I wonder what that Chinese regulator has to say about China's "stimulus"

Several weeks ago, I mentioned a Chinese banking regulator who points at the United States' problems but ignores that China's were always far worse.

China is going to pump four trillion yuan, about U.S. $588 billion, into its economy as a "stimulus package." One of the most rapidly expanding economies needs a stimulus package, though in this year's "slump" it will still see a projected 9% growth in GDP?

Yes. Make no mistake: there may not be tens of millions starving under a "Great Leap Forward," but China's leaders are ever committed to central planning. They want to meet their production targets and will do anything they deem necessary -- easily done when the rulers are perennially well-fed, and the "proletariat" do the real work. Recall that under Chairman Mao, Chinese were so desperate to meet their metal production quotas that they would smelt the tools they needed for farming. The choice was between a near-100% probability of slow starvation or a certain 100% probability of dying in a gulag. Today's Chinese largely don't face the risk of starvation, but do not doubt for a second that the gulags aren't running today with ever greater efficiency.

You might think, well, at least China has a tremendous budget surplus to use for the stimulus. But China needs its surplus to continually add to its foreign currency reserves, particularly U.S. dollars in the form of U.S. Treasury securities, as collateral for its corruption-ridden banking system that would otherwise collapse. What it comes down to is that China is addressing only a short-lived economic condition at the expense of the underlying problem (bad loans) and its longer-term economic health -- just like the U.S. government and Federal Reserve have been concerned about quarter-on-quarter economic growth, ignoring the long-term burdens of using massive new federal debt to buy up bad securities.

The efficiency of Chinese central planning: over 1 billion starved

I almost shuddered when I read this article:

BEIJING (AP) — China's ruling Communist Party on Sunday said it would seek to expand its massive internal market to counter the global economic slowdown that has reduced international demand for Chinese goods.

The party, led by President Hu Jintao, released a statement at the end of a four-day meeting of its Central Committee where it also approved a plan aimed at doubling rural incomes by 2020.

"We should step up efforts to boost domestic demand, particularly domestic consumption and keep the economy, the financial sector and the capital market stable," the party said in a statement released through the official Xinhua News Agency.

The party also recognized inherent "contradictions and problems" with China's economy and said all members should prepare for greater challenges as the global financial crisis unfolds.

China faces difficulties from high energy costs and inflation, but officials say the country has growth potential despite global uncertainties because of its large labor pool, vast domestic market and the increasing competitiveness of its companies.

Economists have cut China's growth forecasts to as low as 9 percent for the year, down from last year's 11.9 percent. That would be the highest rate for any major country, but Communist leaders want to keep growth robust to reduce poverty and avoid job losses, which could fuel political tensions.

China lowered interest rates Wednesday in an effort to revive slowing economic growth and help struggling exporters.

The party said it aims to double the income of the country's farmers — currently around $590 per person a year — over 12 years to ease the growing and politically explosive gulf between the urban elite who have benefited most from China's two-decade-old economic boom and its vast poor majority.

To anyone familiar with China's modern history, this should evoke recollections of how well Mao's "Great Leap Forward" did, which was launched under similar rhetoric.

Even if everything goes as "planned," doubling over 12 years is about 5.95% consistent annual growth, meaning China's rural poor will still be left behind. So much for equality under communism.

Even in China, market forces are stronger than...gravity

My friend JK linked to Pillage Idiot's post on the first Hooters in Beijing, which is the fourth in China (ABC News article here). China is still not free, but I'm always pleased to see further evidence that, being at that crossroads between central planning and free markets, it often moves in the right direction. Some might say it's "the right direction" because of this particular type of restaurant, but I say it because it's toward free markets. After all, why would someone open up a Hooters except in response to anticipated consumer demand?

I've written before and before about uplifting things, but this will be my most uplifting post ever. What really caught my attention (not for that reason, but the economics behind it) was Pillage Idiot's link to this China Daily article. It seems that Chinese bra makers have been shifting, for years in fact, toward larger sizes. There's a serious lesson in this, because it shows that no amount of central planning, whether the type of 1984 or China today or Mao's or Lenin's, could respond effectively to Chinese women's increasingly larger busts. Only the free market can, and only the free market can, ahem, defeat the forces of gravity.

The article says that "The growth trend is credited to women eating more nutritiously and taking part in more sports." This is correct only superficially. The growth trend is fundamentally because of China's increasing prosperity, through which more women can eat protein and develop more muscles, and more significantly, they can eat more excess calories (which are stored as fat, including in the chest).

And how is China becoming so prosperous? Certainly not by producing things for themselves, but producing things for us. Meanwhile, the United States becomes more prosperous because all these inexpensive Chinese goods increase our buying power. What's not to like?

In looking through some of my older posts, I left replies here and here to protectionists (who had left their comments long after my post, so I didn't see them until today). There are things protectionists say that sound right, but they aren't valid when you look at the real economics, and they certainly aren't valid when you consider them from a perspective of freedom.

Thou shalt not fear false prophets like James Wolfensohn

Wolfensohn, the former head of the World Bank, is warning that China and India's economic growth will leave the West -- particularly the United States -- behind.

First, I think Goldman Sachs' estimate of the U.S. economy is off. The U.S. economy need only grow at an average of 3% per year to exceed 46 trillion by 2050. With a mere 2.5% annual growth rate, it will reach $37 trillion in 2050 -- and 2.5% is pessimistic, considering the trend since the Reagan Revolution. Or maybe Goldman Sachs is assuming a Democrat-dominated federal government from now through 2050, one which taxes the country to hell and back...

I'm not worried. China and India cannot sustain their respective growth rates: eventually they will hit a wall because of their dependency on exports. Any business expands only when its customers' income increases (so that they can afford to buy more), and/or when its customers increase in number. In other words, you can manufacture all you want, but you make money only when people buy from you. The disparity between Asian and Western population growth rates therefore eliminates the possibility of the U.S. and other major trading partners being "left behind." Also, you cannot make money by supplanting your customers' livelihood when your customers cannot find other work to do. Right now, China and India have found the balance by specializing in lower-grade manufacturing, allowing Westerners to pursue higher-tech professions. This leaves everyone better off with overall increased wealth. As the Chinese and Indians prosper, they can buy goods from Americans, like software and high-tech manufactured goods, that they can't produce themselves as efficiently. The reverse would not work very well because of the vast population differences. With a lot of designers and only a few manufacturers, there won't be enough product made for anyone to make a living.

China and India can become economically dominant only through a fundamental change in what they produce: they must start innovating. They are great manufacturers, but not (yet?) good designers, and the latter is just not a significant trait of their modern economies. Should that change in the future and they start innovating, the West will still have not stopped its own development. At the Star Trek TOS episode "A Piece of the Action" (one of the greatest), Kirk, Spock and McCoy feared that the "very bright and imitative" Iotians would dissect McCoy's communicator and advance rapidly. However, they forgot that the Federation already had a massive head start of centuries. Even if the Iotians could grow beyond their mere "copycat" abilities, that would not inhibit the Federation from continuing its own technological advancements.

Similarly, I don't believe that China's military expansion is a threat to the United States. Though the Chinese military is expanding rapidly, the U.S. is still so far ahead in technology and the amount of equipment: because the U.S. military is not standing still in its own development, it would take China several decades before it had might at all comparable. As I've expressed before, I don't think China's goal is a direct conflict with the U.S. What it wants is enough of a military so that when it takes over Taiwan, the U.S. will do nothing because the conflict over one island will be too bloody for Americans to stomach.

I recently thought of an analogy that properly compares the growth rates of China and the U.S., because 10% and 3% are meaningless when the baselines are so different. Imagine that the Chinese economy is like a compact car going 55 m.p.h. one year, 61 the next, then 67, and so on. While it's accelerating faster than other cars in its class, it's still much slower than the rocket-propelled American economy doing 500. Also, the driver of the Chinese car is forcibly squelching his 12 passengers, who dislike the cramped conditions and would like a say in the direction of travel. Since the driver wields an SKS while the rest are disarmed, some of the Chinese passengers just want to get out and hitch a ride with the three Americans. The three Americans travel in style, and though they occasionally squabble, their vehicle runs very well.

Then there's the French Citroën. Nowadays it's traveling a little slower than China, but it can't accelerate any faster now, and the driver Jacque would rather placate the kid in the back instead of preventing him from again setting the trunk on fire...

Ned Lamont, you idiot, get staffers who can quote things right

This evening I saw a Ned Lamont commercial showing an old man driving a car into a brick wall, then another, and another. Each brick wall had different graffiti: "Lost 50% manufacturing jobs," "Iraq," and "Privatize Social Security." The old man, who's supposed to be Joe Lieberman, gets out of the car and says, "Stupid car!" Then Lamont appears: "If the definition of insanity is doing the same thing expecting a different result, why send Joe Lieberman back?"

Ned, here's a free clue. Einstein actually said, "Insanity is doing the same thing over and over, expecting a different result." Commercials are limited to 30 seconds, Ned, but you could have had your people trim something to provide the quote correctly.

Lamont and his staff are either willfully dishonest or willfully ignorant. The only thing he could rightfully accuse Lieberman of is supporting the war in Iraq, but polls show that that single issue won't be enough for Lamont to win. As far as the others, Lieberman opposes privatizing Social Security, and how has Lieberman been responsible for these "50% manufacturing jobs" lost? Presumably Lamont means to overseas labor markets, but the fact is that protectionism first harms the country trying to protect its domestic industries, and technology has "destroyed" far more jobs than outsourcing. China has lost many more millions of jobs than the United States because of modernization, so what is Ned Lamont's solution? Going back to hand-operated looms, hand-cut wood and any other muscle-powered processes? After all, it fits the Keynesian bunk of "creating employment."

Your ass is getting creamed tomorrow night, Ned. Hope you have a nice concession speech ready. You know, the standard 21st liberal kind where you charge "voter irregularities" and accuse the winner of having more money. It's too bad, Ned, that it might have worked in other circumstances: this time, you're a millionaire who'd be accusing a fellow Democrat.

Tyrants disguise their actions by distracting the people

Here's another thing I've wanted to blog about but haven't had time. By convincing the poor that they're victims in a new "class struggle," China's leaders hope to distract them from the real issues.

China Premier Vows Protection for Farmers

Mar 14, 2006, BEIJING - China's premier pledged on Tuesday to crack down on seizures of farmland for redevelopment, a source of rising rural anger, but stopped short of saying whether the communist government might allow farmers to own land.

The comments by Premier Wen Jiabao came as the parliament endorsed a five-year plan to close the growing and volatile gap between rich and poor.

Chinese leaders are trying to defuse increasingly violent rural protests over complaints that local officials are seizing land to build shopping malls, factories and other projects and are failing to adequately compensate for the loss in farmland....

The five-year plan endorsed by the ceremonial parliament calls for billions of dollars of new spending this year on rural schools, health care, roads and aid to farmers....

Of course, Beijing will never make any real promises regarding their style of "eminent domain." I would say that government officials can seize land as they desire, as the people have no Constitution as we do, but our Fifth Amendment didn't seem to help us much, did it. Government officials will delay as much as possible, then make only the most vague and hedged statements. One wonders about this chicken-or-the-egg puzzle: did they learn this tactic from Ted Kennedy, or is it vice-versa?

Meanwhile, the leaders will continually speak of "the growing gap between rich and poor," which is a natural progression as a society grows wealthier, and not a bad thing at all. Read my explanation of how wealth does "trickle down" in an economy, meaning if my neighbor grows far wealthier than I do, then that's more money he can spend on goods and services I provide, or more money for him to invest in my business.

After fomenting strife between the classes, China's leaders then engage in massive social spending, hoping it will pacify and distract most people so that they won't perceive the tyranny over them. Why wouldn't it work on the Chinese, when it works so well on Americans who have a tradition of freedom?

"Is life so dear or peace so sweet as to be purchased at the price of chains and slavery? Forbid it, Almighty God!" Patrick Henry's cry rings true for all people, and he would be sad to see today how even Americans largely prefer life and peace at the very high cost of subservience to despotic government. The chains may be light, and they may be invisible, but they are still chains. The subservience may not be a regional governor ordering you into a particular job, or deciding what your food rations will contain, but it is still subservience when most of your life is influenced to some degree by laws and regulations. Are you really free when you must seek government's permission to build or even raze your own home? What about the FDA determining how much blood you can donate, whether a life-saving medical operation is too dangerous for you, or if a new inhalable form of insulin is safe for you to use?

Our friend Josh Hendrickson expressed how "dissatisfied" he is with Republicans, who since 1994 have become the enemy they once assailed. However, to paraphrase the Bard, though their actions seem madness, yet there is method in them. They regained control of Congress by inciting a lot of proper anger against the Democratic machine, but that won't work after a couple of election cycles. Republicans realized they had to win votes by bragging at re-election time how they did this and that for their constituents, just like Democrats did.

Why else did the GOP-leaning New York Post endorse Charles Schumer in 2004? Because, the editorial said, he was doing so much for New York -- bringing home the bacon. Why else did President Bush push so hard for the prescription drug boondoggle, but to convince enough seniors that if they voted? Not only that, he was especially trying to win seniors' votes in Florida, a critical battleground he nearly lost in 2000.

So how can we stop "politics as usual"? Jefferson's advice was, "In questions of power, then, let no more be heard of confidence in man, but bind him down from mischief by the chains of the Constitution." But when courts ignore or completely misread the Constitution, how can we use it to restrain government? We have bad courts because the bad justices were appointed by bad elected politicians, who were likely elected for promising things to the voters. We the people must learn, all over again, the immorality of big government: that all the nice-sounding programs are paid for by others' coerced taxes.

Until then, we get the government we deserve. The Chinese have no tradition of freedom like Americans do, let alone any arms with which to revolt. So what's Americans' excuse when we vote for most of our leaders?

Economic misconceptions to beware of

I was performing the search engine queries by which people found my blog, and I came across this thread at Wal-Mart Watch. There are a lot of comments, but the first few dozen illustrate the moonbat mentality at its finest. There's also at least one obvious troll by a Wal-Mart basher who tries to look like a Wal-Mart supporter.

The Wal-Mart-bashers have so many economic misconceptions, like the nature of trade deficits, and how the higher wages they advocate would actually raise Wal-Mart prices out of reach of the poor that the Wal-Mart-bashers claim to want to help. But what always makes my shake my head is their belief that Wal-Mart "forces" people:

What they don't seem to understand is that Wal-mart forced suppliers that also supply to Target and the others to relocate to China to keep Wal-mart's business. Target and the others have no choice but to get their stock from China thanks to Wal-mart.

Forced? Forced? Wal-Mart didn't force anybody. There are only two ways by which anyone can force me to give him my business: physical coercion or a government charter (i.e. monopoly). Since Wal-Mart does not have people dragging me to their nearest store or at least threatening me with bodily harm if I don't shop there, how can it be forcing me? And that thread alone proves that Wal-Mart is far from a monopoly. If someone is willing to spend $40 more at a small store because he doesn't like Wal-Mart, that's fine. It's his purely voluntary choice.

When competition is unfettered, there's no such thing as "force." There's persuasion, but it's not force. Suppliers shifted their operations to China whether they sell to me, Wal-Mart or Bo Diddly. By taking advantage of lower operational costs in China, they could offer lower wholesale prices, gaining Wal-Mart's business because they wanted to, not because they had to supply things at no higher than what Wal-Mart demands.

I question whether any of these people ever helped run a business (I have), because they'd otherwise know this: if a customer won't pay more than x, but you can't sell it to him at x and make enough profit to stay solvent (or if you can sell another product more profitably, whether to him or someone else), then no matter what your customer demands, you just won't do it. No business is going to accept reduced profit just to sell to Wal-Mart, but it will sell at a lower profit per unit to Wal-Mart if the larger volume means higher net profit.

Frankly, it's idiotic to think that because Wal-Mart said, "We'll pay only $x for y of z," that it "forced" the supplier to find a cheaper way of making the product. If the supplier realized it could move operations overseas and sell for less, it would do so regardless of who its customers are. Again, it would do so to gain Wal-Mart's business, competing with others for a piece of the pie, but not because it's "forced."

In another example of a misunderstanding of what "force" is, my best friend at work rails against "dollar hegemony" (which I think is a stupid term) and claims other nations are "forced" to invest in dollar-denominated assets (especially U.S. Treasury securities). But who is "forcing" other nations and their central banks? The U.S. is criticized for sending its military around the globe, but I've yet to see our Marines storm the Bundesbank or the Bank of Japan, demanding they hold a minimum percentage of dollars. Since it's impossible (so far, without a single world government body that can enforce this) for a nation to have a monopoly on currency, and since there is no threat of military action, the U.S. is simply not forcing other nations.

Other nations invest in dollar-denominated assets because they acquire more dollars than they can spend. If they don't want those dollars, then it's very simple: they have the freedom of choice to stop acquiring them. If they don't want dollars, then they can demand to be paid in their own currency, or they can sell fewer goods and services to Americans that are paid for in dollars. But it turns out that many foreigners are the complete opposite of "forced." They accept dollars in payment because they want to invest in dollar-denominated assets.

The subsequent question isn't as obvious to some: why do foreigners want to invest so much in the United States? It's for the same reason I think Henry Liu's "dollar hegemony" is a stupid term based on a jealous fear of the American economy. The United States is the economic backbone of the world, and other than two short downturns in 1991-1992 and 2001, it's had uninterrupted growth for well over two decades. They know that U.S. stocks, corporate bonds and real estate are, in general, great additions to an investment portfolio. And should they invest in Treasury bonds, they know they're effectively a can't-lose thing. They're the safest in the world, because the American economy is so strong that the government can count on tax revenues.

Our friend Josh Hendrickson recently noted how the media isn't reporting on the good news of the American economy. I had some comments, agreeing with it. Last fall I briefly touched on how when the media does report on good news, it always follows with a caveat. Usually that high GDP growth will lead to inflation, and that the Fed will then have to raise interest rates (causing stocks to decline), which are Keynesian baloney.

So you wanna revalue the yuan?

Related previous post: Why China won't let the dollar slide too far

China announced Thursday that it will no longer peg the yuan to the dollar -- at least, not peg it as tightly. It's about a 2% appreciation in the yuan's value, from a tight band around 8.28 yuan to one dollar, to a looser band around 8.11 (up to .3% swing in daily trading). The alternative was the odious bill introduced by Senators Schumer and Graham, with enough support to override a veto: a 27.5% across-the-board tariff on Chinese exports to the U.S. if China didn't revalue the yuan higher. Are Schumer and Graham really this willing to sacrifice the American consumer for their economically ignorant politics? Tariffs don't work, not even to save domestic jobs.

Unfortunately there was too much support for the Schumer-Graham bill, enough to override a veto (assuming Bush would risk alienating voters who don't realize tariffs destroy more domestic jobs than they save). At least China saved face and both economies with this token gesture. David Malpass wrote in his latest National Review Online column that this is unlikely to have a big effect on U.S. trade with China, or even on the composition of China's foreign exchange reserves. Let's take China-U.S. trade in May 2005 (the latest month for which we have data) as an example. Chinese exports to the U.S. totalled $135.542 billion; U.S. exports to China totalled $76.116 billion (630 billion yuan). Had the yuan been pegged at the new 8.11 value, then all else being equal, Americans would have had to spend $138.4 billion to buy the same goods, while the Chinese would have had to spend only 617 billion yuan.

So yes, strengthening the yuan vis-a-vis the dollar will help bring China-U.S. trade into "balance," but do we really want that? Forcibly reducing the so-called "trade deficit" (which is nothing to worry about) will reduce American consumers' standard of living: they'll either spend more for the same Chinese goods, or spend the same on fewer Chinese goods. The former will ripple through the domestic economy as Americans will have to cut back on domestic goods and services, or on saving, which will eventually result in reduced employment (whether hours or layoffs) and reduced business investment (because of reduced savings).

The latter will boomerang when the Chinese, stung by that drop in income, must cut back on their purchases of U.S. goods and Treasury securities. That will hit the U.S. all over: workers who produce goods exported to China, the federal government that needs China to finance much of its latest budget deficits, and every American individual and business who borrows. (Low interest rates in the U.S. are not just because of Federal Reserve action, but because China is helping to prevent "crowding out" by lending so much money to the federal government.) During the resulting economic slump, Americans would cut back on spending, including on Chinese goods, which starts a new round. Each succeeding cycle is not quite as bad as the preceding one [edit: originally I said "slightly worse" when I meant to indicate the cycles are dwindling with each generation], so the "death spiral" will eventually end, like converging series in calculus. Still, a severe tariff, like the 1930 Hawley-Smoot Tariff or the Schumer-Graham bill, will impoverish everyone before the shocks are finished.

We can therefore dismiss outright the idea of fixing the trade deficit by devaluing the dollar. The gap with China is so wide that bridging just half of it requires that the dollar would have to massively depreciate vis-à-vis the yuan; that would cause catastrophes on both sides, then all over the world. And the Chinese may not buy more American exports just because they've become cheaper. Consider this: let's say that your grocer cut a particular item's price from $1.50 to $1, because his supplier cut the wholesale price. That doesn't necessarily mean you'll buy three items now when you only bought two before. We must factor in the buyer's marginal propensity to consume, and Steve Antler pointed out that the Chinese have an MPC of only 45 cents. "The rest is saved. Mostly here."

Larry Kudlow recently debunked the notion that free trade requires floating exchange rates: "In the U.S., the 50 states comprise a free-trade zone based on the dollar. Economist Arthur Laffer reminds me that New York and Mississippi may incur trade surpluses or deficits with each other, but they do not change the value of the dollar. This works very well." However, the usual trolls on his blog have vandalized his latest entry on the yuan, saying he can't be pro-market if he supports fixed exchange rates. The truth is that they are not mutually exclusive, and the critics don't realize that fully floating exchange rates would certainly result in an even weaker yuan. China buys many dollars to peg the yuan, but it then deposits those dollars in U.S. Treasury securities, which back its wreck of a banking system. Left up to floating exchange rates, the yuan would collapse, and China would experience massive capital flight.

The "Impossible Trinity" in macroeconomics is that a nation cannot simultaneously have independent monetary policy, free capital flows and fixed exchange rates. It can have any two, but not all three; choosing any two makes the third impossible. As the world's main economy and trading partner to nearly everyone, the U.S. needs its own monetary policy, and the free capital flows that facilitate foreign commerce and eventually prosperity. The strength of its economy makes floating exchange rates the least important of the three. China, on the other hand, is a developing economy full of growing pains, and sovereignty over its own monetary policy is not as important as a fixed exchange rate. Free capital flows are a must for China, obviously. Pegging the yuan to the dollar means it has adopted U.S. monetary policy, as Kudlow pointed out, and it also softened the Asian Crisis' impact on the Chinese economy.

Stephen Roach, unsurprisingly, welcomed the strengthened yuan as "unambiguously positive for the global economy," with repeated references to "the global adjustment process", "global rebalancing" and "massive imbalances." Roach can be a good corporate economist with some excellent insights, but as I've written before, he "complains incessantly" about global imbalances. I believe these imbalances aren't inherently bad, and I believe it's imbalances themselves that make it possible for economies to progress. What do entrepreneurs and arbitrageurs do, but recognize opportunities in an imbalanced economy?

Certainly some imbalances can't be sustained forever and will have to stop eventually, but Herb Stein specifically made his Law against those who argue we must take steps to stop them. Free market forces will stop them on their own, and if we try intervention, the cure can be as bad as the disease. Those wanting to intervene to "fix" the U.S. trade deficit warn that if nothing is done, we'll have higher inflation, higher interest rates and possibly crises in our banking system and stock markets. Yet the options of devaluing the dollar, present the very same problems.

A few years ago I'd have agreed with Roach, that the dollar needed a massive devaluation to be "in line" with other world currencies. I'd have even agreed with the more extreme position of Chuck Schumer, Lindsey Graham and other politicians, that China "unfairly" devalues its currency (though Roach has said currency is not how China competes). Back in college, I once argued that in a paper. Fortunately, Dr. O'Cleireacain, my senior thesis advisor, set me straight after he noticed I was starting to harp on the yuan.

But if you're a politician, attacking China and outsourcing will earn you points with voters. You can count on willing media like the New York Times and Washington Post to propagate the myth, especially with sprinkled anecdotes of American shops having to close because of "Chinese competition." The reality is that China needs the peg to maintain its own economic stability, which is in our interest too. And fooling around too much with the yuan's value for the sake of politics can wreak economic havoc on both sides -- not to mention it's part of trying to fix the non-problem problem of the trade deficit.

The error of protectionist economics

China Opposes New U.S. Textile Quotas

China said Saturday it opposed a U.S. decision to impose new quotas on some Chinese clothing imports, calling the move a violation of international standards of free trade.

The Bush administration announced Friday it would reinstate quotas on three categories of clothing imports from China, responding to pleas from domestic producers that a surge of Chinese imports was threatening thousands of American jobs.

The move "violates the spirit of free trade and the basic principles of the World Trade Organization," Chinese Commerce Ministry spokesman Chong Quan said in a statement on the ministry's Web site.

China is a dominant competitor in the $350 billion-a-year world textile trade, and its shipments into the United States spiked sharply after Jan. 1, when global quotas in effect for three decades were eliminated.

The latest U.S. action will impose limits on the amount of cotton trousers, cotton knit shirts and underwear that China can export to the United States — which American retailers argue will drive up prices for U.S. consumers.

It is unimportant that it violates the "principles" of the WTO or the "the spirit of free trade." What is relevant is that the Bush administration is violating free trade itself. Dr. Russell Roberts recently interviewed Dr. Gregory Mankiw, former Chairman of the Council of Economic Advisers. Dr. Mankiw said, "The President is very much a believer of free trade," which usually appears to be true.

It's ambitious that Bush has proposed eliminating tariffs on manufactured goods (not just the U.S., but across the globe). CAFTA and other Free Trade Agreements are a good thing, including ours with Australia, even if it was allegedly just a political reward. Even so, I don't think they go far enough. They're regulated, liberalized trade, not true free trade. Then I really sigh when Bush and his economic team take a step backward for every step forward. First the steel tariffs, now these quotas.

I agree with the PRC and say that the Bush administration is flatly wrong to place new quotas on Chinese goods. Of course the Chinese are looking out for their own self-interest. So am I. So should all other Americans. Americans benefit by purchasing low-cost cotton goods for less than if we made them ourselves; it increases our purchasing power. Now with the quotas, we'll have to pay more, even at Wal-Mart discount prices. Protectionists argue that we'll gain jobs by having to produce things ourselves, but don't they realize that jobs aren't gained at all? At best, they're only transferred. If a good is no longer imported and is produced domestically for $1 more, that's $1 less for the consumer to spend elsewhere (or save).

But it's worse than that. When we busy ourselves making cotton goods, we aren't making the software, aircraft, high-end machinery and other advanced goods that China, India, et al could produce but not very well. This is comparative advantage, the principle and motive behind all trade, not just at the national level, but the individual level too. What families today make their own clothes and shoes, or grow and raise their own food? Instead, we specialize according to our unique talents, and trading with each other maximizes our total production. The Bush administration is forgetting this. Yes, a few American textiles workers will be better off, but at the expense of everyone else. Society will pay more for the same goods. As Bastiat asked, why do you want to support scarcity? After all, that's what higher prices mean.

Bastiat wrote "The Candlemakers' Petition" to demonstrate the fallacy of protecting domestic industry. In his satire, the French government was asked to pass laws requiring people to close all doors and windows -- in fact, seal off any opening that sunlight might come through. This, the petition declared, will promote the entire economy! More candlemakers will be needed, and since they will require tallow, this will create more jobs involving the raising cows and sheep. Jobs will be created to produce lamp oil. Even Parisians will find jobs creating ornate chandeliers!

Of course the entire proposal is ludicrous, but Bastiat didn't once exaggerate the fallacial principles of protectionist economics. He merely applied them to an industry that nobody thinks to "protect" -- why should one industry be protected, and not another? Over 150 years later, the elegance of Bastiat's clarity still helps us see the simple reason why protectionism appears right but is actually wrong. In "protecting" via tariffs and quotas, government's sole aim is to maintain high prices so that domestic industry can stay in business. But high prices tend to encourage an oversupply of such goods, which normally would cause prices to drop. Then as domestric industry erroneously blames (or even lies) that downward pressure on foreign competition, government must restrict imports even more. Government can even purchase some of the excess supply to prevent falling prices.

If only that last part were fantasy: the U.S. federal government does that with certain types of agricultural subsidies. It pays farmers and ranchers so they won't grow crops or raise certain types of livestock; sometimes it's to pay them to destroy crops and livestock. It's a literal waste of perfectly good food, and a waste of effort because the farmers could have produced something instead. Yet this continues several decades after FDR initiated the subsidies, and even France is doing that for its wine industry. Professor Bainbridge noted the recent violence, "radical" winemakers bombing a government office in southern France, and I explained the bad economics behind the subsidy.

Protectionism simply inhibits progress. Not the absurd vision of "progress" that big government pushes on us, but true progress in the advancement of the human condition. When government supports one industry, it's necessarily at the expense of other industries; it's merely diverting from one to another. Bastiat in "What Is Seen" cautioned us not to mistake transfers for an increase, and even today, it is difficult for people to discern the difference. "But we'll have to produce those things ourselves, which will mean more jobs!" Indeed? If more people are needed to breed more cows and sheep for tallow, fewer people are raising oxen to plow fields. If people are creating cotton goods, they're not making high technology like microchips. Nowadays it's designing microchips, as China, India and Southeast Asia have a huge comparative advantage in semiconductor manufacturing. They have no comparative advantage in design, though. The bulk of R&D lies in developed nations, especially the U.S. and Japan. We also produce software, aircraft and heavy machinery that our poorer trading partners cannot easily make.

Second, protectionism promotes inefficiency. It gives artificial longevity to antiquated industries, or it prevents a society from developing newer industries. Should we have taxed the first automobiles to protect horse breeders and buggy manufacturers? Should we have taxed the first transistors to protect glassblowers and others involved in making vacuum tubes? Of course not, so why should we protect domestic textile industries that cannot compete?

But, protectionists object, the difference is that other countries are "stealing" the jobs. Protectionists insist that we need those jobs. Not so! If we're busy making textiles, cheap plastics or even low-end machine parts, we suffer the greater opportunity cost of not making high-end goods. We wouldn't have new software from Microsoft, Symantec and others, nor the latest Intel and AMD chips, and we're certainly not making Caterpillars and John Deeres. These are all products of greater value, which our trading partners cannot make without suffering greater opportunity costs. The Chinese could certainly produce entire Boeing aircraft, but it's more efficient for them to produce bolts and other basic metal components. It's more efficient for Boeing employees in the U.S. to produce entire aircraft, using low-end parts already made for them. If the Chinese tried to produce John Deeres and ship them to American customers, they'd suffer the greater opportunity cost of not making cotton T-shirts.

Consider that if Indians and Chinese are so competitive, if they're willing to work for a fraction of what an American counterpart would, why is the bulk of Microsoft still at Redmond? This is not to be racist, but by definition it means, for whatever reason, that Microsoft values one American more than several Indians or Chinese.

Why China won't let the dollar slide too far

Combustible Knowledge properly accuses the Honolulu Advertiser of cowardice:

...what the editorial staff is saying is that China has the U.S. by the balls because they are holders of a large amount of U.S. debt and that we should tread carefully. The implicit message is the same old liberal philosophy: to appease. It's a good thing that Condi has more balls than the editorial staffs of the Honolulu Advertiser and the Star Bulletin.

I'm not the first to observe that China's leadership is smart, very smart. They're looking decades ahead, when most of our own leaders barely look past the next election. There's a very simple reason that China, Japan and South Korea will do what it takes to preserve a strong dollar: they know doing so is in their self-interest. Ideally it's the Fed who should maintain our dollar's strength, but China, Japan and South Korea will step in if necessary, because a weak dollar will hurt them too.

Huge dollar holdings are a two-edged sword. Some have suggested that since China pegs the yuan to the dollar, China benefits from the dollar's depreciation over the last few years (a weaker currency promotes exports and discourages imports). That much is true, but there's an unseen effect.

China would take a huge hit on its dollar-based investments. At the end of 2004, China had approximately $600 billion in foreign exchange reserves, second only to Japan in size. Not all are in dollars, but China has more than a few nickels in U.S. Treasury securities, and it's even started investing in asset-backed securities. The bottom line is that China needs a strong dollar to maintain the value of its dollar-denominated investments. It's also to China's advantage to promote, or at least maintain, confidence in the dollar. When the dollar depreciates, it becomes harder for China's central bank to main the yuan-dollar peg: it must selling more and more yuan to buy dollars (increasing the dollar's exchange rate versus the yuan). China's central bank can't just print more yuan: woe to the country that tries to inflate its way out of a monetary or fiscal problem.

The dollar had a scare recently when South Korea announced it would diversity its reserve holdings. Now, China has more dollar-denominated holdings than South Korea, so it obviously has more to lose than South Korea when the dollar depreciates. Also, though Japan is the world's top holder of dollar-denominated assets, and China is a somewhat distant second, the yen isn't pegged to the dollar like the yuan is -- so China has more reason than anyone (except the U.S. of course) to defend the dollar's value. In fact, China plugging the leaking dollar dam happened last November 25th. When China Business News reported that China would cut its holdings of U.S. Treasury securities, it precipitated a relatively big dollar slide. China's central bank promptly responded by initiating damage control. One of its top officials denied he knew anything about that, and since he's someone "in the know," the implication is that it was just a rumor.

It worked, not with the euro, but at least with the yen (still, China trades much more with Japan than Europe). On the 26th, the New York Times reported that the dollar had hit a low of 102.18 yen on the 25th, but it had recovered to 102.59 yen. Federal Reserve data don't show an exchange rate for the 25th (or a couple of other days that the dollar seems to have hit lows), but since that bottoming out, the dollar has overall recovered quite a bit. My own gut feeling is that the Bank of Japan sees 100 as a benchmark, the point where they will definitely intervene, but they're being too cautious. Are they waiting to see how much the Fed will tighten monetary policy?

The dollar's performance against the euro since then has been a different story, quite a roller coaster ride. But I don't think it's that the dollar is too weak against the euro so much as the euro is too strong. I'm a bit of a monetarist in believing the European Central Bank should initiate loose monetary policy and kickstart the EU's stagnated economies. This, though, would need simultaneous tax cuts to have any real effect. But these would be short-term boosts, and not enough to overcome their severe demographic problem that's worse than American baby boomers' impending retirement. Several European nations, like France and Germany, have shrinking populations. Under two births per woman just isn't enough. Japan is in the same rut, perhaps even worse.