A Novel Trojan Horse: Code from the Fed

A recent minority staff report from the Senate Committee on Homeland Security and Governmental Affairs brought allegations concerning the ongoing relationships between economists at various Federal Reserve Banks around the US and China. By China, I mean both institutions of higher education as well as government entities, such as the People’s Bank of China (PBOC in the report).

Me too, guilty as charged!! I have had many productive research ventures with Chinese co-authors, have a number of students with jobs in China, etc. All wonderful parts of academic life.

So what does the Senate care about this activity? Well, of course, it is all part of the current anti-China theme, protecting US interests and all of that good stuff. No comment on that, as I promised to stay away from politics.

But in the report, there is a fantastic little tidbit that is impossible to pass up. It concerns Individual A (being such a high security document, that is how the report refers to individuals.). Evidently this individual may have (we are not sure) shared “modelling source code” with a Chinese official.

This may be a key piece of evidence for the committee, but it also might be a Trojan horse inadvertently uncovered by the Senate committee. In fact, this may be part of a deep undercover campaign to destabilize the Chinese economy. It could be a very powerful weapon.

How can that be? I want to make two points.

First, monetary policy in the US is conducted based upon a model of the economy that is, at best, a “dubious representation” of how Fed policy impacts the economy. I promise to write a full essay on the “dubious representation” point. Accept it for now.

Second, however poorly (or well for that matter), that model performs in providing guidance of the US economy, China is so different in structure that such a model would never perform well as a policy tool in that economy. The differences stem in part from the role of state owned firms in that economy, to the central role of the government in allocating resources and the role of exports. Using the US model in China without modifying it to properly take these differences into account would be a mistake. The code may run on a computer in China but that does not make it fit.

If you put these points together, it seems like an individual (that is, individual A) within the Federal Reserve System is doing a remarkable job of undermining the Chinese economy by convincing them to use our economic model. Finally, it seems, we have produced something of value to sell (or give) to the Chinese.

But beware of Trojan horses.