Paul "Smoot Hawley" Krugman

Dr. No

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.