tag:blogger.com,1999:blog-2499715909956774229.post5129650574989452305..comments2024-03-09T02:22:57.289-08:00Comments on Stephen Williamson: New Monetarist Economics: Can the Nobel Prize be Revoked?Stephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger32125tag:blogger.com,1999:blog-2499715909956774229.post-22571487590929279162010-09-22T12:01:56.933-07:002010-09-22T12:01:56.933-07:00A very stimulating post, and lots of good exchange...A very stimulating post, and lots of good exchanges that follow --- including Dr. Williamson's willingness to reply to his critics. <br /><br />1) That said, it's Catesby who is the first to point to the short- or mid-term problem of China's exchange rate policies --- which policies benefit American consumers at the expense of Chinese consumers (rich and poor alike), and make American interest rates lower than otherwise . . . this time, at the expense of Chinese savers who get ludicrously low returns on their financial investments. <br /><br />2) That major problem that Catesby highlights?<br /><br />In a huge Continental-size country, with lots of diverse goods and service industries and a differential need in a post-recession recovery for jobs, China's extraordinarily low level of domestic consumption even by Northeast Asian standards (Japan, South Korea, Hong Kong, Taiwan, and further south Singapore) --- something like an unheard of 36% of GDP recently --- has accelerated through its large bilateral trade-surplus with the USA the pace of labor-market adjustments: in particular, by the surpluses’ impact on where American jobs have been destroyed in industries that became uncompetitive with Chinese (and other imports). Without that impact, our national labor markets would have had more time to adjust to these shifts. <br /><br />3) What follows? Well, if labor markets adjusted without frictions, with little time-lags to large shocks in shifting comparative advantage, the overall national rate of unemployment since December 2007 would have been lower, right? And possibly much lower, no? <br /><br />Enter the reality of our labor markets --- which have traditionally been unusually flexible. In particular, as comparative advantage of our tradable industries has shifted quickly, the result is that the geographical location and labor-skills needed for our growth industries and their firms seem mismatched with a large chunk of the unemployed since December 2007. <br /><br />4) None of this denies that the overall rate of unemployment in the USA will adjust sooner or later and will be overwhelmingly determined by American market influences and government policies. But the distribution of job-creation across our goods and service industries has surely been affected by the huge surge of Chinese imports and our trade deficit with China itself since 2000. <br /><br />In that year, the Chinese trade surplus with us was about $90 billion . . . the same as Japan's. In 2007, our bilateral surplus with Japan was about the same, but China's surplus had surged four-fold. Our consumers surely benefited --- mostly the low-wage income earners among them; and so did those households looking for credit to buy consumer durables thanks to lower interest rates as a result of China's Central Bank buying our Treasuries, just as business firms could invest at lower rates. <br /><br />But the resulting job-market dislocations seem now to have aggravated what you yourself have talked about: a mismatch between the high number of the unemployed and jobs requiring skills they do not easily have . . . or, if they do have them (a certain percentage anyway), the collapse of the prices of any housing they bought earlier in the boom period of the last decades makes it harder for them to move quickly to the areas of the country where jobs are being created steadily. <br /><br />5) In short, when labor markets don't adjust quickly for whatever reasons, the normal processes of "creative destruction" (to use Schumpeter's term for how capitalist markets adjust to clustered changes in innovative technologies of a basic sort) have been partly clogged by China's huge mushrooming surge in exports between 2000 and now 2010 --- with a brief slowdown and drop in 2008 and early 2009 --- that have aggravated, it seems, our overall post-recession unemployment rate, whether or not you regard it as a short- or mid-term problem that will right itself in the "long-run." <br /><br />Michael Gordon, AKA the buggy professorAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-78613667007000554822010-09-17T05:49:21.984-07:002010-09-17T05:49:21.984-07:00"I wouldn't have put it like Williamson- ..."I wouldn't have put it like Williamson- I do think that conscious policy choices and not just incompetent bankers are responsible"<br /><br />No, that wasn't what I meant. The banking system is dominated by a few large state-owned banks. The banks are essentially part of the government, if you like, so the inefficiency is all about government and policy.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-83932853015306138672010-09-16T17:10:04.039-07:002010-09-16T17:10:04.039-07:00I agree that Krugman is making irresponsible overs...I agree that Krugman is making irresponsible oversimplifications. The nominal exchange rate, by itself, is not the issue, because if it has an influence, it is only in the very short-run. I think the issue is whether a broader policy to facilitate exports at the expense of imports that commonly includes a nominal exchange rate peg, along with financial repression, etc. is "unfair". [I wouldn't have put it like Williamson- I do think that conscious policy choices and not just incompetent bankers are responsible] To my mind, the answer is that the question is poorly posed- on one level, if the Chinese want to keep bankrolling a US consumer spending spree (directly through selling goods cheap and indirectly by lending money cheap), hey, if anyone should think its unfair, it is really the ordinary Chinese.<br /><br />The problem is that US institutions (labour markets in particular), are not set up to deal w/ the sudden inflow (and eventual outflow, one hopes, although I have always dreamed of a permanent retinue of Asian servants) of relatively (to the long run) underpriced consumption.<br /><br />What Krugman and his ilk are really upset about is not China's nominal exchange rate, but the inability of the US' institutional set-up that he quite likes to deal with changes posed by China's rise. Being a US Liberal of the 1960s/1970s variety, and thus wedded to the way things are, it is far easier to blame the renminbi.Catesbyhttps://www.blogger.com/profile/09535988854189171475noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-35249946635126331982010-09-16T07:13:42.607-07:002010-09-16T07:13:42.607-07:00I gave you a story about why China is running a cu...I gave you a story about why China is running a current account surplus, which is about savings, investment, and inefficient domestic financial intermediation in China. Krugman's idea appears to be that the current account surplus tells you the exchange rate should appreciate. From my point of view, if Krugman thinks that the current account surplus should be zero in China (not clear why this should be so either, in general), then he should be convincing the Chinese to do something about their inefficient intermediation problem - e.g. opening up competition with foreign banks. Now, the large quantity of Chinese savings that leaves China via the current account surplus makes world real interest rates lower than they otherwise would be. Explain how that makes us unemployed.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-41047022846596419912010-09-16T06:07:47.798-07:002010-09-16T06:07:47.798-07:00It does indeed make sense to me. If China keeps a...It does indeed make sense to me. If China keeps accumulating dollars, thus keeping its currency lower than if it doesn't do so (and yes, this is obviously what is meant by keeping it artificially low, scare quotes or not) then they can maintain a large trade surplus for a long time. We get lots of cheap Chinese stuff in exchange for many of us being unemployed. You can argue about whether this is a good tradeoff, but this is a policy decision, not one that is as clear cut as you imply with all the histrionics about Krugman's position being "nuts" and "bizarre".Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-7932370338572599682010-09-16T05:07:35.411-07:002010-09-16T05:07:35.411-07:00Yes, he would be happy wouldn't he. I was in a...Yes, he would be happy wouldn't he. I was in a hurry and made a sign error. Let's try this again. The renminbi appreciated from 2005 to 2008, and after that it has been essentially pegged against the US dollar until now. Krugman's claim is that the renminbi is "undervalued" and "artificially low" relative to the US dollar. He knows what the exchange rate "should" be, and it's higher than where it is now. Thus, it's not a case of: country devalues, thus moving relative prices in the short run. Of course, Krugman thinks that if the renminbi appreciates that the real exchange rate moves in the same direction. Now the bizarre view here, which I think is a very poor basis for making economic policy, is that the countries of the world are competing for jobs through their nominal exchange rate policies. The view is that the Chinese are stealing our jobs because they will not allow their exchange rate to appreciate. According to this view we therefore put pressure on them to do so, but if they retaliate by unloading our debt, then we have the Fed buy the debt, thus depreciating our exchange rate and stealing the jobs back. Maybe this makes sense to you, but I think it is nuts.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-88666476866963793082010-09-15T17:24:42.987-07:002010-09-15T17:24:42.987-07:00You lost me when you wrote that your bother "...You lost me when you wrote that your bother "complains when the value of the Canadian dollar goes down in terms of US dollars". His income in US dollars exchanges for more Canadian dollars, thus increasing his income to the extent his expenses are denominated in Canadian dollars. Why does this make him sad?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-12149568025962881912010-09-15T07:27:54.741-07:002010-09-15T07:27:54.741-07:00Thanks for your answer, Steven. Two things here. F...Thanks for your answer, Steven. Two things here. First, resetting a price is not the same thing as completely absorbing the nominal shock. Adjustment could still be gradual.<br /><br />Second, my point is similar to Trader's point above. There are quite a few international economists who believe that the nominal exchange rate matters. You can argue that they implicitly rely on price-stickiness which does not seem to show in the data. And so that their beliefs is not warranted. But this is an argument to be made, not a basic principle of international economics. <br /><br />I also agree with the last Trader's paragraph.Lurkernoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-14621475459748234882010-09-15T07:06:25.777-07:002010-09-15T07:06:25.777-07:00Stephen thanks for the reply. I have actually read...Stephen thanks for the reply. I have actually read section 1 in Eichengreen, as well as the other sections and the references that I mentioned. Barry says “My reading of the evidence is that the real exchange rate matters. Keeping it at competitive levels and avoiding excessive volatility are important for growth”; and, again: “the real exchange rate is a relative price and, as such, it is not under direct control of the authorities. But it can be influenced by policy.” Personally, I think that a country that maintains a fixed peg, has in place a system of capital controls and limited currency convertibility, and is endowed with “unlimited supply of labor” (in the sense of Lewis, 1954) that can prevent wages in the tradeable sector from rising, can actually maintain a competitive (undervalued) currency “beyond the very short run”.<br /><br />Anyway, to tell you the truth, the point of my comment was quite different. You seemed to be unaware of the fact that many people --- Dani, Barry, Simon Johnson, people at the IMF, people at the World Bank (I forgot to mention their series of papers), and many others --- have been working on these issues. There is a lot of stuff on undervaluation as well as on undervaluation and growth. Krugman did not “invent” an argument.<br /><br />As I often read his blog, I understand that he can be quite irritating, especially with his frequent accusations of ignorance about basic economics. But you maintain a wonderful blog and my suggestion --- as a passionate reader --- is to try to avoid doing his same mistake.tradernoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-7585664030796045872010-09-15T05:17:52.849-07:002010-09-15T05:17:52.849-07:00I'd never thought I'd be defending Krugman...I'd never thought I'd be defending Krugman, but I guess there always has to be a first...<br /><br />"In any case, in the long run the prices have to adjust."<br /><br />But when is the long run? And what happens from now until then?<br /><br />"China could only be accused of selling us stuff cheap, and lending us the funds to do so at a very low interest rate. Somehow this does not look like deprivation."<br /><br />But maybe looks are deceiving? That is, maybe your description of the situation is not complete and lacks secondary effects which are real and harmful (people thrown out of work who had jobs selling stuff that are now sold more cheaply).anoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-38657356134610353032010-09-15T05:02:32.921-07:002010-09-15T05:02:32.921-07:00Bils and Klenow report that the average price-sett...Bils and Klenow report that the average price-setter resets every 4 months. That doesn't seem like such a long time. Further, that's just an observation about average behavior. It doesn't tell you what these price-setters do when there is a policy shock.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-90138015998030135072010-09-14T19:29:14.409-07:002010-09-14T19:29:14.409-07:00"In any case, in the long run the prices have..."In any case, in the long run the prices have to adjust. Krugman seems to be telling us that the prices never adjust."<br /><br />This is the point. If prices adjust sluggishly, a change in the nominal exchange rate will affect the terms of trade and hence the trade balance. How long does it take to adjust? I don't know, trade economists have different opinions about this (Obstfeld & Rogoff, grad textbook has a nice treatment of the issue). But it is definitely conceivable that affecting a nominal variable has real effects for some time and so Krugman's argument is not so far-fetched as you are making it. <br /><br />Which is different from saying that I agree with the whole thrust of his op-ed, or, more in general, with his "the more goverment, the better" general philosophy.lurkernoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-59051246430483958532010-09-14T18:20:19.888-07:002010-09-14T18:20:19.888-07:00China receives US dollars from its huge nets expor...China receives US dollars from its huge nets exports to the US and then mandate its citizens/corporations to exchange these US dollars for Yuan at a given exchange rate if they want to do business in China -these Yuan being created out of thin air by the Central Bank. The People's Bank of China then turn around and buy US Treasuries with the US dollars, and the Yuan is circulating in the domestic economy as the national currency. Because of this currency swap at a fixed exchange rate, the total assets on the balance sheet of the People's Bank of China amount to a gargantuan 3.4 trillion US dollars.<br /><br /><br />You aim to destroy Krugman with this post and all you do is covering yourself in ridicule with your story that financial intermediation in China is inefficient which would supposedly explains why China buys US treasuries. How long have you studied China's banking system to come up with such statement or are you just making stuff up on the go?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-42071270028133547162010-09-14T11:41:49.595-07:002010-09-14T11:41:49.595-07:00"Krugman seems to be telling us that the pric..."Krugman seems to be telling us that the prices never adjust."<br /><br />PK's blog is political, not economic. What he's telling us - at least on my interpretation - is that the time required for the adjustment (via internal prices rather than the nominal exchange rate) is 'too long' for the Democratic political establishment he represents. Remember he's an unreconstructed Keynesian, and you know what Mr. Keynes said about the long run.<br /><br />Regards (and thank you for your earlier clarification), 'the last anonymous'.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-11389558511352680672010-09-14T11:04:27.085-07:002010-09-14T11:04:27.085-07:00Last anonymous:
Exactly. Marshall-Lerner assumes ...Last anonymous:<br /><br />Exactly. Marshall-Lerner assumes changing the nominal exchange rate changes the real exchange rate in the short run, and then the effect on the trade balances depends on elasticities. I'm saying that we're talking about tradeables. The prices of Chinese exports are determined on world markets in US dollars, and the prices adjust immediately. For Chinese imports, maybe there is some market segmentation, so importers don't change their prices immediately, but maybe not. In any case, in the long run the prices have to adjust. Krugman seems to be telling us that the prices never adjust.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-58713216637922073482010-09-14T10:05:33.268-07:002010-09-14T10:05:33.268-07:00In the short run it depends on the Marshall Lerner...In the short run it depends on the Marshall Lerner condition. Over the long term, prices have to adjust.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-54488463843432335502010-09-14T09:56:22.096-07:002010-09-14T09:56:22.096-07:00Rajan has a nice post a while ago on global imbala...Rajan has a nice post a while ago on global imbalance: http://forums.chicagobooth.edu/faultlines?entry=21Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-82300391389391987352010-09-14T09:52:21.766-07:002010-09-14T09:52:21.766-07:00So the prices of things that China buys and sells ...<em>So the prices of things that China buys and sells on world markets are fixed permanently in units of Chinese currency?</em><br /><br />No, the subsidy/(tax) which Chinese exporters receive (and importers pay) is determined by the Chinese government's exchange rate policy. If France slaps a tariff on Japanese TV sets that doesn't fix the price in Euros 'permanently' or even temporarily. But it surely hurts Japanese exporters and French consumers.Kevin Donoghuehttps://www.blogger.com/profile/07534540865029864916noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-43035805612348440992010-09-14T09:38:14.722-07:002010-09-14T09:38:14.722-07:00Scott Sumner has also been defending China from Kr...Scott Sumner has also been defending China from Krugman:<br />http://www.themoneyillusion.com/?p=6960Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-69167449707735647982010-09-14T09:34:28.822-07:002010-09-14T09:34:28.822-07:00Anonymous 2: As serious as I can be. What about th...Anonymous 2: As serious as I can be. What about the EU and South America?<br /><br />Last anonymous: "That piece" being which?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-46814331303389347242010-09-14T09:02:02.077-07:002010-09-14T09:02:02.077-07:00That piece is consistent with Krugman's statem...That piece is consistent with Krugman's statement.<br /><br /> "China is deliberately keeping its currency artificially weak.<br /><br />The consequences of this policy are also stark and simple: in effect, China is taxing imports while subsidizing exports, feeding a huge trade surplus."Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-49935084966478937472010-09-14T08:55:29.457-07:002010-09-14T08:55:29.457-07:00"Which part?"
Is that a serious questio..."Which part?"<br /><br />Is that a serious question? I'm not going to explain this stuff to you but I think you should think about EU countries in the ECU and some issues that happened in South America.Anonymous 2noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-46837207668372705812010-09-14T08:36:34.885-07:002010-09-14T08:36:34.885-07:00trader:
Read for example Section 1: "Is the ...trader:<br /><br />Read for example Section 1: "Is the Real Exchange Rate a Policy Variable?" in Eichengreen's "The Real Exchange Rate and Economic Growth." That's pretty much consistent with what I am saying here.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-82227855977397254812010-09-14T07:40:00.308-07:002010-09-14T07:40:00.308-07:00Kevin:
So the prices of things that China buys an...Kevin:<br /><br />So the prices of things that China buys and sells on world markets are fixed permanently in units of Chinese currency? Is that your argument?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-35630155671210678112010-09-14T07:16:37.067-07:002010-09-14T07:16:37.067-07:00It's not a principle, it's a theorem, or a...<em>It's not a principle, it's a theorem, or a lemma? It's not basic? It's wrong? Explain.</em><br /><br />Krugman did explain: “in effect, China is taxing imports while subsidizing exports.”<br /><br />You claim that China can’t be doing that, because it’s impossible. Actually it’s not only possible, it’s quite easy. (Admittedly it would be difficult for a less authoritarian regime, which would surely have to contend with a black market in foreign currency.) So your ‘principle’ is akin to the ‘principle’ that rockets don’t work in outer space because there’s nothing to push against.<br /><br />I suppose it’s possible you have in mind some model in which taxes on imports and subsidies on exports have no real effect, because prices of non-tradables and wages adjust, leaving incentives unaffected. But it’s up to you to say what your model is and argue for its validity. I know of nothing Krugman has written on this subject which conflicts with standard textbooks such as Krugman and Obstfeld’s <em>International Economics</em>.Kevin Donoghuehttps://www.blogger.com/profile/07534540865029864916noreply@blogger.com