I agree with all of this:
These days, China seems to play the same role in much of our discourse that Japan did two decades ago. We look at our own follies — which are immense — and then look at the Chinese, and ascribe to them all the virtues of foresight and determination we lack. ...
Basic economics says that by deciding to keep the renminbi undervalued, the Chinese put themselves under inflationary pressure; and sure enough, inflation is rapidly becoming a serious problem.
But political considerations seem to be ruling out all the reasonable responses. They won’t revalue, because that would hurt politically influential exporters. They’re reluctant to raise interest rates, because that would hurt politically influential real estate developers. They’re trying to impose quantitative limits on credit, but are finding that borrowers have enough influence to circumvent the limits. And now they’re trying price controls — which will inevitably come apart at the seams unless they do something about the underlying pressures.
I disagree about the implications of this, which Krugman calls "edifying" and (approvingly) schadenfreude. Why he would be happy to see the unraveling of the economic growth that has done more to advance human dignity and well-being than any other development in the past 100 years is beyond me. Because it makes his policy prescriptions look good? What a jerk.
But the substantive points are indeed true: there is no reason to just assume that China's recent economic performance is projectionable into the indefinite future. It's also true that China's domestic political system -- hailed by Friedman and his ilk for its efficiency and ability to adroitly maneuver through the global economy -- has its own share of tradeoffs that cause the Chinese leadership to privilege some groups over others.
One interesting thing about this is that China's real exchange rate is appreciating even if the nominal yuan is not. In other words, we don't need to start a trade war with China to get macroeconomic rebalancing. We don't need to risk global economic instability by trying to beggar our neighbors. I'd be interested to see what Krugman thinks about that, given what he's written in the past.