China's Responsibility For The Global Imbalances

Brad Setser has a post about a Nick Kristoff article in the NYT accusing democrats in congress of scapegoating China for the US economic problems. The more I think about it, the more I tend to agree with Kristoff. (Perhaps this sis the part I disagree with most: "the U.S. American fiscal recklessness is a genuine international problem". I would rather put this: the US fiscal deficit has been run up to pay for a war in Iraq, when it should have been spent as 'adjustment costs' to help the US economy adapt to the Chinese impact.)

Anyway here are some of my reasons:

"China has some responsibility for global imbalances too"

Could we try and quantify this: say China 10%, Europe and Japan 40%, USA 50%: is this what we mean? This would more or less put things in perspective.

This imbalance didn't come from nowhere: during the second half of the 20th century we steadily watched China's population push up past the 1,000 million mark. Here's the first imbalance. But whilst this was happening, and they were poor, we didn't seem to be too interested, if some third world economist or other gave advice to the first world, they were at best quietly ignored.

Now comes the backdraft. China isn't poor any more. At least it isn't as poor as it was. Still there are hundreds of millions of poor people in China. They have to be the Chinese government's first priority.

I guess if we want the Chinese government to take a more responsible attitude to *our* global problems, then the first thing is that they should be in the G6, at least they should be swapped for Italy. They should then be treated as a partner on equal terms. This advice cannot be a one way street. Pragmatically because it won't work that way, and anyway II don't think it is right.

Of course there is a lot that we can do to help China, and disinterested advice would be one of these ways. But normally, sound advice starts at home, so I think what we should do is focus not on China's problem, but on the US one. And solving this problem has to be in the hands of the US itself. Of course the Chinese, the British, we can all advise, but the US elected administration and its central bank are the ones who need to act.

Now, what can be done? Reluctantly, since really Brad has convinced me that this deficit cannot continue like this for too much longer, the US may in fact have to face the full China impact: deflation, and the application of unconventional monetary policy.

The first step would appear to be to squeeze consumer credit inside the US. That should cut the rate of sucking in imports. The dollar would of course rise, and that is when you would hit the deflation bit, but at least you wouldn't have the deficit.

Of course, and this is the part I think he isn't explaining, Bernake is accepting the trade deficit because he prefers it to deflation, not because he things it is a good thing in itself. It is, the lesser evil. But if you prefer deflation, well, lets give it a whirl.......

I mean this science is anything except dismal :).