Wednesday, July 27, 2005

Economist's View: Stiglitz on China and Why U.S. Economic Advice is Discounted

Economist's View: Stiglitz on China and Why U.S. Economic Advice is Discounted: "Joseph Stiglitz of Columbia University, winner of the Nobel Prize in economics in 2001, discusses why yuan revaluation will have little effect on the trade balance, why yuan revaluation could be bad for the U.S., why China wants a stable exchange rate, and why China has little reason to take economic advice from this administration"

Stiglitz says "stability", when that is only one "half" of the Chienese policy. China has made private investment in manufacturing for export very profitable, by BOTH eliminating the risk of fluctuating exchange rates and making the Chinese currency cheap relative to the U.S. currency.

Stiglitz suggests at one point that China might choose to cease "investing" in the U.S., and transfer that investment to its own infrastructure. But, that "investment" in the U.S. (the buying of U.S. debt) is what depresses the value of the yuan relative to the dollar, and tilts private calculations of the profitability of investment in Chinese manufacturing.

"Volatility" is hardly the only factor enhancing the profitability of private investment in Chinese manufacturing. Stiglitz is wrong not to say so plainly.

For the U.S. to assume a less profligate course would require that U.S. consumption -- personal incomes, in commonsense terms -- would have to take a hit. In some combination of higher prices for Chinese imports sold at Wal-Mart, or higher savings from paychecks, or higher taxes, Americans are going to have to accept at least a temporary decline in their standard of living.

As a political matter, I doubt that Americans are going to accept the need to consume less, even for a few years, without the advent of some crisis. There is no conceivable political course, which will lead us from our present arrogant, ignorant, fat, dumb and happy state to one, which can be sustained in the long-run. Students of "real business cycles" might focus their attention on this dilemma: you cannot get directly from "here" to "there". Only a "crash" and recession would get individuals to a state, with substantial unemployment and personal anxiety, where policies of increased taxation, personal savings and domestic investment could be accepted together as a "solution."

I submit that we are nearing the point of "hoping" for disaster -- a disaster and a switch to a more far-sighted leadership, willing to rule in the interests of more than one percent of the population.

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