Sunday, June 13, 2010

The Return of Decession Politics

. Sunday, June 13, 2010

My previous post got a lot of attention from a series of anonymous commenters (or just one, with nothing better to do than keep missing the point over and over), and a drive-by from Brad DeLong. The post had two purposes: first, to say why I think Krugman and his fellow economic hawks are wrong. I'll try to expand on that point later in this post. Second was to mimic the style of Krugman and his friends in the blogosphere, which goes basically like this: isolate an argument that you disagree with, refer to an old and classic bit of literature that also disagrees, then express shock that the lesson hasn't been absorbed ("we learned these lessons decades ago"). The specific language I used -- saying that not even undergrads should make that mistake, quickly and dismissively summarizing why you think the writer is wrong, being intentionally "shrill" -- was intended to obviously ape the Krugman/DeLong style of addressing one's interlocutors. The commenters missed the reference, which probably means that I didn't make it obvious enough. Mea culpa, I guess.

Thomas captured most of what I meant in his follow-up, and then took more anonymous abuse for bothering to comment on his own blog. What I really wanted to stress can be summed as follows: Krugman seems to think that if the U.S. just exerts a little pressure on China and Germany that they'll capitulate and do whatever we want*. I don't think Krugman's strategy is very likely to work. Perhaps more importantly, I haven't read a single international relations scholar who thinks it will, and there are no clear patterns from history of something like this working. There are no models of politics in which one side make an obviously non-credible threat and the other side backs down. On the other hand, we do have examples of what happens when leading powers pursue nationalistic, beggar-thy-neighbor policies during a global economic slump. The result isn't pretty: worsening economies and political instability, which has often led to conflict. Of course I'm not saying that if the U.S. slaps a "currency tariff" on China it will lead to World War III, but it would certainly make dealing with the Korean peninsula more difficult, as well as maintaining security in the Middle East and Africa. It will also make economic recovery more difficult.

There is a reason I called that post "The World in Decession" and started it with a reference to Kindleberger, an economist. The reason is that Krugman's argument directly contradicts Kindleberger's, using almost mirror-opposite language. It really is uncanny. But I could just as easily have titled it "Krugman Eschews Keynesianism". Keynes certainly understood that economic warfare was not good for economic growth or political stability, and he pushed strongly for multilateralism and cooperation in the post-war settlement. While Keynes might not approve of either Germany's austerity program or China's management of exchange rates (the latter is less clear), he certainly would not have approved of U.S. brinksmanship and unilateralism in the middle of a global downturn, when cooperation is most required. Krugman seems to consider himself Keynes' dauphin, so it is very strange that he has not internalized this lesson.

One anonymous commenter referenced U.S. policy toward Japan and Germany in 1980s as a possible model. But the U.S. was not able to bully Japan very successfully in the 1980s, and the trade imbalance between the two countries persists to this day (and increased in nominal terms since the 1980s before the financial crisis hit). Japan's economic rise was not halted by U.S. intervention (as if that was ever the goal), but by a financial crisis that led to 15 years of negligible growth. Moreover, U.S.-Japanese and U.S.-German relations in the 1980s were rooted in a Cold War context that included U.S. security guarantees. We had much more leverage over Japan in the 1980s than we have over China today, and we still weren't able to force them to cater policy to our wishes. But even if the U.S. was able to successfully play chicken with Japan in the 1980s, the relationship between the U.S. and "Chermany" today is just not analogous.

Another commenter said that I should not criticize a respected academic like Krugman in the way I did. Perhaps, perhaps not. But in the field of international politics Krugman is not an academic; he's a pundit, and in this case he's making amateurish arguments. His comments on international politics carry no special weight just because he is an economist. The same commenter suggested he would stick to reading Marginal Revolution from now on; unfortunately for him/her, Tyler Cowen attacked Krugman along similar lines as me the very next day:

On another front, Germany is finding itself unable to much control the fiscal policies of Greece and they have entered in a common political union with a (supposedly) binding fiscal rule. Germany also has numerous European countries on its side in its struggle with Greece and is much larger, relative to Greece, than the United States is to Germany. If Germany can't control the fiscal policy of Greece, how much can we control Germany?

This is one "get tough" program that is headed nowhere fast.

I planned on writing a post offering my suggestions for how to address macro political and economic problems. This post is getting long, so I'll have to save that for later. But in sum, Krugman really has no leg to stand on here. No theory, no history, no internal logic, nothing.

*I'm not the first one to notice that Krugman sounds amazingly like a Bush-era neocon when he gets going like this, using language like "time to get tough" and "doing nothing is not an acceptable option" and "the United States has to take steps to protect itself" that include pre-emptive, unilateral action.


dm301060 said...

Give credit where credit is due.

In my opinion, it's important to distinguish the two parts in Krugman's post. Let's call the first part "disease" and the second one "cure".

On "disease," Krugman is absolutely spot on! He really captures the essence of the problem facing the world economy today, that is, the issue of how to globally share the adjustment burden. With China refusing to revalue the renminbi and the Europeans - led by Germany - embarking on fiscal austerity, the United States, in effect, is forced to shoulder the burden of correcting global imbalances. It would be a huge understatement to say that the Americans are reluctant to resume the role of "the consumer of the last resort" they played in the pre-crisis era. Nonetheless, it seems increasingly likely that the United States has no viable alternative, given the de facto beggar-thy-neighbor policies of China and the Europeans.

Krugman really deserves praise for precisely pointing out this fundamental problem.

Where I disagree with Krugman - and I agree with Winecoff - is on the "cure" proposed. Krugman always excels in analyzing the problem at hand, but his policy suggestions are often outrageous and show a lack of understanding of international politics, with his advices being misleading at best and outright dangerous at worst.

On China, Krugman is famous for his hawkish view. He is actually right to stress the importance of pressing for the revaluation of the renminbi. Exchange rates are not only important in trade issues, but also from an international macroeconomic perspective, especially now that the world economy is attempting to re-adjust the global imbalances. However, the issue of exchange rates is only one element in the broad relationship between the U.S. and China.

The U.S. faces the huge and thankless job of integrating China into the Western-built international order. From America's point of view, it would be awesome if Washington could simply thwart the rise of China. But that obviously would be too costly a strategy. So the second-best alternative is to engage Beijing, but at the same to make sure that they don't wreak havoc as their economic and military clout grows. On the one side, China has been granted the access to Western institutions such as the WTO. On the other side, the U.S. has strengthened its relations with countries located in the Chinese periphery, in particular Japan, India, Indonesia, Vietnam, and so on.

This is essentially the Grand Strategy that the US has been pursuing in East Asia and on the global stage. It's a foreign policy that combines elements of both realism and liberalism. On the one side, "speak softly" and "douceur du commerce", on the other side, "insurance policy" and "carry a big stick".

Krugman's policy advices lack nuance and sophistication precisely because he doesn't understand the nature of international politics and the complexity of the issues involved.

In sum, Krugman is spot on in pointing out and analyzing the problem at hand ("disease"), but the "cure" proposed by him would only exacerbate the problem.

dm301060 said...

In my first post, I proposed a distinction between the parts "disease" and "cure" to bring clarity to Krugman's argument.

Another useful approach is to distinguish between "ends" and "means." I guess no serious economist or commentator disagrees with the "end" of Krugman's argument, that is, China and the Europeans should do their bit to shoulder some of the adjustment burden, instead of passing the thankless job on to the Americans. If the U.S. unemployment rate remains high for a long time, the domestic mood might get nasty, with the Congress stepping up calls for action, for example against China's currency manipulation. No liberal democracy tolerates sustained periods of high unemployment. In such a combustible environment the US administration might see itself forced to do something, and the standard scapegoat in these cases is trade. And once the reciprocal game of raising barriers and slapping anti-dumping duties begins, things can get out of control.

The United States should take the lead in defusing the current tension before things get ugly. As I said, I guess no serious analyst disagrees with this "end" of Krugman's point. But, rightly, most people are outraged at the "means" that he proposes for achieving this end. Krugman calls for a unilateral and aggressive approach by Washington without giving much thought to its potential downside.

In my opinion, there is only approach that might succeed in getting the Chinese to revalue the renminbi. (Of course, the correlation between the China's currency and global imbalances might turn out to be spurious, and its revaluation might not have a significant impact on reducing US trade deficits). And the approach is one of quiet diplomacy at a bilateral level. This is actually an approach that had some success from 2005 to 2008, so it definitely merits consideration.

Instead, initiatives at both unilateral and multilateral levels are bound to fail. Unilaterally, Washington might name China a currency manipulator, slaps tariffs or anti-dumping duties, or get the WTO to challenge China's exchange rate policy. But Beijing now seeks recognition of its status as an emerging great power. And no rising power seeking "a place in the sun" accepts a hectoring from the hegemon. Beijing reckons that Washington will remain the economically and militarily preeminent power for a long time to come, but its growing clout means that it will defiantly refuse to buckle under US pressure.

Multilaterally, collective action problems remain daunting. No country will dare to openly challenge China's exchange rate policy. The G-20 is a fledgling institution, and no member country is keen to test its effectiveness by taking on China. Also, foreign exchange reserves of nearly $2.5 trillion mean that China can simply ignore any attempt by the IMF to criticize its currency policy.

So, by default, the only viable policy option is bilateral diplomacy between Washington and Beijing, one that gives due consideration to relational as well as substantive aspects.

PS: I know, I didn't offer an option for dealing with the Europeans' fiscal craziness in the midst of high unemployment and anemic growth prospects. But to be honest, I'm still trying to understand what is actually going in Berlin. To put it bluntly, I see it essentially as the reemergence of "the German problem," this time one of an economic kind, but no less virulent. If the Germans impose their dangerous views as the price for rescuing the eurozone, then Europe faces a bumpy road ahead.

Thomas Oatley said...

Hi DM: you might want to take a look at

Which I think anticipates your basic point as well as considers the reason for the "German problem" as you characterize it. Your comments on China merit further consideration on our part.

All of which is to suggest that I think we agree with your analysis. Thanks.

Edwin said...

There is a striking asymmetry in the analysis here. If the US were to double its industrial tariffs, that presumably would inflict egregious economic harm on China and send the world spiraling into war. However, for anyone who bothers to look: Chinese tariffs today are 5-7 times US levels. (take 15 minutes and download the WTO's Tariff Profiles 2009). Even doubling or tripling American tariffs would leave them far below Chinese levels. If high tariffs would damage China's economy; how is it that Chinese tariffs (and subsidized exports) can't be connected with the terrible economic record of the US since 2001. Someone needs to spend at least an hour or two reading up on their economic history.

Kindred Winecoff said...

DM -

I am also in broad agreement and may have more to say on the topic soon.

Edwin -

I think you're reading much more into my post than what's there. I specifically said that applying tariffs would likely not lead to a major war -- "Of course I'm not saying that if the U.S. slaps a "currency tariff" on China it will lead to World War III" -- and I never claimed that Chinese export policy is not hurting the U.S. economy in some ways. Of course, selling goods at below-market prices can also help an economy in other ways, and it's not immediately clear which effect is greater. I may also have more to say on that point soon.

dm301060 said...
This comment has been removed by the author.
dm301060 said...

Dear Mr.Oatley,

Thanks for providing the link to your post.

I posted my take on your proposal. Feel free to give a feedback.


The Return of Decession Politics
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