Chen Weihua

Krugman's ominous greeting unfounded

By Chen Weihua (China Daily)
Updated: 2010-01-05 07:45

A Nobel laureate must have some unconventional wisdom. That unconventional wisdom in Paul Krugman's omninous New Year greeting to the Chinese on Dec 31 in The New York Times has confounded many ordinary people like me.

I have taken a few economics classes and I got to meet Paul Samuelson 10 years ago at MIT, when Krugman's office was on the same floor. Yet Samuelson, quoted by Krugman as if he were the Bible in his article, would disagree with Krugman's assertion that "if the Chinese do dump dollars, we should send them a thank-you note".

In an article written last June, Samuelson was worried about the possible dumping of US dollars or the end of the purchase of more US dollars by Chinese, Japanese and Koreans over pessimism about the greenback.

Krugman is right that the dumping of dollars would hurt the Chinese economy, but he refuses to admit that it would be equally disastrous for the US economy. So sending China a thank-you note would not make sense - unless you get excited watching a mutually destructive economic game.

It is confusing that a leading economist would say "my back-of-the-envelope calculations suggest that for the next couple of years Chinese mercantilism may end up reducing US employment by around 1.4 million jobs". Krugman should know that there is something called comparative advantage in Samuelson's textbook. The Americans are simply no longer competitive with the Chinese, Indians and Vietnamese when it comes to labor-intensive jobs. Those jobs will not stay in, or return to, the US - even if the yuan appreciates 100 percent in the Year of the Tiger.

Krugman seems to blame all of American's economic woes on an undervalued Chinese yuan, and does not acknowledge it was really Wall Street that caused the colossal US economic problems, including the housing bubble.

Besides, China's trade surplus with the US was unaffected after the Chinese currency appreciated more than 20 percent in the last few years. So why would Krugman believe that another gain for the yuan would solve US trade imbalance?

The Chinese, of course, are not dumb enough to follow Krugman's advice and let the yuan appreciate so much that it will devalue the $2 trillion in its reserve into worthless paper. China is also not ready for a fully convertible currency that is simply too volatile for its market.

Krugman uses the word mercantilism several times to describe the Chinese, without realizing that it has been the policy of Europeans and Americans for a long time. China, at best, is still a student learning from European and American mercantilism.

In his Nov 19, 2007, article in The New York Times, Paul Samuelson argued that speculative markets will not stabilize themselves. The best policy is actually the middle way: Not too much freedom for market forces, and definitely not too little.

If Krugman has lots of respect for this late economist, why would he not allow the Chinese government to go the middle way?

The appreciation of the Chinese currency will make Chinese exports more expensive which will hurt China's export industry but also make Chinese products more expensive to US consumers and make US companies that base their manufacturing in China less profitable and less competitive.

Such a mutually destructive course is a big contrast to today's Chinese mentality, which believes in a win-win scenario, even if that often means US multinationals win much more.

Krugman also suggested, much like a narrow-minded politician, a protectionist approach to the Chinese currency issue.

I am not the only one baffled by Krugman. Some 450 comments were posted soon after his article, Chinese New Year, was printed. Most readers expressed huge disappointment in the economist. The strongest opposition seems to come from US readers, who Krugman wants to protect but who will get hurt if his recipe is followed.

Krugman has been consistent in pressing for the revaluation of the Chinese currency. That consistency, in his words, simply means stubbornness.

China-US ties today are deeper and broader than ever. Politicians will have more wisdom than to follow Krugman's out-of-touch unconventional wisdom.

E-mail: chenweihua@chinadaily.com.cn

(China Daily 01/05/2010 page8)