Ignoring China Is Not A Good Idea
I have to respond to Scott Sumner’s recent post on China. After reviewing China’s exchange-rate/saving/export policy, Sumner basically concludes:
“In the end none of this should matter, as the job situation in the US is determined by two factors:
1. US supply-side policies
2. US NGDP growth (i.e. monetary policy.)
China plays no role in either, unless we are stupid enough to let it play a role in #2. If so, we have no one but ourselves to blame.”
This doesn’t seem right to me. I’d argue that what China does with its currency/saving rate, almost by definition, must affect both demand and supply in the US.
On the demand side, a chronic trade deficit with China means that other sectors in the US will need to work harder in order for overall demand to be in line with potential. The leading example here would be the $8 trillion housing bubble that occurred last decade. You would think that a bubble of that magnitude would have been associated with signs of an overheating economy; but not when there was already so much lost foreign demand that had to be made up for. In a way, I guess you could say that the trade deficit hid the housing bubble. Monetary policy, as Scott defines it, was a nonissue here, since NGDP rose in line with trend growth all throughout the bubble years.
On the supply side, it should be abundantly clear by now that letting China do as it wishes with its exchange rate is a great way to destroy manufacturing jobs. I’m all for getting as many people as possible into college and for helping them get jobs in the service sector, but there needs to be an alternative option. Manufacturing used to be the alternative option for millions of lower-skilled workers; but now it’s gone, largely because of Chinese trade policy. The result? Roughly 5 million workers are suffering from long-term joblessness.
Think of it this way: If we bring manufacturing back, then many of the workers who have been out of work the longest would have the opportunity to become more independent and would, therefore, stop relying on transfer payments from the state to survive. Surely this would make every conservative economist happy, no?
The way to bring manufacturing back involves reducing the value of the dollar. And reducing the value of the dollar implies a stronger yuan, to which many other currencies in Asia are pegged – this latter point is important.
I don’t see how there’s any other responsible way forward.