Home > Main > Yuan non-Appreciation: Strip Mining the Middle Class and we’re poorer

Yuan non-Appreciation: Strip Mining the Middle Class and we’re poorer

October 12, 2011 Leave a comment Go to comments

This astonishing car required many decades of a thriving middle class to make it possible.

Matt Y goes all in on the crazy ideas that the Yuan is self correcting - and that its not really a problem in the first place.

I don’t think this remotely reflects reality.    Warren Mosler also says the trade deficit isn’t that big of a deal.

Of course, Warren’s right – if we were running an MMT based economic policy from our government.  If Warren was in charge of spending, I’d be happy to let him make aggregate demand high enough to overcome any offshoring of U.S. industry.

As Rodger points out in a private discussion, the proper policy would be to allow China to give us stuff for free, and then to make up the demand leakage with fiscal policy (read tax cuts and even tax income guarantees for workers) aimed at the middle class.

This would maximize the increases in our standard of living – and probably make for a more stable economic system.

But we’re not running an MMT based policy.   We’re running a semi-coherent gold idolization economic policy that doesn’t even recognize we can’t go broke.

I’m all for pushing the boundries of what’s acceptable discourse and moving the center.  But the proper policy isn’t going to happen in during the 12th 5 year plan.  

I’ll just talk about what’s politically possible with the Yuan.  If we assume we’re going to get the economic policy we’ve had for the last 30 years or so, we’re not going to see an in paradigm policy in place.

What this means is the Chinese Yuan policy is hugely detrimental to the United States, given the current policy of the U.S.   I call it strip mining the middle class, because this is what it does.   The Yuan policy takes jobs from U.S. residents and moves them to China.

Our overall society benefits a little – we shift computer bits around, and they send us real world goods.  This is usually seen as being good for the U.S. in aggregate. But specific groups in our society are worse off – this is widely accepted as true, even by mainstream econ.

Specifically, the middle class is worse off.

Now, for some people, this isn’t a bad trade.

But I am a huge – huge, huge, huge – believer in the value of mass production. Mass production is the way society progresses, to riff on whitehead.

It’s been pointed out to me that mass production requires mass consumption.

This idea – that mass production requires mass consumption – has somehow been lost.  I’d like to point out that 100 iPhones aren’t viable or useful – you couldn’t even think about creating an iPhone with a production run of only 100.  It’s nonsense to think of something like this.

100 million iPhones are useful – because with 100 million iPhones, the prices are low enough for people to buy them, and the app store becomes something truly wonderful.

But the iPhone was made possible by the iPod.  The iPhone isn’t possible until the iPod works out lots of problems.

It’s only after the iPod is mass consumed that the incredible iPhone becomes possible.

So when we allow China to keep their Yuan far, far below it’s fair value – and even farther below the value of “a country growing at 10% per year for another 20 years”, we’re allowing the middle class to be stripmined.

But even worse, we’re missing some truly great consumer product that aren’t being produced.  I don’t know what these products might be.

All I know is that the middle class of 2011 can’t afford them – so they aren’t even being manufactured.   This means we’re missing out on the second and third generations of these things that would probably have gigantic impacts on how we live.

 

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  1. reslez
    October 12, 2011 at 8:05 pm | #1

    I’m glad to see an in paradigm discussion of the real cost of imports. A lot of MMT writers seem to airily wave their hands when they talk about this and how great it is to receive real stuff in exchange for pieces of paper. In a sense I think these writers represents the “First Wave” of MMT bloggers, who are more focused on describing MMT in its pure state and explaining it to total neophytes. As we engage with more readers we’re starting to need a “Second Wave” that discusses MMT within the realm of the politially possible. This post is a great example.

    Job losses are a real problem that comes with a huge trade deficit. Decline of domestic manufacturing base is a real issue, a national security issue too. We also need to talk more about ecological limits to growth. I think a lot of people are looking for this sort of discussion and might be tuning us out because they don’t see much discussion of it in MMT.

    • TC
      October 12, 2011 at 9:00 pm | #2

      Thanks reslez,

      Being able to make something allows you to make something cooler. The newton lead to the iPod, to the iPhone. I think this is a hugely unappreciated part of making stuff. to be an expert at something, first you need to do it a lot.

      MMT is just a handful of people working their ass off. I cry when I think of tasks infront of me. I am just a dude on the internets – why do I have to point out stuff like “the no-Ponzi assumption makes the government budget constraint into religion and not science” and why does beowulf and Joe have to point out we can solve our budget with a trillion dollar platinum coin?

      Don’t we have professionals for this stuff? If not – what are economists doing with their time?

      The MMT crowd doesn’t mind the trade deficit, but it’s from not having the time to think it through all the way. Mosler is a busy dude – hes probably curing cancer or inventing a new form of gasoline you can make from dirt, a paper clip and cow manure.

      Plus many of the MMT crowd are from the professional classes. Smart motivated people who went to school. I happened to grow up in a town that went through a depression during my childhood. Highland Indiana saw the worst parts of steel mills reducing their head count by 90%. I’ve seen first hand how jobs just go away due to foreigners manipulating their currency and our elites standing by.

  2. beowulf
    October 12, 2011 at 10:08 pm | #3

    Excellent points guys. I’m sure you saw Jeff Immelt talk like a crazy person the the other day.
    “I want you to root for me. You know, everybody in Germany roots for Siemens. Everybody in Japan roots for Toshiba. Everybody in China roots for China South Rail. I want you to say, ‘Win, G.E.,’” Immelt told “60 Minutes” correspondent Lesley Stahl.
    He’s implying that if Americans don’t root for GE they’re unpatriotic. As opposed to closing domestic factories and moving the jobs to China. That’s different, see, patriotism is just for the rubes. Personally, I can’t wait for China to take over GE’s factories at their lowball book value. Its called the People’s Republic of China, Jeff, what did you think would happen to your private property?
    http://michael-hudson.com/2010/07/dollar-hegemony-and-the-rise-of-china/

    In his Pragcap posting, More Unfortunate Math Behind our Economic Plight, Cullen came up with a cool “model for future expected GDP growth using a combination of the sectoral balances approach along with a private sector credit element” (forecast: not looking good for Immelt’s hometeam). Cullen assumes a 3.5% trade deficit, I asked if he could remodel it at 0 trade deficit or better yet, remodel at 0 backdated to early 2009. I’m genuinely curious what difference it would make (I’ll link the results back to this thread if he does it).

    • beowulf
      October 14, 2011 at 1:27 pm | #4

      The Oracle of Cullen has transmitted a prophecy…
      “Growth moves to approximately 3%… Pretty healthy recovery we’d be having assuming the budget deficit we are expecting for 2012.”
      http://pragcap.com/more-unfortunate-math-behind-our-economic-plight

      To which I just replied:
      So 0 current account balance moves 2012 GDP growth from -0.88% to approx 3% without increasing deficit… Is there any other monetary or fiscal policy tool that can do this?
      “Without increasing deficit” is an arbitrary, senseless constraint, but since it controls our lawmakers, it controls the rest of us too.

    • October 15, 2011 at 6:00 pm | #5

      beowulf, Immelt has already built many a technology centers & factories as well as having signed many sourcing agreements IN China (as well as India, Russia, Poland, Brazil, etc). The “US Hometeam” is barely 50% of Jeff’s employees.

  3. TC
    October 12, 2011 at 11:18 pm | #6

    yeah, Jeff I. wants the support while he buys up companies who produce off shore. I am sure he really thinks hes doing the right thing.

    I’ve been getting into this reshoring meme pretty strong. I am 100% positive this trend will be huge over the next decade. It will be far larger than the 3 million jobs Boston Consulting estimates.

    Look at the verbiage in China’s next 5 year plan – it says to me “We’re going to converge to SDR’s in our reserve holdings” and “We don’t mind losing a bit of low end manufacturing” and “We want our people to consume more stuff”. This means reshoring is huge, huge, huge.

    It’s a topic I dont even want to talk about because the investment opportunity is so juicy. And I mean really, really juicy. We could see massive gains in manufacturing – plus huge gains in lower to lower middle income good suppliers.

    That model Cullen put together is awesome. It reminds me of Steve Keen’s credit impulse model, simply because it tracks something important in the economy at the aggregate level.

    It took like 10 minutes to do once he thought of it, and it leads recessions like clock work. And Nick Rowe fights the accounting approach to econ to the death.

  4. TC
    October 12, 2011 at 11:21 pm | #7

    I ask: Why does Cullen Roche not have 20 papers to choose from that have different nuances to this approach? What the hell have these people been doing for 80 years?

    • beowulf
      October 13, 2011 at 8:57 am | #8

      Well look at this way, if NASA was run by astrologers, how likely would they be to hire Carl Sagan?
      When you have time, check out what Paul Davidson posted yesterday,
      “The financial crisis of 2007-2009 should have been sufficient empirical evidence to indicate that the axiomatic basis of the mainstream theory needs to be replaced”.
      http://www.creditwritedowns.com/2011/10/paul-davidson-state-of-economics.html

      To bring Davidson’s point back to this thread, every economist who writes about full employment (and the inflationary risks of a low U3 rate) assumes we have a 0 trade balance and every economist who writes about trade and the benefits of running a trade deficit assumes we have full employment (economists writing about immigration assume the same).

      There is no mainstream economics axiom for a situation with both a trade deficit and high unemployment. They’re as lost as those NASA astrologers would be with a hand-delivered presidential directive to send a man to the moon.

  5. Tom Hickey
    October 13, 2011 at 2:52 pm | #9

    The only two solutions under the present misguided ideology and policy are 1) further stripping of the middle class, which will weaken the US economically and therefore militarily, and 2) a trade war, which will lead to a cold war, which in turn risks a hot war. Not great alternatives. We need more options.

    MMT to the rescue, please.

    However, the obstacle against acceptance and implementation of a policy based on MMT policy options is daunting. US politics and policy is in control of people who either do not understand economics or if they do, are neoliberal ideologues and the dominant alternative tendency is toward Austrian economics. This is an almost impenetrable obstacle. Nor is the media any help in correcting the misconceptions or even presenting the facts correctly.

    This ship is in trouble.

  6. October 15, 2011 at 6:02 pm | #10

    TC, you stated “This astonishing car required many decades of a thriving middle class to make it possible.” – that is a Post WWII German Middle Class, where a majority of those works of art are sold, and driven. Fahrvergnügen.

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