August 05, 2011
Ezra Klein is one of the more knowledgeable columnists writing on economic policy today. He puts the rest of the Washington Post team to shame. But he gets it wrong in a really huge way in his front page column today.
He says that China’s desire to slow its economy means that there will be no engine for economic growth in the world. This is 180 degrees wrong. If China wants to slow its economy because it is worried about inflation, then the simple textbook method would be to raise the value of its currency against the dollar.
This has two effects. First, it makes imported goods cheaper for people living in China. That will slow inflation. Second, a higher valued yuan will lead China to import more from countries like the United States and to export less. This will reduce demand in its economy and slow growth.
And the flip side of this story is — that’s right, the U.S. exports more to China and reduces its imports, leading to an improvement in our trade balance and a boost to growth. In other words, the fact China wants to slow growth means that they should be very happy to increase imports from the United States. We should be worried if the opposite were true; if China, like the U.S., Japan, and Europe desperately needed to increase demand, then we would face more of a problem.
(I am going to ignore the fact that Ezra called me “no one.”)
Comments