Inveterate China critic Paul Krugman is at it again. In Taking On China, he rakes these miscreant Chinese over the coals for maintaining a low peg on the Renminbi (yuan) against the dollar and other currencies.
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 — began around 2003...
Today, China is adding more than $30 billion a month to its $2.4 trillion hoard of reserves. The International Monetary Fund expects China to have a 2010 current surplus of more than $450 billion — 10 times the 2003 figure. This is the most distortionary exchange rate policy any major nation has ever followed.
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.
Let me say it upfront: the Chinese should let the yuan float. OK? Game over, I concede the point.
That said, there is one and only one reason to let the yuan float. If the dollar, the euro, the yen and other currencies are valued less relative to the yuan—everyone but the Chinese agree the Renminbi is undervalued—then American (and European and Japanese, ...) exports are more competitive with Chinese exports in global markets. Thus the trade deficit would be reduced, and theoretically, American jobs would be created. Here's Krugman and others talking about it back in 2009—
China's massive trade-related current account surplus, which peaked at 12 percent of its gross domestic product (GDP) in 2008, does "come at the expense of jobs and employment elsewhere in the world," charged Mr. Krugman, who received his Nobel Prize in economics in 2008 for his work on international trade theory.
If China stopped manipulating its currency, it would produce a favorable net export shock [gain] to the United States, Europe and Japan amounting to about 1.5 percent of GDP, increasing the U.S. economy by about $220 billion, Mr. Krugman estimated.
According to C. Fred Bergsten's calculations, a 25 percent to 40 revaluation in the yuan would reduce the U.S. trade deficit between $100 billion and $150 billion per year, adding between 750,000 and 1 million jobs to American payrolls. Robert Scott, a senior economist at EPI, estimated that China's currency manipulation cost the U.S. economy between 1.5 million and 3 million jobs.
I do not know what "back of the envelope" calculation Krugman used to arrive at this $220 billion number, nor do I know how C. Fred calculated that a floating yuan would add upwards of a million jobs in America.
I don't quite "get" how these jobs will be automagically be created in the United States. Perhaps one of these learned economists—Krugman is a Nobel Prize winner, after all—will tell me. I do know that during the Age of Globalization, which takes up most of the last 20 years, American jobs were shipped out, outsourced, transferred, migrated, moved—whatever term you prefer—to China, India, Indonesia, Mexico and so on. The principal reason these jobs were lost was the "comparative advantage" in labor these other countries enjoyed relative to the United States—that is to say, foreign workers could be paid slave wages no American could afford to live on.
In the decade 2000-2009, only about 1 million private sector jobs were created in the United States. In 10 years!
All that time, as Globalization proceeded apace, Americans were told that outsourcing jobs was in their best interests because our country would be flooded with cheap goods from overseas. And Lo & Behold, this Biblical Flood came to pass. And as it did, American household debt grew & grew. And nobody wondered how, without robust job creation, anyone would be able to afford stuff from China & elsewhere, whether it was dirt cheap or not. And now, were China to let the Renminbi float, the cost of all that cheap Chinese stuff you're still able to buy at Wal-Mart or Target would go up. (Where does Paul Krugman shop?)
Meanwhile, back on the farm, as America outsourced the best interests of its citizens, it was also outsourcing most of its export capability, it's manufacturing base. And now, with available credit in the United States falling—precipitously—for the first time since World War II, America will magically reinvigorate its ability to export goods & services, will somehow reclaim some of the jobs lost at a time when its Too-Big-To-Fail banks are too busy covering their sorry asses—whoops, I meant protecting their balance sheets—to loan money to anyone, let alone to risky enterprises whose target markets will be shaky foreign economies. Spain anyone? Portugal? Poland? Italy? Greece? Ireland? The UK? Japan? If only the Chinese will let their currency float, mirabile dictu, Adam Smith's Invisible Hand will do the rest.
When things go wrong, as they inevitably must with an incoherent long-term economic strategy—Globalization has been a Capitalist's Wet Dream but a Nightmare for Ordinary Americans—then it must be time to find a scapegoat. Paul Krugman knows whose fault it is—when in doubt, blame China.