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Wednesday, August 26, 2015

Krugman: China Suffering from “Bungling” Interventions and “Political Dictation of Prices”

It's good to see that some interventions are a bridge too far

There’s some diamonds in the rough of this New York Times piece by Paul Krugman, from two weeks prior to the recent stock market madness:

China is ruled by a party that calls itself Communist, but its economic reality is one of rapacious crony capitalism. And everyone has been assuming that the nation’s leaders are in on the joke, that they know better than to take their occasional socialist rhetoric seriously.
Yet their zigzagging policies over the past few months have been worrying. Is it possible that after all these years Beijing still doesn’t get how this “markets” thing works?

Krugman then detailed the increasingly erratic interventions of the Chinese government, first funneling cheap credit to state-run enterprises, then encouraging a debt-fueled stock market bubble, then suspending trading to stop the cratering stock prices, then devaluing the renminbi, and then sharply changing course to try to prop up its value. 

The common theme in these wild policy swings is that China’s leadership keeps imagining that it can order markets around, telling them what prices to reach. And that’s not how things work.

If that last line leaves you sputtering in disbelief, don’t panic: Krugman then goes on to explain that’s sometimes how things work, like when he wants to raise the minimum wage, or prop up US wages, or push interest rates down, or inject endless QE, or have central banks prop up asset prices, or regulate banking and finance, or basically whenever it’s convenient. But, he says, that’s all different because:

these were short-lived actions, taken at times when markets seemed to have lost their bearings. Staffers at the Federal Reserve used to call these moves “slap in the face” interventions.
That’s very different from the kind of sustained intervention and political dictation of prices China seems to imagine it can pull off. Do the country’s leaders really not understand why that won’t work? 

… Does Krugman? When did he realize that politics and “sustained interventions” can’t ultimately fix market imbalances?

A really remarkable (and, it seems, prescient) piece — albeit soaking in some industrial strength cognitive dissonance. Read the rest here.

  • Daniel Bier is the executive editor of The Skeptical Libertarian.