A Keynesian in China

Paul Krugman is complaining about China’s exchange rate policy. Its government is maintaining an artificially cheap renmimbi (yuan) against the US dollar. This has stimulated the purchase of Chinese exports by US companies and individuals. It has expanded the Chinese trade surplus with the US.

The relatively rich (compared to their Chinese counterparts) American workers are suffering from depressed industries that might be stimulated if Chinese policy were to change. Specifically, if the Chinese were to allow their exchange rates to float, the US dollars would be worth less and the US would export more to China. This would stimulate the employment of resources here.

But wait a minute. Suppose I were a Chinese economist who was working for the Chinese government, I would probably want to ensure the continued growth (recovery) of Chinese employment after the recession.

In fact, it is Keynesian doctrine that when we are not at full employment (however imprecisely that might be theoretically defined or identified empirically) the mercantilists of old have a point. Government can increase employment by stimulating foreign demand for its country’s products by maintaining a cheap currency.

The Chinese government believes that it cannot afford, in its present political and economic condition, to have large numbers of workers (recently urbanized) unemployed. The so-called safety net isn’t as “advanced” as in the US. Therefore, the Chinese Keynesian will want to take advantage of this “loop hole” in the traditional free-trade doctrine preached by economists.

But, as some economists freely admit, the problem is that this pits one country’s interest against another. Either China could gain or the US could gain by manipulating exchange rates.

Yet I cannot help imagining that a Beneficent World Planner with Keynesian views might think it equitable to permit unemployment to stay high in the US but not in China. Not only is the US safety net better, many of our poor or lower middle class are better off than Chinese workers.

However, the ideal Keynesian solution, we are told, is to have an internationally coordinated policy of low interest rates. Of course, China has been following a low interest-rate monetary policy; credit is abundantly available. But Chinese bankers and economists have become increasingly worried about bubbles. Should they not be?

The Keynesian world-view is skeptical of the classical liberal idea of the international harmony of interests under free trade when the economy is operating at less than full-employment. In this world, there are definite conflicts of interest among nations. A Chinese Keynesian would not have the same views as Krugman. This is not because they differ about theory but because the theory sets up conflict. Such conflict is naturally settled by the partiality of their perspectives.

If the Keynesians are right, this is another example of traditional microeconomic theories being annulled in their system. I suggest that the formal limitation to conditions of less than full employment is not as stringent as it sounds. Much, perhaps most, of the time the economy will arguably be in either a state of less than full employment or be threatened with some change in the news that will knock it out of full-employment equilibrium.

None of this demonstrates that the Keynesians are wrong. However, it does show what is involved in accepting Keynesian economics.

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