(This article was published in DNA edition dated December 10, 2010.)
The intellectual war of words between economists Stephen Roach and Paul Krugman is the stuff of legends. They disagree – vehemently – on the fundamentals underlying the reasons for the US economic affliction: the Nobel Prize winning Krugman argues that China is ‘stealing jobs with an undervalued currency, and uses his platform as a columnist in the New York Times to campaign for tariffs on Chinese imports. Roach, on the other hand, points out that the US has a trade deficit not just with China but with 89 other countries, and traces US’ economic ailments to a poor record of saving.
Earlier this year, when the argument got a little too heated, Roach said, “we need to take the baseball bat” to Krugman’s argument.
On Thursday, in Hong Kong, Roach came out swinging against Krugman, who is on the faculty at Princeton University (where, coincidentally, Federal Reserve Board chairman Ben Bernanke also taught). Fiscal and monetary policy as currently pursued in the US, says Roach, won’t do anything to bring down the high unemployment rates for years to come. That, he acknowledges, puts pressure on the elected politicians if they can’t get growth up to a level that increases employment.
“So what they do? They listen to the advice of some very notable academics who should know better,” says Roach, his tone dripping with sarcasm. “One of whom is on the faculty at Princeton, who tells American workers: ‘Your problem is the massive trade deficit, the biggest piece of which is with China. China manipulates its currency. And unless they appreciate their currency, we should impose trade sanctions on them. And that alone will make a big difference for American workers.’ “
Roach points out, without naming names, that Krugman offered his “expert testimony” before the US Congress to say that the undervalued renminbi was costing Americans today somewhere between 500,000 and 1.4 million jobs. “It turns out,” says Roach, “that these are back-of the-envelope calculations that aren’t worth the envelope they are scribbled on.”
The “real problem” in America, says Roach, is not that the US has a major trade imbalance with China. “It’s that we have trade imbalances with 89 other countries.”
Does Roach worry that Krugman’s argument is becoming “mainstreamed” in the US? “I worry that China-bashing has become a very popular in political circles and on Main Street in the US.” And if one looks at Bernanke’s speech in Frankfurt last fortnight, “you don’t have to look very far into the speech to see him single out China as a serious problem for America.”