Thursday, April 06, 2006

Lindsey on the Yuan

Economist Larry Lindsey has an op-ed in today's Wall Street Journal about the Chinese currency. (Also available at this link.) Here is how he summarizes the economics of China's exchange-rate intervention:

America, however, benefits from this arrangement. The Chinese clearly undervalue their exchange rate. This means American consumers are able to buy goods at an artificially low price, making them winners. In order to maintain this arrangement, the People's Bank of China must buy excess dollars, and has accumulated nearly $1 trillion of reserves. Since it has no domestic use for them, it turns around and lends them back to America in our Treasury, corporate and housing loan markets. This means that both Treasury borrowing costs and mortgage interest rates are lower than they otherwise would be. American homeowners and taxpayers are winners as a result.

There are losers, of course, most notably American producers of goods that are now made in China. Yet the losses to these producers are outweighed by the benefits from Chinese subsidies of our imports of consumer goods and the reductions in our borrowing costs from generous Chinese lending. Though correct, in politics these gains are now beside the point.
That is all correct. On strictly economic grounds, a good case can be made that the United States benefits from China's attempts to keep the yuan cheap. After all, what China is doing is buying U.S. Treasury securities. Since the U.S. government is selling U.S. Treasury securities, it would seem odd to object when someone steps up to buy them.

In the end, the ruckus about the yuan is more politics than economics.

By the way, Lindsey was once an assistant professor at Harvard, when he was head section leader for ec 10.