The Balcony Box

Paul Krugman isn’t playing ball with the administration.  Again.

This time, instead of advocating restructuring the banks, he is arguing for a more aggressive response to China’s currency manipulation–import tariffs:

Tensions are rising over Chinese economic policy, and rightly so: China’s policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery. Something must be done.

…In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.

I don’t propose this turn to policy hardball lightly. But Chinese currency policy is adding materially to the world’s economic problems at a time when those problems are already very severe. It’s time to take a stand.

I imagine that this strident view is causing headaches at the White House, the Treasury, and the Fed.  Obama has recently angered the Chinese party several times, and I doubt he wants another confrontation.  Treasury appears to be captured by a free market ideology, and may slightly fear retribution in the bond market.  And the Fed probably fears the impact of higher domestic inflation on inflation expectations, and, ultimately, the need to raise rates prematurely.

Looks like Mr. Krugman is going to get another roast beef dinner at the White House!  Speaking of dinner, David, when are you back in Boston?

In the most recent issue of BusinessWeek, Michael Mandel notes that GDP statistics ignore intangible R&D investments. In the article, entitled “The GDP Mirage“, Mandel argues that companies are cutting these investments in order to boost reported earnings and please Wall Street. The article has a lot of interesting data. For example:

many companies have taken a deep ax to their reported R&D spending, which also doesn’t show up in GDP. Alcoa (AA), in an effort to preserve cash, reduced its third-quarter R&D spending by 36% from the year before. “It’s a matter of focusing on your priorities,” says Alcoa spokesman Kevin Lowery. “We surprised people by announcing a profit [last] quarter.” Texas Instruments (TXN), meanwhile, expects to spend $1.5 billion on R&D in 2009, down 20% from 2008, owing to workforce reductions and cost-control efforts. And Johnson & Johnson (JNJ) has reduced its R&D by 13% over the past year.

As revenues fall, companies including Microsoft and Motorola are boosting profits by laying off thousands of employees.

Good luck with that recovery.