The Agenda

Phil Levy on China and the U.S. Jobs Deficit

Check out this excellent Phil Levy post at Shadow Government. First, Levy notes that many U.S. policymakers are advancing exaggerated claims regarding the likely impact of RMB appreciation on the domestic jobs outlook.

[Fred Bergsten] claims that “such a trade correction would generate an additional 600,000 to 1.2 million jobs.” In this claim he actually underbids competitors such as Paul Krugman (1.4 million jobs) of the New York Times and Rob Scott (2.4 million) of the Economic Policy Institute. Praiseworthy as Bergsten’s moderation may be, how does one get a number like his?

Levy then proceeds to interrogate the assumptions embedded in these outsized estimates. His basic argument is that the assumptions are at the very least contested if not fatally flawed, and that a revaluation could have all kinds of unpredictable consequences. But if we accept for the sake of argument that RMB appreciation will be big and significant and that it will close the yawning overall U.S. trade deficit, where do we get the jobs numbers? All we’re dealing with, it turns out, are crude rules of thumb that collapse under close inspection.

At the end of the post, Levy cites Yale economist Ray Fair (who, incidentally, is the father of a good friend):

One might object to this sort of empirical refutation: of course there were other things going on! You cannot just assume that trade explains everything or rely so heavily on a rule of thumb calculation. We need a more sophisticated model.

Just so. We have a more sophisticated model, from Ray Fair, a macroeconomist at Yale. With careful econometric estimation, he finds that, on balance, China’s currency undervaluation in recent years was a slight positive for U.S. job creation. This is the opposite of Bergsten’s contention.

As I have argued at length elsewhere, China ought to revalue its currency, but this should not be seen as a major U.S. jobs program.

One can quibble with Fair’s methodology — these are very complex systems, and modeling them is exceedingly difficult — but that’s precisely the point. Confident pronouncements about the job creation that will inevitably result from Chinese revaluation border on the absurd. Phil Levy is making sense.

I’d argue that Levy’s approach to these claims offers a good model for how to approach all kinds of claims advanced in economic policy debates: if you think the links are weak in this argument, follow the same steps with any number of other fishy claims, including, particularly including, those that reinforce your own prejudices.

Reihan Salam is president of the Manhattan Institute and a contributing editor of National Review.

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