The global economy may be a mess, but the world's central bankers like to congratulate themselves for one thing. Inflation has been tamed.
Sorry, bankers, but the low level of price inflation has little if anything to do with skilled central banking. In the short run, the absence of price pressure reflects the prolonged recession. And for the past decade or so, the low inflation is the result of China's low wages.
That's right. Consumer prices are flat in substantial part because China sends us so much stuff, dirt cheap. This puts downward pressure on prices. The real price is paid both by Chinese workers who are paid a pittance and by American workers who either restrain their own wages or watch jobs move to China.
But all that may be changing, and the change will be a mixed blessing.
China, long politely criticized by the US government for managing the value of its currency, is now allowing the renminbi gradually to rise in value.
Analysts say China wants a stronger currency to fight inflation.
China is both contributing to the inflation and suffering from it, by being such a large new buyer of raw materials that it drives up prices. A stronger Chinese currency means that the price impact is buffered -- for the Chinese.
China has also been criticized for its low wages. But the Beijing regime has also begun allowing wages to rise, as part of its strategy of domestic development.
Bottom line, stuff from China won't be quite as cheap. That, along with the impact of higher worldwide commodities prices, means higher inflation on the horizon for the US. Unlike the Chinese, we are not letting our currency appreciate in value. We are watching it fall.
What does all this mean? Economics, infamously, is the science of on-the-one-hand-this, on-the-other-hand-that. On the one hand, it's about time that China let its currency behave more like others and began paying its workers more than a pittance. A more expensive Chinese currency and better Chinese wages will be marginally good for American exports, and also good for US wages.
On the other hand, the free ride on inflation may be ending. If so, we could face pressure to raise interest rates at a time when the economy is still suffering from very slow growth and very high unemployment. That means a worse recession.
Professor Charles Kindleberger famously argued in his 1973 book, The World in Depression, that the world economy needs a hegemonic monetary power, to provide a reliable currency, and to be both a lender and a market of last resort. Britain played that role in the 19th century, and the US after World War II. According to Kindleberger, the interwar period was such an economic disaster because no country played that role.
China is fast becoming the monetary hegemon of the 21st century. It has done a benign job of buying our bonds at low interest rates. But it has done a terrible job of opening its markets or managing its currency in the world's interest. On the contrary, its behavior has been entirely mercantilist, in its own self interest.
But if China starts behaving more like a normal nation, we could end up paying more to sell our bonds, and having to deal with higher inflation as well. And, increasingly, China will be in the drivers seat.
No hegemonic power is entirely benign. But the US in the postwar period wasn't bad.
It's hard to imagine China bearing its new-found economic power entirely with altruism.
Yet it would be comforting, but misleading, to scapegoat the Chinese. Yes, they do poach American jobs by subsidizing industry and paying crappy wages. But for the most part, the current crisis was made in U.S.A.
If we had had an industrial policy, we'd have a stronger manufacturing sector. If we hadn't let banks go nuts, we wouldn't have a prolonged economic stagnation. And if we hadn't gutted our tax code to reward the rich, we wouldn't have a huge deficit that required the Chinese to buy so many bonds.
Like it or not, China is now the 800 pound gorilla of the world's economy. The thing about such beasts is that tend to do what they please.
Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His latest book is A Presidency in Peril.
Jeffrey Rubin: A Recession Is Coming But Not Yet
China is still a very poor nation when per capita income is considered, and there are many restless oppressed populations in China that could rise up against the rulers.
So we will collectively pay the price for it and unfortunately the Dems may pay the price as usual!
Inferiors revolt in order that they may be equal, and equals that they may be superior. Such is the state of mind which creates revolutions.
Aristotle
Tariffs should be linked to wage differences. Countries with the lowest wages should be charged the highest tariff. As they pay higher wages, the tariffs should be decreased. This creates incentives for higher wages in exporting countries, thereby increasing domestic income and demand and lessening mercantilist pressures.
Our greatest power in trade is the power of the consumer. We can only correct unfair trade by taxing (tariffs) what we consume from low wage producers. In doing so, we raise the prices of imports, the same as with a devalued dollar, but with several advantages.
First, we gain revenue to offset fiscal deficits. More importantly, we reverse the downward spiral of wages and income in the developed economies.
Tariffs tied to wage differences should create a new stability in world currencies. It would remove the incentive for devaluing of currencies. As we maintain the value or our currency we will be able to buy raw materials at a lower price and this will help offset the higher prices of imports.
So, Robert and other talented HP writers, how about starting a series of articles comparing the U.S. to Germany and other advanced countries? How do they do it? What can we learn from them?
After decades of trial and error, and smart long term vision, many advanced countries like Germany are very far ahead of the U.S. Germany sees China as an opprtunity,not as a problem. On the one hand they sell them the machines that they need to produce things, and on the other sell them high-end finished goods such as Audis.
So, let´s stop thinking of the U.S. population as a pool of consumers and taxpayers, as if the richness and magnificence of life could be quantified in numbers on a piece of paper. Instead we should think of the U.S. as a country of citizens and human beings, and from this point of view build a new economic model that will benefit everyone.
It was not engraved in stone since the beginning of time that things have to work like they do today in the U.S. We have arrived where we are because of inertia and the corrupton of the political system.
The existing laws ( or lack of laws) that organise the U.S. economy are just arbitrary decisions taken by man and signed into a piece of paper. They have no relation to absolute values or to the laws of life.
I wish that people would not compare the U.S. to China all the time.
How about comparing the U.S. to Germany? if this happened, then the American people would start realising many things and the country would change towards the good.
To be continued
Sign the petition on change.org search for "stop giving away"
http://www.change.org/petitions/stop-giving-away-american-jobs
I refuse to buy Made in PROC if **I can help it**. We think of corporations like Apple, Microsoft, Sprint and so forth, as American companies. They have zero loyalty. My favorite phrase for the day is "willfully naive," which includes all the people that pretend their purchases don't have far-reaching ramifications: virtual slavery, environmental destruction and erosion of local economies.
Wages (PPP) in China are a LOT higher than many of the other places that the US exports its jobs to.
In fact, the migrant workers who are often considered to be at the bottom of the food chain not only earn enough money to survive in the big cities, but usually would even save enough money to regularly send money back home in the villages.
And then on top of that, they would still save enough money to buy long distance train tickets and bring gifts back to their families once a year.
And *ALL* of these are *BEFORE* the last few rounds of wage increases!!
Consumerism needs to be rethought. Every geek who stands in line for an iPad only feeds the problem.