Paul Krugman notices that even the Bush Administration now believes that it needs to lead a posse rather than act like a lone cowboy--that the active cooperation and assistance of other countries is very useful for the United States and the world:
The China Syndrome: A funny thing happened this week: the Bush administration, with its aggressive unilateralism, and its contempt for diplomacy and international institutions, suddenly staked its fortunes on the kindness of foreigners. All the world knows about the Iraq about-face... a war [Bush] felt like fighting even though it had nothing to do with terrorism, President Bush is now begging the cheese-eaters and chocolate-makers to rescue him.... he's doing the same thing on the economic front. Having squandered his room for economic maneuver on tax cuts that pleased his party base but had nothing to do with job creation, Mr. Bush is now asking China to help him out [by reducing their exports to the U.S.].
Not, of course, that Mr. Bush admits to having made any mistakes. Indeed, Mr. Bush seems to have a serious case of "l'état, c'est moi": he impugns the patriotism of anyone who questions his decisions. If you ask why he diverted resources away from hunting Al Qaeda, which attacked us, to invading Iraq, which didn't, he suggests that you're weak on national security. And it's the same for anyone who questions his economic record: "They tell me it was a shallow recession," he said Monday. "It was a shallow recession because of the tax relief. Some say, well, maybe the recession should have been deeper. That bothers me when people say that."
That is, if you ask why he pushed long-term tax cuts rather than focusing on job creation, he says you wanted a deeper recession. It bothers me when he says that.
Of course, nobody says the recession should have been deeper. What critics argued -- correctly -- was that Mr. Bush's economic strategy of tax cuts for the rich, with a few token breaks for the middle class, would generate maximum deficits but minimum stimulus.... Instead, however, he's decided to plead with the Chinese for help....
[But] the Chinese remember very well that in Mr. Bush's first few months in office, his officials described China as a "strategic competitor" — indeed, they seemed to be seeking a new cold war until terrorism came along as a better issue. So Mr. Bush may find it as hard to get help from China as from the nations those same officials ridiculed as "old Europe"....
Of course, even an enormous revaluation of the yuan would have little impact on employment in the United States. China would, in a couple of years or so, sell less to the United States. But China would also by less from its other trading partners, which would then have fewer dollars to spend and would buy less from the United States as well. To first order, revaluing the yuan is a small plus for U.S. industries that compete with Chinese imports, but a small minus for U.S. industries that export to other Asian countries. The net effect would be very, very small indeed.
Posted by DeLong at September 5, 2003 10:16 AM | TrackBack
Has the Luskin Posse weighed in on this yet?
Posted by: Alan on September 5, 2003 10:36 AMWell, we do happen to have a massive trade imbalance with China, and adjusting the yuan may change that... a little... eventually...
Again, though, even on the international trade imbalance issue, by running deficits of the size that this lot have rammed through, in the next few years, a substantial amount of foreign capital will drift into American government bonds to finance that deficit (and hence, NOT into private sector capital formation or projects), which will, of course, hurt FUTURE growth, jobs, etc.
The Bush guys always remind me of the henchmen surrounding James Bond movie villains as they are planning on wiping out the Earth and starting their own superrace: don't YOU guys have families too... don't you realize YOU have to live in the same world as this maniac? I mean, sure, the rich (and especially the superrich) will fare better... but do even THEY want to live in the kind of Argentina-style misery that these guys are taking us headlong into? DO THEY???
Posted by: the talking dog on September 5, 2003 10:42 AM>>the rich (and especially the superrich) will fare better.>>
Why is a bad economy good for the rich and superrich? A larger share of a smaller pie could easily be much less than a smaller share of a larger pie. Most rich people I know are suffering more from the economy's effect on income and portfolio value than they are benefiting from a decreased tax rate.
"Most rich people I know are suffering more from the economy's effect on income and portfolio value than they are benefiting from a decreased tax rate."
Well, tell them to vote Democratic!
Let me quote from Adam Smith, The Wealth of Nations:
[01] THE rise and fall in the profits of stock depend upon the same causes with the rise and fall in the wages of labour, the increasing or declining state of the wealth of the society; but those causes affect the one and the other very differently.
[02] The increase of stock, which raises wages, tends to lower profit. When the stocks of many rich merchants are turned into the same trade, their mutual competition naturally tends to lower its profit; and when there is a like increase of stock in all the different trades carried on in the same society, the same competition must produce the same effect in them all.
[07] It generally requires a greater stock to carry on any sort of trade in a great town than in a country village. The great stocks employed in every branch of trade, and the number of rich competitors, generally reduce the rate of profit in the former below what it is in the latter But the wages of labour are generally higher in a great town than in a country village. In a thriving town the people who have great stocks to employ frequently cannot get the number of workmen they want, and therefore bid against one another in order to get as many as they can, which raises the wages of labour, and lowers the profits of stock. In the remote parts of the country there is frequently not stock sufficient to employ all the people, who therefore bid against one another in order to get employment, which lowers the wages of labour and raises the profits of stock.
That's as much as I'm going to contribute to topic drift for now.
"I mean, sure, the rich (and especially the superrich) will fare better... but do even THEY want to live in the kind of Argentina-style misery that these guys are taking us headlong into? DO THEY???"
Actually, I believe that some experiments in psychology have proved time and time again that people basically measure the value of their money only in comparison to what others have. Experiments have shown that people would rather have $50k if everyone else has $5k than have $100k if everyone else has $20k.
I lived in Brazil for 3 years and many of the rich landowing elites still to this day like things the way they are and will use all their power and energy to maintain the current unequal status quo. Better to rule in hell than serve in heaven, perhaps?
I am just trying to get over the irony of Washington trying to convince a country to abandon a peg.
Posted by: Rob on September 5, 2003 12:47 PMWell, non-economist, that's (I guess) why I become more and more of a flaming liberal as I get older. I too have visited lots of places (without living there), including Brazil, Australia, Gorby's USSR and Sweden.
Brazil has tremendous charms-- and I'd love to go back and VISIT. Still, despite spending virtually my entire life in or near New York City, the only time in my life I was mugged was, of course, in RIO. I can see why the rich there like being rich-- but they do have to ride around with armed, and hide behind gated communities, and avert their eyes from the shitty favela slums, some of which don't beat parts of Bangladesh by much.
Stockholm, by contrast, was a place I could go jogging at 3 in the morning with complete impugnity (and not even a second thought); I daresay the income inequality there is a tad less severe than in Brazil.
I guess its all just the kind of place you want to live. Me? I think the Swedes know how to live infinitely better than the Brazilians-- and shitty climate and outrageous tax rates and all, I'd move to Sweden infinitely faster than I'd move to Brazil.
But then, I'm bourgeois, and from New York at that. I suppose if I were patrician from Connecticut and Maine (via Midland-Odessa), I'd feel differently about all this, and realize that the exacerbation of income and wealth inequality that the "tax cuts" (and attendant government spending reductions on social programs) bring about are GOOD and DESIRABLE.
Posted by: the talking dog on September 5, 2003 12:56 PM
Interesting point. Remember how much we encouraged Argentina to keep the peg when devaluation was needed. Still, this is a diversion. China will not re-value now.
http://www.morganstanley.com/GEFdata/digests/20030829-fri.html
The Politics of Globalization
Stephen Roach [Morgan Stanley]
Economic weakness and politics often make for strange bedfellows. This could be one of those times. The political season is now starting to heat up in the United States, and all eyes are on the stresses and strains of America’s jobless recovery. As US Treasury Secretary John Snow heads off to Asia, that issue will be uppermost in framing America’s message to the rest of the world. The politics of globalization are coming to a slow boil....
Posted by: jd on September 5, 2003 12:59 PMTalking Dog,
I’m not sure why foreign capital coming in to finance the pubic deficit reduces investment in private capital. I would think that more foreign investment coming into Treasuries would mean more for all sectors. Domestic funds that would have to be attracted (at higher rates) to Treasuries instead end up in private sector assets. Chinese investment in Treasury debt doesn’t causes crowding out. Using foreign savings means paying dividends to foreign, rather than domestic, savers. If the government weren’t (pardon the jargon) dissaving so fast, more of the fruits of domestic enterprise would go to domestic folks. Foreign capital inflows are good for growth, its just that the payments on the investment go out of the country.
Interestingly, the cheese-eaters and chocolate-makers are with us on the yuan - Duisenberg of the ECB has also called for a stronger yuan. Japan and Mexico are with us, too, as are many other countries. The posse has formed - the coalition of the willing is gathering to revalue the yuan.
Sept 20 will be a key date, according to this Bloomberg story, because of a G-7 meeting.
http://quote.bloomberg.com/apps/news?pid=10000177&sid=aaceggbwG0AA&refer=market_insight
The story also makes clear that traders are doing their thing - if the Chines Gov't is intent on delivering cheap yaun and paying for them with dollars, folks are now lining up to accomodate them.
Business Week has more on this. There are two stories, and if I were any use at all I would recommend just one. Sorry, chaps, can't do it.
Have a great weekend.
http://www.businessweek.com/investor/content/jul2003/pi20030731_4659_pi031.htm
http://www.businessweek.com/magazine/content/03_31/b3844078_mz014.htm
Posted by: Tom Maguire on September 5, 2003 04:01 PMWould the Chinese 'by' less or 'buy' less?
Posted by: Colin on September 5, 2003 09:19 PMWould the Chinese 'by' less or 'buy' less?
Posted by: Colin on September 5, 2003 09:22 PM(re: many rich people taking massive portfolio hits in the past few years, which probably outweighed their tax cuts)
"Actually, I believe that some experiments in psychology have proved time and time again that people basically measure the value of their money only in comparison to what others have. Experiments have shown that people would rather have $50k if everyone else has $5k than have $100k if everyone else has $20k. "
-Posted by non economist at Septembe 5,
And a lot of them are probably wishing for a Bush recovery, and re-election in 2004. That way, their portfolios will recover (at least partially), while their taxes get lower. And with Bush crony capitalism, tax rates for the rich are probably approaching negative levels.
Posted by: Barry on September 6, 2003 06:00 AMK. Harris:
I start with the simple assumption that there is a finite amount of capital in the universe. As such, that finite capital available for investment in the United States is an even smaller finite number.
Until recently, a lot of that foreign capital sloshed around our stock market, driving it up, and driving capital projects, rather than treasuries, because we were running surpluses. If the foreigners perceive a better return in government debt (bid up to attract that investment), it won't be available for our private sector.
That's all-- its the same result as domestic capital, which would also seek better returns-- in t-bills if they are paying beter (which they would if debt skyrockets).
Posted by: the talking dog on September 6, 2003 09:49 AMSeptember 4, 2003
WASHINGTON (AFP) - The United States sneered at plans by four European countries to create an autonomous European military command headquarters near Brussels separate from NATO, referring to the idea's proponents as "chocolate makers."
In unusually blunt language that drew surprised gasps from reporters, State Department spokesman Richard Boucher scoffed at Belgium, France, Germany and Luxembourg for continuing to support the proposal that they first introduced at a mini-summit in April.
He described the April meeting as one between "four countries that got together and had a little bitty summit" and then referred to them collectively as "the chocolate makers."
Posted by: lise on September 6, 2003 10:06 AMThe problem with our poor level of private saving and public deficit is that capital flowing from abroad gains relatively more ownership of American assets. So, returns on investment will increasingly flow abroad. As we age, we need investment income as our earnings decline. We need to save to assure ourselves of investment income. America will likely have a combined public and private saving rate that is zero or negative this coming year.
Posted by: anne on September 6, 2003 10:15 AM"Most rich people I know are suffering more from the economy's effect on income and portfolio value than they are benefiting from a decreased tax rate."
A very convenient rationalization for taking more of their money, to give to other people.
Posted by: Mark Bahner on September 8, 2003 09:56 AM