Everyone's an economist now!

Paul Krugman recently wrote a column about how China's exchange rate policy is holding back the world's attempts to escape recession. It's interesting stuff. You should read it. Matt Yglesias, however, thinks that Krugman has forgotten something important:

When it comes to getting the US and Chinese currencies in a different alignment, it seems to me that it matters whether we’re talking about doing that through more expansion in the United States, or through more tightening in China. There’s good reason to believe that policy is too tight in the United States. Unemployment is very high. Inflation is very low. The “Taylor Rule” tradition indicates that the Fed’s normal response to this level of economic activity would be to try to achieve a -5 percent interest rate. There’s not really much reason to believe that policy is too loose in China. Growth is below the recent trend. Inflation is not accelerating.

Yglesias, who has to my knowledge never studied econ, used to take received wisdom straight from Krugman and DeLong and apply those theoretical insights to political issues. But now, it seems, Matt feels he has read enough blog posts that he is qualified to catch the masters making simple oversights. Its simple! All we have to do is print more money, and imbalances with China won't be a problem! Pfft!

Except here's the problem with Matt's argument. China's currency is pegged to the dollar. As long as that peg remains, China will have to buy U.S. assets. That financial imbalance causes a trade imbalance, which lowers U.S. net exports and subtracts from GDP. No amount of money-printing in the U.S. will change that.

Now, Yglesias might reply: "Who cares? Let there be a trade imbalance! We can make up for it by stimulating domestic demand even more, by printing even more money."

And if this is the case, Yglesias has discovered a magic GDP-creating machine. If Krugman is right, and mercantilist policies really do allow China to increase its GDP by decreasing ours, then all we have to do to take GDP to infinity is for China to peg their currency ever lower, and for the U.S. to print ever more money. Their GDP goes up, ours goes up. Magic wealth.

Of course, if this were true, we'd have no need for fiscal stimulus, since we could create as much demand as we needed simply by printing money and buying stuff (in fact, my advisor thinks this is the case!). If, however, I told Yglesias that "we don't need stimulus because we can just print money instead," he would probably laugh at me.

The truth, I suspect, goes something like this: Yglesias begins with a conclusion, which is that it is of paramount importance to avoid any conflict with China (this is also a viewpoint expressed on occasion by Brad DeLong). He then looks for economics arguments to explain why we have absolutely no reason to disagree with or criticize the Celestial Kingdom.

Which is fine I suppose, except that it contributes to the idea of "anyone can be an economist just by thinking about the issues carefully." If economic truths can be discovered by intuition and reason alone, why do we have professional economists? Sadly, this is a question that professional economists have often proven themselves unable to answer. And until economics gets its scientific act together, we'll be forced to endure blithe armchair theorizing by people like Yglesias, Megan McArdle, and - the master - Thomas Friedman...