Monday, January 28, 2008

China and US Macroeconomic Policies: More Expenditure Switching and Less Expenditure Adjusting Please

As we worry about a US recession, BusinessWeek says the Chinese are hoping for one:

In China, some people might be looking forward to a U.S. slowdown. That's because an American recession could do what Beijing has not been able to accomplish -- namely, cool off China's overheated economy, which in 2007 grew at its fastest pace in 13 years.

I had tried to summarize an interesting economist blog discussion a while back with a tribute to the Tinbergen condition and Brad DeLong got it right with this discussion of China’s policy conflict:

This policy conflict could end in one of several ways: (1) A sudden large burst of inflation in China, as the PBoC finds that it can no longer maintain both the current exchange-rate peg and a stable effective money stock, and sacrifices the second to the first. (2) A sudden large rise in the value of the yuan, as the PBoC finds that it can no longer maintain both the current exchange-rate peg and a stable effective money stock, and sacrifices the first to the second. (3) Slow and gradual versions of (1) and (2) as holders of nominal yuan assets in the first case and nominal dollar assets in the second let their wealth be gradually but substantially be eroded without ever taking steps to cut their losses. (4) Something more unpleasant.

Tinbergen might look at the problem this way (assuming a 2-nation model with China and US and the two nations). The US is worried about a lack of aggregate demand as well as a current account deficit, while China is worried about excessive aggregate demand. Now China’s current account surplus in a 2-nation model is essentially the same thing as our current account deficit. We have three policy tools: (1) US domestic demand; (2) Chinese domestic demand; and (3) a host of expenditure-switching policies. China is employing tight domestic demand policies, while the US is considering expansionary domestic demand policies. Both will tend to widen the current account deficit as China’s exports to the US will grow, while our exports to China will fall. While China will lament our expansionary domestic demand policies (at least according to Business Week), some American policy makers might be hoping to export more to China and would therefore be cheering against their attempts to control Chinese inflation. But what about policy option (3)? Of course, some American policy makers are advocating tariffs and quotas against Chinese goods as a form of expenditure-switching policy. Those of us who still belong to the free trade bandwagon on the other hand are hoping for more yuan appreciation – which was Brad’s (2). But to sacrifice full employment in the US so as to satisfy what the Chinese wish to do in regards their own macroeconomies strikes me as very short-sighted.


Myrtle Blackwood said...

I found the Business Week article very confusing. I'm assuming that this institution only looks at an economy in terms of measurement of Gross Domestic Product. Since that figure also includes the enormous (and rapidly rising) costs related to pollution from industrialisation then it may follow that China's 'economy' will grow. Like a cancer. Dollars persuing the increasingly inflated prices of scarce resources; until they run out completely, of course.

Business Week economists are also displaying an inability to recognise the global economic impacts of China's industrial production.

From Business Week:
"...rising food costs are the main reason for higher consumer prices...profits from doing business in China can be minuscule...Economist Stephen Green ... predicts China's economy will grow 9.5% this year as Chinese exporters, unable to find buyers overseas, bring their goods back home to sell, putting downward pressure on prices and eating into corporate earnings."

Compare with a Mother Jones article on China:

"“In June 2006, an official at China's State Council said environmental damage (everything from crop loss to health care costs) was costing 10 percent of its gross domestic product—in other words, all of the economy's celebrated growth. Vaclav Smil, a highly respected China scholar at the University of Manitoba, pegs the environmental-damage rate at between 5 and 15 percent, with 7 percent a "solid, defensible figure." Smil says that shorn of hype, China's growth rate is also likely 7 percent, "so basically every year environmental damage wipes out the gdp growth.".. Consider Pan Yue, the outspoken deputy minister of China's environmental protection agency. Three years ago, Pan declared that the Chinese economic miracle will end soon "because the environment can no longer keep pace."

And that's only less than HALF the story. China's pollution and environmental degradation is a GLOBAL phenomenon:

.. Every major river system flowing out of China is threatened with one sort of cataclysm or another, including pollution (Amur), damming (Mekong, Salween), diverting (Brahmaputra), and melting of the glacial source (Mekong, Salween, Brahmaputra).”

[China's] appetite for shark fin soup is causing drastic declines in shark populations throughout the oceans; according to a study published in Science in March 2007, the absence of the oceans' top predators is causing a resurgence of skates and rays, which are in turn destroying scallop fisheries along America's Eastern Seaboard… China's new predilection for sushi is even pricing Japan out of the market for bluefin tuna.

The growing Chinese taste for furs and exotic foods and pets is devastating neighboring countries' populations of gazelles, marmots, foxes, wolves, snow leopards, ibexes, turtles, snakes, egrets, and parrots… Enthusiasm for traditional Chinese medicine, including its alleged aphrodisiacs, is causing huge declines in populations of hundreds of animals hunted for their organs—including tigers, pangolins, musk deer, sea horses, and sea dragons.”

no sector better illustrates the vast reach and explosive impacts of China's manufacturing dominance than logging. At one end are the consumers in the United States, Europe, Japan, and China itself, who are mostly oblivious to the social and environmental destruction left by the Chinese-made furniture, plywood, moldings, and flooring they buy.
At the other end are the wood suppliers, almost all poor countries with weak or corrupt law enforcement and a flourishing trade in illegal lumber. Among China's leading wood importers, Thailand and the Philippines have already been stripped of their natural forests; Indonesia and Burma are projected to lose theirs within a decade. Papua New Guinea's will succumb within 16 years, and the vast forests of the Russian Far East will survive no more than two decades. Even so, Forest Trends, a Washington-based nonprofit, estimates that China's wood imports will probably double over the next decade. Chinese manufacturers are already developing replacement sources in Africa, and South America's forests are under threat for a different reason: China's growing consumption of pork and chicken is fed by soybeans grown on newly cleared Amazonian land; by one estimate, 30 percent of the jungle could eventually be transformed into soybean fields.

China overtook the United States as the world's leading emitter of CO2 in 2006.

Acid rain caused by China's sulfur-dioxide emissions severely damages forests and watersheds in Korea and Japan and impairs air quality in the United States

Using high-elevation monitors set up at three California sites, Steven Cliff, an atmospheric scientist at the University of California-Davis, has detected what he calls a "persistent Asian plume"—pollutant-laden air that crosses the Pacific on a nearly continuous basis. To be sure, it's a fraction of what is emitted within California's borders, and most of it continues wafting across North America, falling to earth bit by bit. Nevertheless, at Cliff's mountain sites, particulate matter from Asia accounts for 4 to 6 micrograms per cubic meter of air—already approaching half of California's annual average pollution limit of 12 micrograms. "The problem is going to be that the ability to emit any sort of pollution from any industry here in California will be reduced because of federal regulations," Cliff said. "There could be a day when essentially the entire regulatory limit is met" by Asian pollution. The largest source of that pollution is the billion tons of coal China burns per year, more than virtually all the world's developed nations combined. . .

The Last Empire: China's Pollution Problem Goes Global
Can the world survive China's headlong rush to emulate the American way of life?
Jacques Leslie. December 10 , 2007.

Eleanor said...

Brenda -- This is a very interesting post. This is how America industrialized, by using up natural resources and polluting. The difference is, the US had a much smaller population, vast space and vast natural resources; and its growth happened in a world that wasn't so close to the edge.

We really need accounting that includes the environmental and social costs of doing business. We might discover that most of the world is experiencing negative growth.

Myrtle Blackwood said...

Eleanor, thanks for your feedback.