It’s about productivity, Dr. Krugman

Many economists believe that the US will have a short-lived recovery and head right back to recession once the stimulus money runs out. They think the “multiplier” effect of the stimulus is about one, or even a bit less. This means the stimulus wouldn’t have lasting effects on the economy. When the spigot turns off, the economy will snap back to where it was, or even overshoots to a worse state. The US needs a longer-term and sustainable solution.

The attention turns outward to China. They don’t play fair. They dumped goods on us. They subsidized with artificial exchange rate. They are stealing our jobs. Even prominent economists, such as Paul Krugman, are considering protectionism. All these are still short-term thinking.

This matter is classically about basic productivity (value of output divided by costs). If Chinese productivity is higher than Americans – by producing more with the same or the same with less – then they will continue to win. The productivities can equalize by increasing the costs on the Chinese side or the productivity on the American side. (It is not interesting to entertain the concepts of decreasing the Chinese output, per capita, or American’s costs.) I am quite certain that costs on the Chinese side will steadily rise, since all of them want richer lifestyle for themselves and their offspring. But how do you increase the productivity for Americans, or any society?

There are really only three ways to do it: introduce new technologies, build infrastructure, and educate the people. (There used to be the fourth way: exploit natural resources by extracting what’s in the dirt below you or having interesting geographic control points. Most of them have been fully exploited by now.) We observed China spending almost its entire stimulus package on those areas. As far as I can tell, the US spent practically none (half went to banks, the other half ? I have no clue.)

Protectionism will not increase American’s productivity. It adds costs to Chinese side artificially. It works only for the short-term, since refusing lower-costs goods is an invisible tax to the whole society. I do believe America need some short-term relieves, but doing nothing for the long-term is, well, short-sighted.

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