Friday, June 25, 2010

Why is a cheap Renminbi bad?

Paul Krugman has a column about the evils of the undervalued Renminbi. I'm afraid I don't get it. Here is the comment I left.
Let's say we discover a civilization on Mars. Let's suppose that civilization produces clothes, DVD players, and other items we value. Let's say that this civilization wants nothing more than to make us happy. It does that by giving away all the stuff it produces. Why is that bad for us?

Isn't that the extreme case of China? How can selling us stuff for less than it's worth be bad for us? I can think of three possible arguments.

1. In producing the stuff China is selling us it uses too much of the world's supply of raw materials. Since it is giving us the final product at an unnaturally low price it is essentially putting those raw materials to use in wasteful ways. If we were forced to pay full price for those raw materials perhaps we would use them more wisely.

But I doubt that's the fundamental problem. Aren't we more concerned that China is giving us under-priced labor than under-priced materials.

2. By fulfilling our needs and desires China is depressing our economy because once those needs and desires are met we don't want anything more. Hence no (or reduced) internal demand.

But that doesn't convince me. If we can't find anything else to want once we get all our superficial needs and desires satisfied, we are not very imaginative. It should work the other way. Once our simple needs and desires are satisfied that leaves room for more sophisticated needs and desires. After all, we get our food for very little. That's not bad; it's good. It leaves room for us to want things other than food. So why is it bad to get other things cheaply?

3. By accumulating dollars, China is putting itself in a position to buy our productive assets. When it does that we will be working for them.

I suppose that's a real problem. But that doesn't seem to be what people are worrying about.

So as I said, I'm confused and would appreciate a further explanation.

1 comment:

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