Tuesday, February 02, 2010

Summers channels Krugman chanelling Uncle Sam(uelson)

Compare Larry Summers' message at Davos (relayed by Gideon Rachman) to Paul Krugman's shot across China's bow back on New Year's Day.

Larry Summers, the chief economic adviser in the White House, was rather more subtle in his flirtation with protectionism. He told the Davos audience that one in five American men aged between their mid-20s and their mid-50s is now out of work. In the 1960s, he pointed out, 95 per cent of this age cohort had been employed. Mr Summers was careful to say that the US remains committed to open trade and can gain from globalisation. But he also pointed out that Paul Samuelson, a famous economist (and uncle of Mr Summers), had argued that the case for free trade might not apply when countries were trading with nations that were pursuing mercantilist policies. The reference to China did not need to be spelled out.
I usually hear two reasons for not confronting China over its [mercantilist] policies. Neither holds water....

...there’s the claim that protectionism is always a bad thing, in any circumstances. If that’s what you believe, however, you learned Econ 101 from the wrong people — because when unemployment is high and the government can’t restore full employment, the usual rules don’t apply.

Let me quote from a classic paper by the late Paul Samuelson, who more or less created modern economics: “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.” He then went on to argue that persistently misaligned exchange rates create “genuine problems for free-trade apologetics.” The best answer to these problems is getting exchange rates back to where they ought to be. But that’s exactly what China is refusing to let happen.

The bottom line is that Chinese mercantilism is a growing problem, and the victims of that mercantilism have little to lose from a trade confrontation. So I’d urge China’s government to reconsider its stubbornness. Otherwise, the very mild protectionism it’s currently complaining about will be the start of something much bigger.
As we edge closer toward trade confrontation, note too this warning from Rachman's colleague Martin Wolf  back in Jan. 2009 (which I flagged when Krugman's New Year's column appeared):
Now think what will happen if, after two or more years of monstrous fiscal deficits, the US is still mired in unemployment and slow growth. People will ask why the country is exporting so much of its demand to sustain jobs abroad. They will want their demand back. The last time this sort of thing happened – in the 1930s – the outcome was a devastating round of beggar-my-neighbour devaluations, plus protectionism. Can we be confident we can avoid such dangers? On the contrary, the danger is extreme. Once the integration of the world economy starts to reverse and unemployment soars, the demons of our past – above all, nationalism – will return. Achievements of decades may collapse almost overnight. 
And finally, Rachman is at his nonideological, analytical best in teasing out the themes at Davos and the trends they portent:
One leading western businessman - worried about the protectionist threat - saw a silver lining in the attacks on high finance. "Thank God, the politicians are beating up on the bankers," he mused, "it might stop them scapegoating the Chinese." But, in fact, the backlashes against high finance and free trade could merge. Montek Singh Ahluwalia, a leading Indian civil servant, pointed out to the forum that investment bankers had traditionally been the strongest cheerleaders for globalisation at Davos. But Mr Ahluwalia, using a cricketing metaphor, noted that "the bankers have retired hurt". In their absence, there were fewer western voices to be heard preaching the virtues of a borderless world...The crumbling of the old Davos consensus looks like a trend with staying power.

If James Fallows is right that China is entering its Bush-Cheney phase, watch out.

1 comment: