Unemployment Rate: May 2011

There’s a very old political rule getting a new twist in the House of Representatives right now: When your policies fail, blame someone else. The new twist is: When unemployment is above the level you said would be a catastrophe, and you’re on the road to bankrupting the country in the meantime, start talking about Chinese currency.

This is apparently the plan for congressional protectionists in 2011.

There will always be Members and interest groups demanding that government restrict the ability of American consumers and firms to make their own trade decisions, just as there are Members and interest groups demanding government restrictions on a huge range of other private activity. Protectionism, though, is especially odd.

In 2004, U.S. GDP grew 3.6 percent and unemployment fell to 5.5 percent. This sounds like a great year economically, but protectionists know otherwise. The trade deficit soared $123 billion, so it obviously must have been true that our economy was extremely weak. In contrast, in 2009, the trade deficit fell $325 billion—what an incredible success for America! If you happen to remember 2009 as something just slightly less than an incredible success, you simply don’t understand the great promise of protectionism.

Given the bizarre reasoning protectionists employ, it’s not surprising they don’t understand U.S.–China economic relations. The PRC does, in fact, pursue policies that harm its economic partners. The most important of these are a variety of subsidies for state-owned enterprises that block American imports. And there are others.

The Chinese Yuan's Value and US Unemployment

But the exchange rate between the yuan and the dollar has no direct effect on American prosperity or American jobs. It never has. Seventeen years ago, China sharply devalued the yuan against the dollar. Yet American unemployment fell for years afterward. Since 2005, the PRC has been slowly raising the value of its currency, which is what protectionists say they want. And American unemployment has soared.

The explanation is that there are many other, much more important factors that determine how the American economy is doing. A few of them are made in China, such as those subsidies for state enterprises. Most of them are made right here—as we should expect, given that the U.S. economy is two-and-a-half times bigger than the PRC’s. We control our own destiny.

This, of course, is what’s actually behind demands to punish China for its currency policy. It’s American policies—chiefly an incompetent federal government—that have caused our unemployment to spike.

There are lots of people in Washington whose careers depend on avoiding responsibility for anything. China is an easy target and currency manipulation an easy slogan. Calls to tax trade don’t make any more sense than calls to tax domestic activity. The exchange rate has been proven (and is being proven right now) to be unconnected to American jobs. But never mind all that. To paraphrase, we must blame China and cause a fuss before someone thinks of blaming us.