Paul Krugman: CSI Trade Deficit

Paul Krugman sifts through the clues regarding the causes and potential consequences of our growing trade deficit. When the clues are assembled and evaluated, the crime appears bigger and more problematic than first reported:

CSI: Trade Deficit, by Paul Krugman, Deficit Puzzle Commentary, NY Times: Forensics are in. If you turn on the TV during prime time, you're likely to find yourself watching people sorting through clues from a crime scene, trying to figure out what really happened.

That's more or less what's going on right now among international finance experts. The crime in question is the U.S. trade deficit, which ... reached an amazing $805 billion last year. The mystery is how we've been able to run huge deficits ... with so few visible adverse consequences. And the future of the U.S. economy depends on which of two proposed solutions to the mystery is right.

Here's the puzzle: the trade deficit means that America is ... spending far more than it earns. ... To pay for the excess of imports over exports, the United States has ... borrowed more than $3 trillion just since 1999.

By rights, then, the investment income ... that Americans pay to foreigners should be a lot larger than the investment income foreigners pay to Americans. But according to official statistics, the United States still has a slightly positive balance on investment income.

How is this possible? The answer, almost certainly, is that there's something wrong with the numbers. ... But depending on ... what's wrong, the U.S. economy either has hidden strengths, or it's in even worse shape than it seems.

In one corner are economists who think the official statistics miss invisible U.S. exports ... of intangibles like knowledge and brand-name recognition, which allow U.S. companies to earn high rates of return on their foreign investments. Proponents ... claim that if we counted [this] ..."dark matter," much of the U.S. trade deficit would disappear. ... But ... U.S. companies operating abroad don't, in fact, seem to earn especially high rates of return.

Why, then, doesn't the United States seem to be paying a price for all its borrowing? Because according to the official data, foreign companies operating in the United States are remarkably unprofitable, earning an average return of only 2.2 percent a year.

There's something wrong with this picture. As Daniel Gros of the Center for European Policy Studies puts it, it's hard to believe that foreigners would continue investing in the United States "if they were really being constantly taken to the cleaners."

In a new paper, Mr. Gros argues — compellingly, in my view — that ... foreign companies are understating the profits of their U.S. subsidiaries, probably to avoid taxes, and that official data are ... failing to pick up foreign profits that are reinvested in U.S. operations.

If Mr. Gros is right, the true position of the U.S. economy isn't as bad as you think — it's worse. The true trade deficit ... isn't $800 billion — it's more than $900 billion. And America's foreign debt ... is at least $1 trillion bigger than the official numbers say.

Of course, optimists have a comeback: if things are really that bad, why are so many foreign investors still buying U.S. bonds? ... But I have two words for those who place their faith in the judgment of investors...: Nasdaq 5,000.

Right now, forensic analysis seems to say that the U.S. trade position is worse, not better, than it looks. And the answer to the question, "Why haven't we paid a price for our trade deficit?" is, just you wait.

Previous (4/21) column: Paul Krugman: The Great Revulsion
Next (4/28) column: Paul Krugman: The Crony Fairy

Comments

[Winslow R.]

And the answer to the question, "Why haven't we paid a price for our trade deficit?" is, just you wait.

Wait for the Bush government to shut down offshore tax havens? HA! HA! HA! HA!

BTW, I think it was Brad S. who already wrote about this. The mismatch between 'book' and 'market' values or 'funny books' are just as necessary as tax havens to avoid taxation. Yes, I guess Paul has a larger audience that needs to be informed, but the 'just you wait' part was a bit overly dramatic.

With Mr. Hu leaving and slamming the door behind him, I'm starting to have the feeling that the U.S. is not so different from Japan after all. I'll be watching (and waiting) currency values closely over the next few months while playing with html. The question has always been, 'how long is the long run'? Paul have any numbers?

[anne]

That the trade deficit is in some manner not really there because we are exporting brand names and knowledge in addition to recorded products and services makes no sense. That profits for international investments in America are higher than recorded to mute tax consequences does make sense. The questions then are, what will happen when the trade adjustment finally begins and how to protect personal investment portfolios against the adjustment?

[anne]

Since I cannot work out a way in which we can readily increase exports to simply limit the increase in the trade deficit, then I have to assume there will in time be a significant decline in the relative value of the dollar and corresponding pressure on long term interest rates. The remarkable international bull stock market in turn has to be threatened by monetary instability.

[John Konop]

We have two economies, one foe the average American family with falling wages, negative saving rate and increase need for entitlement help. We a have a have and have not system heading toward a first world economic system. Forget the Macro, the average family is going in the wrong direction.

[Ninjaplease]

"Since I cannot work out a way in which we can readily increase exports to simply limit the increase in the trade deficit,"

You can't think of one way, not even one?

Well... let's see. US companies move factories to China & call centers / engineering to India, so that good may be produced THERE, intended, due to pricing, solely for the US market. Because of the difference in standard of living, the people who create these products and services cannot afford to buy them.

So we import many many more goods and services than we export.

How does one fix this problem import / export ratio problem?

Well one way is to pretend there is no problem at all, as with the dark matter people.

Another way is to take away the incentive for companies to move their production of goods and services to countries that cannot afford to buy the goods and services with variable tariffs that adjust for differences in standards of living, so that the global worker arbitrage field is flat, instead of completely, and grossly one sided.

That would make companies want to invest here, instead of foreign banks investing in mortgage debt. This is how America has been able to have any sort of a middle class, and it worked from about 1776 to 1976.

Stop pretending that globalization is better for everyone when clearly it isn't. It's the same argument that communists use and it has just as many holes.1

[John Konop]

ninjaplease,

That is why I am runnung for office !! No bigger issue !

[NinjaPlease]

John K.

From the posts I've read of yours and the people who you quote, I would certainly vote for you if I was in your district and or county / state.

I wish there were more decision makers in positions of authority, who would accept other solutions, you know, like the ones that have worked for the past 200+ years for the benefit of working people, instead of trying to convince people that they're better off now, when clearly they aren't.

If you manage to get elected, snow shovels full of money will be thrown at you to change your mind. If you can resist it, you'd be a better man that all of congress, the senate and the past 3 presidents.

[John Konop]

Ninjaplease,

I thank you for the kind words. If I win ,I would quit before selling out. I am a guy who started at the bottom selling credit card terminals cold calling door to door. I kick myself sometimes wondering how a guy with a degree in Urban Administration ended up being a highly respected and well paid executive in the financial service industry. I enjoy what I do for a living, I am willing to take the heat and pay cut for our kids future. If I do not win by telling the people the truth about what needs to happen economically, I would rather not go to Washington.By the way if I do win please feel free to use this against me, for positive reasons if I keep my word or negative if I break my promise.

[save_the_rustbelt]

Looks like the science of economics may not be so scientific.

When the stuff hits the fan no tenured economic professors are going to lose their jobs, so why worry?

Rapid globalization may not be such a hot idea. When does Krugman et.al. eat crow?

[bakho]

Another way to look at the trade imbalance is that the US is paying too much for the goods we import given underlying weakness in the market. The US is THE market for many of the goods that foreign countries are exporting. Providing a subsidy for Americans to buy ensures a market. Not subsidizing American buyers would mean that alternative markets must be developed, or the manufacturing hits the overcapacity wall.

The traditional Keynesian economic stimulus is for government to increase demand. One can defend the policy of foreign governments in that a failure to support the American market would lead to overcapacity, and manufacturing would undergo a contraction with attendant unemployment. They can get away with overcharging, only because they are willing to subsidize our buying by investing in the US.

At some point, purchase of American bonds will become less desireable than purchase of American goods that can be used to build the internal infrastructure. There are many neglected needs overseas that could be met by American products. Once the political climate changes and people recognize that they indeed have the resources to purchase American products, the pattern should shift from the trade imbalance to importation with domestic investment in mind.

For instance, China just purchased American Airplanes, no sweat. A key is getting those governments to move faster in making purchases for their domestic economy.

[Mark Thoma]

STR

Just like physicists fighting over which model is correct makes it unscientific?

This is a measurement issue, not a theortical one. They are different.

So, STR, your contention is that we'd be better off without trade? If not, what is your contention, some trade? How much? If some trade is your answer, then it's a fight about how much to open the doors, nothing more, and that's not an argument with a lot of teeth. Help us and tell us exactly where the line is. Which goods should we trade, and which we shouldn't.

And if you say close the doors altogether, we will simply have to agree to disagree as to the merits of that.

[John Konop]

Mark,

The issue is not how much trade it is the rules of the game. If trade is based on killing the enviorment,and a race to the bottom of wages and working conditions who wins? The corporate profits at record rate ,while wages and the enviorment are heading toward third world standards.

[Mark Thoma]

John:

You always adopt a position of moral superiorty, or so it seems to me. Our own environmental history is nothing to brag about (on another point, did you know that we were one of the biggest thieves of intellectual property when we were at the same development stage as China? - Varian has written about this - see Mankiw who writes" Economist Hal Varian writes to tell me that "in 1891, the U.S. was the world's biggest copyright pirate, for the same reason that is true of China today."). Before holding your nose too high in the air, look to our own history and see what decisions we made when we were at China's stage of development. There's reason we had worker riots and the rise of unions, etc. at the turn of the century. Even when I was a kid, while rivers may not have actually burned, there's no way we could boast about our environmental sensibilities. Now that we are a rich country we can afford the luxury of being more environmentally aware, but it wasn't always so (I am not trying to say that two wrongs make a right, only to counter the notion that somehow the U.S. made superior decisons at a similar stage of development - to a large extent we did exactly the same things even with respect to working conditions).

All of the issues you write about, worsening income distributions, environmental problems (I posted at the environmental economics site yesterday, e.g.), working conditions, and so on, have been covered here and my concern over these issues has been made very evident. I care as much as anyone, or I wouldn't spend hours and hours doing this. The question is about the best solution and whether we get that by interacting and persuading, or by closing doors and demanding while adopting a position of moral superiority.

China is changing, there is no doubt about that. I've listened to "a", I can hear the hope in the words, the description of his/her parents back in China and how they are changing their views about China's prospects for the future. It is encouraging and I want to keep China on that path and accelerate movement along it as much as possible. Closing the doors would make it worse, not better. If you care about workers in China as much as you say you do, then explain how stopping trade with China will help them (you switch between concern for Chinese workers and their "slave" conditions and U.S. workers and low wages as convenient - sometimes the "slaves", your term, not mine, are your concern, sometimes it's the wages of U.S. workers, here I suspect you will say it's because it hurts U.S. workers, but at other times you have made the opposite argument.)

The rules of the game are part of that, and I have no problem with negotiating over better rules (but be careful trying to define fair - you will find it isn't easy). But I see no reason to shut the doors to our own detriment while we do that. The pie is growing pretty fast, it's the distribution of the pie, not the generation of income, that is at issue right now. Do you wonder how much of the change in the distribution of income is due to tax changes for high incomes and how much is from trade? Did failure of education in our inner cities contribute? Should we fix that first? Trade isn't the only causal factor here. Are you sure changing the rules of distribution internally wouldn't be a better solution to shutting the doors to trade?

Final question, you've talked a lot with "a" lately. When he/she goes back to China, will the U.S. be better off, or worse off? I say worse off. Definitely worse off.

[NinjaPlease]

Re: Mark Thoma,

Right now it does not make business sense to start up continue operating or to invest in ANY company that manufactures goods in the United States--its at a tax / cost disadvantage to do so.

There is no benefit for companies to stay here, unless they absolutely must, ie, brick n mortar wal mart stores located where their customers are.

There needs to be global environmental statues, and working condition / healthcare & education statues. The more a country conforms to these standards, the lower the tariffs against its goods are.

That is positive reinforcement to motivate companies & governments to change their laws FOR THE BETTERMENT OF THEIR PEOPLE, OUR PEOPLE THROUGH INCREASED TRADE & THE ENVIRONMENT OVER ALL.

The worse your environmental conformance / labor conditions, the higher the tariffs against your goods. This would allow for counties to have industries in compliance & some that are not incompliance, with tariffs on each variable.

This is what makes the most sense to me, it promotes free trade through conformance to global environmental & labor standards, not the INSANE method of free trade implementation that we're experiencing now, on the losing side I might add. Note that if this was implemented we'd probably see farming tariffs disappear to nearly every country, but tariffs against many other goods.

Right now there is no business case for changing both labor and environmental practices at all--you can't even blame the companies for jumping on the bandwagon, but you can blame the representatives who sold us & the people being exploited, out.

[Mark Thoma]

I'm not sure where anyone got the idea I would oppose looking for economic solutions to environmental problems, or to problems of poverty, here or anywhere else.

But on a related question, what if Europe and Canada won't trade with us because we don't have healthcare for all of our workers? Should they put tariffs on any good that doesn't provide healthcare for workers before importing it in the interest of fairness? How should the U.S. react if they stop importing ag goods altogether due to genetic engineering and worries about pollen drift, etc. into other crops? Is that envirnomental objection okay? What if Europe won't trade with us because we have the death penalty, how should we react?

Countries are going to make different decisions about how they trade, in the short-run, environmental quality for economic growth. I'm not sure where the line is where we say you've traded too much environmental quality away, but any externality that affect the U.S. (including employment effects) is certainly worth addressing in some manner through the creation of appropriate economic or political incentives, though my focus is largely on the economic side.

[Stormy]

Exactly right, John.

Mark,

The choice between “Free Trade” and protectionism is a false one. Unfortunately, the overall picture is not reducible to ten-word sound bites. The latest IMF suggestions echo the simplistic inanities that have dominated discussions on trade: Developing countries spend more and allow more flexible exchange rates; developed countries save more

Nothing is ever said in terms of labor, tax, or environmental arbitrage, the three great levers that have pushed the global imbalances to the brink. Nothing is every said about those whose only interest is in keeping these levers working.

Yes, economists occasionally complain about poisoned rivers or about riots. I wonder if it merely to establish their humanity and their concern for things green. What economists do not do is to see the relationship between these things and, say, the trade deficit. Economists are the Jesuits of money-eyed interests. The equations are kept simple; the variables within them, simpler still. And the remedies are the simplest of all: You save; you spend; your currency floats; liberalize more.

If you want Chinese peasants to save, how are you going to accomplish this? Are you going to insist that sweatshops stop, that labor is allowed to organize, that labor regulations be aggressively enforced? Are you going to insist that a country not trade its environment for the benefit of a few, while the rest drink poisoned water and breath even poisonous air?

If you want Americans to bring down their debt, are you going to insist that tax havens protecting the wealth of few be aggressively closed? What say you to Ireland? The Bahamas? Or even to FDI in China that is being given a very nice ride? Is the complaint that doing these things has an economic cost? Cost to whom?

The dots are there. But most economists draw very simple pictures. Must be too much t.v.

[Mark Thoma]

And I thought I had just mentioned environmental arbitrage...

[calmo]

Krugman wades in on 'dark matter' (remember that pile on the floor that H&S left in the corner?) and I wonder if he gets it or if I'm getting a different slice than he is with this:
In one corner are economists who think the official statistics miss invisible U.S. exports ... of intangibles like knowledge and brand-name recognition, which allow U.S. companies to earn high rates of return on their foreign investments. Proponents ... claim that if we counted [this] ..."dark matter," much of the U.S. trade deficit would disappear. ... But ... U.S. companies operating abroad don't, in fact, seem to earn especially high rates of return.

Wasn't the whole business about why US FDI in Asia was doing so much better than foreign investment in the US? It could be that the DM is receding lately but the accounting rules seemed to be crying out for some revision [--either foreign companies here were under-reporting profits or US companies abroad were inflating their's].

bakho posts one of the most optimistic comments on the US trade prospects I have read and unless this is another bakho, I'm all the more surprised.
Such a radical thought (I mean genuine and rare): the US is paying too much for the imports. [Time to forget just how cheap that cordless drill at the supermarket was: buy a 10lb bag of oranges and it's yours free.]
Moreover, "They can get away with overcharging, only because they are willing to subsidize our buying by investing in the US." [Those IOUs in the form of agency, corp and tbill notes keep prices low giving us room to buy that bag of oranges so critical to our cordless drill collection.]
This is so promising: "There are many neglected needs overseas that could be met by American products." And yet I wonder how much of even those Boeing jets are not sub-assembled in Japan or elsewhere. The fact that my closet is brim full of cordless drills distracts me from the non-American picture that may be somewhat different.
The fact that clean water, air, food, may be in short supply overseas does not get in my face like that bargain cordless drill.

[John Konop]

Mark,

This is what the average American is getting out of our trade deals. In all due respect you sound like my kids who tell it is in one way or no way. All we are talking about is balance.

As far as China , How do you explain the gap between rich and poor getting worse?

Earlier today, I mentioned economic disparity in passing. Here's a more in depth take on the subject:

Economic Policy Institute mentioned it on Wednesday. Morgan Stanley's Stephen Roach mentioned it on Friday. The Washington Post mentioned it on Sunday. All three have touched on the topic of economic disparity.

From EPI:

Living standards not keeping pace with productivity
“The median household income rose just 1.6% between 2001 and 2004 … compared to an 11.7% rise in productivity. Workers aren’t reaping the rewards of their labor: real wages are trailing productivity gains because profits are taking the lion’s share of economic growth Growth in net worth has been equally lackluster, nudging up 1.5%

Even this slight gain has been unevenly distributed because it stems entirely from a run-up in housing prices. The central role played by residential property, which constituted 39% of total assets in 2004 (up from 32% in 2001), means that families are increasingly vulnerable to a downturn in housing prices.

If this downturn comes as a result of rising interest rates, households will be doubly impacted because the value of home-secured debt (for families that had any) rose by 27% over the three-year period.”

From the Washington Post:

“Our Financial Failings” by Neil Irwin
“It has about $3,800 in the bank. No one has a retirement account, and the neighbors who do only have about $35,000 in theirs. Mutual funds? Stocks? Bonds? Nope. The house is worth $160,000, but the family owes $95,000 on it to the bank. The breadwinners make more than $43,000 a year but can't manage to pay off a $2,200 credit card balance. That is the portrait of the median American household as painted by the Federal Reserve Board's Survey of Consumer Finances. Blown away yet?

No? There’s more: “Only 49.7 percent of American families even had a retirement account in 2004.”

From Mr. Roach:

Globalization’s New Underclass:
“An increasingly integrated global economy is facing the strains of widening income disparities - within countries and across countries. This has given rise to a new and rapidly expanding underclass that is redefining the political landscape and stoking protectionist fears.” From his “conclusions”, (we edited to focus on the US; footnote is mine as well):

“The United States and China exemplify the full range of pressures bearing down on the global income distribution. (1) *Gini indexes show both nations with relatively high degrees of income inequality. (2) Courtesy of an IT-enabled arbitrage, real wage compression in the United States has moved rapidly up the value chain - sparing an increasingly small segment at the very top of the occupational hierarchy. (3) This sharpens the contrast between America's elite and the rest of the US workforce.”

Joanie notes what the bottomline is:

Don’t know about you, but I don’t have the stomach to stop and linger on any of this stuff for more than an instant. It’s that distressing. Worst of all, it’s been that obvious for some time. John Q is up the creek. If he has anything besides debt, for the most part, it’s his house. Oh, my. And not a sou in the bank for a rainy day or worse, for retirement. And as has been pointed out in this space on numerous occasions as just one example: the deal-makers make billions making the deals that makes John Q. unemployed or underemployed and thanking his lucky stars for a $15 buck an hour job installing sensor alarms on some M&A honcho’s 5,000 acre starter hacienda out in Bozeman.

This is what happens when the tail wags the dog, i.e., when the market drives the economy. Things’ll be different come the Revolution.

[Stormy]

“Countries are going to make different decisions about how they trade, in the short-run, environmental quality for economic growth.”

Does sound like a Bush argument, doesn’t it. I am laughing here. Yup, not much difference between the liberal and right-wing economists.

Ok…let’s say a country does trade environmental quality for economic growth. How should its trading partner respond to keep competitive? One guess.

Have we looked carefully at Bush’s environmental policy lately?

Mark,

The game is not simple; for every action, there is a reaction. It is a race downhill. Don’t you think that China’s environmental policy will have an effect on ours? What do you think companies here have been complaining about: We need fewer environmental regulations so that we can compete.

Why do you think companies here want to strip away pension obligations and reduce wages? What do you think the “Guest Worker “ program is all about? Competition.

This is not a short-run trade-off. This is a race to the bottom. And at exactly the wrong time in our history.

[save_the_rustbelt]

"So, STR, your contention is that we'd be better off without trade?"

Nope, never said that.

I think we could manage the current transition in a more intelligent manner, and wow have we failed at that.

And if the consensus position is that blue collar workers have to be sacrificed, then economists and politicians should be adult enough to stand up and say so very clearly, the politicians preferably before November.

Record profits on Wall Street and K Street, record foreclosures in Ohio and Michigan. I take issue with that.

And I'm still waiting for a free trade economist to voluntarily renounce tenure to compete in the free market.

[Mark Thoma]

When you can assure me that people that feel as passionately as you do won't come after me for giving my honest academic opinion on matters such as free trade, i.e. when the conditions for free trade actually exist, I'll do just that. There's no reason to politicize research even more than it aleady has been. And being targeted because of your research can, and does happen even today (see a recent comment about an economist at UC Davis who talked about ag subsidies for one example).

I don't ever recall being in favor of sacrificing anyone in the name of trade. My goal is the same as yours, to be smarter about this.

[John Konop]

Mark,

The reason I point out that the gap between rich and poor is widening in Communist China, America,Mexico..., while corporate profits are going at a record pace is point out the winners in the trade deals. I am not an economist, but a good horse trader. If you follow the money the answer is right in front of you.

The solution is balancing and enforcing trade agreements based on livable wages,civil working conditions and environmental standards. I do not need an economist to tell me you are robbing Peter to Paul.The only difference is Paul is the multi-national corporation and Peter is the majority of us all over the world.If you are looking for the perfect deal before doing anything, we will become a third world economy.

[Mark Thoma]

John:

One last comment. I am not looking for a "Revolution" with a capital R like you are, I just want to make things better within the current system. Right now, distributional issues are a problem. I am a single dad with three kids I struggled to put or am putting through college. Just like everyone else, I worry about their future. My daughter is doing well (and very much earned it), she is in the next post, and my son is graduating this year and I can assure you he, and me as I felt it all with him, faced the international competition problem head on. It wasn't easy for either of us. My other son is still in college and I of course wonder what type of future he will face. Someday, I hope the college payments end - six consecutive years most with more than one attending has been a challenge.

What I see from my "ivory tower" is what most everyone sees, I think, as I try to ensure that my kids have the best possible future for themselves and make ends meet day to day. If I thought they, your kids, everyone's kids in the U.S. would be helped by closed borders, I would not hesitate to adopt that position. But even knowing competition may be tougher for them as globalization progresses, I still believe open borders gives them the best possible shot in this world. I assure you, they are no ivory tower abstraction to me, they are very much in my mind as I think about all of these issues (the war too, whatever position I take has them foremost in my mind - what is best for their future?).

I sort of wish I hadn't gotten into a back and forth in the comments, I try to avoid that, and would rather let the things I post explain my positions on these issues. But don't think I have anything but the best interests of people, workers, everyone, in mind as I do so. We may differ in our ideas about solutions, and I hope you will at least respect that I've given these matters considerable thought before summarily dismissing the things that I present on these pages.

[camille roy]

First, while I am one of the skeptics about globalization and free trade, I want thank Prof Thoma both for his sincere attention and (relatively) open mind on this subject, and also for supporting this terrific blog, which is now my fave.

My problem with economic theory is that it has to be applied in the real (political) world, and I have observed that the economists who advocate their various theories don't seem to have a good enough grasp of political economy to even see the consequences of the policies they advocate.

For example, there has never good a good response to a point I've raised numerous times: given free trade and globalization, what role democracy and voter representation?

Obviously, for globalization to work, the ties that knit together the intl community must be both much stronger (with teeth) and much more representative (of the will of the people/workers). Otherwise free trade is simply the rule of the boss, democracy be damned. In the long run this will not work, because so many powerful countries are democracies.

Economists push free trade and globalization without taking account of the fact that our (international) political institutions are far too immature to manage the consequences.

[Mark Thoma]

camille:

I have to thank all of you too. You ask great questions and you make me think. That's good.

As I've written about free trade, people have told me that borders matter and economists do not understand that. Your points about worker representation in a global economy without walls have caught my attention, STR said something similar once when he first commented here. I haven't forgotten and don't yet have a good answer. I can tell you that I have my eyes and ears open (I've been hoping, e.g., Project Syndicate or someone might touch on this issue), and when I come across intellignet things on this topic, I will pass them along. For now, it's just one of those nagging questions that rolls around in your head hoping to find an answer.

Partly, I think it is a matter of welfare analysis - as we calculate costs/benefits as U.S. policymakers, whose costs and benefits ought to enter the equation? But I haven't fully formed thoughts on this yet.

Thanks again.

[NinjaPlease]

Re: Mark Thoma,

It is a wise man who says: "I don't know enough about the problem to make an informed decision."

It says a lot about you.

Love the blog by the way.

[Emmanuel]

There is worker representation in a global economy without walls. It's called the International Confederation of Free Trade Unions (ICFTU). Whether it's effective or not in addressing labor concerns is another thing.

[dryfly]

I don't know about you guys but these issues aren't just academic exercises for me. I directly compete against off-shore sources and at the same time am not 100% against trade. After all I live in Minnesota and happen to like fruit in winter... and we can't grow enough fruit in the southern US to meet the demands of all us frozen northerners & southerners too. If I'm going to eat it it's going to come from somewhere outside the US.

However I don't see how trading with countries who peg then freeze their currency is 'free trade'... or where we can't agree at all on a system of unified standards & enforcement on issues like labor rights, pollution, intellectual property rights, etc.

Where currency exchange rates are 'frozen' or grossly manipulated and where huge differences in operating conditions exist then why even pretend it is 'free'... in such cases trade is 'manipulated' so admit it and be done with it. It quacks - its a duck.

And if it can be manipulated one way then why not another?

And I don't believe for one minute that we in the US are always the guys in the white hats - our agricultural & forestry products subsidies & protections are indefensible. And I live in farm country... I see it.

But so are things like the Chinese peg & Japanese currency manipulations... Europeans bitch about our 'labor rights'. All are reasonable arguments.

In such cases if ANY of these countries feels that freely trading with the others under these terms undermines their national desires & aspirations then they should be allowed to levy tariffs. If we don't like the Chinese peg, then raise tariffs on Chinese products. If Europeans don't like our labor laws raise tariffs on our products... so on.

Maybe then we'll be able to sit down and address these issues reasonably. I only hope that somebody tries to influence the discussion toward RAISING standards occasionally... say raise developing country environmental laws or raise US labor law practices... as often as they push to lower subsidies & unnecessary protectionism.

I don't see how this trade argument has to be an 'all open' or 'all closed' debate. People are not computer chips, we aren't 'binary'.

[dryfly]

BTW - I don't know if any of you heard PBS's "Marketplace Money" this weekend but it appears that their chief economist has guzzled the 'Dark Matter' Kool Aid too...

You can hear it HERE...

The stuff must be addictive... Programs like this are the economics equivalent of 'meth labs'. Sheeesh.

[John Konop]

Mark,

I enjoy your website because you do a good job of posting all sides. Also from reading the comments you attract many different views. I would not take my time reading your site had I not thought I am gaining Knowledge. As I said in the past I have used information from your site on numerous occasions in public. I do thank you.

In regards to this issue, you want to put me in a box as an isolationist who wants no new immigration or trade. If I dare challenge our immigration and trade policy many will label me a isolationist or racist by the right and left. Yet I pointed out Caesar Chavez,Walter Mondale, Robert Abernathy , all wanted to control the rule of supply and demand relative to immigration.Are all of us RACIST or are we trying to help middle class American families ? By the way was Cesar Chavez wrong , have migrant workers condition improved ? Did ADM,Tyson Chicken.. invest in robotics to raise the standard of living for workers or create working poor with no rights? Do you think Tyson Chicken would not love to have guest workers with no voting rights ? Why do you think professional qualification are being watered down in our trade deals ? http://www.johnkonop.com/EagleForumCAFTADoctorsDentists.php If we have a labor shortage why are wages going backwards ?

The solution I have talk about is enforcing trade agreements with livable wages, environmental standards and working conditions. As far as the boarder I do not know the number of immigrants, what I do know is it is being used now to drive wages down to compete with $2 a day overseas workers. My point is control the boarders,while working with the business community to make sure we have the right number of workers. Also make it mandatory for all immigrants to have health insurance pre-paid or guaranteed by employer. Also we need to have proper health checks as well as security. I am confused how this is a view of an isolationist or racist ?

[Winslow R.]

Currency markets are telling us Mr. Hu may have 'winked' at Bush when he told him, NO!

http://finance.yahoo.com/q/bc?s=USDJPY=X&t=5d

[save_the_rustbelt]

"When you can assure me that people that feel as passionately as you do won't come after me for giving my honest academic opinion on matters such as free trade, i.e. when the conditions for free trade actually exist, I'll do just that."

I won't be coming after you because I'm a First Amendment advocate, and I don't see many people gunning for professors anyway. I even spend a little time in academia, the real enemies of most profs are their catty, petty colleagues. And besides, many of us have to defend our work in the marketplace every day. I;m certain you are up to it

Workers aren't being sacrificed, the are being "displaced," a nice sterile term. This isn't the 19th century, this is the richest country on the planet, and the economy is being redistriuted to 10% of the population as if we were a banana republic, but in the name of progress.

[a]

I became interested in Econmics through Paul Krugman's elegant NYT editorial artciles. I was interested in the Globalization and Trade topics as well, and my first book on it is "Globalization and Its Discontents".

Through various readings and my own work, I found that my economic knowledge is not enough to understand most of issues. So I started taking economics class. Contrary to many people's claim here, I see the major contribution of economists in the 20th century, and more. While people feel insecure with more and more competition, recessions have been mild and containable, and the economists have tools at hand to tune the economy. In the USA, despite recent set back on wages, (I think it has more to do with corporation governance and imprudent fiscal policy than trade), people enjoyed the best living standard in the world, with wonderufl programs like Socail secuirty and Medi Care that many Chinese people envy (and please don't let anyone destroy it).

While many Americans are complaining about the Trade imbalance, as a Chinese, I see things differently. Sure, I am an easy target because I am a Chinese. It takes some courage to say it, but I feel that I should be candid in this wonderful blog Mark maintains.

First I see the Fiscal deficit a direct consequence of an unpopular War and a "popular" tax cut, which, just when everyone almost forgot, was mentioned again by Bush and he still wants to make it permanent. I say "popular" because there has been much less public rejection of it than the Iraqi war. The reason China can "manupilate" the currency is that you have lots of bond to sell.

Second, I see the trade imbalance as a consequence of the US's embargo of technology sale to China. The authors of "China: Balance Sheet" argued against it, I only heard his argument on TV and I found his evidence extremely thin. Someone earlier on this blog posted the things USA are willing to export to China, and it is NOT flattering! There are lots of things China wants to buy and USA does not want to sell. The trade imbalance is not a failure of trade system, but the result of ideological control.

Third, I agree developing countries like China should pay close attention to the environment. Braizil is such a great example to China! It takes time and leadership to achieve that, and I hope truly as they showed in their 11th 5 year plan (as quoted by Prof Stiglitz) they are moving towards solving the problem the Braizilian way!

Fourth, on the argument of labour condition, Prof. Krugman argued long time ago, low wages are better than no wages. Even USA and Europe has come from a history of bad labour condition. True better labour condition is always favored. But can one deny the majority of the developing countries jobs because most of them make less than $2 a day? How can they ever get to make more than $2 a day and bargain for better labour conditions, if they don't have jobs at all? And arguing the Trade imbalance is due to cheaper labour cost in China is also false, because there are many country whose labour cost is even cheaper, and yet they don't have much trade surplus, many of them were living on AID.

And, my deep appreciation for the Host to give everyone a space to speak their mind and argue!

[anne]

http://www.calvorn.com/gallery/photo.php?photo=6395&u=99|3|...

Yellow-rumped Warbler Singing
New York City--Central Park, Nutters Battery.

A, what a terrific series of comments, rock on :)

[a]

And I forgot to mention the real reason the CHinese are buying US Bond is lack of an efficient financial system. Be sure the Chinese are working on it. Most Chinese people are worried about gettind old, getting sick and getting laid off, gettin gtheir Children through college, just as Americans do. The difference is: there is no Social Security, the health care reform is a failure, admitted by the government, and there is no unemployment benefit, and worse, there is no financial market to invest in.

So they save, and they put money in the bank and the bank does not know how to make good loans to business or individual, so it buys bonds (from who happens to sell),

The Chinese is not going to relax control on their financial market untill they figure out a good financial market and social insurance program to share risks. This is another good things Americans have and may not realize that it not available everywhere.

The Chinese leader made it clear that CHina would have to solve the internal problems first. It is fair. I don't want a leader who does not pay attention to those issues first.

I hope you can understand!

[anne]

http://www.nytimes.com/2001/09/16/books/chapters/16-1st-sijie.html?ex=1128744000&en=13d3cb5e9ba677e8&ei=5070&ex=1122696000&en=0041147f323e866d&ei=5070

September 16, 2001

Balzac and the Little Chinese Seamstress
By DAI SIJIE

The village headman, a man of about fifty, sat cross-legged in the centre of the room, close to the coals burning in a hearth that was hollowed out of the floor; he was inspecting my violin. Among the possessions brought to this mountain village by the two "city youths" -- which was how they saw Luo and me -- it was the sole item that exuded an air of foreignness, of civilisation, and therefore aroused suspicion.

One of the peasants came forward with an oil lamp to facilitate identification of the strange object. The headman held the violin upright and peered into the black interior of the body, like an officious customs officer searching for drugs. I noticed three blood spots in his left eye, one large and two small, all the same shade of bright red.

Raising the violin to eye level, he shook it, as though convinced something would drop out of the sound holes. His investigation was so enthusiastic I was afraid the strings would break.

Just about everyone in the village had come to the house on stilts way up on the mountain to witness the arrival of the city youths. Men, women and children swarmed inside the cramped room, clung to the windows, jostled each other by the door. When nothing fell out of my violin, the headman held his nose over the sound holes and sniffed long and hard. Several bristly hairs protruding from his left nostril vibrated gently.

Still no clues.

He ran his calloused fingertips over one string, then another . . . The strange resonance froze the crowd, as if the sound had won some sort of respect.

"It's a toy," said the headman solemnly.

This verdict left us speechless. Luo and I exchanged furtive, anxious glances. Things were not looking good.

One peasant took the "toy" from the headman's hands, drummed with his fists on its back, then passed it to the next man. For a while my violin circulated through the crowd and we -- two frail, skinny, exhausted and risible city youths -- were ignored. We had been tramping across the mountains all day, and our clothes, faces and hair were streaked with mud. We looked like pathetic little reactionary soldiers from a propaganda film after their capture by a horde of Communist farm workers.

"A stupid toy," a woman commented hoarsely.

"No," the village headman corrected her, "a bourgeois toy."

I felt chilled to the bone despite the fire blazing in the centre of the room.

"A toy from the city," the headman continued, "go on, burn it!"

His command galvanised the crowd. Everyone started talking at once, shouting and reaching out to grab the toy for the privilege of throwing it on the coals.

"Comrade, it's a musical instrument," Luo said as casually as he could, "and my friend here's a fine musician. Truly."

The headman called for the violin and looked it over once more. Then he held it out to me.

"Fogive me, comrade," I said, embarrassed, "but I'm not that good."

I saw Luo giving me a surreptitious wink. Puzzled, I took my violin and set about tuning it.

"What you are about to hear, comrade, is a Mozart sonata," Luo announced, as coolly as before.

I was dumbfounded. Had he gone mad? All music by Mozart or indeed by any other Western composer had been banned years ago. In my sodden shoes my feet turned to ice. I shivered as the cold tightened its grip on me.

"What's a sonata?" the headman asked warily.

"I don't know," I faltered. "It's Western."

"Is it a song?"

"More or less," I replied evasively.

At that instant the glint of the vigilant Communist reappeared in the headman's eyes, and his voice turned hostile.

"What's the name of this song of yours?"

"Well, it's like a song, but actually it's a sonata." ...

[camille roy]

a: The Chinese is not going to relax control on their financial market untill they figure out a good financial market and social insurance program to share risks.

Love that! In the long run, when the powerless of the earth are well taken care of by the powerful, the Chinese govt will 'relax control'.

As in, never.

So, if that's not going to happen, what are the alternatives?

Some Pimco guys have recently proposed a coordinated zero interest rate policy. What do people think of that?
http://randolfe.typepad.com/Documents/A_ZIRP_Remedy_to_Global_Imbalances.pdf

The intention is to create a synthetic tariff for exporters of capital as a way of addressing global imbalences.

[John Konop]

a,

You seem like a nice person. Yet the reality is our personal and national debt is out of control. The gap wages between rich and poor in China and America is widening. The saving rate for the average American family is negative 1. Healthcare, college cost,energy prices and child care all growing 2 to 4 times faster than wages. The average American baby boomer will not be able to retire even with SS.

I have no problem with Asian people. My wife and I almost adopted a Korean child. Yet I do not trust a communist government. We all know how communist China used technology from Cisco to Yahoo to track and in prison people for disagreeing with the government. As far as technology even in they buy plans from us most of the components are not made here. Your ideas just do not box for the U.S. or China. Why are you against raising the bar instead of racing to the bottom?

[a]

Camille and John,

many American firms are moving in to China, buying up Chinese banks and hopefully they will transfer some technology (financial markets, not millitary, :)), risk management skills, etc... I myself got chance read about the aspect of Asset Backed Securities being created in China, so at the end we will have our own bond market... So, Camille, it will happen faster than you think. And it is not just about rich people. Most Americans invest through mutual funds.

And if the American politicians don't trust Chinese government and don't want to sell techonology, fine. I just point that out to show that, from my perspective, it is the main reason of the trade imbalance. China has extreme low import tarrif, and Chinese people love American products.

[dryfly]

The Chinese leader made it clear that China would have to solve the internal problems first. It is fair. I don't want a leader who does not pay attention to those issues first.

I hope you can understand!

a, I agree with a lot of what you say... especially the part about our deficit (due to war spending & domestic spending run amok & tax cuts) causing so many problems.

But don't discount the role the Chinese gov't & central bankers play in setting the currency market exchange rate pegs. It does TWO things... (1) by not adjusting the RMB exchange rate to reflect growing Chinese economic strength it results in Chinese workers not receiving the benefits of their hard work and (2) it artificially disadvantages numerous US companies that would prosper if the currencies of the two countries reflected the new realities better... the owners & workers of US companies wouldn't earn as much in 'globally adjusted purchasing power' but would continue working.

A revaluation produces a win-win for the people of both countries and the sooner it is done the better.

[Ninjaplease]

Re: A,

Stop funding the J-10 fighter / bomber project, stop funding the Z-10 attack helicopter project, stop funding nuclear submarines loaded with nuclear warheads in MERV's, stop performing military excercises on the shores near Taiwan, stop building infantry landing craft and running drills on the shores near Taiwan, stop funding the Maoist insurgents in Nepal, and I'll stop agreeing with a complete technology trade embargo against China.

"people enjoyed the best living standard in the world, with wonderufl programs like Socail secuirty and Medi Care that many Chinese people envy (and please don't let anyone destroy it)."

Your tense is correct. "Enjoyed." These programs were formed out of the successes of what you'd probably refer to as a "protectionist" government. They are not a result of free trade.

Recently the company I worked for was bought by a conglomerate that is very "global," with a factory in Shanghai and a partially state owned factory in Donguang? The day we were bought (we were privately owned, now publicly traded) we were told that there was a budget and hiring freeze until the end of the year.

I also found out that they've hired 4 engineers in China specifically to support our products. Did I mention we were a domestic manufacturer?

All of that is now over. Profits must be maximized, non-value add costs must be reduced, and resources will be "reallocated" --which is executive speak for "laid off."

But hey, old navy sells realy cheap fleeces, and walmart sells really cheap food, right?

[a]

Dryfly, you might be right that revaluating Yuan would benefit Chinese workers, improving their living standard. But I am more convinced that China needs to have the infrastructure to make it work. I just read a Japanese businessman's observation on China's factories --- far from being the factory of the world, he argued the fragmented inefficient, family owned small workshops only are making money because the Chinese people are so willingly working long hours. (It makes my heart ache! I know what they were thinking when they labour hours after hours, and they simply appreciate the chance to be able to work.) But it is also an analogue of the Chinese banking system.

Last year, I wanted to wire some money back home, I tried Bank of China, and Chase, Commerce Bank. Commerce bank is a local small bank compared ot Chase. Commerce bank charge me a flat $25 for any amount I wish and the money get to my parents account in Bank of China the next dat, though the manager told me that had they been Chase or HSBC, it would be faster. Same for Chase. But Bank of China would take weeks and charge additional fees... even though I am wiring to an account in their branches in China.

It takes time. I only wish it happens faster!

[a]

Ninjaplease,

I am not sure you get all of the military things right (the Nepal Maoist group is not related to the CHinese government), but I understand your point and I want to agree. I want to agree because I myself don't like military actions/spendings. But then when I look at Iraq, I think perhaps it is not a sin to buy some fighters. :). I am sorry that I can't agree with you completely.

Social Security was created by Roosevelt and Medi care by Lindon Johnson. I am not knowledge enough to know if they are protectionists though.

As for your firm, I am sorry that you are not happy with the current strategies the firm is making. Would you be happier if everything else is the same, and just that the factories are not in China? If so, I am more sorry, since I am a Chinese. Any chance that the products can also be sold to Chinese local markets? Because that is often the reason to get into China.

Anyway, if we can quickly and successfully create our own insurance programs and an efficient financial market, many Chinese people will start buying and hopefully Americans will be happy selling to us.

Till then, all I can say is: bear with us, thanks!

[dryfly]

a - if the RMB revalued, those small Chinese owned shops would benefit A LOT... right now the ones who benefit the most from the current system are the western multinationals who operate factories in China and 'exploite' the low costs some of which is due to the cheap RMB.... THEN take those products over here, sell them and receive over-powered USD... That is some thing the small local Chinese factory owner or his workers can't do.

But the reason the changes will take so long is because so many powerful groups here and in China benefit from the current system.

[John Konop]

dryfly,

You are right. Henry Ford was asked one time why he paid his employess so much. He said I want them to buy my cars.This part of the deal is lost.

[Ninjaplease]

Re: A

", I think perhaps it is not a sin to buy some fighters. :)"

It would be entirely silly for the US to ever think about attacking China. My point was more that the US could never do anything about a militarily aggressive China, other than threaten her with nuclear weapons.

"s for your firm, I am sorry that you are not happy with the current strategies the firm is making. Would you be happier if everything else is the same, and just that the factories are not in China? If so, I am more sorry, since I am a Chinese. Any chance that the products can also be sold to Chinese local markets? Because that is often the reason to get into China."

I would simply be happier if I knew that I wasn't going to eventually be replaced by someone who's cost of living is that much lower than mine (Chinese electronics engineers make around $3000 per year,) because this isn't a question of whose smarter, or whose better at their job, or whose more willing to work longer hours, its a factor that I can never compete on, unless I move to China to work for $3000 a year. There is no competition, simply jobloss in my field. I have nothing against Chinese people or Indians or anyone else, but my government has made it more beneficial for companies to lay off everyone and move their facilities to China TO SELL TO THE US MARKET, since the Chinese market cannot afford the prices the companies are selling at.

The products were never meant for the Chinese market, because the standard of living needs there to catch up and the Yuan has to appreciate a hell of a lot more before they become affordable.

"Anyway, if we can quickly and successfully create our own insurance programs and an efficient financial market, many Chinese people will start buying and hopefully Americans will be happy selling to us."

I wish you the best of luck in getting the benefits you're looking for. With no tariffs and the world population as a labor pool, the odds are not good of increasing any sort of social net, for anyone.

[anne]

Again, for a reason that I do not understand instead of asking why and how Australia or Japan or France or Germany or Sweden or the Netherlands manage to have fine labor standards and protections even while competing internationally, the conversation is generally a lament about China.

[a]

dryfly,
you might be right here "But the reason the changes will take so long is because so many powerful groups here and in China benefit from the current system."

Just might. I don't see much evidence that aside from benefiting from the system, those powerful groups are actively making the banking system transform slow.

I know the banks are plagued by corruptions.
I also know western banks are eager to get into China.

Discussion and research (by American Academic) on Chinese banking systems have been conducted over the years. The time China was accepted by WTO, everyone thought the inevitable opening of financial market is going to crush Chinese banks. It is well known. In FEb 2006, Columbia offered a symposium on this very topic. I tried to get hold of some of the handout, but I have not read them carefully yet. The Chinese lacks the expertise and I hope they are paying close attention to Americans advise.

But then again, you might be right, I don't know that much.

[a]

Ninjaplease,

your product might take a long time to reach ordinary Chinese. But I can assure you there are a sizeable group of Chinese wealthy enough to enjoy it.

Perhaps they did not earn their wealthy fairly, but that is another issue.

[John Konop]

anne,

Wage riots in France ? Japan moving to zero saving rate economy ? I do not get your point ?

[anne]

There certainly were no wage riots in France. There were however happily successful student and union protests against an attempt to reduce employment security for younger workers. As for Japan, even through a sustained low growth period, workers were protected and treated remarkably well and Japan has largely restructured and is growing well again. Both countries have fine social service programs that will not be limited, for voters will not allow a limitation.

[anne]

French workers are well represented and well treated, and though there will now and again be union demonstrations, for that is part of French bargaining, workers will continue to fare nicely. Japanese household saving is ample for an older society given ample social services. Japan is fine.

[anne]

The point is to learn about others and use what is learned. What might be learned about health care in Australia, that we might use? What of the low unemployment in Finnland or the Netherlands? Why are Swedish or German workers, who are surely well cared for, not fretting about trade? Why has Delphi failed, while a European vehicle parts maker thrives?

[a]

Yes the Chinese are looking that Japan with admiration (while, there may be resentment over other matters) for their economic achivement: Gini coefficient, a Chinese bloger mentioned, is 0.28 (compared at China's 0.41), the lowest among developed major economies.

[anne]

Oh, by the way, we could immediately have $100 billion and lots more to spend on wonderful programs or even save, by simply leaving the lunatic occupation or war in Iraq immediately. Imagine if we simply left Iraq, now, what might be done to build rather than destroy.

[Stormy]

A good discussion with many of the cards finally placed on the table, not just the issues of revaluation and property rights. Labor, taxation, and the environment are all part of the deck.

How one trading partner plays these cards puts pressure on the other to do the same. The issue is then complicated with the flight of our companies overseas to leverage their own profits and the subsequent erosion here at home.

China's entry into the WTO was premature. The terms of NAFTA were ill-advised, as are those of its little cousin, CAFTA.

In the long run, no one will be well-served, neither China nor the U.S.

To move ahead, we need to understand the nature of the problems we created. Moving ahead will not be easy.

We need more of these discussions.

[John Konop]

anne,

You might want to read this about the French economy.

The Economics Fueling the French Riots
It's becoming quite clear how unsustainable a system is that actually fosters sky-high youth unemployment -- and not just in France

Could the riots in France spell the beginning of the end of the European economic model? So far the unrest, which started in a Paris suburb and has now spread to more than 300 French towns, including Orleans, Nantes, and Rouen, has been mainly attributed to religious, ethnic, and immigrant issues. And the arson, car burnings, and other attacks so far seem to be centered in Muslim and African communities, fueled by pervasive discrimination and genuine grievances. Advertisement

Yet the outbursts were supercharged by an economic system that not only tolerates but actually fosters sky-high youth unemployment. In September, an incredible 21.7% of 15- to 24-year-olds in France were unemployed, compared to only 11% in the U.S. and 12.6% in Britain. France isn't alone -- other European countries, such as Belgium, Spain, Greece, Italy, and Finland -- also have persistent youth unemployment rates above 20%.

Such sky-high levels of idle youth are a by-product of the welfare-state mentality that's still pervasive across much of Europe. The idea is that government's main role is to provide a safety net for the population, in terms of jobless and health benefits. Generating growth and creating jobs takes a distinctly lower priority, resulting in high unemployment, especially among the young.

UNDIRECTED ENERGY. By contrast, in the U.S. economic model, rapid economic growth and low unemployment can help pull young people over racial and ethnic hurdles. When businesses need lots of new workers, they are willing to take chances, as they did in the late 1990s. From 1996 to 2000, for example, the unemployment rate for young Americans dropped from 12% to just over 9%.

The problem for Europe -- and France in particular -- is that no society can long survive when 20% of young people, with plenty of energy and no place to put it, are unemployed. It's not simply an immigrant problem. Romano Prodi, the leader of the center-left coalition in Italy, says living conditions are terrible in that country's suburbs, even in areas made up only of Italian citizens.

One important lesson of the French riots is that the European economic model is leaving too many people behind, and that's not sustainable.

[John Konop]

anne and a,

What is you opinion on this article.

SimonWorld says:

Despite the flak I took in promoting an article written by mainland born, U.S. based political science professor Minxin Pei (the last time about Taiwan), I shall do it again. This time, Dr. Pei writesa very readable editorial for the sometimes geographically challenged readership of the San Francisco Chronicle. He had some brave observations about why we should be pessimistic about political liberalization following on from economic liberalization... I don't agree with all of his arguments, but they are a quick read and definitely worth absorbing.

Here's the commentary on China's patronage system:

The dark side of China's dazzling economic boom, by Minxin Pei, Commentary, SF Chronicle: The only thing rising faster than China is the hype about China. ... And why shouldn't they believe the hype? The record of China's growth during the past two decades has proved pessimists wrong and optimists not optimistic enough. But before we all start learning Chinese and marveling at the accomplishments of the Chinese Communist Party, we might want to pause. Upon close examination, China's record loses some of its luster. ...

Behind the glowing headlines are fundamental frailties rooted in the Chinese neo-Leninist state. Unlike Maoism, neo-Leninism blends one-party rule and state control of key sectors of the economy with partial market reforms and an end to self-imposed isolation from the world economy.

The Maoist state preached egalitarianism and relied on the loyalty of workers and peasants. The neo-Leninist state practices elitism, draws its support from technocrats, the military, and the police, and co-opts new social elites (professionals and private entrepreneurs) and foreign capital -- all vilified under Maoism. ...

To most Western observers, China's economic success obscures the predatory characteristics of its neo-Leninist state. But Beijing's brand of authoritarian politics is spawning a dangerous mix of crony capitalism, rampant corruption and widening inequality. Dreams that the country's economic liberalization will someday lead to political reform remain distant.

After a quarter century of gradual economic reform, has China succeeded in transforming its old command economy into a genuine market economy? Not nearly as well as most people would guess. ... The Chinese state remains deeply entrenched in the economy. According to official data for 2003, state-owned companies directly accounted for 38 percent of the country's GDP and employed 85 million people (about one third of the urban workforce).

But China's tentacles are even more securely wrapped around the economy than these figures suggest. For example, Beijing continues to own the bulk of capital. In 2003, the state controlled $1.2 trillion worth of capital stock, or 56 percent of the country's fixed industrial assets. There are only 40 private firms among the 1,520 Chinese companies listed on domestic and foreign exchanges.

To many observers, Beijing's tight grip on the Chinese economy means only that its reform process is incomplete. As China continues to open itself, they predict, state control will ease and market forces will clear away inefficient industries and clean up state institutions. The strong belief in gradual but inexorable economic liberalization often has a political corollary: that market forces will eventually produce civil liberties and political pluralism.

It's a comforting thought. Yet these optimistic visions tend to ignore the neo-Leninist regime's desperate need for unfettered access to economic spoils. Few authoritarian regimes can maintain power through coercion alone. Most mix coercion with patronage to secure support from key constituencies, such as the bureaucracy, the military and business interests. In other words, an authoritarian regime imperils its capacity for political control if it embraces full economic liberalization. Most authoritarian regimes know that much, and none better than Beijing.

Today, Beijing oversees a vast patronage system that secures the loyalty of supporters and allocates privileges to favored groups. The party appoints 81 percent of the chief executives of state-owned enterprises and 56 percent of all senior corporate executives.

State enterprises are miserably unprofitable. In 2003, a boom year, their median rate of return on assets was a measly 1.5 percent. More than 35 percent of state enterprises lose money and 1 in 6 has more debts than assets. China is the only country in history to have simultaneously achieved record economic growth and a record number of nonperforming bank loans.

Political savvy and business acumen do not often go together. Because of the party's fixation with high growth, government officials are rewarded for delivering, or appearing to deliver, precisely that. This incentive structure fuels a widespread misallocation of capital to "image projects" (such as new factories, luxury shopping malls, recreational facilities, and unnecessary infrastructure) that burnish local officials' records and strengthen their chances of promotion. The results of these mistakes -- gleaming office complexes, industrial parks, landscaped highways and public squares -- tend to impress Western visitors, who view them as further proof of China's economic prowess.

The Chinese economy is not merely inefficient; it has also fallen victim to crony capitalism with Chinese characteristics -- the marriage between unchecked power and ill-gotten wealth. And corruption is worst where the hand of the state is strongest. The most corrupt sectors in China, such as power generation, tobacco, banking, financial services, and infrastructure, are all state-controlled monopolies. ...

Various indicators, pieced together from official sources, suggest endemic graft within the state. ... Dishonest officials today face little risk of serious punishment. On average, 140,000 party officials and members were caught in corruption scandals each year in the 1990s, and 5.6 percent of these were criminally prosecuted. In 2004, 170,850 party officials and members were implicated, but only ... 2.9 percent ... were subject to criminal prosecution. So, party membership has its privileges.

Rapid economic growth has not yet produced China's much-anticipated political pluralism. In part, democracy itself has been a victim of the country's economic expansion. However flawed and mismanaged, the country's rapid growth has bolstered Beijing's legitimacy and reduced pressure on its ruling elites to liberalize. Democratic transitions in developing countries are often caused by economic crises blamed on the incompetence and mismanagement of the ancien regime. China hasn't experienced that crisis yet. Meanwhile, the riches available to the ruling class tend to drown any movement for democratic reform from within the elite. Political power has become more valuable because it can be converted into wealth and privilege unimaginable in the past. At the moment, China's economic growth is having a perverse effect on democratization: It makes the ruling elite even more reluctant to part with power. ...

The emerging social elite ... is co-opted and coddled. The party showers the urban intelligentsia, professionals and private entrepreneurs with economic perks, professional honors, and political access. For example, nationwide, 145,000 designated experts, or about 8 percent of senior professionals, received "special government stipends" (monthly salary supplements) in 2004; tens of thousands of former college professors have been recruited into the party and promoted to senior government positions. At least for now, the party's charm campaign is working: The social groups that are usually the forces of democratization have been politically neutralized.

China has already paid a heavy price for the flaws of its political system and the corruption it has spawned. Its new leaders, though aware of the depth of the decay, are taking only modest steps to correct it. For the moment, China's strong economic fundamentals and the boundless energy of its people have concealed and offset its poor governance, but they will carry China only so far. Someday soon, we will know whether such a flawed system can pass a stress test: a severe economic shock, political upheaval, a public health crisis or an ecological catastrophe. China may be rising, but no one really knows whether it can fly.

[anne]

Well, I admit to worrying about the end of France, or all of Europe for that matter, when I read the essay, then I remembered that last night I madly decided to buy a chunk of yummy dark French chocolate at Whole Foods and I was relieved. But, I understand, France is bad, terribly bad, never ever offer French living samples to Americans to consider. Of course, no one I know would turn away from a year in Paris, but France is bad :)

[John Konop]

anne,

Talk to parents of French children and they would not find that so funny.

[a]

I happen to know some French quite well, and watch French news in Chanel 25 as often as I can.

French's problem is more complex than John's description. I am not sure John understands it.

French are facing high retirement, which leaves many skilled jobs vacant, meanwhile many young people found it hard to get a job because they don't have the skills... It is a big headache.

The government tries to solve it by allowing companies hire/fire more easily or people under age 26. So young people may face less desirable contract but they at least can gain experience and training.

Similiar contracts were passed quietly in Germany in recent month, just when French students are protesting. Italy and Spain have pass similar laws too.

There are many reasons that the French were protesting, I will post an artcile shortly, which analyzes it through her socialist tradition. But in many of my French friends' opinion, it is politics of the 2007 presidential election, plus Velpin's arrogance. Many of the students protesting may not even know the terms of the contract...

My two cents of information. BTW, even though CPE is officially dead, companies are just doing that by offering "temp" contract anyway.

[a]

Is France Unreformable?

http://www.project-syndicate.org/commentary/hadas_lebel4

=====
It all begun a year ago with the French “No” in the referendum on the European Constitution. It continued last fall with the wave of violence in the suburbs. Now, France has again brought itself to the world’s attention with weeks of street demonstrations against the “contract of first employment” (CFE) proposed by Prime Minister Dominique de Villepin to address high youth unemployment.

These three sets of events, different as they are, together illustrate several deep-seated characteristics of social life in France.

First, France has found it difficult to adjust to the demands of globalization. Beyond ordinary dissatisfaction with economic problems, the failed referendum in May 2005 expressed the rejection by an important part of the French electorate of the discipline imposed by EU policies ensuring free movement of people, goods, and capital – and thus of the primacy of economic competition. In a similar vein, last fall’s explosion of violence in the suburbs reflected the frustrations of disoriented young people facing the grim prospects that a modern economy offers to those who lack proper training and education.

The young are also at the center of the most recent protests, but this time, the disaffected include all strata of French youth, including university graduates. In combating the CFE, they express their refusal to accept a precarious life outside the French model of job security that their parents enjoyed in the context of a profoundly different economy.

There is something very French about all this, because, while the economic rules of the game have changed throughout Europe in the last couple of decades, the need for greater labor-market flexibility seems to have been accepted more easily in most other countries.

In Spain, under a socialist government, roughly one-third of wage earners are working on temporary contracts; the percentage is even higher for the young. In Italy, greater employment flexibility was introduced by the Prodi government in 1997, and further strengthened under the so-called Biagi Law of 2003.

In Germany too, the coalition agreement between the Social Democrats and the Christian Democrats includes a provision that extends from six months to two years the trial period during which an employee can be dismissed without explanation – the same duration contemplated in the Villepin’s CFE law. In all these European countries, the new employment laws seem to be accepted as inevitable.

In France, by contrast, the statist tradition – which, as Tocqueville so aptly observed, harks back to the Ancien Régime, and which is equally shared today by both the Gaullist and socialist ideologies – is strongly linked to a marked distaste toward the strictures of economic liberalism. Since the French Revolution, the imperative of equality has often triumphed over the concern for liberty. As a result, the French are enamored with the welfare state in all its manifestations.

Not even the obvious failures of the French social model in today’s environment – mass unemployment (reaching 25% among the young), huge public deficits, the blockage of social mobility – have diminished its public prestige. It would be much more logical to take inspiration instead from the Scandinavian model of “flexisecurity,” which combines employment flexibility and social security (albeit at the cost of a tax burden that France would not easily accept).

Add to all this the French preference for ideological confrontation and the absence of a culture of negotiation and compromise, to say nothing of consensus, and one can understand why so many reform projects in France end up being contested in the streets. Indeed, quite significantly, most observers have automatically associated the recent disturbances with those of May 1968, which continues to hold a strange fascination for the French. In truth, however, other than reflecting the French preference for the politics of the street, the two phenomena have nothing in common.

So is France unreformable? Certainly not. The country has been transformed profoundly in the recent decades. Whether it is the breakup of public monopolies, such as electricity, gas, telecommunications, and even the post office, or the replacement of military conscription by a professional military, or pension reform, France has changed much more than is commonly believed. This is particularly true with respect to French companies, which have remarkably adapted to the demands of international competition.

But much remains to be done: the entire educational system, up through the university level, requires serious reform, and many taboos regarding employment rules, social security, and the functioning of the state must be questioned. What the experience with the CFE shows is not that reform is impossible, but that it cannot be unilaterally imposed. Time must be taken for explanation, consultation, and negotiation. In a society like France, marked by uncertainty about the future and in great need of having its self-confidence restored, the time taken to build consensus and create legitimacy for further reforms will certainly be well spent.

[anne]

Seriously, as far as I can tell the middle class French, who complain politically all the time but can surely change what they wish changed as we have found, rather like being French and are doing rather well in general. Even the problems faced in truly integrating west Africans are social first and economic second. The French middle class is broad and doing nicely for all the delay in youth employment that may be found. I would happily say all these things to any French parent :) I like France.

[a]

"What the experience with the CFE shows is not that reform is impossible, but that it cannot be unilaterally imposed. Time must be taken for explanation, consultation, and negotiation."

This is how I see it too. I admire French for their democratic spirit!
The CFE, is only valid till one is 26. After that, the firm has to either hire you permanently or fire you. It is not that bad, but Velpin really killed it himself. I would blame him, and very few French think he has any chance to be elected as president.

[anne]

http://www.nytimes.com/2006/04/14/opinion/l14france.html

A Victory in France

To the Editor:

If the ruling class has lost, does it follow logically that French workers and students have also? No.

Through weeks of protests and strikes, France has forced its elected leaders to listen, and to back down. This is what democracy looks like.

The "reform" that Prime Minister Dominique de Villepin, President Jacques Chirac and their business counterparts supported is evidence of the steady chipping away of social capitalism. The students did not seek to secure lifelong jobs; they sought to demonstrate opposition to the law that would make them terminable at the drop of a hat.

The French resist change that destabilizes their livelihood; with a conscience, who wouldn't? Free-market ideology cannot penetrate Europe as easily as in the United States. Sorry, but the working class won.

Marit Knutson
Olympia, Wash., April 11, 2006

[John Konop]

a,anne,

So this has nothing to do with cheap labor in countries like communist China?

"French's problem is more complex" statements like this mean you have not thought out your position.

[anne]

There are always social problems to contend with and subtle ethnic prejudice against African immigrants is a problem, as is prejudice in the immigrant community. Youth employment needs to be increased, though youth are well cared for from free education on. But as "A" alluded to the change in demographics in France alone may raise youth employment. I would like to see lower European interest rates, and structural stimulation of small business and easier use of limited time employment as in the Netherlands, but there will be change.

[anne]

What I have been thinking would solve all our problem would be a fresh period of colonization. Would China, do you think, agree to be colonized again? India? Brazil? We could offer inducements :) Short of a fresh colonizing, we are just going to have to stop railing about developing peoples and work on assisting them in turn for assistance which is what diplomacy and negotiation are about. Suppose we have the British just ask for Hong Kong....

[a]

John,
recently on Frnech news, the jobs that desparately needed to be filled are:
1) restaraunt workers --- Anne would be happy to hear that they, unlike here, get decent wages and 6-week vacation, and that is why in France, you tip nominally.
2) construction workers
3) software engineers

You are just using one-formula-fitting-all argument nonstop. It is not interesting to argue with you if you continue to ignore information and repeat yourself on empty slogan like "questions".

[John Konop]

a anne,

I am old school businessman ,I see falling real wages ,soaring debt of consumers & national ,without including the war, infrastructure falling apart, healthcare cost growing 4 times faster than wages. All I hear from you do not worry be happy. My solution is level the playing field by lifting the bar around the world, zero base budgets , mandatory pay health insurance. Also we should control immigration not stop, so it is not a tool to drive wages down. Invest more in America in technology to replace needs of low wage illegal immigrants to drive wages up for Americans first.Be leader in energy efficiency to grow our economy instead giving the money to multi-national oil companies.Control our boarders for national security and to stop importing poverty.Enforce trade deals and have no tolerance for slave labor ,poor working conditions and poor environmental standards.You can get more details on contolcongress.com

What is your plan ?

[a]

my plan?
Close the trade, only let the absolutely smart in, if "we" need them.
Let the slave labours in third world countries die, or maybe we give them some aid if they beg us nicely enough. And don't ever go close to them, only go to Europe, if you want to.

Stay safe and be happy.

[anne]

Needed in France by "A":

"1) restaraunt workers --- Anne would be happy to hear that they, unlike here, get decent wages and 6-week vacation, and that is why in France, you tip nominally.

"2) construction workers

"3) software engineers"

Truly living wages, pension, vacation, health care and protection against job loss. There is a hopeful work environment. The housing surge in France continues, and I am hopeful in a spread to Germany as structural limits to home construction are being reduced. The Internet is becoming an ever more significant part of pleaseure and work lives and software drives the Internet beyond the frame.

[anne]

What I would like to do is strengthen the ability of labor to organize or bargain collectively with management while strengthening the ability of managers to compete with a more secure labor force by offering federally subsidized catastrophic health care insurance to workers. Higher wages, lower health care costs and government bargaining over health care costs to slow the increase. Education to take students to preferred job opportunities and workers through transitions from job loss.

Continued negotiation to raise labor and evironmental standards internationally and increase markets for American exports, especially with developing nations a number of which we should be extending aid to as well. China is and should be a part of our middle class market, and we should be and will be invited to be a rapidly increasing part of China's burgeoning middle class market.

[John Konop]

anna,

Should we borrow the money from communist China that we are giving them in aide in your plan ? We are doing this with China now via import/export bank and world bank while facing out of control national and consumer debt.The average American saving rate went from 11% to negative 1 since we started doing your idea of investing in places like Mexico,China..... Show me how get out of the red in trade and national debt via your plan? What stops communist China from using human rights violation to keep the edge on labor cost ? I have a more questions , but this is allot.

[John Konop]

anne,

How do you pay for your healthcare plan ?

[Richard]

A listing of current account surpluses (deficits) worldwide (source: CIA Factboook):

http://www.cia.gov/cia/publications/factbook/rankorder/2187rank.html

Some obvious points:

1) Japan, not China, is still the current leader in current account surpluses.

2) Germany is certainly in the same league as China, at least as far as CAS goes.

3) Japan and Germany, together, will probably maintain their collective lead in CAS for years to come.

So why does China relentlessly garner the heat? We made a deliberate decision in this country - dating back to Nixon and the recognition of China - to integrate China into the world economy. Forget about the multinationals and the export of American jobs for a moment: our policy, since the mid-seventies, has been one of binding China politically and economically into the world economy, and it's a policy which has been sustained by every administration since then.

Just as our policy after WWII to bind Europe into an international system was the right thing to do politically and economically at a time of collapse, so binding China internationally was the right thing to do thirty years ago. Smaller issues - whether there need be a WTO protest here or a rate hike there - are small potatoes compared with this much larger picture.

In fact, our faiilures of policy have not been in China or in Europe, but in the Middle East, and largely because we have relied too heavily on propping up autocratic regimes and, lately, the use of military force. But economic and political suasion is more delicate, more reasonable and more economical in the long run.

[anne]

Rather than asking that we pay for a federal catastrophe insurance progam by the saving in leaving Iraq, I would gradually restore the tax levels of 2000 by allowing the cuts to lapse. Also, I would stop the Alternative Minimum Tax which is quickly erasing all middle class tax cut effects since 2000. However, I understand that tax increases however come by may yet be politically impossible. So, present the idea repeatedly and wait or push to leave Iraq immediately.

[anne]

Richard, you continually make interesting comments :)

[John Konop]

anne,

You would still be in the red with your tax plan? A tax cut is not a tax cut unless you cut spending at the same rate. All you are doing is delaying expenses with interest and squeezing out the private sector for money that creates jobs.That is a double hit the interest expense and opportunity cost. If you pull out of Iraq with no energy plan what would happen to oil prices ? What would happen to the stability of the Middle East ? What about Iran ? Both sides need to stop pointing fingers and work together to solve the problem.

[John Konop]

a,anne,

FYI

I guess I am not the only one.

But I'm left wondering... why the unquestioned assumption that it is France needing to change? When I read the litany of "French" problems I find myself comparing them to American problems. At least the French have a real education system, a real healthcare system, a real public transportation system, a significant social safety net, and strong labor representation. And talk about high youth unemployment or a foreign worker underclass! No, we don't have that problem in America do we.

I think France is doing just fine. And at least she has a history of manhandling her politicians in the streets. I'm afraid that we see these cutting-edge, global economic problems highlighted in France precisely because the workers there have the political clout to stand up and refuse their leaders attempts to turn them into a little America.

Yes, we have all these problems in the U.S., only worse. And because the labor turmoil is so well hidden beneath the smothering blanket of corporatism, elitism and political cronyism, when the problems do finally surface in America, it will be in the form of a major crisis, not labor taking to the streets in a (relatively) peaceful fashion.

Is reform possible in France. Yes, history proves the French very capable of listening to her citizens and reforming her system. The real question should be, is reform possible in an America owned and operated by global capitalist bent on the complete subjugation of labor and destruction of social entitlements?

Posted by: Marseille | Apr 26, 2006 5:12:31 AM

[anne]

John

Pleasingly, you are now setting out positions that though I may object to the ideas are developed in a way that allows for argument. I will respond gradually, when the chaos about calms :)

[Cyrille]

Anne, I had initially missed your professed liking for France in this thread. Well, thanks for the endorsement!
It is quite true that while we voice our complaints (much more so than in the USA -here it is quite common for a president to have less than 35% approval at some point of a mandate), we are glad to be French. And of course, for all our -real- problems, we are doing quite well. At the last check, very few of us envied the Zimbabweans.
I certainly would hope we would inch more towards Sweden than towards the USA (I wouldn't be comfortable with a high poverty rate, even if it meant I could have a lot more myself). Even though we may not be civically minded enough for a system quite like Sweden's, we certainly wouldn't want a winner takes all and purely consumerist society. But the problem is that globalisation in its current form has a definite prisonner's dilemma to it. If you force a country to compete with another that has lax environmental rules, lower wages, lower taxes, forbids social action and so on, you create a very strong pressure against the more social models -especially since the companies of the social countries will tend to become targets for the others, making it even harder to defend their model.

[bijan safavi]

thank you very much. be very usefull to me.
please sent to me your model a bout the relationship between technology and export(or trade). thanks-bye

[Ga Vet]

Sonny Purdue is in love with Lucy his wifes dog.
Sonny cares more for animals than people. This is true of many southern men and women They taste test all of Lucy's food. Where does a dog lick first Sonny do do.
Sonny syeals from the mentally ill outreach programs to
fund dog programs. Get ready for new mental hopsitals.