Archive for the ‘Unemployment’ Category

Why China Undervalues Its Currency

October 26, 2010

Yesterday, Brad DeLong described what he believes to be the primary Chinese rationale for its weak renminbi policy:

China has 900 million rural dwellers who are still living at a standard of living not that far above subsistence. The pressure to migrate from the countryside to the coastal cities is enormous. China needs to grow at more than 8% per year in order to avoid mass unemployment in the coastal cities. And mass unemployment in the coastal cities is likely to be followed by political collapse and turmoil on a gigantic scale.

Part of growing at 8% per year is to continue to rapidly expand exports to the North Atlantic core of the world economy. But in order to expand exports Chinese-produced goods must look like good values. And if demand for dollar-denominated assets falls and the value of the dollar falls, Chinese-produced goods will no longer look like good values.[i]

The U.S. policy problem is that the undervalued renminbi is leading to weak demand for U.S. goods and services in China.  The U.S. needs to reduce its trade deficit with China.

To reiterate, the five causes of high unemployment in the United States are:

  1. Inadequate aggregate demand.
  2. Migration of jobs to other countries, especially China.
  3. Increased productivity of employed workers.
  4. Inadequate credit for small businesses.
  5. Uncertainty about future taxes and regulations.

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Aggregate Demand vs. Structural Unemployment

October 26, 2010

The U.S. unemployment rate has been stuck in the range of 9.5% to 10% since the beginning of the year, with many uncounted discouraged workers and many underemployed part-time workers.  Does this mean that we have structural unemployment?  Brad DeLong published a short paper today[i] arguing that our unemployment problem is currently due to inadequate aggregate demand, not structural unemployment.

DeLong explains that if we suffered from structural unemployment, then some sector such as construction would have high unemployment but another sector such as manufacturing would be booming and employers would be seeking qualified workers without success.  The actual situation, DeLong argues, is that almost all sectors of the economy have seen significant declines in employment, which is a symptom of inadequate aggregate demand.

Paul Krugman argued as usual yesterday that the $800 Billion American Recovery and Reinvestment Act of 2009 was wholly inadequate, providing mainly tax cuts, unemployment extensions and meager aid to state and local governments that was barely enough to offset declining state tax collections in the short term and not nearly enough to compensate for the precipitous decline in demand in the private sector in 2008-2009.[ii]

This does not mean that we are not in danger of falling into the trap of structural unemployment.  If the current high rate of unemployment persists for two or three more years, the long-term unemployed will lose their skills and become unemployable.  Then we will be in a worse economic mess than we are in now.  That is the danger of electing a Republican majority in Congress, which will block any further proposals by President Obama to stimulate the economy.

I reiterate the reasons for high unemployment in the U.S.[iii]

  1. Inadequate aggregate demand.
  2. Migration of jobs to other countries, especially China.
  3. Increased productivity of employed workers.
  4. Inadequate credit for small businesses.
  5. Uncertainty about future taxes and regulations.

Trade Friction with China

October 20, 2010

There have been several developments since I posted two weeks ago about jobs and industries being shipped overseas.  (“Causes of High Unemployment in the U.S.”)

The United States has ramped up the pressure on China to revalue its currency. Yesterday, Treasury Secretary Tim Geithner reiterated to a gathering in Palo Alto that the Chinese renminbi is significantly undervalued (despite a 3% revaluation over the past month or so).  He said that he is postponing the scheduled report on whether a major trading partner has been unfairly manipulating its currency value; he wants to coordinate his strategy with other aggrieved countries at the coming G-20 meeting in South Korea.

This is not first excuse Geithner has had for not publishing an accusation that China has been manipulating its currency.  Is he afraid of Chinese retaliation?  In the past, there has been speculation that the Chinese could retaliate by selling U.S. bonds, driving down the dollar.  Indeed, the dollar has declined about 7% against the euro and other currencies in the last two months, but not against the renminbi.  Is makes little sense to fear a potential Chinese action that would make the U.S. companies more competitive in international markets.  However, the Chinese have a more effective means of retaliation.

Last Friday, American trade officials announced that they would investigate whether China was violating international trade rules by subsidizing its clean energy industries. The inquiry includes whether China’s steady reductions in rare earth export quotas since 2005, along with steep export taxes on rare earths, constitute illegal (under WTO rules) efforts to force multinational companies to produce more of their high-technology goods in China.  The Chinese did not like that announcement, and they did not wait for the outcome of that investigation.

On Sunday evening, in an extremely rare move for a senior Chinese official, the country’s top energy policy maker, Zhang Guobao, called in reporters from international media organizations and objected to the American announcement.  Hours later, according to the New York Times[i], Chinese customs officials began singling out and delaying rare earth shipments to the West.  Today China denied that it had halted sales of rare earth shipments[ii], but the threat of a future cutoff has been duly noted.

Rare earth production is another example of the failure of American laissez faire economic policy in the face of competition from Asian managed economies.  Rare earths are important in the production of many high technology products, from advanced fighter avionics to high temperature superconductors to windmill blades.  China has about 30 percent of global rare earths deposits but accounts for about 97 percent of production. The U.S., Canada and Australia have rare earths but stopped mining them in the 1990s.

Just as consumer electronic industries moved to Asia, rare earth production moved to China over the last two decades because of lower costs.  Congress is considering legislation to provide loan guarantees for the re-establishment of rare earth mining and manufacturing in the United States, but new mines will probably take three to five years to reach full production.  Meanwhile, China will have an advantage in the production of high technology products, including clean energy products.

In his Palo Alto discussion, Secretary Geithner said he opposed the import tax on Chinese products advocated by Andy Grove (and that would be enabled by legislation that passed the House of Representatives recently) because that would provide subsidies to inefficient American companies as well as raising prices for consumers.  Geithner did not discuss Grove’s analysis of the need to rebuild a manufacturing infrastructure in order to compete in the development and production of new high technology products.

Our trade imbalance with China, largely due to the undervalued renminbi, remains a factor in the high unemployment in the United States.