Full disclosure — I am not a huge Paul Krugman fan. I do not mean that in the sense that I do not like the man or his work. For the most part, I do. I only mean that I own just one of his many books, and that happens to be the International Economics text book he co-authored with Maurice Obstfeld. (I have, however, read everything he has written on the Japanese economy.)
Nevertheless, I do recognize that not only does Professor Krugman understand economics, but he also has a brilliant gift for making it understandable (and even enjoyable) to others.
Consider this example from today’s NYT:
Here’s how the U.S.-China economic relationship currently works:
Money is pouring into China, both because of its rapidly rising trade surplus and because of investments by Western and Japanese companies. Normally, this inflow of funds would be self-correcting: both China’s trade surplus and the foreign investment pouring in would push up the value of the yuan, China’s currency, making China’s exports less competitive and shrinking its trade surplus.
But the Chinese government, unwilling to let that happen, has kept the yuan down by shipping the incoming funds right back out again, buying huge quantities of dollar assets – about $200 billion worth in 2004, and possibly as much as $300 billion worth this year. This is economically perverse: China, a poor country where capital is still scarce by Western standards, is lending vast sums at low interest rates to the United States.
Yet the U.S. has become dependent on this perverse behavior. Dollar purchases by China and other foreign governments have temporarily insulated the U.S. economy from the effects of huge budget deficits. This money flowing in from abroad has kept U.S. interest rates low despite the enormous government borrowing required to cover the budget deficit.
Low interest rates, in turn, have been crucial to America’s housing boom. And soaring house prices don’t just create construction jobs; they also support consumer spending because many homeowners have converted rising house values into cash by refinancing their mortgages.
(To see the point o read the rest of the story here. Trust me, it’s worth it.)
It doesn’t require a PhD in Economics from MIT to see that the United States, “isn’t just bogged down in Iraq; it’s deteriorating under the strain. We may already be in real danger…” Any reader of the NYT who happens to be in a semi-conscious state would have picked up on this in reading through the 24 pages that preceed the op-ed section.
So please, Mr. Krugman, I have absolutely no objection to your criticizing the policies of the Bush Administration, and most often I even agree with you. But please, please, stick to economics.