I went to see Paul Krugman's lecture on globalization yesterday (part of a "festschrift" conference honoring a U of M professor, Alan Deardorff). I was surprised by what a good speaker he was, given the tendency of some professors to descend into jargon when facing a crowd. Those years of punditry have served Dr. Krugman well.
In any case, one of the most interesting - and ominous - parts of the lecture was Dr. Krugman's prediction on the end of America's current economic slump. Recessions caused by banking crises, he said, last a long, long time (since banks become institutionally wary about making new loans). Every country that has experienced a banking crisis-driven recession in recent decades - Sweden, Japan, Argentina, Mexico - has, he noted, exported its way out of the slump.
Having made this point, he paused, and said "Well, unless we find another planet to export to..."
Most people in the audience, hearing that remark, probably took it to mean that global demand is so anemic there's no one to buy our exports. That may have been true at the beginning of this year, when global trade collapsed. But if you look at the headlines now, you'll notice that our top trading partner, China - which also happens to be the world's second-largest economy - has shaken off the slump like a bear shaking off a pesky chihuahua. China is forecast to grow 8.5% this year and 9% next year.
But Krugman discounted the possibility that China will buy our exports, and with good reason. As long as China keeps its currency, the yuan, de-facto pegged to the dollar (a peg that was lifted for about two years and then reinstated as soon as the crisis hit), they will continue to run a big trade surplus with us. This is why Willem Buiter says that dollar depreciation is necessary to get the U.S. growing again - but, like Krugman, is extremely skeptical that China will allow this to happen. Hence, our economy will limp along for a lot longer than Sweden's did after its banking crisis.
What do we do about this? Well, we could do what Britain did to us in the Great Depression, when we tried to do what China is doing now: raise massive trade barriers, and force the over-eager exporting behemoth into a sharp vicious slump. That would help no one, of course. But if we could use the credible threat of protectionist measures to force China to revaluate its currency, both the U.S. and China - and the rest of the world - would benefit enormously, the U.S. from increased growth, China from increased purchasing power for its consumers.
Can we make a credible threat? China has been a source of cheap labor for U.S.-based producers and retailers, and those big businesses will be the first to oppose any proposed trade barrier. (Note that those are the same businesses that often wax eloquent about the value of "free markets" and the evil of "government intervention," except when massive anti-market intervention by the Chinese government boosts those companies' profits at the expense of low-end American workers). And a trade war, though it would hurt China the most, would hurt us a bit as well.
But when the alternative to a Chinese currency revaluation is a "lost decade" for the American economy, our course should be clear. If the threat of trade barriers is necessary to give millions of Americans a shot at re-entering the labor market, then so be it. Even Krugman, once one of the biggest advocates of free trade, mentioned in his speech that we shouldn't be inordinately scared of protectionism. Sometimes the disease really is worse than the cure.
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