Friday, February 15, 2008

How Asia Could Actually Benefit From U.S. Recession

The popular view is that the economies of China and the rest of Asia is dependent on exporting to America, and so they will suffer greatly from a American recession. But the truth is that there is no basis for that view. Apart from some short-term adjustment costs, there is no basis for believing that Asians would suffer from shifting their economy from exports to domestic demand. Indeed, there is every reason to believe they would benefit from it, as they and not the Americans would enjoy the fruits of their hard work.

As it is now, the Asians are basically getting screwed by the Americans. America get their goods and services and Asians get useless government bonds in return, bonds who have negative real returns, meaning that America in effect gets away with not paying much of the bill. I have previously written extensively about how much China loses by in effect subsidizing exports by holding down the value of the yuan.

I re-read an old Peter Schiff column about the subject which I have actually linked to before. It provides an excellent analogy of why Asia would actually benefit from falling exports to America by pointing to how America benefited from the end of World War II despite the fact that the U.S. economy in 1944 were seemingly completely dependent on military spending. But this overlooked first of all how resources could be shifted to producing consumer goods rather than weapons and secondly that military spending isn't a positive good for people (At best, it is something which helps a country avoid something even worse). Similarly, Asian countries could and should shift their production to domestic purposes and similarly exports do not provide any direct benefits for them. At best it helps them earn future benefits, but even that is to a large extent dubious considering how America inflates/devalues away much of the value of their debt. So, just like America benefited from the ending its "dependence" on military spending so would Asia benefit from ending its "dependence" on exports to America.

"During the Second World War, America’s industrial might was concentrated on supplying the war effort. We had ten million men under arms spread across three continents, our ships patrolled the Atlantic and Pacific and our bombers blackened the skies. Factories that had previously produced passenger cars, sewing machines, and farm equipment had been retooled to make fighter planes, jeeps, tanks, rifles, bullets, artillery shells, destroyers, aircraft carriers, submarines, uniforms, helmets, boots, mess kits, and military radios.

At the time we were a very busy nation. Our factories were in operation 24/7, and more people than ever before were working, including legions of women previously absent from the workforce.

Given this full-throttled activity, economists of that time period may have argued that America should never have stormed the beaches at Normandy or Iwo Jima. After all, if the War ended, a disaster would befall America’s wartime economy. Millions of soldiers and factory workers would lose their jobs and corporate profits would collapse as there would have been no more demand for all the weapons and military equipment they were producing. As victory abroad would surely bring recession at home, the war needed to be waged indefinitely.

As ridiculous as this argument sounds, it is exactly what most believe the Chinese should do today, as in reality their export driven economy is basically no different from America’s wartime economy in 1944.

During the War, American consumers did not receive any direct economic benefit from their hard work and economic activity. In fact, they sacrificed greatly. Because factories were producing military goods, consumer goods were in short supply. In addition, scores of common staples, such as butter, nylons and gasoline, had to be rationed, so that they or the resources needed to produce them, would be readily available for the military. Similarly, Chinese citizens now produce export goods from which they themselves derive no direct economic benefit. In effect, consumer goods are rationed in China so as to make them readably available in America.

However, when World War II ended, American factories didn’t shut down, they merely retuned to consumer goods production. Soldiers didn’t lose their jobs; they merely put their labor to more productive uses. Instead of being wasted on a war (which unfortunately had to be fought), resources were applied to civilian purposes, leading to a post-war economic boom.

The same would apply in China today. As Americans once sacrificed to defeat the Nazis and Imperial Japan, the Chinese now sacrifice merely to support the purchasing power of Americans. If China allowed the dollar to decline against the yuan, American purchasing power would by definition be transferred to the Chinese. In China, factors of production would therefore be reallocated as they were during post-war America. Factories would retool and labor would seek more productive employment. Instead of wasting scarce resources producing goods to export, China would instead produce goods for domestic consumption.

The time has come for China, and the rest of Asia for that matter, to redirect its vast resources to raising the standard of living of its own people rather than to propping up the living standards of Americans. As soon as the Chinese stop producing goods for Americans they can finally begin producing more for themselves.

It’s time for China to declare peace. Unfortunately, as Americans are the principal profiteers in China’s war, we stand to lose the most when it ends. So while peace means China’s days of sacrifice, rationing, and under-consumption will soon end, it means America’s are about to begin."


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