I got this email from Robert Reich about John Maynard Keynes

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I am confused about what you are talking about.

Krugman is in favor of 1. If by 2, you mean that he is favor of a fiat money system, the issue is that the majority of economists are in favor of a fiat money system. I said he WASN'T the disciple of Milton Friedman though, and I was really referring to Milton Friedman's libertarian politics, so I don't know what your inference is from.

You are misunderstanding my points. The point isn't that foreign trade with China needs to be reduced, it's that the U.S as one part of the trade needs to secure better deals. When investing in a company, a wide moat is preferred as a barrier of entry for competition. The Chinese policy of requiring companies to partner with a Chinese company in order reap the benefits of cheap labor and a lack of regulation in certain areas, causes non-Chinese companies to give up parts of their competitive advantage in order to obtain it. Thus making Chinese companies who have better circumstances for operating in the Chinese market to get an advantage without having to pay for the R&D.

Therefore, its in the best interest of the US companies to use their government to put pressure on the Chinese government in order to obtain more favorable deals. A kind of "tit for tat" if we allow mainly free trade, then you should as well. All the major Asian "new" actors in the market, Japan, Korea and China have utilized protectionist measures during the start up phase of their industry, in an attempt to avoid specializing in industries where they may have a competitive advantage in the present, but which are more vulnerable due to low barriers of entry than others. As referred to in my example, the policy of requiring foreign operators to partner with a Chinese company gives the Chinese company the opportunity to leverage (not financially) their position as a manufacturing and distribution partner, into a fully fledged company without the need for its American partner.

At that time the American company has given up what could potentially have been a long term competitive advantage in exchange for a short term labor cost benefit. Sure, "subjective measures of value" and so on, but there is an objective value to exchanges as well. For a country which is very well suited towards agriculture or resource mining, it makes little sense to export minerals and purchase back agricultural or mining equipment, because it will inevitably result in a negative trade balance. The effects of which are spoken on by Krugman http://economistsview.typepad.com/econo ... an_cs.html

He's also spoken on China's policies here http://krugman.blogs.nytimes.com/2010/0 ... -deficits/ as a comment on this http://www.nytimes.com/2010/08/16/opini ... .html?_r=1 editorial.

And, kind of supports my argument here http://www.nytimes.com/2010/01/01/opini ... an.html?hp and here http://krugman.blogs.nytimes.com/2009/1 ... cantilism/

*Note that is without mentioning the irony of appearing to support a quote saying that Adam Smith is the only sane economist, following by the citation of whole heap of works by economists who are not Adam Smith*

Last edited by TM on 16 Jun 2012, 4:17 pm, edited 1 time in total.

American companies have to exchange dollars for yuan to finance Chinese factories. The Chinese government has little use for the US dollars except for food and fossil fuel imports. What's left over can either be hoarded or invested by buying US bonds. I don't think the point is where the dollars go but where the value ultimately goes. US consumers get cheap goods and companies still make a large profit, but how much of this profit is being financed by the US government going into debt just to keep money in the hands of consumers? If government spending through wages and social programs was suddenly drastically reduced how much would the economy tank?

But the competitive advantage of US companies is irrelevant. The real issue is whether the trade benefits America, not US companies.


By "pressure", do you mean that we should push China to not engage in protectionism? That's somewhat reasonable, but ONLY IF this impacts the terms of trade. China is already giving us cheap goods, so what do more cheap goods do.


The issue is ultimately the cause of a trade deficit. Krugman's JUST ARGUING that a trade deficit is a larger problem than imagined, and.... that's kind of irrelevant, as the real issue is why does it exist rather than correct? He seems to argue that the US has larger foreign debt.(and debt is a bigger issue)


Krugman is only arguing that we should shy away from strategies that risk trade-war for the sake of changing Chinese policy. That's very different than pushing for protectionism.


Those two arguments only make sense during a recession economy.


There is no irony. I don't support it as I see economics as semi-continuous from Adam Smith. I mock Longshanks.


No, I am not misunderstanding your points. You're not being clear. I understand Krugman's arguments. He's arguing that the Chinese are screwing up the balance of trade(which I agreed that they could, but that this wildly depends on the particular policy) and that protectionism is a good thing to threaten to counter-balance that.(And I've agreed that threats are fine, just so long as we try to make our strategy the avoidance of a trade-war) He's also coming at this explicitly from the perspective a recessionary economy, which you haven't been clear on, leaving me to assume that you really just wanted protectionism.

So, the long and the short is that I think Krugman is reasonable in the context as he goes mostly into what I have been saying, but you have not presented anything close to reasonable, and a few of your comments don't relate back to his. So, either you can agree with him, and accept this was a huge misunderstanding, or you can persist the argument.

I am against long-term US government deficit policies that I think are responsible for the ongoing trade-deficits. I think that once we solve that, then we wouldn't have as much to worry about trade-deficits. I think that if the US government suddenly changed policies overnight, a lot of economic problems could emerge. I don't think that under the current climate budget deficit reduction is a priority. However, I do think that in the long-run alteration could solve some of our concerns.

My basic worry is that most calls for protectionism are ill-informed. So, the same kinds of cries used to happen over Mexico.

I agree that the tendency for ongoing long-term deficits is a problem. The cause is obviously politics. It's easier for politicians to lower revenue generating taxes than raise them and it's easier to expand government programs than cut them.

As for the debt causing the trade imbalance I'm not sure I understand. I'm not an expert on economics but to me it seems one could argue the other way around as well, that the trade imbalance causes the deficit. Maybe it's not true in the case of the US, but it certainly seems to be the case for countries like Greece. There's no way a country can consume more than it produces other than continuously taking on debt, either public or private. When private debt clamps down due to economic recession, public debt has to increase to compensate.

So, you're basically saying that a trade imbalance causes a recession, and then this recession causes deficit spending?

In a situation like this, I would be more concerned about the cause of the trade-imbalance. I'm simply suspicious towards the existence of an exogenous trade-imbalance, with the concern less on a trade imbalance and more on the causes.

Not exactly.


Why can't mobility of low-skill production cause a trade imbalance all on it's own? I don't think trade imbalance necessarily causes a recession. Without government intervention what it seems to cause is a glut of low skill labor and a shortage of high skill labor. Right now it seems like the high-tech industry that's left in developed countries relies a lot on government loans and grants to finance education and provide a source of skilled labor. They also rely on subsidies for research and development. I'm saying all industry in the first world in an indirect sense relies on government handouts. Yet these same governments are unwilling to be heavy-handed when it comes to collecting the tax revenue needed to sustain such an economy. Thus the tendency to continually run deficits.

Because the primary use of a currency is buying things using that currency. Why would people take money if they weren't going to use it? The only reason I can think of for them to not spend the money they get is if interest rates are particularly favorable in a particular nation, and usually that ends up requiring a distorting influence on the financial markets.


I am unsure how to take this in relationship to the larger issue. I mean, you're arguing that there is a structural issue in the economy, and the institutional structure of the government is such that it does not handle taxes properly. But, that really just seems like an argument that the economic system is screwed, not really related to any particular instance.

Second and third world countries don't have to trade dollars back to the US because the dollar is a de-facto world trade currency that practically any country will take. It can circulate indefinitely without ever returning to the US. I don't fully understand why China buys so many US bonds other than a sense of security. There's also the fact that China isn't truly a free-market society outside of Hong-Kong, so I assume it is the state buying the bonds rather than individual Chinese citizens. I can imagine plenty of other government regimes might decide to hoard US dollars for their own security rather than investing it. When you have primarily states rather than individuals dealing and trading US dollars the market is obviously going to behave differently.


I really have no idea of the economic system is screwed or not. I'm just exploring ideas. I would love to have a better understanding, but unfortunately I haven't really studied economics in any formal way. Beyond my basic intuition I'm actually pretty clueless and would love to have an expert really explain things to me. Unfortunately economics isn't an easy subject to self-teach as it's difficult to really get to the meaning behind all the language and jargon economists like to converse in.

Strictly, no. Then again, getting something for nothing isn't exactly a bad thing either. The real problem in that situation is stability. Frankly, it'd be great to have a MASSIVE trade deficit, if it weren't for the fact that we can't expect the economic climate to be the same as the one allowing that deficit, but rather we should expect a shift. (Kind of like how being massively in debt wouldn't matter if the people who lent to you never ever asked you to pay it off)

I don't think you have a situation of primarily states though. I mean, China is the only really large economic power that is also totalitarian. It's hard to say either way, because China's relationship to a market economy is complicated.


Actually, the larger difficulty is the mathematical models and the assumptions in those models.

I mean, when economists popularize they really are just trying to engage in the political discussion more than anything else anyway. The textbooks aren't difficult math, but they express everything in math.