« Medicare for everyone, part II | Main | What I really think of my colleagues »
The bill to raise the value of the yuan might pass
So reports The Washington Post. It is worth reviewing (my interpretation of) Milton Friedman:
1. Attempts to stabilize nominal exchange rates, as the Chinese are doing, can in fact be destabilizing, since the eventual adjustment will often come suddenly rather than gradually.
2. Accelerating that adjustment by passing laws aimed at foreign countries is unlikely to be a good idea. The laws encourage a sudden adjustment now, become a focus on rampant speculation, and the target of the laws is unlikely to react with good grace or feel gratitude.
3. In the long run a country can peg its nominal exchange rate but not its real exchange rate. In other words, if the Chinese lower the value of the yuan sooner or later Chinese prices will rise to restore the appropriate terms of trade. Sterilization of flows (e.g., soaking up Chinese money supply by selling bonds) can succeed for only so long and eventually the problem will cure itself.
4. We might have to actually apply the punitive tariffs.
In other words, this development is really bad news.
Posted by Tyler Cowen on August 1, 2007 at 07:56 AM in Economics | Permalink
Comments
The rosy economic view of economists is not necessarily shared by all
Americans.
The economists' fear of dealing firmly with China is also not shared by
many Americans.
Question: if we require the Chinese to send us safe toys, safe tires,
safe toothpaste with honest labeling and edible food, is that
protectionism? The Bush administration seems to think it is.
Posted by: save_the_rustbelt at Aug 1, 2007 10:02:38 AM
When it's 2007 in the global economy, it's 1930 in America.
Can anyone tell me why the stock market is tanking? anyone? Bueller? Smoot? Hawley? anyone?
Posted by: Max at Aug 1, 2007 10:35:27 AM
"save the rustbelt,"
Developing mechanisms that to ensure that goods are delivered as agreed upon (safe toys, tires and toothpaste) is likely to increase the benefits of trade. However, interference into what should be agreed to between buyers and sellers (tariffs and tinkering with the terms of trade) is not.
Posted by: MW at Aug 1, 2007 10:40:39 AM
Do any of these people ever go to the countries they make grandstanding speeches about? This idea is so bad it's beyond stupid.
A. Post-Mongol invasion, does anyone have an historical example of pushing the Chinese to do anything?
B. With over $1 trillion dollars in currency reserves China can bring the Yuan into line with the Dollar by gutting the US dollar through divestment. Imagine what happens if they move just four percent of that over to Euro denominated instruments...
C. Congress can't reform the tax structure in the US, but wants to get China to accelerate the 7 percent devaluation of the Yuan (it's a devaluation to them when inflation there is already 11 percent).
D. Between 1999 and 2005, the USDA paid $1.1 billion in farm payments to nearly 173,000 people who were farmers, but who were dead. But Congress wants to reform Chinese institutions through US legislation...
Sorry for the rant. Please don't think this is in any way, shape, or form, a defense of Chinese policy or their repressive government.
Posted by: Eric at Aug 1, 2007 10:51:50 AM
1930 in America? Wow. I mean wow. I am without words. That has got to be singlehandedly some of the most hyperbolic agitprop with no basis in reality that I have read in a really long time.
Posted by: Jacob at Aug 1, 2007 10:56:16 AM
I think, as just about always, Tyler is right and Rustbelt is wrong. There are things worth standing up to China about, such as human rights and Taiwan. This crap over the yuan is just ignorant political posturing.
Because we may need to stand firm on some tough issues down the road, we need to show that we're capable of dealing rationally with China and respecting their interests, so that when we stand up for the things that matter, people understand it's for principle and not to appeal to stupid xenophobes.
Posted by: Keith at Aug 1, 2007 11:58:47 AM
Since we don't make most of this stuff in the US anymore how is forcing the cost of Chinese-made items up going to help the average American consumer?
There are only two outcomes (not mutually exclusive):
1. Prices will rise - people will buy less
2. Prices will rise - people will buy less of something else
What won't happen is that we will suddenly see TV sets being built in the US again, or that Delphi will rehire 10,000 workers to make auto parts and close its Chinese factories.
Just remember it's silly season in Washington with an election looming. Expect to see a lot of what I call symbolic legislation being put forward. Yesterday's example was the new lobbying rules. Requiring naming contributors won't have any affect, lobbyists don't have any shame.
Posted by: robertdfeinman at Aug 1, 2007 12:06:51 PM
robert: I agree on the uselessness of the China legislation, but naming contributors does have benefits: politicians may not have shame, but they can be shamed. The risk of being chastised by the media will help keep them in line. Sunshine usually has a sanitizing effect, even if it's not a cure-all.
Posted by: Petrarca at Aug 1, 2007 12:21:43 PM
Oooh, Mr. Kotta, Mr. Kotta, I just thought of another reason Rustbelt is so abysmally wrong on trade!
Remember how the anti-traders say that trade will lead to a regulatory race to the bottom? Well, as China demonstrates, they turned out to be wrong! After all, when these scandals over tainted products broke out, we didn't lower our safety standards, China raised theirs.
Posted by: Keith at Aug 1, 2007 1:08:15 PM
Wrong, Keef. China executed a ministry-level state employee because they understand full well that businesses need to be monitored and this particular gatekeeper was not only not doing his job, but accepting bribes.
Left to its own devices, the Chinese company that sold us tainted goods tried like hell to do exactly that, which is why the bribes occurred in the first place.
Try again.
Posted by: fustercluck at Aug 1, 2007 1:33:52 PM
Left to its own devices, the Chinese company that sold us tainted goods tried like hell to do exactly that, which is why the bribes occurred in the first place.
Er, yes . . . and? I'm not seeing how pointing out that the object of regulation tries to avoid being regulated is in any way a rebuttal of Keith's point. After all, that's more or less the assumption of every regulatory system -- that's why they exist, no? If companies would adhere to safety standards without the threat of fines and punitive action hanging over their heads, we wouldn't need the FDA. And can you possibly imagine that if they could get away with it, companies wouldn't bribe their regulators here in the US? Of course they would -- we have whole reams of laws to prevent it!
China's problem, as I understand it, is that the lack the mechanisms to enforce health and safety regulations on Chinese products across the whole of their economy, in more or less the same way that we lack the mechanisms to enforce our regulations on all imports that come into the country. My hope is that bad PR and U.S. regulatory mechanisms applied to US companies sourcing from Chinese companies will lead to those US companies being more careful about their sourcing, and lead to an improvement in health and safety standards in the Chinese companies, dovetailing with an improving Chinese regulatory climate. And that seems reasonable to me.
Posted by: Taeyoung at Aug 1, 2007 1:56:38 PM
The Chinese company that sold defective tires to a NJ retailer ran away when the liability hit the fan.
Expect to see more of that.
"China raised theirs."
It is a little early to judge the results, don't you think?
I'm not anti-trade by the way, just pro common sense. And unlike many on the blogosphere, I've done honest work and do not view blue collar workers as subhuman.
Posted by: save_the_rustbelt at Aug 1, 2007 2:01:59 PM
The Chinese company that sold defective tires to a NJ retailer ran away when the liability hit the fan.
Expect to see more of that.
"China raised theirs."
It is a little early to judge the results, don't you think?
I'm not anti-trade by the way, just pro common sense. And unlike many on the blogosphere, I've done honest work and do not view blue collar workers as subhuman.
Posted by: save_the_rustbelt at Aug 1, 2007 2:02:09 PM
The Chinese company that sold defective tires to a NJ retailer ran away when the liability hit the fan.
Expect to see more of that.
"China raised theirs."
It is a little early to judge the results, don't you think?
I'm not anti-trade by the way, just pro common sense. And unlike many on the blogosphere, I've done honest work and do not view blue collar workers as subhuman.
Posted by: save_the_rustbelt at Aug 1, 2007 2:03:11 PM
'm not seeing how pointing out that the object of regulation tries to avoid being regulated is in any way a rebuttal of Keith's point. After all, that's more or less the assumption of every regulatory system -- that's why they exist, no? If companies would adhere to safety standards without the threat of fines and punitive action hanging over their heads, we wouldn't need the FDA.
You missed the same point: libertarians/free traders don't think there should be an FDA. The markets police themselves in this beautiful utopia.
Posted by: fustercluck at Aug 1, 2007 2:15:04 PM
rustbelt: " And unlike many on the blogosphere, I've done honest work and do not view blue collar workers as subhuman."
Rustbelt, most intelligent people have respect for blue collar workers. But I don't think many of us are ready to grant them the special protected status you seem to favor.
FYI, I've worked in blue collar jobs, in white collar jobs, and as an entrepreneur. All of it was "honest work". Are you implying that many of us have been dishonest? Why do you insult the people who provide you both a platform and an audience for your ideas?
Posted by: John Dewey at Aug 1, 2007 2:44:06 PM
fc...is the free market/libertarian idea that there shouldn't be an FDA, or rather that we must realize that the FDA has perverse incentives, and causes a lot of harm? Most of the discussion I'd seen seems to be saying more of "hey, the FDA isn't the Jesus that it's made out to be, so maybe we shouldn't trust it so unquestioningly."
Posted by: shawn at Aug 1, 2007 2:48:03 PM
Re: fustercluck
You missed the same point: libertarians/free traders don't think there should be an FDA. The markets police themselves in this beautiful utopia.
I'm not sure that's . . . quite how they see it. I think Shawn is nearer the libertarian perspective than you are. Continuing, though -- the idea that we need an FDA specifically to prevent the kinds of problems we've seen in our China supplies is probably mistaken. After all, poisonous toothpaste probably runs up against basic product liability torts and criminal laws against assault and battery. Provision of non-conforming goods (e.g. because they are poisonous, or faulty, like the tires) is probably a violation of contract. And misrepresentation of the status of the goods, what safety tests have been performed on them, or what safety standards they meet, is probably fraud.
The FDA assumes responsibility for keeping a fair amount of this stuff from the market, but it's not as though there aren't well developed legal mechanisms that would keep it from the market anyway. And I rather doubt that most libertarians want to do away with contract law and laws against fraud and basic product liability.
Posted by: Taeyoung at Aug 1, 2007 3:17:46 PM
The tariffs are a good idea. B
eyond helping to mitigate what is essentially a subsidy on all Chinese goods, they will also provide a necessary incentive for Americans to save more. This is a process that needs to take place in order to restore trade balance. The sooner it starts the better.
Posted by: Trudy at Aug 1, 2007 3:24:41 PM
fc...is the free market/libertarian idea that there shouldn't be an FDA, or rather that we must realize that the FDA has perverse incentives, and causes a lot of harm? Most of the discussion I'd seen seems to be saying more of "hey, the FDA isn't the Jesus that it's made out to be, so maybe we shouldn't trust it so unquestioningly."
and
I'm not sure that's . . . quite how they see it. I think Shawn is nearer the libertarian perspective than you are.
Milton Friedman disagrees with both of you:
ROBINSON So your view is abolish the FDA..
FRIEDMAN Absolutely
Posted by: fustercluck at Aug 1, 2007 3:35:50 PM
Sorry, the end got cut off and the formatting on that site is a bit screwy:
[ROBINSON] So your view is abolish the FDA..
[FRIEDMAN] Absolutely
[ROBINSON] And what comes up in its place? what comes up?
[FRIEDMAN} It's in the self-interest of pharmaceutical companies not to have these bad things. Do you think the manufacturer of Thalidomide made a profit out of Thalidomide or lost?
[ROBINSON] I see, ok.
[FRIEDMAN] And you have to have..people should be responsible for harm that they do. It should've been possible...
[ROBINSON] So tort law takes care of a lot of this.
[FRIEDMAN] Absolutely, absolutely..
[ROBINSON] Alright, if Lilly or Merck comes up with a drug that does me harm, I go after them, I join a class action with everybody else who's taken that pill and we sue them for billions of dollars and wipe out their share holders equity. Seeing that, they have every interest to be extremely rigorous in testing that drug before they make it available.
[FRIEDMAN] Let me give you a different example. The rules imposed on airlines, for safety. Who has the most interest in preventing airline accidents.
[ROBINSON] After the passenger themselves, the airlines.
[FRIEDMAN] Well it's not even clear that the passengers have more interest than the airlines because included in the passengers are the pilots. [ROBINSON] Right, of course
[FRIEDMAN} Why is the government going to improve airline safety? How are they going to do it? How do they add any incentive to anybody to improve airline safety?
[ROBINSON] Does Milton Friedman really oppose all health and safety regulation? Let me try this one on him- doesn't the public have the right to know about the nutritional content of the food it buys?
(etc.)
I also like how Friedman switches gears and backpedals on the pharm/tort issue. People crucify John Edwards but in this Libertarian world there would have to be a helluva lot more where he came from.
Posted by: fustercluck at Aug 1, 2007 3:44:24 PM
First, contrary to the stereotype certain commenters have, a libertarian can disagree with another libertarian, including Milton Friedman, and no group on Randians runs out and sets fire to you, or even takes away your libertarian decoder ring. I say this as someone who isn't really even a libertarian.
But yes, my position is that wide-scale globalization and trade makes me much more optimistic about federal regulation, because then regulation is subject to a larger market and competition. In other words, it has to be good or it will likely end up jettisoned. The market constrains the irrationality of politics.
"People crucify John Edwards but in this Libertarian world there would have to be a helluva lot more where he came from."
I think you're confusing two effects. I might think there should be more reliance on the tort system over the regulatory state, and I also might think we have too many frivolous torts because we lack "loser pays." So, a libertarian could logicially prefer a world with loser pays and sans a regulatory agency, where torts actually reflect a truly worthy grievance. We'd have fewer torts but the ones we do have would perform a greater social good.
This would be unlike John Edwards's actual famous tort case where he falsely blamed standard birth practice on conventional delivery. This tort led to many more women receving unnecessary and painful C-sections and raised health care costs, all to avoid a lawsuit risk over a problem that didn't even actually exist.
Posted by: Keith at Aug 1, 2007 5:01:02 PM
Re: fustercluck:
Milton Friedman disagrees with both of you:
Uh . .
[ROBINSON] So tort law takes care of a lot of this.
[FRIEDMAN] Absolutely, absolutely..
Okay. Yeah. Totally different from what I said.
Posted by: Taeyoung at Aug 1, 2007 5:44:54 PM
Since you didn't like my direct rebuttal of your first statement, let me ask about the second part.
The FDA assumes responsibility for keeping a fair amount of this stuff from the market, but it's not as though there aren't well developed legal mechanisms that would keep it from the market anyway.
What "well-developed legal mechanisms" are you referring to? Maybe you think deterrence through possible future lawsuits is a "well-developed legal mechanism" for preventing faulty goods from hitting the market? I hope that's not what you're implying...
Let's get personal since people rarely answer the same when a theoretical model is put in real-world terms:
Let's say there are 10 drugs on the market - all claiming the same benefits - and it's up to you to choose one for yourself/your child. In this free market system in which there is no regulatory body to ensure quality or at the very least ensure rigorous and effective testing, would you be okay choosing one?
Mind you, you can't solicit the help of your doctor because he has no time to personally read up on all drugs which have flooded the market in this unregulated system. So, you're on your own ("ask your doctor if [insert space-age-named med here] is right for you even though we're under no legal obligation to tell you a thing about how it may or may not have been tested, what interactions there may or may not be with other drugs, and so on.")
Would you feel comfortable making these decisions for yourself or your loved ones, knowing that your only recourse should something go wrong is to sue after-the-fact? In, as Keith suggests, a "loser pays all" legal environment? Honestly?
Posted by: fustercluck at Aug 1, 2007 7:13:46 PM
Fisher-Price to Recall Nearly 1M Toys
Wednesday August 1, 7:35 pm ET
By Anne D'Innocenzio and Natasha T. Metzler, Associated Press Writers
Fisher-Price to Recall Almost a Million Toys Worldwide Because of Lead in Paint
WASHINGTON (AP) -- Toy-maker Fisher-Price is recalling 83 types of toys -- including the popular Big Bird, Elmo, Dora and Diego characters -- because their paint contains excessive amounts of lead.
The worldwide recall being announced Thursday involves 967,000 plastic preschool toys made by a Chinese vendor and sold in the United States between May and August. It is the latest in a wave of recalls that has heightened global concern about the safety of Chinese-made products.
The recall is the first for Fisher-Price Inc. and parent company Mattel Inc. involving lead paint. It is the largest for Mattel since 1998 when Fisher-Price had to yank about 10 million Power Wheels from toy stores.
Posted by: save_the_rustbelt at Aug 1, 2007 7:47:05 PM
