys goods from U.S. producers at very high prices. In consequence it exports a lot to the U.S. (and to other countries as well, for its currency is undervalued relative to other currencies besides just the dollar, notably the euro) and imports little. Since it receives more dollars than it pays, it has accumulated huge dollar reserves--accumulated them rather than giving them to its people. It has more than $2 trillion in foreign reserves, mostly U.S. dollars. The dollar has been falling lately, and the value of China's dollar reserves with it.
Could China have sensible reasons for such an odd, old-fashioned policy ("mercantilism"--the maximization of a nation's cash or cash-equivalent reserves--famously attacked by Adam Smith more than two hundred years ago)? It could. The immense exports that China's skewed exchange policy has fostered provide employment for a large number of Chinese. Their wages are low, but at least they have jobs. Of course they might have jobs if the dollar were cheaper relative to Chinese currency. China would import more and export less. It would manufacture less, because many workers would be required for the expanded system of domestic distribution that would be necessary if domestic consumption (both of Chinese manufactures diverted from export to internal markets and of imported goods). It would manufacture a different mixture of goods, because of competition from imported goods, but above all it would need a much more elaborate system of wholesale and retail distribution, and perhaps a different commercial culture. The transition to a modern consumer society with its credit cards and product warranties and malls and the rest would be difficult. In the interim there might be widespread unemployment; shifting employees from manufacturing to distribution, or from one type of manufacturing to another, doesn't happen overnight. And China doesn't have the kind of social safety net that we do, to catch the unemployed before they reach the bottom. Because of the limitations of domestic consumption, Chinese are great savers, and this relieves the pressure the government would otherwise feel to provide social services. That provision might strain the government's administrative abilities.
China has a long history of political instability, and there is tension between its dictatorial communist government and its largely free-enterprise economy. It is naturally reluctant to take chances on changing its economy from one of producing manufactured goods for export to one of manufacture and distribution primarily for domestic consumption.
And there is value to China in those trillions in foreign reserves that it has accumulated. They magnify its global power. China is our major creditor. It finances our deficit. Like any dependent debtor, we must be very careful not to offend our major creditor. It is true that our relation with China is one of bilateral monopoly: if we devalue the dollar (which we may be doing) in order to lighten our debt burden, we hurt China; but if China in retaliation stops buying our Treasury bonds, we are badly hurt.
For all these reasons, while China is likely to abandon mercantilism in the long run, it probably is sensible for it to do so gradually.
Would we benefit from China's abandoning mercantilism? As Becker points out, our consumers benefit from the artificially low prices at which Chinese goods are sold in this country. At the same time, our dependence on China's financing our public debt weakens our ability to influence Chinese policy on issues of urgent concern to us, such as the threat of nuclear proliferation posed by North Korea, Iran, and Pakistan, and the need to take effective steps to limit global warming.
Then too it seems that the only way in which we can buy those cheap goods from China is to borrow from China. We buy more from China than we sell to it and so China accumulates dollars to bridge the gap, dollars that it then lends to the U.S. Treasury. The effect is to reduce pressure on our government to pay down our immense and growing public debt either by raising taxes or by cutting spending. We cannot continue along the path of ever-growing debt unless our economy grows very rapidly, which is not assured. So I am not sure that I agree with Becker that China's policy is good for us and bad for it. The reverse may be truer.
Things you can do from here:
- Subscribe to The Becker-Posner Blog using Google Reader
- Get started using Google Reader to easily keep up with all your favorite sites
No comments:
Post a Comment