Saturday, January 02, 2010

Economic suicide is not an option

Almost everybody who is anybody seems to be scrambling to figure out how a Nigerian terrorist came so close to blasting a hole in a transatlantic airliner approaching Detroit. The concern is legitimate. But while concentrating on one peril, we are ignoring another – that the United States is blindly on the path to a major economic disaster.

The alarming signs are there aplenty, but policymakers are either not connecting the dots or not telling the public what the signs mean. Either way, it’s way past time to spread an alarm about the danger of national econicide.

Buried in his January 1 New York Times column, Paul Krugman makes this prediction: that China’s policies probably will reduce U.S. employment by 1,400,000 jobs over the next two years. That should be startling, except that it’s nothing new. China has been stealing jobs from American workers for years without causing corrective action by American leaders, Democrat or Republican.

The supposed cure, mindlessly repeated, is to make Americans more “competitive.” But American companies are among the most efficient in the world, Richard McCormack, editor of Manufacturing and Technology News, points out, and in an article published in the January-February issue of The American Prospect adds:

“The nation’s steel industry, for instance, produces one ton of steel using two man-hours. A comparable ton of steel in China is produced with 12 man-hours, and Chinese companies produce three times the amount of carbon emissions per ton of steel. The same kinds of comparisons are true for other industries.”
“China is blatantly protectionist,” Carolyn Bartholomew, chair of the U.S.-China Economic and Security Review, writes in the same magazine. “The Beijing government manipulates its currency, showers subsidies on favored industries, provides low-interest loans from a state-owned banking system, tolerates and even encourages the theft of intellectual property, and ignores WTO rules.”

In his column, Krugman explains that China, now a major financial and trade power, “doesn’t act like other big economies. Instead, it follows a mercantilist policy, keeping its trade surplus artificially high. And in today’s depressed world, that policy is, to put it bluntly, predatory.”

Among the excuses given for why we can’t retaliate against China’s predatory actions is that protectionism is always a Bad Thing, always, even in response to the persistent protectionism of others. “If that’s what you believe, you learned Econ 101 from the wrong people,” Krugman writes, and goes on to explain that the usual rules don’t apply in times of high employment that are not solved by domestic measures.

For support, Krugman turns to the master, the late Paul Samuelson, to show how mercantilism (such as practiced by China) changes the situation. Here is his quote from a classic Samuelson paper, interspersed with Krugman’s defintion:
“With employment less than full… all the debunked mercantilistic arguments”—that is, claims that nations who subsidize their exports effectively steal jobs from other countries – “turn out to be valid.”
Krugman calls Chinese mercantilism such a serious problem that “the victims have little to lose from a trade confrontation.”

For detailed insights into what the U.S. government should do (“before it’s too late”), don’t miss the special report in The American Prospect at

Will Congress and the administration stand up to predatory China, or are our leaders paralyzed by what they mislearned in Econ 101?

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