I agree with pretty much everything Paul Krugman writes in his column today about the Chinese and their currency shenanigans--especially the point that the Chinese have rigged it so that our bilateral trade deficit will spike once the recovery gets going. (And the point that the forces driving our trade deficit were only temporarily suppressed by the recession.)
The only thing I'd quibble with is the implication of these two paragraphs:
So picture this: month after month of headlines juxtaposing soaring U.S. trade deficits and Chinese trade surpluses with the suffering of unemployed American workers. If I were the Chinese government, I’d be really worried about that prospect.
Unfortunately, the Chinese don’t seem to get it: rather than face up to the need to change their currency policy, they’ve taken to lecturing the United States, telling us to raise interest rates and curb fiscal deficits — that is, to make our unemployment problem even worse.
I think the situation in China is slightly more complicated. For two reasons, both of which have to do with domestic politics there. On the trade deficit, I think the Chinese leadership understands the general need to "rebalance," so that the Chinese people consume more (and therefore import more), which would make their economy less dependent on exports. The problem is that investing in export-led growth, as they have for years, is a self-perpetuating cycle. It creates powerful domestic constituencies that go nuts every time you try transitioning to a different model. For example, one of the reforms China has flirted with is lowering the valued-added-tax rebate it uses to subsidize exporters. But the backlash has been intense. “You’re getting today in China industry lobbyists … coming in and screaming,” Steve Orlins, a former State Department official and investment banker who now heads the National Committee on U.S.-China relations, told me a few months ago.
The annals of Sino-American relations have seen more than a few celebrity-diplomats: Henry Kissinger, a young Richard Holbrooke, and, of course, the current secretary of state. But, unless the record has been lost to history, none has ascended to this rarefied plane of geopolitics while running the Office of Management and Budget.
And yet, there was budget director Peter Orszag rushing to a lunch with Chinese bureaucrats on a Monday in late July. To his surprise, when Orszag arrived at the site of the annual U.S.-China Strategic and Economic Dialogue (S&ED), the Chinese didn't dwell on the Wall Street meltdown or the global recession. The bureaucrats at his table mostly wanted to know about health care reform, which Orszag has helped shepherd. "They were intrigued by the most recent legislative developments," Orszag says. "It was like, 'You're fresh from the field, what can you tell us?' "
