Lawrence Summers on China

I wanted to draw your attention to Lawrence Summers’s observations on the dollar and policy towards China in the Financial Times earlier this morning but somehow it got away from me. Dr. Summers opens by putting the situation in context and continues with a terse description of recent policy:

The US has responded in an ad hoc way by carrying on a “strategic dialogue” with China – by far the largest economy with an exchange rate linked to the dollar – backed by congressional threats to address exchange rate issues using the tools of trade policy and references to communiqués from the Group of Seven leading industrial nations. In reality the dialogue is anything but strategic. Like so much of American international policy in recent years, it seems to confuse the firm statement of legitimate desire with the serious conduct of diplomacy.

and characterizes the issues that the Chinese leaders must consider include evaluating the relative importance to Americans of global stability and market access for “well-connected US firms”. Dr. Summers concludes by proposing two principles on which a future administration could base its policy:

First, any new approach must be premised on the desirability of a strong, integrated global economy that benefits the citizens of all countries, not on the idea that economists or politicians can calculate “fair” exchange rates.

The right and potentially effective case for adjustments in the current alignment of exchange rates relies on their unsustainability and the distortions they induce in macroeconomic policies, not on ideas of fairness to workers.

Second, multilateralism is better politics and economics than unilateralism but it must not become an excuse for inertia. Any new group should be as large as necessary and no larger, should meet with some frequency and should include central bankers. It should be analytically informed but everyone should know that key decisions will ultimately be taken by senior officials in the national interest, not by international organisations.

I encourage you to read the entire article.

In his reaction to Summers’s article Brad DeLong counters with a different rhetorical stance for economists. I think his advice for economists to give the U. S. Congress is sound:

…China’s economic policies have transferred wealth from America’s manufacturers and manufacturing workers to the construction sector and to coastal homeowners–but dealing with that transfer is an internal matter for us.

I found Brad’s advice on what to say to the Chinese leadership cryptic:

…the longer China delays rebalancing–delays shifting from export-led development driven by an undervalued currency to development driven by domestic demand–the greater the likelihood of a major crash someday, the greater the magnitude of that crash should it come, and the higher the chances that China’s economic development will suffer a severe check and that the cadres of the CCP will wind up in the garbage dump of history.

I sincerely wish that Dr. DeLong would flesh that out a little more for me. I see no signs that the Chinese leadership—the roughly .001% of the Chinese population (mostly Party members and their families) that accounts for 90%+ of China’s wealth—is in any danger of losing control of the country in the foreseeable future whatever the rest of the world might do, say, or want. I think they’re prepared to do what’s necessary to keep their hands firmly on the reins of the government there (“preserve harmony”). Indeed, I think that any political upheaval in China is as likely to concentrate power there more as anything else.

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