The China Syndrome

SYNOPSIS: After wasting our fiscal ammunition on a tax cut designed to be large but not to increase aggregate demand substantially, and offending most of our allies around the world, George W. Bush begs China to appreciate the yuan. Please also note the excellent phrase that Krugman has coined to describe the Iraq war: "Operation Flight Suit"

A funny thing happened this week: the Bush administration, with its aggressive unilateralism, and its contempt for diplomacy and international institutions, suddenly staked its fortunes on the kindness of foreigners.

All the world knows about the Iraq about-face: having squandered our military strength in a war he felt like fighting even though it had nothing to do with terrorism, President Bush is now begging the cheese-eaters and chocolate-makers to rescue him. What may not be equally obvious is that he's doing the same thing on the economic front. Having squandered his room for economic maneuver on tax cuts that pleased his party base but had nothing to do with job creation, Mr. Bush is now asking China to help him out.

Not, of course, that Mr. Bush admits to having made any mistakes. Indeed, Mr. Bush seems to have a serious case of "l'ιtat, c'est moi": he impugns the patriotism of anyone who questions his decisions.

If you ask why he diverted resources away from hunting Al Qaeda, which attacked us, to invading Iraq, which didn't, he suggests that you're weak on national security. And it's the same for anyone who questions his economic record: "They tell me it was a shallow recession," he said Monday. "It was a shallow recession because of the tax relief. Some say, well, maybe the recession should have been deeper. That bothers me when people say that."

That is, if you ask why he pushed long-term tax cuts rather than focusing on job creation, he says you wanted a deeper recession. It bothers me when he says that.

Of course, nobody says the recession should have been deeper. What critics argued — correctly — was that Mr. Bush's economic strategy of tax cuts for the rich, with a few token breaks for the middle class, would generate maximum deficits but minimum stimulus. "They" may tell him it was a shallow recession, but the long-term unemployed won't agree.

And the fact that even with all that red ink the recovery is still jobless should lead him to wonder whether he's running the wrong kind of deficits.

Instead, however, he's decided to plead with the Chinese for help.

Admittedly, it didn't sound like pleading. It sounded as if he was being tough: "We expect there to be a fair playing field when it comes to trade. . . . And we intend to keep the rules fair." Everyone understood this to be a reference to the yuan, China's supposedly undervalued currency, which some business groups claim is a major problem for American companies.

By the way, even if the Chinese did accede to U.S. demands to increase the value of the yuan, it wouldn't have much effect unless it was a huge revaluation. And China won't agree to a huge revaluation because its huge trade surplus with the U.S. is largely offset by trade deficits with other countries.

Still, even a modest currency shift by Beijing would allow Mr. Bush to say that he was doing something about the loss of manufacturing jobs other than appointing a "jobs czar." And so John Snow, the Treasury secretary, went off to Beijing to request an increase in the yuan's value.

But he got no satisfaction. A quick look at the situation reveals one reason why: the U.S. currently has very little leverage over China. Mr. Bush needs China's help to deal with North Korea — another crisis that was allowed to fester while the administration focused on Iraq. Furthermore, purchases of Treasury bills by China's central bank are one of the main ways the U.S. finances its trade deficit.

Nobody is quite sure what would happen if the Chinese suddenly switched to, say, euros — a two-point jump in mortgage rates? — but it's not an experiment anyone wants to try.

There may also be another reason. The Chinese remember very well that in Mr. Bush's first few months in office, his officials described China as a "strategic competitor" — indeed, they seemed to be seeking a new cold war until terrorism came along as a better issue. So Mr. Bush may find it as hard to get help from China as from the nations those same officials ridiculed as "old Europe."

Sic transit and all that. Just four months after Operation Flight Suit, the superpower has become a supplicant to nations it used to insult. Mission accomplished!

Originally published in The New York Times, 9.5.03