Five Second ... Responses to Krugman

Krugman is engaging in some more Chinese exchange rate bashing, arguing that it is time for America to take a stand. Given how much the Chinese economy has been doing to support the US in recent years, I really don't think taking a hard line approach is the right way to go. But you don't have to take my word for it.
Scott Sumner:

As you may recall, back around 2005 a number of Congressman were insisting that the Chinese revalue the yuan by 27%. In fact, they did revalue their currency by 22% over the next 3 years. But now we are told they need to do another 20% to 40%. And people wonder why the Chinese are so frustrated with the West. Does this game ring any bells? ... around 1970 the US government kept insisting that the Japanese trade surplus was caused by an undervalued yen. ... The yen has now gone from 350 to 90 to the dollar. ... And the Japanese still run a current account surplus that is more than half the size of China’s surplus, despite having less than 1/10th China’s population. I think it’s fair to say that international economists have become increasingly skeptical of the notion that simply by manipulating nominal exchange rates you can eliminate current account imbalances that represent deep-seated disparities of saving and investing. ...

how many of you think that 40 years from now, when we look back on the American economy in 2010, that most economists agree with Krugman’s argument that a significant part of our economic problems were due to an overvalued yuan? ...

BTW, I notice that Krugman often implies that those who oppose health care reform and unemployment comp. extensions are just a bunch of cruel, heartless, right-wingers. Does Krugman know that if his proposed 25% tariff “works,” and does in fact sharply reduce Chinese exports, that millions of extremely poor Chinese workers will lose jobs in exports industries? Workers who are much worse off than even the bottom 10% of American workers.

One final point. If we do nothing the Chinese will probably revalue the yuan by about 5% to 10% this year, with vague assurances that further increases will occur as conditions allow. If we threaten a trade war there will probably be some compromise in the end, and China will revalue the yuan by 5% or 10% this year, with vague assurances that further increases will occur as conditions allow. But in the second case a lot of bad blood will be stirred up, financial markets will be depressed by uncertainty, and the world recovery might even slow down a little bit. And that’s the best case from his proposal.

Sumner has argued in the past that the low peg helped stimulate China's economy and their demand for our products, thereby reducing the chance of the recession becoming a full blown depression.

Greg Mankiw from a year ago:

when the Treasury secretary complains about the undervalued yuan, his message to the Chinese boils down to this: Stop lending us money. ... Directing attention to the China currency issue amid a worldwide recession and growing fears of depression is more than a distraction. It is downright counterproductive.

The Economist also points out that:

Since America no longer makes most of the products it imports from China, a stronger yuan would initially act more like a tax on consumers. ... from 2003 to 2009, America's exports to China grew by more (245%) than America's imports from China (195%). For "the most distortionary exchange rate policy any major nation has ever followed", it sure doesn't seem to be preventing the very shift Mr Krugman would like to see. ...

And Mr Krugman seems entirely uninterested in the domestic political constraints facing China's leaders. He doesn't consider for a second the possibility that a bullying strategy on America's part might make China less likely to do what the administration wants. Why on earth would a nationalistic nation anxious to establish itself as great power want to come off to all observers as a weakling in the face of American bluster? Mr Krugman would paint China into a corner, forcing them to take steps detrimental to all involved.

UPDATE: Krugman has responded with a more balanced voice. He and Sumner agree that the main point is that people in Asian economies are saving more than they invest, and that money has to go somewhere. They still disagree about the rest - are we in a liquidity trap or not? who should do something? are the costs of a trade war more or less than the benefits?.