China Bashers Pass Buck on What’s Ailing U.S.

By Kevin Hassett

'Blaming China is fun for the political and intellectual elites because it allows them to ignore their own failures'

 

Oct. 4 (Bloomberg) -- China bashing is all the rage in Washington, as politicians of both parties blame the world’s fastest-growing major economy for high jobless rates in the U.S.

Such a popular target is China that the U.S. House of Representatives, all but paralyzed by the prospect of next month’s election, easily passed a bill last week that might impose tariffs on China in retaliation for currency manipulation.

Blaming China is fun for the political and intellectual elites because it allows them to ignore their own failures. Gridlocked politicians on both sides of the aisle are equally attracted to the claim. The problem with U.S. growth isn’t that we have an out-of-control government and the second-highest corporate tax rates on earth; it’s all China’s fault.

As political scapegoating goes, this is easy -- too easy. In truth, the impact on the U.S. economy of a change in Chinese currency policy could well be so small that it would be almost impossible to detect.

First consider the arguments of those who say the U.S. would see significant benefits from a more freely floating yuan.

C. Fred Bergsten of the Peterson Institute for International Economics testified in the House last month that “elimination of the Chinese misalignment would create about half a million U.S. jobs, mainly in manufacturing and with above-average wages, over the next couple of years.”

Toward Equilibrium

How to accomplish that? Bergsten estimates that an appreciation of about 25 percent against the dollar would be necessary to restore an equilibrium exchange rate. When he testified on Sept. 15, the yuan had risen at an annualized rate of only about 4 percent since June, when the Chinese government pledged more flexibility. The growth rate does seem to have increased since Sept. 15.

Bergsten recommends that the U.S. designate China as a “currency manipulator” and encourage other nations to apply pressure on China to change its policy. He also says the U.S. should engage in “countervailing currency intervention,” which means purchasing yuan to offset China’s dollar purchases.

There is a good deal of academic disagreement over the Bergsten analysis. Helmut Reisen, head of research at the OECD Development Center, part of the Organization for Economic Cooperation and Development, wrote in April that “it is far from assured” that an appreciation of the yuan would influence current account balances.

He added, “There is a clear political focus on the bilateral U.S.-Chinese trade balance, but bilateral imbalances are of no economic interest -- there are more than two countries in the world.”

Ripple Effects

Philip Levy, my colleague at the American Enterprise Institute, shares this view. The ripple effects throughout the trading world of a more flexible yuan could be enormous, diluting the specific impact on any one country, even if that country is the U.S.

If we buy fewer imports from China, we might just buy more from some other country. A sign that this effect might be important, Levy argues, is that even while Chinese imports into the U.S. have been surging, total Asian imports have been roughly constant. This suggests that at least part of the impact of a change in Chinese currency policy would be a tweak in U.S. trade with Malaysia or Japan.

Economist Ray Fair of Yale University attempted to account for ripple effects in a paper that analyzed the macroeconomic impact of Chinese revaluation.

“The estimated effects on U.S. output and employment are modest,” he wrote. “Positive effects on U.S. output from a decrease in imports from China are offset by negative effects on U.S. output from increased inflation and from a decrease in U.S. exports to China because of a Chinese contraction.”

History as Guide

History also is a guide. If changes in the exchange rate are truly a big deal, then the U.S. trade deficit with China should have decreased during the Chinese currency appreciation from 2005 to 2008. Instead, it grew.

Then there’s the question of scale.

Assume that starting in August 2008, when China’s last revaluation ended, U.S. imports from China started tracking those of Japan, another big Asian trading partner of the U.S. that does let its currency float. Under that scenario, imports from China this year would have been about $27 billion lower. In a $14 trillion economy, that is hardly enough to have much of an impact on jobs, especially if imports from other countries increase.

Economic policies with uncertain benefits can be defensible if they carry no cost. Bashing China has real costs: It might cause a trade war reminiscent of the one that put the world economy into a death spiral in the 1930s. And it definitely distracts attention from the need for government policies that directly help the U.S. economy and those looking for jobs.

So isn’t it time we left China alone?

(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He was an adviser to Republican Senator John McCain in the 2008 presidential election. The opinions expressed are his own.)

--Editors: Laurence Arnold, James Greiff
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To contact the writer of this column: Kevin Hassett at khassett@bloomberg.net
To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net

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Economics is a religion, not a science

THINK ASIAN
By ANDREW SHENG

‘Within the cathedral of mainstream economics, there are many chapels devoted to specialised problems’

IS economics a religion? Paul Krugman argued recently in his Aug 21, New York Times column that the policy elite of central bankers, finance ministers and politicians are “acting like priests of an ancient cult, demanding that we engage in human sacrifices to appease the anger of invisible gods.”

By gods, he means the “bond vigilantes,” who advocate spending cuts to reduce the fiscal deficit to enable the bond market to become stronger, resulting in greater confidence in the economy.

The biggest advocate of deficit reduction during the Clinton Administration was former US Treasury secretary Robert Rubin.

As he put it in his memoirs, In an Uncertain Age ( 2003): “In important ways, the deficit had become a symbol of the government’s inability to manage its own affairs – and of our society’s inability to cope with economic challenges more generally, such as our global competitiveness, then much in question.

“The view that fiscal discipline was being restored contributed to lower interest rates and increased confidence, and that led to more spending and investment, which in turn led to job creation, lower unemployment rates, and increased productivity.”

Rubin is the mentor of former economic adviser to US President Barack Obama, Larry Summers, and the current US Treasury Secretary Tim Geithner, both of whom served under Rubin in the US Treasury.

Have they adopted fiscal reduction again as the way to restore confidence, despite Krugman’s view that there is a need for further government spending to ‘get back to the job of rebuilding the economy’?

Krugman is advocating Keynesian intervention in the economy, while the bond advocates are going back to the monetarist’s “let the market work”, by cutting back over-blown government spending back to sustainable levels.

Nobel Laureate Joseph Stiglitz, who broke ranks with the Washington Consensus during the Asian crisis on the irresponsibility of tightening interest rates and cutting fiscal deficits in the midst of a crisis, has just written a new book, Freefall: America, free markets, and the sinking of the world economy.

He has written the most powerful book on the current crisis – not a blow-by-blow account of what happened and whodunit – but a damnation of the crisis in economics and the crisis in morals.

“Economics had moved – more than economists would like to think – from being a scientific discipline into become free market capitalism’s biggest cheerleader.”

The mainstream economists had become so smug in their beliefs that the market was almost efficient that “it was a theological position, and it soon became clear that no piece of evidence or theoretical research would budge them away from it.”

Stiglitz does not hesitate to see the economics profession as a religion.

He aptly describes it as: “Within the cathedral of mainstream economics, there are many chapels devoted to specialised problems. Each has its own priests and even its own catechism.”

He is right. Despite the overwhelming evidence against their utility, the mainstream economists have convinced policymakers that there is little wrong with their models or efficient market Capital Asset Pricing Models.

Let’s get back to the business of making money. In a passionate defence of the under-privileged, Stiglitz argued that there is an underlying moral deficit – “far harder to forgive is the moral depravity – the financial sector’s exploitation of poor and even middle-class Americans.”

He laments the fact that “economics, unintentionally, provided sustenance to this lack of moral responsibility.”

What Stiglitz has demonstrated of the economic theologians is that if they believe that they are right, it must be their detractors who are wrong. So their energy is not spent on what is wrong with their beliefs or assumptions, but why those who try to demonstrate that the theory does not fit with reality are infidels.

Should governments cut deficits?

But let us come back to the big debate: Should governments cut deficits or increase them to get jobs going?

My personal view is that if the United States suffers from fundamentally excessive consumption financed by excessive leverage, then simply increasing public debt to substitute for Wall Street losses does not make sense.

De-leveraging has to happen some time, either in the private or public sector and de-leveraging means cutback in consumption.

The dilemma is whether government spending is for creating temporary jobs or for getting long-term growth going that would create new jobs.

Advanced country public debt is so high because the vested interests, from bankers to healthcare, basically would not allow the government to cut spending and instead push for tax decreases. This fiscal model in the long run is not viable.

The Keynesian argument that if the private sector lacks confidence to spend, the government should spend is not wrong. But Keynes did not spell out where the government should spend. Nor did he envisage that lobbyists can influence government spending to be wasteful. Hence, every prophet can be used by his or her successors to prove their own points of view. This is religion, not science.

One of my dreams is to write a film script about how Martians came to visit Earth in the year 2200, when the world is destroyed by a nuclear war.

As Martian archeologists explore the ruins, they notice that the tallest and the most important edifices left standing are the most magnificent. Deep in their basements, they find vaults made of tungsten steel that seem to protect the most sacred items.

In almost every city they find these buildings. When they manage to open the vaults, they find ashes of paper that could have been records of something important.

They think these are religious documents. Then, they discover some small coins, objects for which the Martians have no use. In each coin, they finally decipher the words: In God we Trust.

The Martians conclude that in the last days of Earth, there flourished an important religion that worshipped a god called Money, and these temples were called banks. They did not find traces of the priests, who were called economists.

·Tan Sri Andrew Sheng is adjunct professor at Universiti Malaya, Kuala Lumpur, and Tsinghua University, Beijing. He has served in key positions at Bank Negara, the Hong Kong Monetary Authority and the Hong Kong Securities and Futures Commission, and is currently a member of Malaysia’s National Economic Advisory Council. He is the author of the book, From Asian to Global Financial Crisis.

China Launches New Lunar Probe Chang'e 2 to Scout the Moon's 'Bay of Rainbows'

China successfully launches Chang´e 2 Play Video Chief Designer: Getting closer to the moonPlay Video China Launches Second Robotic Moon Probe By SPACE.com Staff posted: 01 October 2010 09:28 am ET

An unmanned moon probe blasted off from China Friday (Oct. 1) to begin the country's next phase of lunar exploration and set the stage for even more ambitious spaceflights to come.

The Chinese moon probe, called Chang'e 2, launched at 6:59:57 a.m. EDT (1059:57 GMT) from the Xichang Space Center in southwestern China's Sichuan province, according to state media reports. It should take about five days for the spacecraft to enter orbit around the moon.

The Chang'e 2 spacecraft soared into space atop one of China's Long March 3C rockets. It launched on Oct. 1, National Day in China – a holiday that commemorates the 61st anniversary of Communist rule in the country. 

Chang'e 2 is the second step in China's three-phase Chang'e moon exploration program, which is named after China's mythical moon goddess. Chang'e 2 will test out technology and collect data on possible landing sites for the Chang'e 3 spacecraft, which is scheduled to land on the moon in 2013, China's state-run Xinhua News Agency has reported.

According to media reports, the mission has a cost of about $134 million.

Chang'e 2  will eventually swoop down to an orbit just 9 miles (15 km) above the lunar surface to take high-resolution pictures of landing areas for the Chang'e 3 mission, Xinhua has reported.

After snapping the photos, Chang'e 2 will retreat to an altitude of about 62 miles (100 km) to conduct a study of the lunar surface and dirt. 

The Chang'e 1 probe launched in October 2007 and conducted a 16-month moon observation mission, after which it crash-landed on the lunar surface by design, in March 2009. 

The Chang'e missions are just one prong of China's burgeoning space program, which has seen three successful manned spaceflights, including the nation's first spacewalk on the most recent mission, the Shenzhou 7 flight of 2008. 

China's New Lunar Probe to Scout the Moon's 'Bay of Rainbows' By SPACE.com Staff posted: 01 October 2010 03:45 pm ET

When the unmanned moon probe launched by China today (Oct. 1) arrives at its destination next week, it will target a specific zone on the lunar surface to scout out future landing sites, the country's state-run media reports. 

The robotic Chang'e 2 spacecraft will take a close look at the moon's Bay of Rainbows, or Sinus Iridium, which has been proposed as a potential landing site for China's next moon-bound mission, the Xinhua News Agency reported today.
Chang'e 2 will send back high-resolution photos of the region to help mission planners pick the best landing targets for Chang'e 3 – the probe that is expected to make China's first unmanned moon landing in 2013. 

"The geological structure in this area is diverse, so a probe there would have greater scientific value," Wu Weiren, the chief designer of China's lunar exploration program, told Xinhua. 

The Bay of Rainbows is approximately 147 miles (236 kilometers) wide. Its coordinate location is around 44 degrees north latitude and 31 degrees west longitude. 

Four or five areas have been identified as possible landing grounds for the Chang'e 3 spacecraft, Wu said, but the Bay of Rainbows is the current frontrunner, Xinhua reported. 

"Other places on the moon have already been landed on, so we want to choose one that has not been explored before," he said. "Previously, most lunar programs landed around the equator of the moon, an area easier for monitoring and control maneuvers, but Chang'e 3 will take on greater challenges." 

Chang'e 2 launched at 6:59:57 a.m. EDT (1059:57 GMT) from the Xichang Space Center in southwestern China's Sichuan province, according to state media reports. 

It should take about five days for the spacecraft to enter orbit around the moon. 

After snapping the photos, Chang'e 2 will retreat to an altitude of about 62 miles (100 km) to conduct a study of the lunar surface and dirt. 

The Chang'e 2 mission follows on the success of China's first lunar probe, Chang'e 1, which launched in October 2007 and ended its flight in March 2009. Chang'e 1 crashed into the moon after completing its mission. 

China is also the third country after Russia and the United States to launch manned spaceflights. The country has launched three manned space missions using its Shenzhou spacecraft, most recently the Shenzhou 7 flight of 2008. That mission included China's first three-person spaceflight and China's first spacewalk.

• 10 Coolest New Moon Discoveries
• Making History: China's First Human Spaceflight
• China's Next Moon Probe to Be Better, Faster Than First 
• Moon Exploration Is Not Dead, NASA Official Says

 

A Chinese Long March 3C rocket stands poised to launch China's second moon mission, the Chang'e 2 lunar orbiter, on Oct. 1, 2010. Credit: CALT

A Chinese Long March 3C rocket launches the unmanned Chang'e 2 lunar probe toward the moon on Oct. 1, 2010 from the Xichang Satellite Launch Center. Credit: CALT

An unmanned Chinese Long March 3C rocket blasts off with the unmanned Chang'e 2 lunar probe toward the moon on Oct. 1, 2010 from the Xichang Satellite Launch Center. The mission is China's second lunar exploration flight ever. Credit: CALT

An artist's illustration of a lunar sample return mission, the third phase of China's planned decade-long Moon exploration plan, slated for 2017. Credit: CNSA. Click to enlarge.

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