Yay For Me

As the title suggests, this is more of a "shiok sendiri" post. Last week, I posted a comment on Scott Sumner's post about the role of culture in economics. Here is my comment in full:

As a Malaysian Chinese, I can strongly relate to the culture argument. For those who are not aware, Malaysia practices “pro-Bumiputra (pro-indigineous/Malay)” policies, resulting in the vast majority of opportunities (education placement in top schools, business deals, cheap housing, etc) being channeled towards the Malay community. On the surface, it appears to be a form of affirmative action, but bear in mind that the Malaysian population comprises around 70% Malays. So, the so-called affirmative action policies actually favor the majority. And the Malay politicians in Malaysia insist on maintaining rights of Malays in obtaining these excessive privileges, which is often perceived as “racial supremacy” in Malaysia. 

Despite the oppressive policies that have been implemented since 1970, the Chinese community has continued to thrive and are responsible for the vast majority of business activity in Malaysia. They have still managed to succeed given the “handicap”, which demonstrates a cultural resilience and determination to overcome the overwhelming odds. I am not saying that Chinese are superior to other races in Malaysia, but there is a certain cultural element to it that is possibly unmeasurable as we do not see the same kind of success for other races in Malaysia. But I can attribute part of this to the kind of upbringing in Chinese families. Since I was young the message that was drummed into my head was to keep working hard in order to overcome the overwhelming odds. Despite 40 years of oppressive policies, Malaysia has remained rather peaceful and the Chinese community seemed to have accepted it as a way of life, simply working harder (among other things) to overcome the handicap. This is very much in line with the peaceful/passive approach taught by Confucius. 

Now, back to China. I think what a lot of analysts miss and what is written by Professor Zhang Weiwei in his book, “The China Wave – Rise of a Civilizational State”: 

“Good governance matters more than democratization. China rejects the stereotypical dichotomy of democracy vs. autocracy and holds that the nature of a state, including its legitimacy, has to be defined by its substance, i.e. by good governance, and tested by what it can deliver.”

… 

“China is still faced with serious challenges such as fighting corruption and reducing regional gaps. But China is likely to continue to evolve on the basis of these ideas, rather than by embracing Western liberal democracy, because these ideas have apparently worked and have blended reasonably well with common sense and China’s unique political culture, the product of several millennia — including 20 or so dynasties, seven of which lasted longer than the whole of U.S. history ……… While China will continue to learn from the West for its own benefit, it may be time now for the West, to use Deng’s famous phrase, to “emancipate the mind” and learn a bit more about or even from China’s big ideas, however extraneous they may appear, for its own benefit. This is not only to avoid further ideology-driven misreading of this hugely important nation, a civilization in itself, but also to enrich the world’s collective wisdom in tackling challenges ranging from poverty eradication to climate change and the clash of civilizations.” 

These are just excerpts from his marvelous book, which I think gives some very insightful thoughts from a true Chinese perspective.

 I managed to get a response from Scott, albeit a short one:

Yay for me!

Nominal GDP Targeting

Here is a pretty balanced piece on nominal GDP targeting.

I suppose this post is more for me than for anyone else. The link contains many good links on NGDP targeting. It's a very interesting idea especially since we learnt in Economics 101 (or any other beginner Economics course) that the role of the central bank is to maintain price stability and low unemployment.

The appeal of NGDP targeting is that it is a single target that can do both, much like killing two birds with one stone. Although, I am not much for killing birds with stones.

Volume 3 Issue 43: Two-Cent Economics

Chuck Schumer, The Big Fat Bully

Another great piece from Scott Sumner. If you have been keeping up to date with the currency debate, Chuck Schumer would be a familiar name to you. He is one of the strongest proponents of China being a currency manipulator. He has brought it up so many times since 2004 that I can't even remember. It is always some lame excuse with no backing whatsoever.

Scott Sumner calls him the big bully in high school:

If only it were true. There really isn’t any “problem” at all, but the perception is that the yuan is getting increasingly undervalued. Back in 2005, Chuck Schumer said the yuan was 27.5% undervalued, and he demanded a revaluation. China has more than complied with this request; the yuan has increased by nearly 30% in nominal terms and more than 50% in real terms. So is Chuck Schumer happy now? Not quite. He now insists the yuan is 32.5% undervalued, and demands another massive revaluation. All this despite the fact that the previous revaluation didn’t reduce the deficit by 1 cent; indeed the deficit got bigger. 

Remember the high school bully that would pick on the nerdy kid? You know, the one that would promise to stop beating him up if he just did what the bully wanted. Then when the victim complied, the bully would just issue more demands, and keep picking on the poor boy. That’s Chuck Schumer.

Volume 3 Issue 41: Two-Cent Economics

Scott Sumner Pwns Paul Krugman

The entire post is really long. Basically, Krugman has returned to his China-bashing ways with this article and personally, I don't see how a Nobel laureate can get it so wrong. As a result, Scott Sumner just bashes Krugman into the ground with his reply. Here are some excerpts:

But how do we know the yuan is undervalued? Its current value is not out of line with predictions of the Balassa-Samuelson Theorem, which predicts that countries with higher per capita GDPs will have higher real exchange rates. Krugman points to the huge Chinese trade surplus. But is their surplus actually all that large? After all, China is a very big country. As I pointed out earlier, the Germanic/Nordic current account surplus is vastly larger, despite the fact that the countries lying between Switzerland and Norway have a combined population only a tenth as large as China’s. The smaller East Asian countries also have vastly bigger surpluses on a per capita basis. So why focus on China?

...

What bothers me the most is Krugman’s assertion that China is “standing in the way” of an increase in US aggregate demand. This makes the Chinese seem like some sort of enemy of the US, even though the private actions of those thrifty Nordics are doing us far more harm, according to Krugman’s model. Even worse, it suggests that we are helpless victims, whereas even Krugman admits that the fundamental problem is that we don’t use monetary and fiscal policy to boost our own aggregate demand (AD.) So the “harm” being done is only harmful if our policymakers ignore textbook advice to keep AD at an adequate level. Yes, we are ignoring that textbook advice, but I’m having trouble seeing how that’s China’s fault. Again, I’m not arguing that there is any logical inconsistency there, but I can’t imagine that many of Krugman’s readers will connect the dots as I have. Most will assume that China really is “standing in the way,” not that we could offset any harm with the flip of a switch.

You can read the rest on your own. Personally, I think it is this finger-pointing that has got America into where it is right now. America is like a big bully in high school, or a jock, if you will. They have pretty much had things the way they wanted their whole lives and now, something doesn't go their way, they just can't get their heads around it. America needs to do a lot of soul-searching and accept a little bit of bitter medicine in the form of humility and understand that they themselves are the problem.

As Scott Sumner aptly puts it at the end of his piece:

The worst mistake the world could make right now is to descend into nationalistic posturing. We can all see what’s going on in Europe, and we all know how nationalism can end up hurting everyone. The last thing we should be doing right now is pointing fingers at foreigners.

We have the ability to solve our own AD problem; now we need to get on with doing it. If the Senate wants to do something constructive, give the Fed a mandate consistent with what the Senate wants the Fed to accomplish. If the Senate wants more AD, don’t try to take it out of the pockets of Chinese workers. Let’s do it the way economics textbooks say it should be done, with Federal Reserve targeting of prices or NGDP.

Don’t make policy based on zero sum thinking. The world needs growth, not trade wars. 

US Learning From Singapore?

Even Scott Sumner thinks its the US can learn from Singapore:

7. The East Asian countries that actually are pretty rich (Singapore, Hong Kong, Taiwan, South Korea and Japan) tend to have tax rates that are well below the average of western countries.

8. Despite taxes that are much lower than in the US, Singapore has lots of nice roads and new infrastructure.

If we want to find an East Asian model to emulate, I’d suggest looking to low tax, rich, efficient Singapore, not poor and inefficient China.