Paul Krugman continues to be very upset with the Chinese government over its currency policy. He has written another column declaring that China's dollar peg is damaging to the global economy, and that America should get tough with the leadership in Beijing. This still makes no sense to me.

As our Leader points out this week, it is probably in everyone's interest for China to allow the renminbi to appreciate at this point, though I'm sympathetic to Scott Sumner's argument that during the depths of the global recession, China's peg was highly stimulative to the Chinese economy and helped to end the global economic freefall. But while appreciation of the RMB would be good for mostly everyone:

[I]t would not be a magic bullet, either within China or outside. Rebalancing China's economy will require big structural reforms, from tax to corporate governance, as well as a stronger currency. A stronger yuan would not suddenly bring back millions of jobs to America. Since America no longer makes most of the products it imports from China, a stronger yuan would initially act more like a tax on consumers.

Rebalancing America's economy will also require major structural reforms. As I have been pointing out, America's trade deficit with China has been steadily shrinking, and recent growth in the deficit has primarily reflected an increase in America's petroleum deficit. Mr Krugman tries to illustrate the scope of the problem by comparing current data to 2003 numbers, saying, "The International Monetary Fund expects China to have a 2010 current surplus of more than $450 billion — 10 times the 2003 figure." But from 2003 to 2009, America's exports to China grew by more (245%) than America's imports from China (195%). For "the most distortionary exchange rate policy any major nation has ever followed", it sure doesn't seem to be preventing the very shift Mr Krugman would like to see.

His view of what ought to be done is perplexing. First, he calls on the Treasury department to label China an official currency manipulator. I'm not sure why he believes that anyone in China or America is confused about what the Obama adminstration thinks of the dollar peg. They've been quite clear. I'm also not sure what effect this is supposed to have.

But that's just the warm-up. Here's the call to action:

Some still argue that we must reason gently with China, not confront it. But we've been reasoning with China for years, as its surplus ballooned, and gotten nowhere: on Sunday Wen Jiabao, the Chinese prime minister, declared — absurdly — that his nation's currency is not undervalued. (The Peterson Institute for International Economics estimates that the renminbi is undervalued by between 20 and 40 percent.) And Mr. Wen accused other nations of doing what China actually does, seeking to weaken their currencies “just for the purposes of increasing their own exports.” But if sweet reason won't work, what's the alternative? In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it's hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent. I don't propose this turn to policy hardball lightly. But Chinese currency policy is adding materially to the world's economic problems at a time when those problems are already very severe. It's time to take a stand.

This is really remarkable. Mr Krugman is careful to explain why we shouldn't fear that China, as a major creditor, has the leverage to punish America, but it seems as though he has given no thought at all to what leverage America has over China. Neither does he seem to pay the least mind to the potential fallout from such a reckless rush to a more aggressive approach to China. Perhaps the decision to impose these surcharges will have the desired effect. Or perhaps, the Chinese government will retaliate, touching off a trade war at the worst possible economic moment. The potential upside to Mr Krugman's recommendation is trifling; the potential downside is massive.

And Mr Krugman seems entirely uninterested in the domestic political constraints facing China's leaders. He doesn't consider for a second the possibility that a bullying strategy on America's part might make China less likely to do what the administration wants. Why on earth would a nationalistic nation anxious to establish itself as great power want to come off to all observers as a weakling in the face of American bluster? Mr Krugman would paint China into a corner, forcing them to take steps detrimental to all involved.

The general tone of his column—focused on toughness, insensitive to the internal politics of foreign nations, blind to potential negative outcomes, reckless and impatient—is familiar. It looks like nothing so much as the argumentation deployed by the Bush adminstration as it rushed to war in Iraq. Mr Krugman was prescient and prudent in fighting back against that misguided policy. He would do well to stop for a moment, take a deep breath, and think again before urging America to "take a stand", damn the consequences.

He should respect China enough to know that its leaders understand that RMB appreciation is in their interest. And he should be humble enough to understand that patience and reserve is far more likely to lead to his desired outcome than ill-considered sabre rattling.

UPDATE: By the way, Mr Krugman has responded to this post, and I answer him in a new post here.