Rare and Foolish

Krugman blasts China in his latest column:

http://www.nytimes.com/2010/10/18/opinion/18krugman.html?_r=1&partner=rssnyt&emc=rss

I generally agree with this article -- China is a menace. But, Krugman engages in some flawed criticism of China:

"Couple the rare earth story with China’s behavior on other fronts — the state subsidies that help firms gain key contracts, the pressure on foreign companies to move production to China and, above all, that exchange-rate policy..."

Krugman, like most economists, misses the point that foreign government subsidies are a terrific thing for Americans. If the Chinese are willing to subsidize American consumers, that inures to the benefit of America. Take an extreme example: imagine that China, in an effort to keep its factories humming, decided to give America 50mm pairs of free shoes. This is the ultimate subsidy -- 100% -- but nobody would argue that it hurts America. In fact, America is unquestionably wealthier by getting free shoes. The same logic applies when there is a partial subsidy (which is of course almost always the case). American consumers are being made better off by lower prices.

Of course, the counterargument is always, what about American producers, aren't they being harmed? The answer is no (in the aggregate), and even if they were, it would be of no concern to policymakers. First, to the extent that foreign subsidies lower prices of consumer goods, consumers will have more to spend. This means that American producers should benefit from foreign subsidies by increased aggregate demand (note the Keynesian jargon). Further, to the extent that certain industries (think steel) lose out, this is no reason for concern. Steel companies, like all businesses, exist for a single purpose -- to meet consumers' needs. If domestic steel companies are no longer necessary, because China is giving away what they're selling, they should simply disappear. To argue otherwise is to suggest that corporations have some sort of inalienable right to indefinite existence regardless of whether they actually produce valuable products.

This point is a microcosm of a larger point, namely that the only true consumer advocates are libertarians. Libertarians aren't pro-corporation, they're pro-market, which is a crucial distinction. If a company goes out of business, consumers have spoken that they do not want or need the company's products. Contrary to the narrative of government sticking up for the little guy, government always protects unions and inefficient corporations (who are always well-organized) at the expense of consumers (who are very poorly organized and thus wield no political power). So, we get corporations and unions protecting Americans from the scourge of low-priced products. This phenomenon creates an interesting paradox -- Krugman, a man of the left, ends up defending entrenched corporate interests to a far greater extent than the allegedly pro-corporate right-wingers.