by Dean Baker, Center for Economic Policy Research
No one expects to get serious insights on the economy from reading Thomas Friedman, but he really went off the deep end in a column 03 May 2014. The piece is a diatribe about how our economic weakness is preventing the United States from acting like a real superpower.
At one point Friedman tells readers:
“We need to counterbalance China in the Asia-Pacific region, but that is not easy when we owe Beijing nearly $1.3 trillion, because of our credit-fueled profligacy.”
Presumably Friedman is referring to the amount of government debt that China owns, but it is hard to tell since the statement makes no sense at almost any level.
Let’s assume that Friedman is referring to government debt. And this poses a threat to the U.S. exactly how? Yes, China could dump the debt. If they tried to sell it all Monday morning, it would probably drive down the price a little bit and raise interest rates some, but there is not exactly a shortage of people willing to buy U.S. debt right now.
Friedman may not have access to the business section of his paper, but the current interest rate on 10-year Treasury bonds is under 2.6 percent. If China dumps its bonds then maybe it would rise to 2.7 percent, 2.8 percent? Maybe it will go back to the 3.0 percent level we saw in December. A lower interest rate is better than a higher interest rate right now, but I don’t recall anyone saying that high interest rates were suffocating the economy five months ago. (in more normal times, 10-year Treasury bonds carry a yield of 5-6 percent.)
Of course the story doesn’t end with interest rates. The Obama administration has been publicly committed to a policy of forcing China to raise the value of its currency against the dollar. Many accuse China of “manipulating” the value of its currency, deliberately keeping it low against the dollar to make its products cheaper in U.S. markets.
The way China keeps the value of its currency down is through purchasing hundreds of billions of dollars of assets in the United States, primarily government bonds. If China were to dump its bonds, then it would send down the value of the dollar against the Chinese yuan. This is ostensibly exactly what the Obama administration has been asking China to do.
The result is that we will be able to export more goods and services to China and other countries and domestically produced items will replace imports. This will lower our trade deficit and potentially create millions of new jobs, many of which will be relatively high-paying jobs in manufacturing. Are you scared yet?
But wait, there’s more. Friedman is badly confused about the relationship of “our credit-fueled profligacy” and the debt to China. Suppose that we had been running balanced budgets for the last decade, but China had the same policy of trying to prop up the dollar to boost its exports. It could have bought the exact same amount of government debt that was already outstanding. Alternatively, it could have bought up debt of private corporations or bought equity in them. In these cases, the United States would be just as much indebted to China as it is today, even though the government will not have been profligate by Friedman’s standard.
In other words, our indebtedness to China is due to the conscious decision of the Chinese government to lend money to the United States, not any need by the U.S. government to borrow. It is probably also worth mentioning that the government has not been in any way particularly profligate in any normal meaning of the word. The deficits were just over 1.0 percent of GDP and the debt-to-GDP ratio was falling before the collapse of the housing bubble threw the economy into a recession.
If we had run smaller deficits over the last six years the main effect would have been to raise the unemployment rate. Friedman may be willing to throw millions of people out of work and weaken the bargaining power of tens of millions of others in the interest of his confused great power ambitions for the United States, but much of the public likely does not share his priorities.