being some weakening of the dollar against other advanced-country currencies). Meanwhile, China will offset its trade surplus vis-à-vis the United States by running deficits vis-à-vis other countries. In effect, the world economy engages in a game of scissors-paper-stone: China takes markets previously held by America, America takes markets from other advanced countries, and these countries make up the difference by selling to China. It may seem that America is bearing an excessive burden, being required to accept the lion’s (dragon’s?) share of Chinese exports without gaining a comparable share of the Chinese market. But this is the wrong way to look at it; in fact, on most counts the United States gets the better deal.
First of all, to suggest that the United States does worse than other countries, because it allows in imports while they don’t, brings to mind the classic comment of the nineteenth-century economist Frédéric Bastiat: It’s like saying that we should block up our harbors because other nations have rocky coasts. By accepting labor-intensive imports from China and producing other things instead, the United States is taking advantage of the opportunity to stop doing things it does relatively badly and concentrate on doing things it does relatively well. Meanwhile, other advanced countries are denying themselves that opportunity: The kinds of goods they will start selling to China will be pretty similar to the goods they stop selling to or start buying from the United States.
Moreover, to the extent that you think some industries are more important than others—for example, because they yield technological spillovers—the jobs the United States gains by rolling back Japanese and European market shares in computers or semiconductors are surely more likely to produce those benefits than the jobs we give up by allowing in Chinese shirts and footwear.
The downside—which is significant—is that precisely because our more open markets lead us to gain high-wage jobs but lose low-wage employment, our disproportionate role as a market for Chinese exports may exacerbate the problem of growing income inequality.
The important thing to bear in mind is that the bilateral imbalance between the United States and China does not mean that the Chinese are taking advantage of our naiveté. (Which is not to say that they wouldn’t if they could.) It is mainly the result of the restrictions third parties place on China’s exports, not the restrictions China places on ours. And we are not being taken advantage of: In fact, the imbalance is actually a sign that America is taking advantage of opportunities that other advanced countries are passing up.
Part 4
Delusions of Growth
F ew subjects in economics are as contentious as the business cycle—those fluctuations of output and unemployment around the long-run upward trend. A generation ago economists were all pretty much agreed on what caused business cycles. Then, partly as a result of “stagflation”—the unexpected and unpleasant combination of inflation and unemployment that emerged in the 1970s—but mainly as a result of differences in methodological tastes, economists studying the business cycle divided into rival factions. Some argued for an updated version of the old, mainly Keynesian approach; others wanted to reject it entirely. The great business cycle theory wars did huge damage to the prestige of economics as a profession; they also created a sense that nobody knew anything, which opened the door for various crank doctrines—most notably supply-side economics.
Don’t tell anybody, but those wars are basically over. (Princeton’s Alan Blinder calls this the “clean little secret of macroeconomics.”) While the factions still tend to use different language, their actual views have converged—to something not very different from the consensus view of a generation ago. But the damage has proved hard to repair: many people
First of all, to suggest that the United States does worse than other countries, because it allows in imports while they don’t, brings to mind the classic comment of the nineteenth-century economist Frédéric Bastiat: It’s like saying that we should block up our harbors because other nations have rocky coasts. By accepting labor-intensive imports from China and producing other things instead, the United States is taking advantage of the opportunity to stop doing things it does relatively badly and concentrate on doing things it does relatively well. Meanwhile, other advanced countries are denying themselves that opportunity: The kinds of goods they will start selling to China will be pretty similar to the goods they stop selling to or start buying from the United States.
Moreover, to the extent that you think some industries are more important than others—for example, because they yield technological spillovers—the jobs the United States gains by rolling back Japanese and European market shares in computers or semiconductors are surely more likely to produce those benefits than the jobs we give up by allowing in Chinese shirts and footwear.
The downside—which is significant—is that precisely because our more open markets lead us to gain high-wage jobs but lose low-wage employment, our disproportionate role as a market for Chinese exports may exacerbate the problem of growing income inequality.
The important thing to bear in mind is that the bilateral imbalance between the United States and China does not mean that the Chinese are taking advantage of our naiveté. (Which is not to say that they wouldn’t if they could.) It is mainly the result of the restrictions third parties place on China’s exports, not the restrictions China places on ours. And we are not being taken advantage of: In fact, the imbalance is actually a sign that America is taking advantage of opportunities that other advanced countries are passing up.
Part 4
Delusions of Growth
F ew subjects in economics are as contentious as the business cycle—those fluctuations of output and unemployment around the long-run upward trend. A generation ago economists were all pretty much agreed on what caused business cycles. Then, partly as a result of “stagflation”—the unexpected and unpleasant combination of inflation and unemployment that emerged in the 1970s—but mainly as a result of differences in methodological tastes, economists studying the business cycle divided into rival factions. Some argued for an updated version of the old, mainly Keynesian approach; others wanted to reject it entirely. The great business cycle theory wars did huge damage to the prestige of economics as a profession; they also created a sense that nobody knew anything, which opened the door for various crank doctrines—most notably supply-side economics.
Don’t tell anybody, but those wars are basically over. (Princeton’s Alan Blinder calls this the “clean little secret of macroeconomics.”) While the factions still tend to use different language, their actual views have converged—to something not very different from the consensus view of a generation ago. But the damage has proved hard to repair: many people
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