Monday, August 05, 2013

Strange China Bashing in the NY Times

It is a rare day when an economist not named Krugman publishes an OP-ED in the NY Times.   Today, an economist named Peter Navarro (not to be mistaken with the guitarist Dave Navarro) has published a strange piece.  While Peter is a Harvard Ph.D.,  he doesn't appear to have taken Greg Mankiw's Ec 10 class.    Here is a quote from Dr. Navarro who has 64 lifetime citations for his work on China.

"The bottom line here is this: Buying “Made in China” — whether steel for our bridges or dolls for our children — entails large costs that most consumers and, sadly, even our leaders don’t consider when making purchases. This is hurting our country — and killing our economy."
Now the author is certainly correct that the U.S should avoid purchasing "lemon products".   If China tries to sell us low quality steel and pass it off as "high quality", how can we dissuade them from selling us such stuff?  In a repeated game, we won't buy products that turn out to be cheap but low quality.  If we know that we don't know what is the quality of China's steel, then we conduct random audits of its quality before we incorporate it into our bridges.  If we anticipate the challenge that worries Dr. Navarro, then we design audits and credible punishments to incentivize China's exporters to sell us high quality stuff.   If you worry that the Chinese company will declare bankruptcy if a U.S bridge collapses, then the U.S steel buyers can require exporters to post a bond that the exporter will lose if a disaster takes place.  Again, this threat of future punishment incentivizes the exporter to take more precautions so that the credible punishment isn't meted out. These are all standard issues in mechanism design and contracts.  Dr. Navarro would need to explain why standard contracting issues can't be addressed in the case of China's exports.   In his piece, he doesn't bother to address these points.

So, why did the NY Times publish this B+ stuff?  The NY Times embraces a Keynesian/Behavioral economics worldview.  A "Buy America" mandate by more local governments would "stimulate" some of our manufacturing sectors.  Dr. Navarro seeks to utilize fear to create some demand for domestic manufacturers. This is clever but ugly.

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