Tuesday 23 March 2010

Why Paul Krugman is so wrong and his stance is dangerous

Paul Krugman is pushing for a rise of 25% in tariffs on Chinese goods.


If history is a lesson to a Nobel Prize in economics, Paul Krugman should probably revisit the devastating impact the re introduction of tariffs had during the Great Depression with the implementation of the Smoot–Hawley Tariff Act of 1930.

Maybe Paul Krugman should read Wikipedia relating to the Smoot-Hawley Tariff of 1930:

"U.S. imports decreased 66% from US$4.4 billion (1929) to US$1.5 billion (1933), and exports decreased 61% from US$5.4 billion to US$2.1 billion, both decreases much more than the 50% decrease of the GDP."


"According to government statistics, U.S. imports from Europe decreased from a 1929 high of $1,334 million to just $390 million during 1932, while U.S. exports to Europe decreased from $2,341 million in 1929 to $784 million in 1932. Overall, world trade decreased by some 66% between 1929 and 1934."

"Although the tariff act was passed after the stock-market crash of 1929, some economic historians consider the political discussion leading up to the passing of the act a factor in causing the crash, the recession that began in late 1929, or both, and its eventual passage a factor in deepening the Great Depression.[16] Unemployment was at 7.8% in 1930 when the Smoot-Hawley tariff was passed, but it jumped to 16.3% in 1931, 24.9% in 1932, and 25.1% in 1933."

Why on Earth Paul Krugman thinks this time it is different?(the 5 most dangerous words in the world).

I am completely baffled by such a reckless statement from a Nobel Prize and I am not the only one concerned.

John Mauldin in his latest "Thoughts from the frontline" entitled "The Threat to Muddle Through" shares the same thoughts with his readers:


"Krugman and the Keynesians are right in this regard. If consumption falls, as it does in recession, then a corresponding increase in "G" helps offset that drop. But Keynes assumed that in good times government would run surpluses. It seems that we forgot that part."

As per above extract from John Mauldin's excellent letter, this is why Keynesian cannot work anymore in our current environment in Western Europe and in the US.

Keynes assumed government would be managing public finances in an efficient and responsible way.

Well Mister Paul Krugman, looks like Portugal, Spain, Italy, France, United Kingdom and of course Greece have been exactly doing that and the US as well!

The only efficient Keynesian policies which have been implemented in fact has been done by China! The main difference is that the Chinese have been managing much more effectively their economy so far!


"A statement on the government's website said the State Council had approved a plan to invest 4 trillion yuan in infrastructure and social welfare by the end of 2010. This stimulus, equivalent to US$586 billion, represented a pledge comparable to that subsequently announced by the US, but which came from an economy only one third the size. The stimulus package will be invested in key areas such as housing, rural infrastructure, transportation, health and education, environment, industry, disaster rebuilding, income-building, tax cuts, and finance.

China's export driven economy is starting to feel the impact of the economic slowdown in the United States and Europe, and the government has already cut key interest rates three times in less than two months in a bid to spur economic expansion.

The stimulus package was welcomed by world leaders and analysts as larger than expected and a sign that by boosting its own economy, China is helping to stabilize the world economy. World Bank President Robert Zoellick declared that he was ‘delighted’ and believed that China was ‘well positioned given its current account surplus and budget position to have fiscal expansion.'News of the announcement of the stimulus package sent markets up across the world."

It is up to the US to resolve their trade imbalances by being more competitive and to increase the amount of goods and services they export.

I agree with John Mauldin, should the US target as well Japan and Germany with higher tariffs?

Should all the countries with trade surpluses be targeted?

No comments:

Post a Comment

View My Stats