ROACH: KRUGMAN IS DEAD WRONG ABOUT CHINA
19 March 2010 by Cullen Roche
8 Comments
Stephen Roach of Morgan Stanley Asia, says the US is trying to ignore their domestic problems by blaming the downturn on China:
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Comments
Well, let’s see. Stephen Roach is a practicing, boots on the ground, Asian expert economist. Krugman is a joke. Who should I believe?
Nothing personal but a lot of the experts in property and mortgages got it horribly wrong back in 2005-2006 while the some hedge fund ‘newbies’ made a lot of money.
Same with Japan back in the 90s and Asian countries in the mid 90s.
Krugman is also brilliant and Roach panders to the Chinese…
Can I make a sincere and passionate plea: Could America please pull its head out of the sand and start rebuilding a great nation? Pleeeeeeeeze?
Seems likely to me that tariffs targeted at China and a resulting trade war could well cause a serious (perhaps severe) global downturn. I also agree that our own actions, i.e., excessive consumption fueled by debt, scant savings, irresponsible lending, and rampant, unchecked speculation are the principal causes of our current dilemma.
I think, however, that the excesses of the last decade both reflect and served to mask a fundamental economic challenge facing America and many other developed countries (i.e., we were able to sustain growth and living standards through debt accumulation based on asset bubbles and lax credit standards). Increasingly it makes economic sense to produce elsewhere because of lower cost labor. This is a result of globalization and the technological advances that have made globalization possible. Seems to me that this is more or less what is happening:
• Developing countries, e.g., China and India among others, attract internationals to invest in their countries because they can produce goods for less and improve profitability.
• Once some companies have begun pursuing this strategy, competitors are compelled to do so as well to remain cost competitive.
• As it becomes clear that developing countries are “where the growth is” internationals have an additional incentive to invest there so they will have a local presence that will enable them to participate in future growth.
• Technology transfer occurs to the extent that technology is tied to the jobs that are outsourced.
• Over time, developing countries are “trading up the professional ladder,” i.e., increasingly, they are competing for professional jobs (e.g., engineering, software development, other scientific and R&D jobs, management jobs, and perhaps now financial and accounting jobs). This trend fosters more technology transfer.
It also seems to me that these trends have unfortunate side effects for the US (and other developed countries). In effect, their gain is our loss. My perception (i.e., I don’t have hard data) is that increasingly investment is being diverted away from the US to developing nations. We are losing our jobs and our technological edge, and are becoming increasingly dependent on and indebted too others for provision of the goods (and increasingly services) that we consume.
I’m particularly concerned about China, because the regime currently in power there scares me. My impression (admittedly based only on what I read in the press) is that they are an oppressive regime very much interested in expanding their power. My guess is that they are playing the “my gain is your loss” game, and so far have been quite successful.
If I’m right (maybe I’m just paranoid), I’d like to think there’s something we can do about it.
I am no economist but by commonsense there are very simple but not easy solutions.
Generally economy will be more competitive if government is smaller, regulation is fewer and tax is lower.
A depression will liquadate unproductive assets, cheapen the labors and other cost to make us more competitive.
America’s best days just happen to be when tax was zero and depression took place much more often.
In other words, Free market economy is the solution. Absolute free market is the absolute solution. But unfortunately, people wouldn’t even believe it any time soon.
People want the comfort that a pure free market offers but not the discipline and pain that is also a natural part of it. To make things worse, a corrupt government like that in the US decides winners and losers not based on merit but on who pays the most bribe.
Tom,
I agree with your thesis except for the last bit. Just like greed and fear direct the market, they also direct actions of the Chinese government. Of the two, I think they are more motivated by fear – fear of instability in China, fear of losing their power, also fear of going down in history as a failure. It is more complex than just wanting to hold onto power, like many other despotic regimes in the third world. Chinese leaders are not stupid, they know they’ve got more than enough on their plate to handle and thus would not be dumb enough to even contemplate imperial expansion. This is what the West, especially the US does not understand. Just because Americans like bullying other countries so they can be number one, they think others must be like them as well. So they worry about China taking over as the new bully. Same cold war mentality, different opponent.
Below is a comment I left on another blog that goes along with your thesis:
As I watch and ponder over events since 2008, I have grown more pessimistic about the overall lack of understanding of the fundamental nature of the problems and the regressive nature of the solutions proposed. Most people wish or believe the good old days will return. What they fail to realize is we are experiencing effects of a paradigm shift. While all the focus is on China and the US, changes and their impact are global. I will try to be pithy and outline a few factors that I think deserve more attention and creative solutions.
1. Automation – The effects are twofold. Firstly, it increases productivity and thus reduces the aggregate need for labor to produce most things needed to achieve a reasonable standard of living. Secondly, it reduces the skill levels needed for production. This has a more significant impact on developed countries in general because their comparative advantage is diminished. Countries like Germany and Japan are affected as well, but due to their cultural emphasis on quality and technical training, their industrial base has not been eroded as much as in the US and Canada. Complacency and specious arguments in defense of the status quo in education in the US and Canada will further leave us behind.
2. Inequity in income distribution – The potential demand for “stuff” and services, be they a matter of need or hedonistic, is huge when we think about the number of people who still have a low standard of living and thus could have more. The big question is: What can they produce or provide so they can exchange their efforts for things they want? This is a factor of four things that will have different effects on different cultures: (1) A pragmatic definition of what constitutes an acceptable standard of living (How much do we reasonably need? Should everyone aspire to the “Western” lifestyle or is that too extravagant?); (2) The relative values assigned to different forms of productivity (Why do we pay bankers so much more than miners? Is that discrepancy warranted?); (3) Has automation simply rendered some of us redundant? and (4) How much does a given society emphasize on self-reliance, i.e. making the most of one’s potential when given a fair chance instead of relying on someone to provide for them.
While cultures in the world encompass a wide range of common or antagonistic values, in a globalized economy, it really does boil down to who’s willing to work harder and spend and save more wisely. In that regard, the US and Canada has some serious soul searching to do.