By David Caploe PhD, Chief Political Economist, http://www.economywatch.com/
Conventional academic economics is a disease.
Despite its pretensions and mathematical “certainties,”
So while especially disappointing, it’s not particularly surprising when usually UN-conventional economists – notably Paul Krugman of Princeton and, more importantly, the New York Times, and Nouriel Roubini of NYU, aka Dr Doom, one of the few academics who had even the vaguest inkling the disaster of Black September 2008 was coming – lapse into the orthodoxies they generally eschew.
Intriguingly enough, these conceptual slips often come in the area of global trade and balance of payments, where otherwise smart people like Krugman and Roubini are seemingly unable to break free of the stale platitudes they generally disdain when it comes to MOST issues of political economy:
in Roubini’s case, the “sub-prime”
with Krugman, he’s on the mark regarding just about EVERY issue – lately, the IN-sufficiency of the Obama stimulus, which he correctly said at the time it passed Congress would NOT be enough to promote a sustainable recovery, and the economic [not just human] imperative of SERIOUS health care “reform,”
although he was a little late in realizing how significant a blockage the insane US campaign contribution “system” would be in achieving anything of real value.
It was thus pretty disheartening to wake up on Monday, eager to read his latest clear sally against all things stupid in American political economy, to instead be blasted by his ill-mannered screed against China’s alleged currency manipulation, which is supposedly having such a bad effect on the weak efforts at global recovery.
Tensions are rising over Chinese economic policy, and rightly so: China’s policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery. Something must be done.
And on he went from there.
It was equally dismaying to read two days later a New York Times editorial – whose board, like Krugman, has generally been notable in making strong and convincing arguments against the babbling inanities that pass for “public discourse” in the US these days – taking the same sort of ill-informed line on the whole question of Chinese currency values:
China’s decision to base its economic growth on exporting deliberately undervalued goods is threatening economies around the world. It is fueling huge trade deficits in the United States and Europe. Even worse, it is crowding out exports from other developing countries, threatening their hopes of recovery.
And on THEY went, making more likely just the sort of international trouble they correctly warned against at the conclusion, namely that “this disagreement [can] escalate into a fight that no one can win.”
So what is the problem with this line – and why does it go back to the nonsense of conventional academic economics ???
Put bluntly, both Krugman and the Times editorial board are ignoring the central fact of the world political economy that has existed since the late 1940s: countries either sell to the US or they sell to countries that sell to the US.
Instead, they are simply following the inaccurate – but ubiquitous – conventional academic economics ASSUMPTION that world trade should somehow be “balanced”
In fact, this flies in the face of not just the current world political economic set-up, but the entire history of world political economies that have existed, in various forms, since at least 1815 and the rise of the “second” British Empire, following its victory in the Napoleonic wars of the early 19th century.
“Equilibrium”
even if, as is the case with the current world recession in general and trade scene in particular, it is completely ir-relevant to what is actually happening.
Now most of the time, smart guys like Krugman / the New York Times Editorial Board / Roubini realize this, especially when it comes to DOMESTIC economies,
where it’s blatantly obvious equilibrium may be a “consummation devoutly to be wished,” but they recognize it for what it is: “a complete falsehood,” as Michael Corleone told the Senate in Godfather II.
But somehow, when it comes to issues of trade and the world political economy – especially one in the terrible shape it is today – they want to return to the emotional comfort of the dominant myths of their graduate school days,
and pretend an equilibrium they know is totally fictional in domestic political economy somehow really DOES exist on the global stage.
In fact, however, it NEVER has – the US, for example has run an overall balance of payments deficit since 1959, and an overall trade deficit since 1971, without any appreciable decline in the American standard of living –
and, given the American-centered nature of the world political economy since 1947, it never SHOULD.
Put bluntly, both the US and the rest of the world have benefited greatly from a global political economy that is fundamentally UN-balanced:
it is good for both America and every other country that the US run consistent payments and trade deficits, which will enable at least SOME countries to run payments and trade SURPLUSES –
which, by the way, are a) not the same and b) not necessarily good things in and of themselves, but that is a subject for another day.
To read the rest of this article at EconomyWatch.com, go to:
http://www.economywatch.com/
