Sometimes I wonder whether there are elements of the economic system that are hard to discern, that lead economic players down a path they want to go on in the short-run, but don’t want to go on in the long-run, but that short-run choices inevitably lead to a bad long-run result. Another way to say it is that past mistakes were the result of logic that linear thinkers would consider rational even now.
This post derives from MIchael Pettis’ post regarding a post of Dani Rodrik. Beijing wants to employ many people who are migrating from the farms to the cities, and so it wants to produce more goods that they can export. To make those goods competitive, they don’t want the Yuan to appreciate. And over the past week, it has depreciated.
If you want a Keynesian stimulus to work more powerfully, you don’t want its effect to leak out to other nations, and thus, a tendency toward protectionism. Interventionism begets more interventionism. Everyone protecting their own interests leads to a collapse of the division of labor, and greater poverty.
No fun, I say, and it will be interesting if the US and China can strike a better deal than protectionism.