have gone so far as to ally themselves with lobbyists for manufactures to pass legislation that would provide protection and subsidies to increase the share of manufactures in GDP. Because of the financial crisis, many politicians have accepted the argument, in a virtual throwback to Adam Smith, that financial services are unproductive -- even counterproductive -- and need to be scaled back by governmental intervention. It is then inferred that this means that manufactures must be expanded. But this does not follow. Even if you wanted to curtail financial services, you could still focus on the multitude of non-financial services. Diesel engines and turbines are not the only alternatives; many services, like professional therapy, nursing, and teaching are available. The case for a shift to manufacturing remains unproven, because it cannot be proved. Monday, August 16, 2010 Killer Trade Deficits, by Paul Krugman : I agree with everything this NYT editorial has to say about the economics of widening international imbalances. Where I disagree is on the issue of negotiating strategy. My colleagues believe that we should lecture the Chinese on what a bad thing they're doing, but not actually threaten sanctions, lest we start a trade war. My belief is that this gets us nowhere. Right now, China is following a policy that is, in effect, one of imposing high tariffs and providing large export subsidies -- because that's what an undervalued currency does. That should be a violation of trade rules; it might in fact be a violation,