"China the financial nexus" - Krugman
Updated on 04 August 2005
The most controversial economist in the US talks to Liam Halligan.
With his soft voice and bearded smile, Paul Krugman looks just how a Princeton professor should look. His mild manners and somewhat unkempt appearance complete the stereotype.
But throw this 52-year-old American a serious question and he clears his throat, looks you straight in the eye and bats back a ferociously intensive answer. For Krugman is no ordinary academic. He is arguably the most brilliant economist of his generation. He is definitely the most controversial.
Cornering Krugman during a flying visit to London, I raise the ongoing US-China trade talks. It is a hot topic: Congress is considering a bill to put stiff tariffs on Chinese-made products if Beijing refuses to revalue its currency.
"China has immense power in this trade row," says Krugman. "If it stops doing what it is doing, the Chinese government could easily trigger a global economic earthquake".
Sensing my surprise, Krugman lays out his argument. "China exports lots of goods and foreign companies are investing heavily there, so it's running a huge trade surplus. But rather than keep all that money, Beijing is using it, overwhelmingly, to buy US government Treasury bills.
"America is very dependent on its housing market right now. Almost everything moving the economy forward relates, directly or indirectly, to our housing boom." That sounds familiar, but how does it link to China?
Krugman then spells out the jaw-dropping extent of China's T-bill purchases: $200bn in 2004 and possibly as much as $300bn this year. Beijing, he says, is "bankrolling America's huge budget deficit", now almost 5 per cent of national income, to the tune of $1bn per day.
"At some point," he says, excited by the power of his logic, "China could well decide to stop this. If so, the dollar falls sharply, US interest rates rise and our housing bubble bursts."
A pause. "Quite simply," he concludes, "that would stop the American economy, the locomotive for the whole world, in its tracks. So, in this weird way, China is now the financial nexus keeping the global recovery going."
Krugman combines the virtues of a great economist - analytical clarity and profound respect for facts - with none of the usual caution. Talking to him is like sitting in an intellectual wind-tunnel. US lawmakers want President Bush to force Beijing to break its fixed exchange rate regime and let the value of the yuan rise. That would make China's imports to the US less competitive, so placating American businesses and trade unions.
Krugman's analysis highlights the fact that the president has only limited ability to threaten China, given its "key role" in propping up the dollar. "There's no sign that anyone in government wants to face the unpleasant reality of our addiction to loans from abroad," he says. "If the US weren't so dependent on China buying T-bills, we would have become much more protectionist already."
A hate figure among many Republican voters, Krugman regularly receives death threats and has his mail opened with tongs. In 2003 he published The Great Unravelling, a compilation of his New York Times columns.
Since September 11, he says, most US commentators have been "captive", unwilling to be too critical. His book, which amounted to a coruscating attack on Bush's economic and foreign policy, was an instant bestseller.
Since then this shy man has emerged as one of America's most influential pundits. His reputation is based neither on a PhD thesis on flexible exchange rates nor on his well regarded textbook on economic principles. It stems instead from his grit and pellucid writing style.
Financially motivated denial
In the run-up to next month's G8 summit, I switch the conversation to climate change. "The scientific proof [that it is a serious problem] is as solid as you are going to get, when it comes to analysing complex systems," he says. "But my government is in deep and financially motivated denial.
"I say that because the big oil companies like ExxonMobil and the coal-burning electric utility companies directly influence the White House."
Krugman's attacks on Bush belie the fact that, as a young economist, he worked for President Reagan, another Republican. This makes it harder to dismiss him as a disgruntled left-winger, as does his longstanding support for free markets.
He keeps a close eye on the UK, so I ask him about our housing market too. An intake of breath. "Prices here are completely out of whack with the fundamentals," he says. "Across the UK as a whole, they look as over-inflated as in south Florida and California, the most bubblicious parts of the US".
Krugman goes for the kill. "Interest rates here are a bit higher, so there is some room for manoeuvre," he says. "But if this bubble bursts, the UK economy is in very deep trouble."
Whatever you think of his views, Krugman has a huge following. His columns create enormous internet traffic, with many dedicated "tribute sites".
Whether the economics profession likes it or not, he is now in the process of joining the very small number of economists in history - like John Maynard Keynes or Milton Friedman - who've combined academic brilliance with genuine popular appeal. Krugman rises, shakes my hand, and is off to catch his next plane, leaving me feeling just a bit more anxious about the economic outlook.