Roundabout

The next question about higher Chinese wages is, what does it mean for us?

There's a lovely psychic benefit to thinking of Chinese workers getting wealthier, happier and healthier, all while supplying us affordable HDTVs. Some analysts, however, are worried that this benefit will come at a stiff cost to us: inflationary pressure from Chinese exports. For some years now, the falling price of goods from China has helped hold down inflationary pressure in industrialised nations. But with wage and commodity bottlenecks appearing, Mervyn King, the governor of the Bank of England, fretted publicly last year that rising Chinese export prices would reverse that pressure upward. As Chinese inflation has gotten stronger, other analysts have joined him.

This would be a particularly bad time for that to happen, as the central bankers, particularly America's, would like some room to cut rates if there are liquidity or other economic problems. If Chinese goods are getting more expensive, that will be harder.

But as my former employer wrote earlier this month, these fears are overblown. Much of the inflation is in local goods such as prepared food. And while wages are rising, productivity is rising even faster, holding down the price of the goods shipped. To the extent that export prices are rising, this is more a result of China's looser yuan policy than an outflow of domestic inflation.

Of course, to Americans shopping for electronics and other China-made gear, the difference is theoretical; price pressure is still up. But we could fight that by backing off the Congressional obsession with a weak-dollar policy. As the article concludes: "The real threat to America's inflation is not that Chinese export prices start to rise modestly, but that Congress is short-sighted enough to impose protectionist measures which prevent American consumers from continuing to buy cheap Chinese imports."

Comments

Let's set aside the revaluation of the RMB. I'd say China's current inflation trends have a lot to do with the real estate boom, with the price increases in that market pushing other prices higher. This, in turn, has a lot to do with the underdeveloped investment sector in China. China has a lot of people with "new money" here, and they have few investment options, so they choose the one that's easiest to understand -- houses.

There's a lot of room for prices to rise in China, in fact, since price controls and subsidies result in the underpricing of key commodities such as oil and steel. For instance, electricity and gas in urban China is still cheaper than in most of the US, even after the government raised prices after the war in Iraq. The big question is whether wages can keep up with inflation or if China is due for a "big crunch" in the years ahead.

Posted by Matthew Stinson | August 29, 2007 12:46 PM

Higher cost of oil would be one clear result.

Posted by Chris | August 29, 2007 12:54 PM

OK. I hope this isn't off topic. If it is, nuke it.

I'm gonna pose a question here that has been asked at Jerry Pournelle's blog and never really answered. With globalization displacing many of our "working class" jobs, and with no comparable jobs springing up, what do we do with those on the left hand side of the intelligence distribution?

It used to be that there were jobs in construction (largely taken by illegals in the South and West) and factories (now offshore). We only need so many plumbers. Not everyone can work in "knowledge industries". Where are the middle class jobs going to come from? Sure some of the problem will be fixed by a declining youth population, and some could be fixed by getting control of the borders (assume any solution you want from a 500 mile tall wall to Maxwell's demons adapted to immigration). Factor in the greater load that local manufacturers have to directly bear in health and pension costs compared to 3rd world countries.

Pournelle thinks a 10-15% across the board tarrif would help.

Comments?

Posted by ech | August 29, 2007 1:06 PM

Repeat after me:

Inflation is a monetary phenomenon. Inflation within the United States is caused by the increase in the money supply by the Federal Reserve and by American banks. If the general price level in China is increasing, it is the result of the increase in China's money supply. Everything else being equal, the price of Chinese goods in the United States would remain the same, even with inflation in China, because the rates of exchange would adjust. However, the truth of the matter is that we, the US, have been exporting our inflation to China, with the Chinese government's blessing and aid, for years and years. Perhaps this is coming to an end?

Posted by Yancey Ward | August 29, 2007 1:40 PM

We only need so many plumbers.

That's true, but at present we seem to need more than there is. Plumbers, electricians, painters, carpenters, roofers -- housing contractors of all kinds. My long experience as a homeowner taught me that there is a big gap between the companies in yellow pages and the "illegal immigrant handymen" (pardon my clumsy attempt at political correctness). The latter are inexpensive, but very often lack skills and/or work ethic necessary for satisfactory result. The former charge an arm and a leg (says me, a "golden-shirt" software engineer...) and the quality of work is, well, hit-and-miss. This gap is partially filled with DIY efforts, opportunity costs notwithstanding, and partially through the referential network that passes on the names of the few (the proud, the obsessed) contractors who are worth their rate -- mostly small business owners of various backgrounds, many of them immigrants from the south.

I guess what I am trying to say, there's plentiful demand for handywork professionals, not so much for the attendant marketers, salesmen, customer service agents (and, I guess, union officials). Perhaps de-cartelization (less strict and burdensome licensing requirements) and supportive infrastructure for small business owners would do the trick better than tariffs?

Posted by ...Max... | August 29, 2007 1:49 PM

Obviously Vietnamese will sneak north of the border to do the Jobs that the Chinese won't.

Posted by Njorl | August 29, 2007 1:50 PM

Ech,

Pournelle is a closet eugenicist who longs to abolish public education and permently create an underclass under the guise of using I.Q. as the basis for permitting access to education.

Should that preclude listening to his ideas on economics? Pehaps not. Grain of salt is all I'm saying, grain of salt.

Posted by tolbert | August 29, 2007 2:00 PM

Yancey Ward:
What Megan ignores is that guys like Kudlow and Cramer have been calling for rate cuts for a few weeks now. Smart people say rates cuts now would be bad because the dollar would just get weaker than it already is. I don't know who else in Congress besides Dodd who has called for rate cuts. So it is more Wall Streeters not Congress(I believe).

Posted by Joe Klein's conscience | August 29, 2007 2:47 PM

Some analysts, however, are worried that this benefit will come at a stiff cost to us: inflationary pressure from Chinese exports.

Well, with luck, we'll be able to buy more and more cheap stuff from Haiti say, or Cambodia, or eventually maybe Africa. I think what we should all want is more places moving "upmarket" (ie., increasingly similar in economics terms to the rich West), and one necessary first step in this process is rising wages. I can't imagine what the planet would be like if everybody enjoyed EU or US wealth and living standards, but I bet it would be a pretty awesome place. I see no reason in theory it can't come to pass, in the fullness of time. So, what about it, capitalists -- start funding some Liberian sweat shops!

Posted by Jasper | August 29, 2007 2:57 PM

The next question about higher Chinese wages is, what does it mean for us?

Less outsourcing of jobs to China?

Posted by Jason Bontrager | August 29, 2007 3:59 PM

Yes, Congress is a problem, and certainly a terrible one when it comes to economic policies that are most harmful to the poorest nations on Earth, especially the farm subsidies.

But the real threat comes both from short sighted Congress and the political elements of the Bush administration (are there any elements of the Bush administration aren't political?). What has been the result of this silly policy? Are a handful of West Virginia votes worth having our steel tarifs declared illegal by the WTO? Illegal actions which, by the way, the implementers knew full well were illegal when implemented!

In addition to the nakedly political choices made with economic policy, Bush's preference for bilateral trade deals instead of implementing large scale regional or global agreements seems way more driven by a desire to marginalize multilateral institutions than any sort of shrewd economic rationale.

And don't think these devaluations of multilateral agreements institutions comes at no cost to the US. How do US knowledge workers expect their intellectual property to be protected without some agreed to multilateral framework?

Posted by szr | August 29, 2007 4:03 PM

Joe Klein's Conscience,

Well, of course Wall Street likes cheap money as a way to socialize some of their recent losses- that goes without saying. However, Congress is definitely itching to put up trade barriers, and such barriers are a weak dollar policy, both explicitly, and in actual effect. It is a bit unfortunate that the language used doesn't explicitly differentiate between trade barriers and lowering of central bank interest rates, but it is a minor quibble.

Posted by Yancey Ward | August 29, 2007 4:17 PM

Pournelle is not 'evil', in the sense that the modern Republican party is 'evil'. He does not wish to limit education for the lower slots of the intelligence test levels. He wishes to make them into vocationally trained students. Vocational training is not cheaper than academic training.
I disagree with his premise that lower intelligence test level people should be slotted into jobs as machinists and plumbers, though, because I don't think they can do the work. I think nonacademically inclined smart people should be slotted into such work.
You want smart machinists and entrepreneurial plumbers. They really do need to be as smart as programmers, paralegals, etc. I have no idea why he thinks otherwise.

Posted by wkwillis | August 29, 2007 5:26 PM

I disagree with his premise that lower intelligence test level people should be slotted into jobs as machinists and plumbers, though, because I don't think they can do the work.

Perhaps I explained his position poorly. He realizes that many of the formerly "unskilled" jobs are now skilled. He sees the semi-skilled jobs that paid a lower middle class wage either becoming higher skill jobs (due to increased complexity of the job) or going offshore and not being replaced. He also thinks that a side effect of the NCLB is an over-emphasis on college for all and a denigration of the worth and dignity of jobs such as plumbing, carpentry, etc.

So what we are left with is a large pool of workers that will not have a chance at a middle class life, or will see their job sent overseas with an inadequate safety net to help them. He thinks we need a tariff to level the playing field and provide revenue to build a safety net.

Unlike other commenters, I don't think he's a racist or eugenicist. He seems genuinely concerned that we are moving to a divide in society where only the children of the rich and high income families have a chance at the credentials needed for good jobs. (I've met him in person and he can be overbearing and stiffnecked, though.)

Posted by ech | August 29, 2007 6:13 PM

I am with Jasper! and The Economist as quoted by Megan!

One of the main reasons I had stopped reading the Economist (for a while) about 14 years ago was that I got bored of reading: China booming for yet another year but soon inflation pressure must hit her or pause her..

Please - go The Economist archives and make a search for the keywords: "china, inflation"

I am not saying - there is no inflationary pressure and that they have to do their homework on it. But the last few decades of insane growth and surprisingly controlled inflation must have thought the Government a thing or too.. I always impressed when i see a broadcast of their government meetings.. they sound like an Economics Club and address potential economic challenges openly etc? Yes their financial infrastructure is still weak (but improving quickly too)

As The Economist, this time rightly, points out - US Congress should think twice, or even more often, before introducing protectionist measures.

Posted by Hugo Pottisch | August 29, 2007 7:47 PM

If history is any guide, when Chinese wages rise to the point that manufacturing of cheap goods there becomes too expensive, that manufacturing will go elsewhere. That's why there's a cheap-goods manufacturing industry in China now, because wages in Japan and Korea got too high to support it. It will move on to some other less-developed country, and the overall price level will stay the same.

Posted by Tom T. | August 30, 2007 8:11 AM

An Indian expatriate who moved his software startup engineering effort back to the US to save money.

Posted by Andy Freeman | August 30, 2007 10:53 AM

Tom T pretty much has the issue identified. Manufacturing basically follows the cheap labor, and once that labor has worked enough that it isn't cheap, the manufacturing goes somewhere else.

Remember when everything was Made In Taiwan?

I'm sure that in another twenty years or so, we'll be hearing about problems with cheap African imports.

As for Jerry Pournelle: He does indeed believe that intelligence is distributed along racial lines, and that the average intelligence of non-whites is lower than the average intelligence of whites. I'm not sure why he thinks it's so meaningful--I'm sure he'd hate to be treated exactly the same as the average member of his demographic (i.e. shoved into a nursing home and fed mush for the rest of his life.)

He does make a useful point, though: That there was originally a 'safety valve' for young people whose temperaments were not suited for college-type education. That is, trade school. However, given that there is almost no domestic manufacturing, the demand for tradesmen has fallen to the point where there is no perceived need for trade schools. As a result, the schools are forced to deal with students who are mentally incapable of being educated there--but they can't just send them to vo-tech, because there is no more vo-tech.

Posted by DensityDuck | August 30, 2007 11:51 AM

The only people exporting inflation to the U.S. are the North Koreans with their super bill printing machines and unless China plans on shipping over containers filled with freshly minted U.S. dollar, I fail to see how they're going to cause inflation.

Posted by Matt | August 30, 2007 12:42 PM

Pournelle's also come out in favor of dictatorship taking over. I believe it was the notion that Mexicans should enjoy human rights at borders that drove him to that statement. Although, having read his fiction, I doubt it's the first time he's held that idea.

With globalization displacing many of our "working class" jobs, and with no comparable jobs springing up, what do we do with those on the left hand side of the intelligence distribution?

Pournelle's been pretty sheltered, I guess. He knows no stupid college students, and has never held a high-skills job where the management doesn't want thinking. There's no shortage of either, I'd say. Where's the problem?

Posted by jonny-boy | August 30, 2007 1:51 PM

The trashing of Pournelle is unjustified. He has identified four very real problems:

1. The uncontrolled entry of large numbers of unskilled immigrants has made things worse for people in the bottom half of the income distribution, driving down their wages, driving up their rents, and worsening their living conditions. This affects white and Hispanic Americans, but it disproportionately affects black Americans.

2. Large numbers of students without the aptitude to benefit from college go anyway, graduating with devalued degrees and using several years of their lives to little positive effect.

3. There is very little vocational education anymore, in spite of the fact that skilled tradesmen actually do pretty well for themselves in today's economy (BTW, these are not people on the "left side of the bell curve" because you need brains to do the problem-solving work that skilled tradespeople do).

4. Politicians don't do anything about these problems because voters seem to be living in a fantasy world where everybody's kid can become an intellectual property lawyer.

These are all very real problems that deserve a lot more consideration than they are getting. Shooting the politically incorrect messenger reflects very poorly on those responsible.

Posted by CJ | August 30, 2007 11:42 PM