The Corner

Increased Pressures to Allow Yuan Appreciation

Bloomberg News reports that Sens. Sherrod Brown, Charles Schumer and Debbie Stabenow, “prodding President Barack Obama to take a tougher line on China’s currency, are drawing up legislation and convening hearings on the yuan’s effects on US companies.” Their legislation “set[s] criteria to find a country has a misaligned currency, and the consequences…. The moves reflect pressure on the Obama administration to demand that China allow appreciation in the yuan and end a policy that provides Chinese competitors an unfair advantage, said Scott Paul, executive director of the Alliance for American Manufacturing.”

I know where they are getting their ideas on this topic. On Sunday, the New York TimesPaul Krugman once again called for the U.S. to pressure the Chinese to revalue the yuan. Because a low yuan allows Americans to get more for less from China, Krugman believes that the resulting reduced demand for American-made products promotes higher unemployment in the U.S.

See, I thought that getting more for less was good for consumers who then have more money to buy even more stuff they wanted.

For much more on why Krugman’s argument and, hence Senate Democrats’, make no sense, read this fantastic piece by Scott Sumner over at TheMoneyIllusion. One of my favorite paragraph:

Think about the following questions:  How many economists today honestly believe that America’s economic problems in 1971 were due to the European currencies being 10% undervalued?  How many economists today honestly think that if the Chinese give us another 25% revaluation that this will significantly improve America’s economy?  And how many of you think that 40 years from now, when we look back on the American economy in 2010, that most economists agree with Krugman’s argument that a significant part of our economic problems were due to an overvalued yuan?  In contrast, how many people think that 40 years from now most economists will agree with Krugman’s claim that our economic dilemma is due to the stubborn refusal of the Fed to set a higher inflation target?

My claim is that in 40 years most economists will agree with Krugman.  I mean the good Krugman.  The guy who wrote Pop Internationalism.  Not the guy who says we’re “stuck” in a liquidity trap and who ends his NYT editorial with the crude populist slogan “It’s time to take a stand.”

Read the whole thing here. (Via Tyler Cowen over at Marginal Revolution.)

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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