Thursday, January 22, 2009

US-China Relations and Economic Strategy

Some highlights from today's New York Times:

"Timothy F. Geithner, who moved closer to confirmation as Treasury secretary on Thursday, told senators that President Obama believed China was 'manipulating' its currency, suggesting a more confrontational stance toward that country than under the Bush administration.

...An administration official said that Mr. Geithner was only repeating what Mr. Obama had said during the campaign, and pointed out that his statement also emphasized that the president intended to use 'all the diplomatic avenues available to him' to address the currency question...

...The Bush administration purposely did not use the term 'currency manipulator' to avoid antagonizing the Chinese, even when it was criticizing China’s trade policies....

...Prices of Treasury debt fell modestly after news of Mr. Geithner's comments, reflecting worry among investors that China might be less willing to buy United States debt if the new administration pushed the country to further revalue its currency."

Unsurprisingly, I think most of us feel that Bush was a pretty subpar president, but his economic treatment of China was actually pretty well run. Before this crisis, China was slowly reducing the level at which they manipulated their currency while still purchasing US treasury bonds at a rapid rate.

This is important because Chinese government decisions about capital allocation (US treasuries vs. not US treasuries) have the potential to significantly raise interest rates and inflation in this country, both of which would be substantial long-term negatives for US economic growth, and thus political strength. China's already buying fewer US bonds than before, which is bad given that our budget deficit is growing. I'm all for trying to get China to appreciate the Yuan, but it seems kind of dangerous to verbally assault them right now until we can start shrinking the budget deficit instead of growing it.

Interestingly, by the way, getting China to appreciate the Yuan is good for businesses who export goods (and their employees and shareholders) and good for people who work in manufacturing domestically, but it's bad for people who need to buy goods as cheaply as possible. In effect, this screws the unemployed, underemployed, and those who work in domestic service positions in the short to medium term, before growth from higher exports kicks in and starts improving the lot of everyone, long term.

In a sense, it's a pretty fiscally conservative step if it works without adverse political effects on Chinese treasury purchases. Although there's a general consensus that Chinese currency is absurdly undervalued (making US goods more expensive in China and Chinese goods cheaper in the US), transferring greater economic short-term hardship onto many low-income families is somewhat unexpected from a Democratic president, even if this policy does help unions.

In the long run, it's not necessarily a bad policy given our trade and budget deficits, because the longer we put that off the worse it'll be for the low-income families when it happens. But that's the case with Social Security (which, ironically, Bush tried to address - in a mediocre way - and failed to get legislative support, and Obama has not indicated any solid proposed policy to fix), Medicare, and the budget deficit/national debt in general. Politicians, ever election-focused, usually look at shorter term results. Just in terms of economic short-term results, and ignoring political rhetoric and stance (especially, but not exclusively, Democratic ties to unionized labor), this aligns more with Republican ideology than Democratic. In long-term results, it should be good for everybody.

This isn't to imply that Obama took a big political risk doing this, because it's not popularly obvious where each party stands on China and how Chinese relations compare to economic ideology (and unions offer lots of political support). But I just thought it was kind of cool, nonetheless.

(I'll try to keep my political views - currently socially liberal, foreign policy moderate, economically moderate to conservative, though I'm in college and have a lot to learn - out of my posts. If they shine through somewhat, I apologize).

Political risk from Chinese and Japanese purchases of US treasuries goes away with a balanced budget, but that's for another day.

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