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Paul "Smoot Hawley" Krugman

Dr. (Oh) No
From The Daily Capitalist
I used to rail regularly against Paul Krugman, our "liberal conscience," but I became bored. His ideas are so silly and wrong that it was like the proverbial shooting fish in a barrel. Or is it shooting monkeys? Whatever. But a column of his on March 14 really had me concerned because the fellow is so dangerous.
This will just amaze you: In the middle of the Great Recession he is calling for retaliatory trade tariffs against China to force them to revalue the yuan.
Here's how he frames the question:
China’s policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery. Something must be done. ...
To give you a sense of the problem: Widespread complaints that China was manipulating its currency — selling renminbi and buying foreign currencies, so as to keep the renminbi weak and China’s exports artificially competitive ...
And it’s a policy that seriously damages the rest of the world. Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset.
The foundation of his idea is based on Keynesian fundamentalism. What Keynesians suggest as a cure-all of the world's malinvestment created during the fake money credit boom is to inflate our way out of the problem. This hasn't worked. In fact, it never has worked. The last thing they think we should do is to actually liquidate the bad debt and overvalued assets on the books of financial institutions which are tying up credit. Yet until that happens, we'll be stuck in the "liquidity trap" that government policies created in the first place. (See my articles, "It's Supposed To Work," parts I and II.)
It boggles the mind.
Krugman says that arguing with the Chinese will no doubt be futile because they won't revalue. His solution, referring to a policy of the Nixon Administration in 1971 to erect trade barriers against trade partners:
At this point, it’s hard to see China changing its policies unless faced with the threat of similar action [as in 1971]— except that this time the surcharge would have to be much larger, say 25 percent.
Yikes! What he is saying is that we should erect a trade barrier against Chinese goods.
Our government did this in 1930 and it was one of the causes of the Great Depression as international trade collapsed because of retaliation by other governments.
This article has caused a furor in the blogosphere. Everyone from Mankiw to Mish have properly put Krugman down for this dangerous idea. My favorite critiques are from Bill Anderson at Krugman-in-Wonderland and anything by Don Boudreaux at Cafe Hayek. Also see this excellent article, "Paul Krugman, the Nobel prize winner who threatens the world" by Jeremy Warner of the London Daily Telegraph.
Krugman like many of his faith-based fellow Keynesians has got it wrong, completely wrong.
First of all, there is no way that China will revalue the yuan in the foreseeable future. Their economy is on shaky ground and the last thing they will do is allow the yuan to rise and damage its export market. Please see my major article, China’s Fragile Economy, Its Housing Bubble, and What It Means To Us.
If we impose a 25% tariff on Chinese imports what will happen?
It is obvious that, all things being equal, we consumers will either pay more for Chinese goods, or we will cut back on purchasing them, or we will buy substitute goods. The impact on us would be that our standard of living would go down either as a result of having to pay more for the same goods, or as a result of not being able to purchase these goods.
Why would Krugman want to harm us consumers?
Krugman believes that revaluation of the yuan will spur U.S. exports and create jobs in America. What is really happening here is that, in effect, the dollar is way overvalued because of the financial insanity of our government. We, and I'm talking about our government not the private sector, have so much debt that, in effect a revaluation of the yuan really means that the dollar has devalued.
A devaluation of the dollar would theoretically spur U.S. exports because our goods would be cheaper on the world markets. But it would be at the expense of all the U.S. jobs and businesses tied to imports. Why the government would favor exports over imports is an economic policy called mercantilism, or state corporatism. Mercantilism is a policy whereby some companies or industries are preferred by the government over other companies. This was big in the 18th Century. Too bad Krugman hasn't progressed much further than that.
The other side of this is that most major currencies are also overvalued compared to the yuan. A rise in the yuan would result in a devaluation of many major currencies. Thus its a self-defeating policy: our exports to those countries devalued by a rise in the yuan would lose their advantage from our cheap currency. Maybe companies that trade with China would benefit, but companies that don't would at the very best have no net gain.
Then there are other low-cost producers who would rush to fill the gap left by the Chinese. Vietnam, Indonesia, Malaysia, Mexico, India, Brazil, Mexico. While this would not occur overnight, in relatively short order we would be shipping our dollars to these countries instead of to China and the same problem that Krugman was trying to solve would reoccur: dollars would pile up in those countries instead of China.
And then there are those ingenious Chinese producers who would try to offset the tariff by cutting costs, become more efficient. If they don't, look for a rise in Chinese unemployment, something the Chinese will avoid at any cost.
This policy puts the Chinese government in an impossible situation. If they let the yuan rise, they will crater their export market; if they don't, the U.S. tariff will crater their U.S. exports. It will result in Chinese unemployment. It's funny that Krugman has no compassion for Chinese workers.
Then there is the ultimate terror: an international trade war where countries engage in retaliatory trade tariffs as in the 1930s. This would cause a World Wide Depression. Brought to you by ... Nobel laureate in economics, Paul Krugman.
I loved this comment from Bill Anderson's article, in which he refers to a piece written years ago by FEE's Lawrence Reed:
[I]f one wishes to better understand Krugman's economic worldview, read "7 Fallacies of Economics," and you will find that nearly everything the Nobel Laureate writes falls into one of the categories listed in that piece.
I am beginning to believe that the man is not misguided or addled, but evil. He keeps recommending things that turn out to be harmful to anyone who takes his advice. Japan did everything he recommended them to do back in the '90s and their economy has been stagnant for 20 years.
His advice on China is irresponsible.
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To paraphrase Clausewitz
"Economics is the continuation of Ideology by other means"
hereby copyrighted by Flakmeister
the professors, who never worked in their lives, and gain tenure by both enforcing the mythology and pretending they are expanding the frontier of knowledge, are running the show. not a coincidence.
So it's settled, the American worker must be dragged down to the level of the Chinese peasant! We must suffer because the ineptness and corruption of their government has so impoverished their people that they work for next to nothing. You can't compete with a peasant. And you are saying we are powerless to stop it. Give us a break man! We should not be free trading with most of Asia, Africa or south America.
What is this? Shit on Paul Krugman day? He's wrong on China needing to revalue its currency but show the man some respect. He's done more for the dismal science than all other Nobel-prize winning frauds put together. Would you prefer to see the Chicago School lunatics publishing op-ed pieces in the WSJ? They can tell us all about how Wall Street doesn't need to be regulated and how bankers' bonuses are completely defensible because they're based on the invisible hand theory and market clearing "equilibrium". Nah, I prefer Krugie, but he needs an extended vacation. Take the cat along.
Leo:
Bugs is right: every day is shit on Paul Krugman day.
I appreciate your comment, but it repeats the fundamentalist approach of Keynes's faith-based economics. Krugman may have done some good research in international trade but the only reason he got the Nobel was because the Swedes hated Bush and his award was a shove-it-in-W's-face backlash.
Leo, until you understand the causes of the crash, stop swallowing the conventional wisdom, and start thinking out of whatever box you're in, you'll miss the point.
But I do like your articles on the pension bomb.
" He's done more for the dismal science than all other Nobel-prize winning frauds put together." So this Nobel fraud is the best fraud amongst Nobel frauds?
Every day is Shit On Paul Krugman Day!
"the threat posed to Western economies by
competition from low-wage nations....
[It is raised by] entirely ignorant men...
whose views are startlingly crude and
uninformed.”
"They can tell us all about how Wall Street doesn't need to be regulated and how bankers' bonuses are completely defensible because they're based on the invisible hand theory and market clearing "equilibrium"."
If the bankers' bonuses were actually corrected by the liquidation necessary to clear the system's debt, would you be bashing those claiming that non-existent bonuses are a result of market clearing "equilibrium"? Oh, but we need a nice flat line to follow. Krugman was never too good at coloring when the lines started to squiggle.
Yes, I'd much rather have the Friedman zealots publishing in WSJ than heading up the Fed.
The Krugzster is right on China needing to unpeg their currency, he's wrong on trying to force the issue through ham handed diplomacy. Especially considering USD isn't quite manipulation free either, to say the least.
He's a social misfit and shouldn't be applying his Euclidean intelligence to foreign relations as he is clearly incapable of non-linear problem solving or relating to humanity in any other way than to try and mold it into his personal hugbox.
wait...what?
"...One unsolved economic problem of the day is how to get rid of the Federal Reserve..."-- Milton Friedman
Because the Fed is in no way increasing the money supply in an attempt to acheive price stability nor maintaining a near zero nominal rate.
I have clearly imagined these things.
Yeah, that would be great. Cause the SEC is demonstrably inept at regulating Wall Street, and according to some, intentionally inept. There is a tendency for regulating bodies to be captured by their respective industries(see monsanto). Without regulatory assistance, the bankers wouldn't be getting bonuses. They'd be out of business.
I'm no fan of Krugman or his economics. He's as bad as it gets in terms of advocating money printing.
That said, your historical analogy is off base, I'm afraid. A Smoot Hawley today would be for China the creditor to stop selling to US the debtor, because the debtor can not pay with real money. Back then Germany was the debtor. US the creditor had legitimate reasons to stop selling real goods in exchange for Weimar inflationary marks.
Trade war was only a sympton. With unsustainable debt levels the Great Depression would have happened with or without trade war.
Not true. The Great Depression started out as a recession from the credit expansion from 1926 on. Hoover and Roosevelt turned it into a depression. Depressions are caused by governments.
China's economy would totally collapse because exports drive it.
The Rise of Firms by Paul Krugman:
http://nobelprize.org/mediaplayer/index.php?id=1072
Krugman got this one right. China is the problem (but one of many).
They have zero environmental laws, no human rights laws, no labor laws and no quality control. This is how Walmart keeps lowering prices.
America keeps buying worthless junk, China keeps hoarding U.S. Dollars or the commodity equivalent, and America goes into a jobless and debt downhill spiral.
China keeps their uprisings down and exports their domestic turmoil to the U.S.
Too bad Krugman, Bush, Obama and the other bought-and-paid-for politicians are now discovering the consequences of their dirty little deal with China-IT IS TOO LATE.
Pegging their currency to the USD gives them the ability to behave like the US on a smaller scale.
Joblessness in the US has little to do with China. When you visit the royal suite in a pricey world class hotel, you dont expect to see clerks as the perpetual residents.
The US is turning its environment in this royal suite like stuff. Believing that any trade should allow people to live in the US is delusional.
And yes, everything points out to the US being the biggest loser in world trade.
Pegging their currency to the USD gives them the ability to behave like the US on a smaller scale.
Joblessness in the US has little to do with China. When you visit the royal suite in a pricey world class hotel, you dont expect to see clerks as the perpetual residents.
The US is turning its environment in this royal suite like stuff. Believing that any trade should allow people to live in the US is delusional.
And yes, everything points out to the US being the biggest loser in world trade.
Another "HOPE" to "DOPE" Nobel Prize Wiener. Nothing to see here, move along.
Krugman fits in so well with the Obama administration and the rest of the socialist left wing dems in office. He is the ultimate "pass the buck", "it's not our fault", "if I wish I could have", "spend, spend, spend" MORON of a man! I swear he studies Marxism. Your right about the fact he is dangerous. But then again it seems we are living in a very dangerous world right now.
One advantage of studying Marxism is that you know what it is, not what various fringers tell you what it is.....
The fringers are the ones that cannot describe the difference between Fascism and Communism....
What have we got to lose? Some jet engine exports? In the 30's we exported more than we imported so tariffs was a shot in the foot. If we gradually raise tariffs the machines will be returned to Michigan; where they came from. This will make the streets safer for traders- the pitchforkers wont jab Wall Streeters cuz they'll be at work!
Great solution! What about all those employed in the import trade? Their unemployment means nothing? What about tariff walls and a collapse of international trade? You think we've got high unemployment now ...
This is perhaps the only issue on which Krugman is correct, (forcing the Yuan to float) minus the tariff, of course, which won't help. Free trade means freely floating exchange rates. Free trade also means, at least to me, free economic actors, not slave laborers, freely entering into transactions.
I'm all for free trade among and between free people. I have a problem with so-called "free trade" between the US and slave labor working under a managed exchange rates.
All these f***ing pseudo-Libertarians bashing Krugman ought to spend more time advocating for political and economic freedom in China. Gimme a f***ing break, please.
I think China will free float their currency against the USD if the US agrees to replace the reserve currency. US gains a significant advantage by having their currency be the reserve currency and the currency in which energy and commodities are priced in. US also has unlimited powers to create USD which gives it an unfair advantage in global trade (Imagine a limitless ability to buy real stuff with an electronic bit/green paper!). The Chinese by pegging their currency to the USD have leveled the playing field to an extent by ensuring that the US advantage is not without downsides. They will not unpeg until the US agrees to creation of a new reserve currency. So, outsourcing is a feature of the current global trade architecture and will not go away.
The Chinese are aware that they are probably accumulating a reserve that may lose value over a period of time but here and now they are gaining the ability to create mass employment and acquire technologies and skills which they were lacking.
Krugman has his moments, but I am disappointed by this. The most elegant way to level the field with the Chinese is via a carbon tax. Cap'n Trade is a farce, simply put a $30 / tonne tax on carbon emissions domesitically and on all imports. With such a tax in place, the U.S. is the most efficient producer of steel in the world, not to mention a host of other manufacturing industries. The pea-brains in congress simply don't get it.
He's attempting to force all the money still circulating into US goods. This will only partially succeed. If the value for the transaction sucks, people will simply use less and suck it up.
It does beg the question, "Why is anyone listening to him?"
Because he tells them what they want to hear. The unwashed think that economics is a zero sum game. They see a rich man, or a rich nation, and think that by destroying them, they will themselves become richer.
They are the harbingers of misery and slavery. Beware...
For a good chuckle.
Almost all mainstream liberal intellectuals are government shills. Overspecialize them and they're easy to control. Give them fancy accolades so they believe their own idiocy.
Glen Greenwald points out modern examples on a regular basis. Noam Chomsky has pointed out numerous modern historic examples. Buckminister Fuller wrote about the long term history of monarchs and their intellectual class.
Krugman is a moron. China could set the Remimbi at 1:1 with the dollar, and chinese goods will still be cheaper because the chinese work for less compensation. The price of the finished goods would simply adjust to the new exchange rate.
Krugman's ideas are so nutty, its hard to call him dangerous. The fact is, he's nothing but a puppet. The dangerous government leaders who enact his ideas have already decided the path they want to take. They just engineer giving bozo the economist a nobel prize so that when he echos their preconcieved notions, they can pretend like they are "following the consensus of top economists".
China should just dump all their dollar reserves. That'll move the fx rate in our favor. I wonder if he thought about the consequences of every item at walmart going up 50% in price overnight.
He's despicable.
The time traveling tariff.
The USD is pegged among other things to oil.
Huan pegged to USD is a defensive reactionary move.
What would be the effect of a USD devaluation on the oil consumption?
Has oil importance in present times changed in such a meaningful manner that a currency linked to it can be devalued?
Low cost producers stepping for China: well, that is a nice idea but which has not worked up to now. Mexico was specially shaped to offer an alternative to China production with the competitive advantage of being located on the US borders (as it was thought at that time) The result can be seen nowadays.
Jobs are not outsourced from the US because of a currency issue.
Jobs are outsourced from the US because the environnment offered by the US is less and less adapted to harbour entire segments of trades.
There are environments for rich people, for averagely rich people and poor people. Environments for blue collars, white collars etc...
On the global scale, the quality of environment offered by the US is disqualifying more and more this country to harbour farming jobs (must be subsidized to stay in the US), blue collar jobs, clerical white collar jobs...
Here, there is nothing different from what has happened at the US scale. Car workers live in neighbourhood for car workers. They dont rent a residential suite in a Hilton.
Look , im no fan of economists , least of all Krugman , but the backlash against his piece is misplaced imho.
I could go on a long diatribe about the global imbalances and balance of power geopolitically , but its wasted breath. I can sum it up by saying "Mercantilsm wins"
Read some history books from the 17th -20th century and decide for yourself what the best ingredients are for a strong economy. (its painfully obvious - a mercantilist economy and a strong military)
So what if theres a world wide depression. Its inevitable. It who comes out stronger that matters.
WRONG! Like, majorly, stupidly wrong. The ingredients for a strong economy are a lack of taxes and a lack of regulation.
Those things tend to lead to innovation and, combined with other types of fees the government can use rather than taxes to fund itself, result in a strong military. Mercantilism went away for a reason. It was stupid from the get-go, because it assumed that economic prosperity was a zero sum game. This is clearly wrong, wrong, WRONG!
Free markets are the ONLY way to prosperity, and have been for all time.
"Free markets" is a very simplistic , generic term used to describe some form of capitalist utopia. They never have and never will exist.
In that way , the term free markets is akin to socialism. Theyre both great idealogies for utopian theorists but dont work in the real world.
Mercantalism hasnt gone away.
The only thing you have got right is the need for low taxes.
I was worried about free market capitalism and such but thanks for taking that off my plate by explaining it so simply - it doesn't work in the real world because you said so.
I heart appeal to authority, especially when its to the altar of such a brilliant and insightful mind.
But... but... but.. he won a Nobel Prize!!! Just like Obama!
...and Al Gore.
My wife was watching a show on cable about Albert Einstein (she usually has no interest in shows on History/NatGeo/etc.) and she was taken aback that he didn't win a Nobel Prize for relativity. I tried to explain to her what he won for, but decided it was going to take too long to get to the punch line.
I'm beginning to see why my great-great-grandfather left Sweden.