August 14, 2015
Economists and people who write about the economy are not known for being especially astute when it comes to economic issues. After all, there were almost no people in this group who were able to see the $8 trillion housing bubble whose collapse sank the economy. More recently, we have a substantial clique running around yelling that the robots will take all the jobs. This is at the same time that we continue to have most of the Washington elite types fretting that the retirement of the baby boomers will leave us without any workers. These concerns are 180 degrees opposite, sort of like complaining that the soup is too hot and too cold, but that’s the sort of conceptual absurdities folks have come to expect from people who write about the economy.
The usually astute Catherine Rampell is one of the guilty parties today, telling readers that the recent drop in the value of the Chinese yuan is a response to the market, not the result of currency management by China’s government. The problem in this story is that it ignores that China’s central bank is holding more than $4 trillion of reserves, about $3 trillion more than would be expected for an economy of China’s size. This stock of reserves has the effect of raising the value of the dollar and other reserve currencies against the yuan.
If that is not obvious, consider the analogous situation with the Federal Reserve Board and its holding of more than $3 trillion in assets as a result of it quantitative easing (QE) policy. Under this policy, the Fed bought up large amounts of government bonds and mortgage backed securities. The idea was that the Fed’s purchases would drive up the price of these bonds and thereby directly lower long-term interest rates.
While the Fed’s act of buying bonds almost certainly drove up bond prices and lowered interest rates (it is the same thing), the fact that the Fed continues to hold a huge amount of bonds means that bond prices are higher and interest rates are lower than they otherwise would be. If the Fed didn’t hold this stock of $3 trillion of bonds, there would be a much greater supply in the market, which would lead to lower bond prices and higher interest rates. In other words, the Fed’s QE policy is still putting downward pressure on interest rates, even though it is no longer in the process of buying bonds.
Applying this logic to China’s holding of $3 trillion in excess foreign exchange reserves, if China did not hold these reserves then we would have another $3 trillion worth of foreign exchange floating around on world markets (most of it in dollars). This would lead a lower price of the dollar against other currencies, including the yuan if it was allowed to float freely.
So Rampell has missed the boat completely in telling readers that the downward movement in the yuan is the result of free market conditions. As long as China holds a huge amount of excess reserves it is still holding down the value of the yuan. This is just a market fluctuation, like a fall in long-term interest rates in the United States, against a backdrop of very large government intervention.
There is another item that Rampell gets badly wrong in this piece. She tells readers:
“There are a lot of Chinese policies that are unambiguously bad for American companies and workers, including disrespect for intellectual property rights, …”
No, that one is wrong. Unless you happen to own lots of stock in Pfizer or Microsoft, you have no particular stake in China’s disrespect for intellectual property. In fact, you might be hurt if China respected it more. “Respect” in this context means paying more money for royalties and licensing fees. If China pays our software and drug companies more money for their patents and copyrights it means that it has less money for other products from the United States. Other things equal, the more money being paid to Pfizer and Merck, the lower the value of the yuan against the dollar. This means that people who work in steel and auto factories will find it harder to compete against the goods produced in China. It’s hard to see why this is a good story for them.
Since patents and copyrights are archaic and inefficient mechanisms for supporting innovation and creative work, most people in the United States might be better off if China were to ignore U.S. property claims in these areas. This could allow, for example, people suffering from cancer to get drugs in China that would cost $1,000 or even less, rather than the $100,000 plus charged for new cancer drugs protected by patent monopolies. Pushing a free market in this area would also eliminate the corruption associated with monopoly prices, such as efforts to mislead the public about the safety and effectiveness of drugs, which leads to bad health outcomes and sometimes death.
So it is not true that most workers in the United States should want to see China have more respect for the intellectual property claims of U.S. companies.
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