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Source link: http://archive.mises.org/6083/yellow-journalism-at-the-weekly-standard/

Yellow Journalism at the Weekly Standard

January 3, 2007 by

Critics of the welfare-warfare state are no fans of the magazine The Weekly Standard, writes Robert Murphy. Bill Kristol and its other regular contributors are among the most hawkish of neoconservatives out there. Yet these “right wingers” are also bad on economics too, Today’s case study is Irwin Stelzer’s recent piece, “Worry About OPEC, Not China.” Although international trade can get complicated, especially when fiat currencies are involved, Stelzer manages to pack an impressive amount of nonsense into a fairly short article. FULL ARTICLE


RogerM January 3, 2007 at 8:32 am

Nice job! Thanks! Conservatives have decided to take the populist position on trade instead of the informed one. Sean Hannity, Laura Ingraham, Bill O’Reilly, and others all side with Lou Dobbs that imports damage the economy by stealing jobs. The only conservative I know who defends free trade is Limbaugh.

I sometimes ask opponents of free trade to imagine that we import/export just one commodity–gold, then ask them if that would change their opinion of free trade. Obviously, they would want to import as much gold as possible and export as little as possible. Then I ask them why they consider gold to be more valuable than oil, clothing or cars.

One of the main problems with the national accounting system is that it records cash flows only, while excluding the value of the goods exchanged. Oil is much more valuable to this country than gold.

Stefan Karlsson January 3, 2007 at 9:37 am

Good article. NRO Financial have been pretty bad with its pro-deficits and pro-inflation articles, so we shouldn’t be suprised that the Weekly Standard is bad on economics too.

My only complaint to the article is that it claims that China is stockpiling dollar asset to be able to prevent devaluation. A trillion dollars in reserves is far beyond what would be necessary for that and no currency speculator would bet on a devaluation of a currency which is widely considered significantly undervalued. Instead the purpose is of course to slow the pace of yuan appreciation against the dollar . China no longer has a strict fixed peg against the dollar , but instead has a managed slowly appreciating exchange rate versus the dollar.

China should let the yuan rise a lot more, not for America’s sake (It is dubious whether America is really hurt by Chinese currency policy), but for China’s own sake. While a higher yuan exchange rate would hurt exporters, it would also reduce the cost of oil and other imports, reduce the risk of anti-Chinese protectionist legislation and limit the damage for China even if such legislation is passed, it would make it easier to restrain monetary inflation and it would require that less Chinese savings is squandered on assets likely to decline in value (i.e. dollar assets).

RogerM January 3, 2007 at 9:52 am

Good points. Could China accomplish the same thing by monetizing its reserves instead of devaluing its currency? It seems to me that if they increased the money supply in China, that would cause Chinese to purchase more of their own exportables as well as more imports and effectively reduce the exchange rate.

Raging Ranter January 3, 2007 at 11:11 am

Thanks for repeating that truism once again. Any form of subsidy, whether it be a direct transfer of tax revenue to domestic exporting firms, or subsidy by stealth via currency devaluation, the final result is the same. What occurs is a net transfer of wealth from consumers in the exporting country to A) producers in the exporting country, and B)consumers in the importing country. Every time. Always.

“Weak” Chinese currency equals less consumer buying power for the Chinese. “Strong” US currency equals more consumer buying power for Americans. You cannot subsidize domestic production without a large portion of that subsidy ending up in the hands of foriegn consumers who are importing the goods. It’s that simple. Full stop.

Stack Lavin January 3, 2007 at 11:56 am

While Murphy has some great points, he reduces his effectiveness by his conclusion. What the heck the neoconservatives’ “misconceptions regarding military might” have to do with the rest of the article, I can not find. The “no doubt” postulate was way over the top.

Stefan Karlsson January 3, 2007 at 12:30 pm

Roger, the People’s Bank of China is accumulating foreign exchange reserves at a sum of roughly $20 billion per month. This would have led to a massive increase in domestic money supply hadn’t they first of all acted to “sterilize” the effects of this by selling domestic securities and hadn’t the Chinese government hadn’t used extensive administrative controls to limit credit expansion to sectors deemed overheated. The Chinese government seems to be more aware than Western governments about the link between credit expansion and consumer price inflation and over-investments.

Particularly with the strong structural productivity growth China is experiencing, it has basically three choices: 1. Continue to amass excess foreign reserves and see the current account surplus (already the biggest in the world in absolute terms after having surpassed Japan in that respect in 2006) continue to rise sharply, with the many negative effects this imply. 2. Raise the real exchange rates by raising the nominal exchange rate of the yuan 3) Stop sterilizing the increased reserves and do away with the administrative controls on bank lending. This would casue a rapid acceleration in domestic demand and inflation and would through higher prices and higher demand reduce the Chinese current account surplus just as the option with a higher nominal exchange rate. But this risks setting into motion an austrian style boom bust cycle and higher consumer price inflation could increase popular unrest.

It seems to me that option number two is the best one for China. While it would in the short term probably lead to lower growth than options number one and three, these two other options risk creating greater distortions in the long run.

RogerM January 3, 2007 at 4:51 pm

Good points! But doesn’t the Chinese gov have to sterilize dollars because of it’s credit expansion? If it would stop with the insane credit expansion, it could stop sterilizing dollars and the economy shouldn’t overheat, because the dollars result from real production. It seems to me that the Chinese citizens should benefit from their sales to the US, but they’re not. Instead, state-owned businesses benefit from insane credit expansion while the hard-working citizen has to sell his dollars for gov debt in order to keep the Chinese economy from inflating. In other words, the real problem seems to be credit expansion, mainly going to state-owned businesses to keep them afloat.

Tim Swanson January 3, 2007 at 5:41 pm

Stack Lavin said: “While Murphy has some great points, he reduces his effectiveness by his conclusion. What the heck the neoconservatives’ “misconceptions regarding military might” have to do with the rest of the article, I can not find. The “no doubt” postulate was way over the top.

I believe what Murphy was trying to show was that, as he mentioned in the beginning, neo-conservatives are typically known for their seemingly fallacious, hawkish foreign policy.

In addition, entire volumes could be filled with prose from free-market economists painstakingly noting how posterity is not won at the end of a bayonet, but rather, through non-aggression, free-association, and contracts.

Thus, perhaps one of the reasons that their foreign policy views are haphazardly myopic, is because they fail to fully understand how economies grow and falter.

David Spellman January 3, 2007 at 6:12 pm

One important thing to keep in mind is that certain people are already promoting the idea that there must be an ultimate showdown between the United States and China for world dominance. I wish I had some references (you caught me flatfooted), but prominent people are predicting war with China.

I find this disturbing but believable in our era of heightened imperialism. So I view Stelzer’s article as one more beat on the war drums. China is, in fact, an economic competitor of incredible proportions. The tragedy is that our political response is to destroy rather than cooperate.

Spectator January 3, 2007 at 7:49 pm

This article throws in some confusing theories where a much simpler explanation would suffice. Makes Austrians look like they don’t know what they’re talking about. Talk of a run on the yuan makes no sense.

The simple explanation is China promotes its manufacuring and industry, for obvious reasons and with some success. They then need to mop up the incoming dollars to avoid over-valuation of its currency.

We can argue about whether the China govt. view of potential over-valuation is correct, but there’s little doubt they want to avoid a surge in their currency. I’m of the view that with a world reserve currency willfully being devalued, the Chinese are doing the right thing. Why should they help out US currency manipulation? The irony is that it’s the accuser thats trying the currency manipulation. That’s not to deny other kinds of market intervention by the Chinese.

David C January 3, 2007 at 8:56 pm

The US has a habit of buying stuff from all over the world on credit, and then paying down that credit with watered down dollars, thus screwing over all the foriegn creditors. By keeping the dollar pegged, it makes it so that it is not the Chinese creditors that get scred over (in currency markets), but the Chinese people (in the form of inflation) as they water down their yen to keep up with the dollar.

One more thing, the US could very easially compete with China head on. But because we have free trade, yet not the free flow of labor – it distorts the market and forces industrial infrastructure overseas to find cheap labor right into the hands of Chinese control.

In sum, both the US people and the Chinese people are being screwed over in terms of their money being watered down, but in addition the Chinese are being screwed out of the political freedom that they would have if they moved to the US and the US people are being screwed out of control over our industrial base.

Unless the US returns to honest money and opens up the immigration flood gates (which implies killing the welfare state) – we are pretty much pre-destined for bitter conflicts with China.

Max January 4, 2007 at 6:49 pm

It isn’t that neocons actually want a war with China (they aren’t that crazy), but rather that it is useful to have a powerful “enemy” when trying to justify a continued military build-up. Obviously, whether the economics are correct or not is irrelevent to these guys. Whatever serves the cause…

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