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March 03, 2007
In Which I Cheer For Brad DeLong
By Ezra
Brad responds to Jeff Faux on China:
In 1877, it was the United States that was the rising superpower across the ocean to the west of the world's industrial and military leader. Today it is China. In 1917 and again in 1941 it was greatly to Britain's benefit that America regarded it as a friend and an ally rather than as a competitor and an enemy. And since 1945 it has been greatly to Britain's benefit that America has regarded it as a trading partner rather than an industrial competitor.
There is a good chance that China is now on the same path to world preeminence that America walked 130 years ago. Come 2047 and again in 2071 and in the years after 2075, America is going to need China. There is nothing more dangerous for America's future national security and nothing more destructive to America's future prosperity than for Chinese schoolchildren to be taught in 2047 and 2071 and 2075 that America tried to keep the Chinese as poor as possible for as long as possible.
This is why I worry when concerns over trade turn into accusations of currency manipulation and when neocons publish Atlantic Monthly cover stories on war with China and make it official US policy that we seek the preservation of the unipolar order. Whether China's internal contradictions will retard or eventually halt the nation's ascent into superpower status is, for now, unknowable. But if the country is able to transcend its growing pains and urban/rural divide and political unrest to emerge a functional, decent, powerful nation, I'd far prefer it viewed America as an ally that sought to open the doors to economic development and broad betterment, not slam them shut for a couple more decades of waning dominance.
March 3, 2007 in China | Permalink
Comments
This is a pretty silly response, both from DeLong and from you. Protectionism won't help anyone, but this idea that "caring about American workers = wanting to keep China poor" is just off-the-charts bullshit. Surely the idea that there's a necessary tradeoff between American and Chinese workers is promoted only by DeLong himself, via the kind of "free trade" agreements that he favors. Those, of course, aren't really "free trade" agreements, as Dean Baker tediously and accurately points out every day on that blog of his that sits next to TAPPED. We can have mutually beneficial trade with China, but only if get over DeLong's idea that the only kind of trade good for China is the kind he favors.
Posted by: fair trade guy | Mar 3, 2007 10:53:32 AM
It's also kind of silly because the Chinese don't have an American or British system of government. Without that system in place in China as well, the analogy seems a big stretch.
Posted by: keatssycamore | Mar 3, 2007 11:05:44 AM
I don't think DeLong has that idea at all. Moreover, this post is about the occasional economic demagoguery of China that does, indeed, surface in American life. No one has drawn an equivalence between wanting to aid American workers and wanting to keep China poor. Brad has suggested, often rightly, that Faux isn't thinking through the implications of his rhetoric, and should be a bit more serious about explaining what a mutually beneficial trade regime with China would look like, instead of making some up some bullshit about how just have to tax the capitalists-turned-commissars or whatever.
As any and all good fair traders know, the point of fair trade isn't protectionism -- it's a better regime for all involved. Indeed, as a friend of mine likes to argue, you could create a simultaneously more liberal and fair trade regime by sweeping away all the accumulated special interest bullshit and making access to the US market contingent on a set array of enforceable -- and achievable -- labor standards and a promise to refrain from manipulating exchange rates.
What scares me, however, is a tacit or unconscious alliance between neocon China-hawks determined to retain American unipolarity and labor-liberals furious over China's effect on the American worker. Faux's rhetoric, at times, veers close to the latter, and in this exchange it occurred without much offsetting concern or thought for how to help actual Chinese workers. I don't think there's a zero-sum gain between helping Americans and helping Chinese. But it falls on folks like Faux to explain what that regime will look like, not just attack bad trade.
Posted by: Ezra | Mar 3, 2007 11:07:59 AM
Look, nationalism sucks. I am 100% in favor of internationalism. But the effect of plumping for DeLong over Faux in this little slapfight is to promote the disastrous NAFTA/CAFTA model DeLong favors. I think Faux does a perfectly respectable thing attacking the bad model since it's predominant and there's little chance of getting anything else for the next few years, even with a Democratic Congress.
I will also go on record saying that the effects of trade tend to be wildly overstated, and that if we want to help Chinese workers, we would do well to begin building solidarity with their particular struggles on the ground in particular factories, etc, rather than thinking exclusively about government policy. For that, I'd recommend looking at the China Labour Bulletin and the Asia Monitor Resource Center.
Posted by: fair trade guy | Mar 3, 2007 11:29:20 AM
That's a total strawman, Faux and fair-traders would love for China to become as "rich" as we are. And we are not afraid of the Chinese.
DeLong is ducking and has always ducked the real question of fair-trade vs. free-trade.
You should be calling him on that.
Posted by: jerry | Mar 3, 2007 11:29:41 AM
I'm pretty sure Brad opposed NAFTA, and he recently wrote a searing column on NAFTA's failures, so I'd suggest his opinions aren't quite so easy to pigeonhole. I do agree on trade being overstated, though, and the need for international labor solidarity.
Posted by: Ezra | Mar 3, 2007 11:54:53 AM
I think both Delong and Faux have mostly managed to slip and slide past the important issue. The complaint about Faux's rhetoric may be valid to some degree, mainly in regard to current relations, but not in the terms Delong makes it out to be, with a generation of Chinese hating us. Faux actually pointed out some good reasons to doubt that would be a problem. The more important point was whether free trade is really helpful for the poor in China, something that Faux was ignoring, though he finally got around to claiming that actually it isn't good for them. I find his claims not very credible, in light of opposite claims I've read elsewhere.
According to what I've read, DeLong did support NAFTA. I don't blame him for that. I think those who have criticized NAFTA have mainly done so for reasons that have little to do with its failure. It was mainly bad timing, with the deal done just as low-wage jobs were starting to move more quickly to Asia.
Posted by: Sanpete | Mar 3, 2007 12:57:47 PM
So Brad thinks that expanding our peasant class to reduce China's peasant numbers is a good idea. By the way, here in the midwest we are losing jobs to China, India, and Mexico (CI&M). There's no way that we can lift the people in those countries up to our standard of living. What's happening now is that those countries want to carry large trade surpluses with the USA to fuel their economies. The salaries in manufacturing and Information Systems have already been negatively impacted because of trade. How low do our salaries have to go before people rebel? Change is going to happen. The real question is whether we can control the RATE of change. CI&M have unlimited human resources compared to ours. Capital, goods, and the means of production move much faster than in previous centuries. Workers and communities can't possibly change fast enough to keep up with unrestrained trade. Brad keeps obsessing about keeping the Chinese poor. We won't be able to help anyone if our own economy gets to the point where people demand protectionism. Lou Dobbs will be more popular than ever (unfortunately).
Posted by: MarvyT | Mar 3, 2007 1:04:58 PM
Ezra: "No one has drawn an equivalence between wanting to aid American workers and wanting to keep China poor. "
Ezra, meet Brad DeLong; Brad, meet Ezra.
Posted by: Barry | Mar 3, 2007 3:18:29 PM
I'm pretty sure Brad opposed NAFTA, and he recently wrote a searing column on NAFTA's failures, so I'd suggest his opinions aren't quite so easy to pigeonhole. I do agree on trade being overstated, though, and the need for international labor solidarity.
I am pretty sure you are 100% wrong on that. Even his searing column on NAFTA's failures, IIRC, was more of the interview answer to "name your biggest failing", "oh, well everyone says I work too hard!". "Name NAFTA's biggest failings...." I could be wrong, why don't you look that up?
Posted by: jerry | Mar 3, 2007 3:25:43 PM
DeLong was one of the people who created NAFTA.
That said, it doesn't matter what is theoretically possible. When Howard Dean says, "We need to create high-paying jobs and keep them from China," the possibility for spinning that as merely a statement of pro-Americanism isn't very big.
Posted by: Alon Levy | Mar 3, 2007 4:10:14 PM
How low do our salaries have to go before people rebel?
Shorter MarvyT: Americans have a birthright to $50,000/year jobs, but Mexicans, Indians, and Chinese should be content with $5,000/year jobs.
Posted by: Alon Levy | Mar 3, 2007 4:17:35 PM
Shorter MarvyT: Americans have a birthright to $50,000/year jobs, but Mexicans, Indians, and Chinese should be content with $5,000/year jobs.
That's a distortion of MarvyT's point of view. Please don't do that.
The real question is whether we can control the RATE of change.
That is the real question. It took the US 225 years to get where we are. DeLong says we should go fullspeed ahead to bring China up to our level. Some of us worry the evidence shows we will lose our protections in the environment, safety, education, standard of living, etc. if we go full speed ahead.
The questions are is a full speed ahead plan the one that maximizes human wealth in the most fair distribution? And do we have a moral or ethical duty to harm our own labor protection? Is there a way we can bring everyone up in a monotonically increasing manner?
This is a person that asks MarvyT's exact question, How low do our salaries have to go before people rebel?
But you wouldn't dare call Ben Bernanke a person that wants to keep the Chinese poor at the American's expense would you?
Why can't people argue without having to resort to truly stupid arguments? It's really bullshit when people bully their way through a discussion by mocking other people, calling them trolls, or flouting their own credentials.
Posted by: jerry | Mar 3, 2007 5:05:37 PM
Brad DeLong was an initial supporter of NAFTA and he worked on it some back when he was in the Clinton administration. He has since soured on it but largely because it hasn't been as successful for Mexico as he/they predicted it would be back when it was orchestrated, not for the standard Labor/Perotist critique that it caused the loss of hundreds of thousands of jobs, increased crime by the thousands and made films less classy than they used to be. His opinion of NAFTA is more or less the same as Jamie Galbraith's; I.E. Wasn't bad for the U.S. but wasn't great for Mexico either. Brad DeLong opposed CAFTA.
DeLong is ducking and has always ducked the real question of fair-trade vs. free-trade.
Could you explain just what exactly "fair-trade" is, as a coherent alternative system to free-trade? I've yet to see anyone really articulate this.
So Brad thinks that expanding our peasant class to reduce China's peasant numbers is a good idea.
There is no existence anywhere in the U.S., even in the poorest most destitute & deprived areas, that is comparable to the life of subsistence rice farmers in China. You have no concept of what a "peasant" really lives like.
There's no way that we can lift the people in those countries up to our standard of living.
If current growth trends prevail, and there's no reason to think they won't. The economic difference between the U.S. & China will be too small for the decision to relocate production to china to no longer be a no-brainer by mid-century. At that point, the rest of their climb to the status of "Developed" won't depend on U.S. benevolence.
But you wouldn't dare call Ben Bernanke a person that wants to keep the Chinese poor at the American's expense would you?
No I wouldn't. But that's not what Ben Bernanke was saying. He said that if the risks posed by this economic volatility aren't midigated, people are no longer going to support it. He's arguing for a safety net, not for the process to stop.
Posted by: DRR | Mar 3, 2007 9:55:42 PM
"This is why I worry when concerns over trade turn into accusations of currency manipulation..."
I generally support the DeLong position on trade, and I'm a big fan of Jeff Sachs who likewise thinks protectionism keeps third world people poor, but what China has done is pretty much textbook currency manipulation. I think Krugman, the man who wrote the book on currency crises, would agree with me on that. Since the Yuan is PEGGED to the value of other countries and is not valued based upon the performance of their own economy, this should be self-evident. Why it is dangerous is that China is now an enormous player in the free-trade system; I'm unaware of any other like it that has ever had a pegged currency.
The evidence: China participates in the free trade system, but fixed it's currency to the dollar, and now possibly to a basket of foreign currencies. Generally, free trade countries allow their currencies to "float", or trade freely. Valuations adjust based upon market conditions, notably a country's current account surplus or deficit. By running an enormous current account surplus, in a free float system, China would see a great deal of appreciation vis a vis a current account deficit nation like the US. Thus, chinese exports would fall as they would become more expensive. Chinese people would get richer, as their currency would be worth more in real terms (also allowing more imported goods to reach the Chinese economy and Chinese people to afford things like Fords and Intel chips).
China also buys LOTS of US treasuries, on which they fully expect to lose money. They know their currency should be worth more dollars than it currently is, and that this cannot last forever. When their currency is revalued, or allowed to float freely, their US government bonds will certainly be worth much less than had they kept their money in Yuan. Why would they do this?
Similarly, why would the Chinese invest in US bonds, paying interest rates under 5%, when their own economy is growing at 8-10% per year? Wouldn't they make more money by investing (like many hedge funds, private equity firms, and wealthy Americans) in the Chinese economy?
Why would China choose to lose money on its foreign reserves? This is outside economic theory, which says they should pursue the greatest returns on their investments.
Because they want to prop up their export driven economy for a few more years. They lend us money to keep our dollar strong and our inflation low. Export driven economies grow at much faster rates than those that rely primarily on the domestic market.
China is capitalist, but it is a planned capitalism. Calculating that an extra 1-2% GDP growth can be gotten for themselves by manipulating the dollar/yuan exchange rate. If you don't believe me, believe Brad DeLong. He has written a lot about this.
Posted by: tomboy | Mar 3, 2007 10:07:40 PM
No one is saying it needs to stop. Read what MarvyT said. This is what Faux and everyone else is saying.
Not stop. Slow down. Regulate. Yes to some. No to others. Reform.
And Bernanke basically said that if we don't help out American workers and stop the inequality some way, the peasants are going to revolt. Which is exactly what MarvyT said.
There are many definitions of fair-trade that revolve around the same center tenet. One I heard last week that I liked was that we don't just have free-for-all trade with any country where employees can't form unions and have a real say.
Apart from that, there are only 59,000,000 google hits for it, and I am certain you can do better research about it than I can at this time of night.
Read Faux, just don't put words in his mouth.
Posted by: jerry | Mar 3, 2007 11:04:15 PM
Thanks Jerry, obviously you read my post carefully. The real road to prosperity for China, India, and Mexico is to develop their DOMESTIC economies along with their exports. The US can only run so much of a deficit before reaching a crisis. One of the reasons none of those countries have a strong domestic economy is the lack of trade unions. Without unions or a strong liberal government, workers wages will rise very slowly compared to the economy. All three countries have a severe concentration of wealth at the top with very little trickling down to the masses. I want to see these countries succeed in building robust domestic markets before they kill the golden goose - the US market. If 1.5 billion workers are basically geared for exporting most of their products and services, their markets will eventually fail. None of us want to see that.
Posted by: MarvyT | Mar 3, 2007 11:59:33 PM
Wouldn't they make more money by investing (like many hedge funds, private equity firms, and wealthy Americans) in the Chinese economy?
For the Chinese, investing here is a hedge. There is also the question where they would invest the money domestically, since their economy is already growing as fast as they could possibly want it to. But I'm sure you're right about their wanting to prop up the export market too.
Export driven economies grow at much faster rates than those that rely primarily on the domestic market.
Right, and it seems a good thing for us to support that for China, both for direct humanitarian reasons and because of that economy/democracy idea we like so much, as long as we can handle it without too much grief here. Seems to me we have a good balance that way now, and can continue to work on the "fair" part without dumping on the "free" part too much. China's internal market is still very small in wealth, so it can't be the main focus to grow their economy yet. If growth is to occur at anything like the rates desired, their domestic market has be built up with the economy as a whole before that can happen.
Posted by: Sanpete | Mar 4, 2007 12:40:24 AM
The position taken by Ezra and Brad is that "free trade" may make American workers worse off, but it makes the much poorer Chinese, Indians, Mexicans, (...) better off, and is morally justified on that basis.
My question is this: Had trade pacts been openly advocated on such grounds, would they have passed? The answer is obvious: no, they would have been rejected by huge majorities. Thus, to advance this argument now is to implicitly admit that the American people were lied to when they were told "free trade" would make them better off.
Posted by: Josh G. | Mar 4, 2007 12:55:48 AM
"So Brad thinks that expanding our peasant class to reduce China's peasant numbers is a good idea. By the way, here in the midwest we are losing jobs to China, India, and Mexico (CI&M). There's no way that we can lift the people in those countries up to our standard of living."
I think this is a really important issue, but focusing on trade is missing the point, IMO. The more fundamental issue is technological progress and how the fruits of technological progress, and gains from trade, are distributed.
Suppose those midwest workers were losing their jobs not because of foreign competition, but because of labor-saving technology? Suppose those IT jobs were disappearing, not because cheaper workers were doing the same work, but because with new software frameworks, the same work was being done with much fewer people?
There would be no issue of foreigners versus Americans, but the problem would still be the same, wouldn't it?
I think this is what Ezra's talking about. China, India, Mexico are not the fundamental problem here. The problem is that some people and some regions, through no fault of their own and for various reasons, are facing huge swings in income, and the dominant reigning ideology is that people facing these really difficult economic problems are basically on their own, they can't expect or depend on help.
As technology develops, and as the economy becomes more and more complicated, looking for lucrative work can seem like a combination of musical chairs (more and more people competing for fewer and fewer slots) and calvinball (because the ways to accumulate your little pile of green stuff can seem somewhat arbitrary, and divorced from producing something really valueable; see the recent MP3 patent fiasco).
No big solutions, except, speaking for myself, to try to make things as simple as possible (looking around, what is the truly useful work that needs to done, and will add value to people's lives? Then, how to train myself and put myself in a position where I'm able to do that kind of labor, making a decent living at a useful trade?
Posted by: roublen | Mar 4, 2007 1:55:03 AM
The position taken by Ezra and Brad is that "free trade" may make American workers worse off
I'm not sure that's their position, though it could be. Obviously trade with China has been very advantageous to the American worker when he goes shopping. Even if wages have stagnated, the value bought by them has continued to increase, and by a sizable amount. (Ezra hated that point when Will Wilkinson made it, but it applies.)
There is also the point that has been explained to the public in the context of trade, that there might be some pain in the short term but in the long term it will be better all around. The alternative, it's explained, is to fall behind the rest of the world in efficiency, etc. Obviously such arguments have their limits, but they could reasonably be applied here.
Posted by: Sanpete | Mar 4, 2007 2:14:56 AM
Sanpete,
The Chinese are not investing here as a hedge. A hedge involves making a play on relative risks that move together. This is in no way what the Chinese are doing. You might say they are trying to diversify their risk portfolio, but really they are just financing the borrowing of the US government and the US economy. They keep our mortgage refis cheep so that we fill up our houses with new flat screens, marble counter tops, and furniture that increasingly is coming from China.
Almost every macro-economist in the world knows that the dollar is over-valued and that our financial situation as a country has steadily eroded over the last 5 years. Why would the Chinese invest in a vehicle that pays the lowest rates in the world with their principal tied up for a period of time where it is not unlikely to lose 20%?
Because in financing our borrowing, their economy can grow by 1-2% per year faster, which comes out to hundreds of billions of dollars in added GDP per year.
In addition, a fair valuing for the Yuan would result not just in a slowdown of export growth and a slowdown in the Chinese economy, but also could result in the onset of a new set of protests that would make Tiennamen look tiny. China's young industrial tech workers, with their cell-phones, internet access, and experience demonstrating for higher wages, better working conditions, and improved environmental standards, would make the students of 1989 look like complete amateurs.
The Chinese government needs to keep the status quo going; they need to deliver economic growth, and if that means a bit of currency manipulation, they'll do it. They are not classic rational economic actors pursuing gains on their investments.
Posted by: tomboy | Mar 4, 2007 10:47:30 AM
Actually their position is that free trade can make everyone worse off.
Mankiw's Ten Principles of Economics, Translated, for the Uninitiated. http://www.youtube.com/watch?v=VVp8UGjECt4
Posted by: jerry | Mar 4, 2007 12:00:40 PM
Tomboy, you may be right that China investing in US bonds isn't done as a hedge. I think if the Chinese economy were to tank, money would move from it (and possibly other parts of Asia, as they often go in tandem) to the US, driving up the dollar, thus a good hedge. But you're right to point out that the dollar is already seen as artificially high because of Chinese investment, so it might not be such a great hedge. Hard for me to say. I've already agreed with your basic point; I was just adding a couple additional reasons China might invest here instead of at home.
Posted by: Sanpete | Mar 4, 2007 1:32:09 PM
Sanpete,
I think that a huge problem with the Chinese economy would likely result in pretty big problems everywhere, especially the US. But anyway...
People who feel the US should be less inclined to free trade should read Jeff Sach's book, The End of Poverty. It is pretty eye opening just what freer trade has meant to literally billions of impoverished people in the last 25 years. And this has come at the price of what here? We in the US are not getting much richer? Well we are, but we're not dividing our wealth optimally. That, and a few million people in the US have lost their competitive advantage in manufacturing.
Excuse me, but a billion people lifted from extreme poverty (less than $1 a day) is worth some trade off here. I think liberals, of all people, should understand that.
Posted by: tomboy | Mar 4, 2007 2:31:52 PM
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