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Home Publications Blogs Beat the Press Stephen Roach is Badly Confused About China and the United States

Stephen Roach is Badly Confused About China and the United States

Tuesday, 26 November 2013 20:55

Stephen Roach managed to get the basic economics 180 degrees backwards in his discussion of China's turn to a more consumption based economy and its implications for the United States. After commenting that China will likely export less to the United States as it produces more for its domestic economy, he tells readers;

"The coming transition to a rebalanced China changes the rules of engagement in this co-dependent relationship. America seems unprepared for this possibility. Long dependent on China as the world’s ultimate producer, the United States may have a hard time waking up to the reality of a China that is less focused on enabling America’s excess consumption and more interested in spending money on social services rather than buying Treasuries and helping to keep United States interest rates down.

"The United States needs to liberate itself from the mind-set that it cannot afford to change its economic strategy. It must shift the fixation on consumption for today’s generation to greater focus on saving and investing for future generations. The sluggish recovery and unacceptably high unemployment make this shift difficult, but not impossible."

Contrary to what Roach asserts the sluggish recovery and high unemployment make the shift to fewer imports easier not harder. This means that we have excess workers and capacity that can be diverted to producing items that we used to import. If the opposite were the case and we were near full employment then the loss of imports from China would mean a decline in the standard of living. In the current situation, increased net exports (i.e. fewer imports) could mean more employment and output, in other words a rise in the U.S. standard of living.


Comments (6)Add Comment
written by watermelonpunch, November 27, 2013 12:53



Or has he just woken up from a 12 year coma?

Or wait... does he only circulate among rich people who buy useless nonsense they never have use of & assume the masses of unemployed are somehow doing the same?

Is he thinking soup kitchens are buying extravagant amounts of cheap China made tableware?

It doesn't make logical sense as a story to someone who even just read what he wrote. There isn't even an internal logic here, so it wouldn't even make good fiction.

Space alien parasite podding maybe?
Pareto Tent People of America Give Thanks on Thanksgiving Day
written by Last Mover, November 27, 2013 6:29

You don't say, Stephen Roach. That happened to me the other day as well.

I was standing around in the middle of middle class America watching some homeless Americans having an American Thanksgiving dinner in a makeshift American tent.

I kept telling them to stop eating their own capital, to take advantage of their comparative advantage and forego more consumption and save more for the future so they could have a better tent.

They kept saying they were victims of the paradox of thrift, because everyone was saving in a depressed economy they couldn't spend anymore on Chinese goods in big box stores for a better tent, nor could they make a better tent in America for lack of jobs.

In fact, they actually claimed they were operating on the very edge of their production possibility curve so there was nothing they could trade off to be better off. They even called themselves the Pareto Tent People.

I lectured them with tough love economics, reminding them they were running a trade deficit inside their own tent, consuming more than they were producing beyond their production possibility curve which could result in inflation if they kept it up with no increased output from the supply side to push the production possibility curve upwards and outwards with more real output.

Now that China has decided to stop producing more than it consumes so America can consume more of what it produces, America's Pareto Tent People must move quickly on this matter to balance and clear the global markets as usual and maintain the full unemployment, underemployment and disemployment of labor as always.

Don't take the takers bait America. Consume less of what you produce America, because you can't afford to buy it with debt financed by China anymore. Chronic massive unemployment and skipping dinner is the safe way to a better tent to live in America.

Never forget, unlike comparative advantage where both trading partners are better off, under Pareto welfare only one partner need be better off. The rest, like America's Pareto Tent People, qualify by being no worse off.

Count your blessings for what you have as makers of tents ordinners America, not as takers of tents anddinners. Forego consumption now and make at least one American better off and no American worse off.
written by dax, November 27, 2013 7:03
"The sluggish recovery and high unemployment make the shift to fewer imports easier not harder."

I agree with this.

"In the current situation, increased net exports (i.e. fewer imports) could mean more employment and output, in other words a rise in the U.S. standard of living."

And the big word here is "could". I agree with "the U.S. standard of living could rise", but I don't see a "will" here. It almost seems to be possible that, even in conditions the most favorable possible to a diminution in Chinese exports, the U.S. standard of living could *decrease*.
written by skeptonomist, November 27, 2013 10:35
As Dean says the changes in Chinese policy, especially their claim that they will no longer buy foreign currency to keep the yuan low, should mean greater employment and higher wages in the US in the long run. But everyone should realize that the short-term effect will probably be a decrease in standard of living of lower-income people because of higher prices - this means higher prices of most things in Walmart. Mercedes cars and French wine will not be affected. Some people will blame higher inflation on the Fed and there will be pressure to bring it under control and to keep the dollar strong - this pressure must be resisted. This is a case in which inflation should definitely be beneficial after changes in demand have a chance to work through the system, and probably the Fed and others (Baker and Krugman) should be explaining what is likely to happen - pain before gain.
skeptonomist is right
written by Shawn Wilkinson, November 27, 2013 1:08
But I doubt it will affect the impoverished who are completely obliterated. Food prices should not rise, since food products and the bulk of the supply chain is manufactured/processed in the US (of course, new firms would have a disadvantage in procuring equipment made from goods from China). Electronics would increase, but I never was convinced that the number of iPads or kitchen gadgets in a household was a proper way to measure standard of living.
written by Mrrunangun, November 27, 2013 4:44
Changing one item in the policy mix is not necessarily a game changer. With factory wages at $600/month in China and minimum US wage at $1200/month and a zero capital gains tax rate on industrial investment in China, reducing the degree of currency intervention will not necessarily have much of an effect on US domestic wages or employment.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.