Disagree with Krugman, Fallows, and Pettis

http://jamesfallows.theatlantic.com/archives/2010/01/krugman_protectionism_and_the.php

Disagree pretty strongly with Krugman, Fallows, and Pettis about the RMB revaluation.  I think that they are vastly overestimating the amount of political pressure that exists in the US for protectionism, and making incorrect comparisons with the 1930’s.  There are a number of differences….

1) First of all, outside of some very specific industries, it’s not obvious to anyone that tariffs are going to help employment.  The problem is two-fold.  First is that you have many industries (Walmart and software) that benefit from cheap Chinese goods, and there are some major interest groups that have switched from being pro-tariff to anti-tariff over the last thirty years (organized labor).  The second issue is that a lot of the groups that would be protectionist really don’t care about China.  If you move Chinese factories to Indonesia, it won’t help anyone in the US.

2) Second, is that we have an international framework for trade now, and this limits what people can do.  In order to do something really drastic, the US would have to decide to pull out of WTO, which would be politically difficult because of factor 1).  There are too many people benefiting from international trade for the plug to be pulled.

3) Finally, I think that people vastly overestimate the importance of legislation and economic policy in globalization.  There hasn’t been any major trade liberalization legislation passed since the late 1990’s, and the many things that create globalization are technological.  I can be sitting in an office in NYC, and type on a computer in Hong Kong, and I do this pretty routinely.  Instant messaging, cheap phone calls, and jet travel have reduced the costs of international trade enormously and since the 1990’s, *those* have been the driving factors for trade liberalization, not legislation.

Having said that, personally I think that as a mechanism for resolving trade dispute, protectionist tariffs as a tools are *MUCH* better than currency revaluations.  The trouble with currency revaluations is that they always have massive global unpredictable effects.  Targeted industry specific tariffs within the framework of WTO are much, much less unpredictable.  Even when they cause bad things to happen, they tend to be known bad things, whereas tinkering with currency policy tends to cause generally unknown bad things to happen.  Having the US stick tariffs on Chinese steel might be annoying, but it’s not going to kill either the Chinese or US economy, whereas there is a laundry list of countries that have had their economies wrecked by bad currency policy.

So if it’s necessary to protect a class of politically sensitive constituents with tariffs, then I think it’s a good idea for the US or China to raise tariffs at that specific industry.  All of this can be discussed and negotiated within a WTO framework.  US puts tariffs on steel, China raises a counter tariff on something else, WTO blesses everything and we just carry on business. It’s especially good, because one you have tariffs to protect steel workers or textile workers, they aren’t going to care about tariffs in other areas.  You’ll only have problems if people want to try to raise tariffs on everything, but that would require pulling out of WTO, and you’ll blow up the industries that *do* generate jobs from trade.

This poses a general problem with macroeconomic solutions which is why I like industry-specific tariffs.  Macroeconomic solutions tend to be extremely blunt and can’t really be used to micromanage an economy.  If you have steel workers that are screaming at you, the only think that an economist can tell you to do is to do something like raise interest rates, which then changes the whole world in unpredictable ways.  If you just do targeted industry tariffs and then negotiate with your trading partners over what tariffs *they* can raise, then you end up with “known bad stuff” happening.

Tire tariffs and the general cluenessness of the New York Times

I’ve been in this discussion of the Chinese tariff on Brad Delong’s website,

http://delong.typepad.com/sdj/2009/09/barack-obama-does-something-really-stupid-tire-tariffs.html

when this article from the New York Times comes in.  Geeze they are totally clueless.

China unexpectedly increased pressure Sunday on the United States in a widening trade dispute, taking the first steps toward imposing tariffs on American exports of automotive products and chicken meat in retaliation for President Obama’s decision late Friday to levy tariffs on tires from China.

China’s response is only unexpected if you know nothing about international trade and Chinese politics.  The Chinese response is perfectly expected if you have the slightest idea of what is going on.  It’s not as if the Chinese Ministry of Commerce, suddenly had a meeting on Saturday when they decides what to do.

Even if you know *nothing* about Chinese politics and economics, the prospect that the Chinese government would impose some sort of tariff in response to Obama’s tire tariff is hardly unexpected.  What would you expect the Chinese government to do, hug and kiss the US trade negotiations and heap love and praise on them.  Thank you, thank you, thank you for imposing tire tariffs.  Sheesssshhh.

Also, saying that maybe you will have the WTO look into something is not a *strong countermove*.

The Chinese government’s strong countermove followed a weekend of nationalistic vitriol against the United States on Chinese Web sites in response to the tire tariff. “The U.S. is shameless!” said one posting, while another called on the Chinese government to sell all of its huge holdings of Treasury bonds.

My God!!!!  This is dumb.  The New York Times is reduced to figuring out what is going on from *BLOG POSTS*.   What’s worse they are mentioning a blog posting without doing something creative like maybe linking to the posts.

So let me get this straight.  Some college student in some internet cafe somewhere starts writing some angry blog posts in between games of World of Warcraft and surfing internet porn.  The New York Times reads this and concludes that China is about to declare economic war on the US.  OK maybe, but can you at least do me the favor of *linking* to that blog post?

But the timing of the announcement — on a weekend and just after the tire decision in Washington — sent an unmistakable message of retaliation. The official Xinhua news agency Web site prominently linked its reports on the tire dispute and the Chinese investigations.

Well maybe can you link to that website?

Also you might try to find someone that can read Chinese, who can point out that the tire dispute isn’t being mentioned very heavily at all on any Chinese website.  Finally, you aren’t getting the hint.  The tire dispute on Xinhua is number two.  If you look at the number one article on any Chinese website (that is, assuming you can read Chinese), you’ll find that the number one article on Xinhua is Hu Jintao visiting the G20 summit to talk about financial regulation.

“Why did our government purchase so much U.S. government debt?” said one posting signed by a “Group of Angry Youths.” It continued, “We should get rid of all such U.S. investments.”

Yes.  The “Group of Angry Youths.”  As we all know the “Group of Angry Youths” is such an important group in Chinese trade policy.  Now that Obama has got the “Group of Angry Youths” upset, we know that there is going to be WAR!!!!!  The Politburo thought that they were going to issue just a formulaic response, but then they started reading the blogs and found out that the “GROUP OF ANGRY YOUTHS” was upset, so Hu Jintao got on the phone and told the Minister of  Commerce,  we need to do something because internet bloggers are after us.

Actually as the day goes on, I expect to see the New York Times gradually change.  Also, if any reporters from the NYT really do want some ideas as to what is going on.  Just go to the discussion on Brad Delong’s blog.

Here the general cluelessness of the NYT is just funny.  The fact that we got into a major war based on “intelligence” that wasn’t much better than this makes it less funny.

Also, I don’t have a problem with the NYT getting it’s news from blog posts and websites, but do you mind maybe *linking* to those sites.

Making connections between Taiwan and US politics

Part of the reason I’ve been thinking a lot on how the Republican party collapsed between 2004 and 2008 as that people have been talking about Ma Ying-Jeou’s response to Morakot and W’s response to Katrina, and I’ve been thinking about how to make sure that the same thing *doesn’t* happen.  Fortunately so are people within the KMT.  We’ll see how things look like in a few months.

One thing I do find interesting is that the Western media has characterized the PRC’s response to the Dalai Lama’s visit to Taiwan as “angry.”  It really isn’t.  I’ve seen the PRC angry, this isn’t angry.  It’s also interesting to me that all of the official mention of it is in the English media.  So far the PRC has not mentioned it at all in the Chinese language press.  Also there isn’t a huge amount of coverage in the Taiwan press (either pro-blue or pro-green).  The pro-blue press is trying to forget the story.  The pro-green press is trying to do what they can to make Ma look bad by suggesting that he cooperated with the PRC in handling the public response to the visit (and I wouldn’t be surprised at all if he did).

The other thing that I find interesting is the parallels between politics in southern Taiwan and those of the southern United States.  A lot of the notion of “independence” is rather similar in both places.

Southern US politics

Here is a note on southern US politics that mutated out of a discussion on health care reform.

http://delong.typepad.com/sdj/2009/08/health-care-andrew-samwick-really-doesnt-understand-what-is-going-on.html

Getting news wholesale – Notes on the New York Times article

The blog post that I did a few days ago on the Sanlu trial got me into an interesting argument over Chinalaw, but while I was researching this, I found some interesting coincidences between a NYT article and a SSRN article on punitive damages,

http://www.nytimes.com/2008/03/26/us/26punitive.html

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=945197

Looking at the NYT article and the SSRN paper, it seems obvious what the NYT reporter did. You can do a fact by fact comparison, and every fact and point in the NYT article seems to have originated in the journal article that was the basis for SSRN paper.  The NYT reporter does cite and credit the paper and its author John Y. Gotanda for one quote, but he doesn’t mention that basically all of the facts in the article come from that one paper.

They started with the SSRN paper, and then used this to as a template in which they tracked down some of the people mentioned in the SSRN article and then interviewed them.  This isn’t a bad way of writing a news article, and the NY Times article does have some “value added” in that they went through and interviewed the people involved in some of the cases.

But I do wonder if this is a particularly got way of doing journalism.  The thing that sort of annoyed me was that they didn’t hyperlink the NYT article to the paper, which would have saved me a lot of time.  One problem with hyperlinking the article is that at that point it would have been obvious how much of the article was actually written and researched by the law professor rather than the reporter.

This gets at the problem about why newspapers are failing.  The problem is that newspapers still think of themselves as a monopoly on information.  I read the article on punitive damage awards and think to myself.  Gee, I want to know more about punitive damages awards, where can I find it?  At that point the news monopoly just says “sorry, you just get your news from us.”

Best and the worst – The Sanlu Settlement

The last article was about the worst of Chinese law.  This article is about something that I think was handled very, very well, which is the aftermath of the Sanlu milk scandal.  This discussion came out of a post on Chinalawblog on Chinese food safety.

http://www.chinalawblog.com/2009/08/chinas_food_chain_nobody_trust_1.html

In response to a statement that SanLu milk should have gone bankrupt, I mentioned that:

SanLu *did* go bankrupt as a result of the milk scandal. Two of the executives got death sentences. Nineteen other executives got various sentences from five years to life. The basic procedure to settle the civil claims was something very similar to what the US government did to setlle the 9/11 lawsuits. The government and the dairy association brokered a settlement in which people could either accept a cash settlement, or else go to court. Most people want to get on with their lives so they took the settlement.

We can talk about US-style class action lawsuits. One of the problems in these mega-lawsuits is that if you win a huge judgment and then the company goes bankrupt, then most defendants may end up with nothing. The other problem is that while the litigation goes on, the company is under a cloud and cannot rebuild.

What happened with the Sanlu case is far far batter than having a massive class action wind its way through the legal system taking years with no one making money except for the lawyers. The nightmare you want to avoid is what happened with asbestos litigation. The first case was filed in 1966, and it’s *still* going on. Sort of like “Jarndyce and Jarndyce”

Among the problems, what if the companies goes bankrupt during the court proceeding? What happens if the company *threatens* to go bankrupt in order to impose a settlement. And as far as I know, all US litigation has been civil litigation. None of the executives involved in the asbestos case (or in the tobacco cases) have every been personally tried. One problem here is that if you are an executive whose company goes bankrupt, so what? That’s why I think it’s important to have personal liability (i.e. people go to jail).

Also while the US uses “class action lawsuits” to deal with consumer liability issues, “class action lawsuits” are not common in most European countries, all of whom have different ways of dealing with the issue.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1296843

As I said above, as far as the actual settlements and consequences, I do think that the Chinese government handled things quite well, and I’d like for people that are critical of the legal aftermath to explain what the Chinese government could have done better. Yes, one could argue that the payouts where low, but as it was, it totally bankrupted the company responsible. If you mandate US-style damage awards, then the whole thing becomes a lottery, in which people that are the first to file or who have particularly good lawyers get the bulk of the money, and everyone else spends years fighting over the scraps that remain. (What happened with asbestos.)

Also if you have a long nasty class action lawsuit, then most of the money ends up with the lawyers (there is an entire industry devoted to asbestos lawsuits). In the mean time, honest dairy farmers and dairy workers who weren’t involved in the scandal are hurt because the company gets pounded into dust.

On the legality of black jails

Comment I made on this story

http://www.blackandwhitecat.org/2009/08/15/rape-and-beatings-in-a-beijing-black-jail-hotel/

I’ve often heard the statement that the black jails system by which petitioners are detained before being released is illegal.  It is true that it *should* be illegal, but just because something *should* be illegal, doesn’t mean that *is* illegal.  There is in fact a very solid legal justification for black jails under the Chinese criminal procedure law.

———–
Article 63. Any citizen may immediately seize and deliver to the public security organ, the people’s procuratorate or the people’s court for handling:

1. any person who is committing a crime or is discovered immediately after having committed a crime; or

2. any person who is on the wanted list; or

3. any person who has escaped from the prison; or

4. any person who is being pursued for arrest.

———–

What this means is that if someone is reported as wanted by the police in jurisdiction A, then it is legal for any citizen to detain them in another jurisdiction until they can be transferred home.  All they have to do is to get the PSB at the home town to state that someone is wanted for questioning, and Article 63 kicks in.

This law has a huge loophole and is obviously being abused and needs to be changed. Among other things Article 63 allows people to do an end run against all of the time limits in the criminal procedure law.

But it is the law… (Don’t shoot the messenger) Just because something should be illegal doesn’t mean that it is….

The situation with Sun Zhigang is different. Under Article 8 of the Legislation Law, you can only detain someone as a result of a law that is passed by the NPC. Custody and repatriation was passed as a result of a State Council regulation, which made that regulation legally challengable. This isn’t the case with black jails.

Also the politics is very different. There is very, very little sympathy among urban Chinese for migrants and petitioners from rural areas. In Sun Zhigang’s case, he was seen as an urban intellectual (i.e. one of us) which caused outrage. Rural migrant petitioners are usually seen as “one of them” and so get a lot less sympathy.  Let me ask an inconvenient question.  How may people do you think died in custody before Sun Zhigang,  Sun was different because from the point of view of the intelligentesia, he was not one of them.  Sun Zhigang was by no means the first person to die under C&R regulations, but he was the first “urban intellectual” and so the sense was, “if it can happen to him, it can happen to us.”

Unfortunately (and again don’t shoot the messenger), that’s very unlikely to happen in a “black jail.” If you are an urban dweller, all you have to do is to call the local PSB, and you will be released. The system is set up so that only “one of them” is likely to get caught in the system.

Now as far as arguments that my legal analysis is incorrect.  I’d be interested in hearing them, but you have to remember legal arguments only matter if you can get a Chinese judge to agree with them, and if you come up with nice logical argument, you need to explain why a Chinese judge would look at your argument and given the political pressure I mentioned look at my argument, and accept your argument.

The other problem is that we can true to change things legislatively but that has some limits.  If you talk to some urban dweller in China, they likely are going to have some prejudices against rural petitioners. They may nod their heads in agreement while you tell them how its a bad thing, but deep down, I think that they’d rather petitioners just go home.  So when it comes time to pass a change to Article 63, people are going to come up with a thousand excuses to keep things they way they are.

China is DOOMED DOOMED DOOMED

So says this article….

http://www.foreignpolicy.com/articles/2009/07/23/the_china_bubbles_coming_but_not_the_one_you_think

This is a great article for summarizing everything the bogus notions that I’ve seen about the Chinese economy.  It briefly goes over pretty much every single fallacy of the Chinese economy.  Two of them are:

1) the false analogy.  In particular bad things happen when you compare a company with a nation.  Nations can do things like print money, and if you end up with an overproduction problem, then the rational thing to do is to start dropping money from the skies so that the factories are producing.  If you really have overcapacity, don’t worry about borrowing money.  Just print it.

2) overgeneralization – One building in Shanghai fell down and therefore the entire Chinese economy is doomed.

Also if you google for “China” and “bubble” you end up with this article from 1994

http://www.foreignaffairs.com/articles/49881/richard-hornik/bursting-chinas-bubble

There is no Asian Development Model

There is no Asian development model and talking about one obscures confuses things greatly.  The Japanese economy is as different from the economy of Hong Kong as one can possibly get.  The one thing that Japan has in common with Hong Kong is that both ran massive trade surpluses with the United States, but then again everyone runs massive trade surpluses with the United States, and so relations with the United States has more to do with the United States than with Hong Kong or Japan.

Also Germany and Saudi Arabia ran trade surpluses with the United States, but no one calls them Asian.  It is true also that most countries in East Asia feel more comfortable with government intervention with the economy than the United States, but again that’s a peculiarity of the United States than with East Asia.

The problem with talking about an Asian development model is that people see something that Japan does and assumes that China does the same thing and vice versa which is not true.  For example, because Japanese companies have captive banks in a corporate group structure people assume that Chinese companies do the same thing, when this is not the case.  In  fact that Chinese banking system has many more similarities with the United States than it does with Japan, largely because the critical era in which major decisions where being made happened between the Japanese property crash and Enron.

The problem with talking in terms of development models is that you end up with two or maybe three models, and that ignores the fact that there are many ways of getting it right and many ways of getting it wrong.

Overproduction is a problem ????

http://mpettis.com/2009/08/what-should-have-been-discussed-during-the-sed-meetings-part-2/

It’s always seems to be bizarre to me when people say that the Chinese economy has a problem with overproduction that must be resolved or else China is doomed.  It sounds like a parody of Stalinist propaganda.  Our factories are too efficient and productive, please save of.  The fact that the big problem that people see right now is that people save too much and factories are too efficient should tell you that China is *not* a Soviet style centrally planned economy.  Soviet propaganda lived in a world of overproduction, but Soviet reality was one of chronic shortages.

Anyway there is one solution to overproduction which is trivial economically but hard to do politically:

• Pay people to do nothing.

That’s actually quite hard to do politically.  The political problem is that people get quite upset if they see their neighbor getting paid to do nothing while they aren’t getting the money.  Figuring out who gets paid to do nothing is quite tricky, but there are ways around it.  One way of doing this is to make people think they are doing something useful, when they aren’t.

The other problem is that paying people to do nothing, or worse yet getting people to think that they are getting paid to do something when they are doing nothing tends to become a habit, and if you have to change so that you are no longer in a situation of overproduction, you have a problem.

One alternative way of saying “pay people to do nothing’ is to say “be less efficient” which is why I think it is weird when a lot of the people who say that the problem with the Chinese economy is that it overproduces also come up with ideas to make the economy more efficient.  If the real problem is overproduction, you really want to make the economy *less* efficient.  Sometime less efficiency is a good thing.  A power saw is more efficient than a hand saw, but it leaves a bigger mess if something goes wrong.

Anyone some other things that I disagree with Michael Pettis about:

a) In general, I don’t think that the government is pumping money into the economy to create “excessive investment.”  In fact I would argue that with banking policy, it’s doing the reverse.  Lending interest rates are high, which discourages borrowing while borrowing interest rates are low, which discourages savings.  The reason people save is that they are looking forward to retirement, and the reasons that companies are saving is because they are making profits, and make investments out of retained earnings because it cost them a great deal of money to borrow from banks.  The one area that the government could change policy to reduce investment is by taking some money in the form of dividends, but as I point out later there are good reasons not to do that.

b) Also it’s interesting that the examples, that Pettis gives to argue that the government is biased toward investment really show no such thing, and the policies that he proposes to remove this bias also do not fix the problem.  It’s true that China make be keeping it’s exchange rate low, but keeping it’s exchange rate low doesn’t change the consumption/investment ratio.  Also it is also true that banks are biased toward large enterprises, but again if the Chinese government removed this bias it wouldn’t change the consumption/investment ratio, and if this bias changes so that small and medium enterprises such that interest rates go down, this will actually increase investment.

The big problem here is that people when they talk about China, they aren’t talking about China, but rather Japan and Korea which had very radically different economies.

c)  Finally, I do not think that China is overinvesting.  The danger in thinking that you are more efficient than you really are is that it leads to Great Leap Forward type situations, in which you cut back on production, and later found that this was a bad idea.  What worries me about statements that China should consume more is that they fail to take into account China’s very rapidly aging population.  Once the baby boom generation ages, then all of that previous investment is suddenly going to prove useful.

One final thing.  Michael Pettis likes to use the phrase “it has never happened before.”  That doesn’t prove anything with regard to China.  In the case of China, there are so many things that have never happened before in human history, that “it’s never happened before” is just not an argument.