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March 30, 2008
I [Heart] America's Trade Deficit!
Don Boudreaux
In his brilliant book, The Myth of the Rational Voter, my colleague (and EconLog's) Bryan Caplan identifies the "anti-foreign bias" as a major impediment to economic enlightenment. That bias is real and ubiquitous -- see, for example, this recent essay by Peter Morici at Forbes.com.
I sent the following letter in response to Mr. Morici's essay:
Peter Morici unloads a riotous barrage of accusations against free trade: Free trade caused, among other misfortunes, the collapse of the market for adjustable-rate mortgages, excessively high CEO compensation, inflationary monetary policy, and Uncle Sam's inexcusable bailout of Bear Stearns ("It's Time To Cut The Trade Deficit," March 26). Mr. Morici, however, doesn't explain how allowing consumers to take advantage of bargains from abroad caused these calamities. He simply assumes it to be self-evident that America's growing trade deficit proves that free trade triggers countless system-wide maladies.
Alas, Mr. Morici doesn't know what he's talking about. America's trade deficit represents capital flowing into the U.S. True, some of this inflow finances Uncle Sam's Eliot-Spitzer-party-like spending. But that spending is caused by reckless politicians, not consumers. Nearly all the rest of the trade deficit represents positive investments in America - investments that not only signal continued investor confidence in the U.S. economy but, more importantly, investments that finance R&D, product development, worker training, new firms, factory modernization, and other activities that promote economic growth. Does Mr. Morici really think that such investments harm Americans?
Sincerely,
Donald J. Boudreaux
Posted by Don Boudreaux in Balance of Payments, Myths and Fallacies, Trade | Permalink
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Comments
This guy Morici is a real prize. He is actually on the faculty of the University of Maryland, I can't believe any school worth its salt would give a position someone so dead wrong on this issue.
Posted by: MikeB | Mar 30, 2008 12:10:26 PM
You know what's really scary?
"former Chief Economist at the U.S. International Trade Commission during the Clinton administration."
Eeek!
Posted by: Tim Worstall | Mar 30, 2008 1:28:14 PM
Economic flat-worlders.
I had to stop watching Lou Dobbs when I heard him calling for the re-implementation of the "Corn Laws".
I don't think these "thinkers" realize how silly their arguments are. Or, that they've been attempted--to sad effect--before. I had an old guy, one day, describe this as the goose effect. "Every time they open their eyes, it's a brand new day."
Gooses. Geeses. They make a lot of noise, don't they?
Posted by: OregonGuy | Mar 30, 2008 2:56:29 PM
MikeB, I know how you feel. I react the same way when Boudreaux starts talking about immigration.
Posted by: Non | Mar 30, 2008 3:29:20 PM
Morici = Muirdiot? Possible? I think so.
Posted by: FreedomLover | Mar 30, 2008 4:11:45 PM
Why, yes, Freedomlover, Morici is a more readable but similarly incoherent Muirdiot. The bow-tie was a nice touch. I wonder if he realizes how much it makes him look like a "Wall Street rascal". Clearly, the tenure needs to be abandoned.
Posted by: Methinks | Mar 30, 2008 6:45:18 PM
This Maryland grad is quite embarrassed. We've come down a couple of notches since the loss of Julian Simon.
Posted by: M. Hodak | Mar 30, 2008 8:36:40 PM
Lou Dobbs is an economic idiot, but at least he wasn't the Chief Economist of the U.S. International Trade Commission. I'm in agreement with Tim Worstall.
That a person with that background could be as foolish about basic economic ideas is mind-boggling. I may not be able to sleep tonight.
Posted by: James Hanley | Mar 30, 2008 10:11:04 PM
Methinks - credentials mean nothing to me. If a person wants to convince me of something they better be able to lay out all the facts on the table and construct a scientific argument that's 100% airtight. Credentials are for idol worshipers and getting hired.
Posted by: FreedomLover | Mar 31, 2008 12:33:24 AM
The article is crap, the foreign investment obviously doesn't harm america. However, I still don't agree with Don's explanation:
America's trade deficit represents capital flowing into the U.S.
A man who is getting heavily indebted by buying a new car, new home, plasma TV, getting drunk every night, enjoying free time - is running a trade deficit. But: nobody would argue, that
- it is sustainable
- it represents an investment
The fallacy here is that inflow of credit doesn't equal investment. That might be mostly true if the 'deficit' was financed mainly by private individuals, even though they could make mistakes as well. However, huge amount of the trade deficit is financed by foreign central banks or state companies. I don't think you can claim that these people have incentives to put money into sound investments. Quite the opposite. Financing a drug addict is their official agenda.
Posted by: andy | Mar 31, 2008 6:47:20 AM
Economic flat-worlders.I had to stop watching Lou Dobbs when I heard him calling for the re-implementation of the "Corn Laws".
I don't think these "thinkers" realize how silly their arguments are. Or, that they've been attempted--to sad effect--before. I had an old guy, one day, describe this as the goose effect. "Every time they open their eyes, it's a brand new day."
Gooses. Geeses. They make a lot of noise, don't they?
Posted by: OregonGuy | Mar 30, 2008 2:56:29 PM
You're the one that just doesn't "get it" and is in denial, OregonGuy. Everyone knows that we trade with one another (outside our political boundaries) at our own peril: we trade to make ourselves worse off than we were before. Sheez, you would think that you free-market types could grasp this truism having been told so often.
[/sarcasm]
Posted by: LowcountryJoe | Mar 31, 2008 7:13:55 AM
A man who is getting heavily indebted by buying a new car, new home, plasma TV, getting drunk every night, enjoying free time - is running a trade deficit.
Posted by: andy
Technically, that's a budget deficit. The trade deficit is different.
Posted by: mnm | Mar 31, 2008 7:59:25 AM
Freedomlover: "If a person wants to convince me of something they better be able to lay out all the facts on the table."
Morici: "...productivity gains were hogged by executives at Wall Street banks..."
Morici: "China is perhaps the biggest renegade in the mugging of the American middle class. The U.S. has slashed tariffs on Chinese products from auto parts to TVs, while China maintains much higher tariffs..."
So, Freedomlover, are you saying that suddenly aggressive assertion is not an "acceptable" argument and the Chinese subsidizing our consumption is NOT bad? What's this upside down world you live in? Didn't you notice Morici's cool bow-tie?
Posted by: Methinks | Mar 31, 2008 8:21:20 AM
mnm - no, it's both - budget AND trade deficit. If you get financing through equity and not debt, that would be trade deficit only. However, I doubt there is any fundamental difference - it cannot be called 'investment' in either case and it is not sustainable in either case.
If the US government runs a budget deficit and sells the bonds to foreigners, it is both budget deficit and trade deficit. And it is definitely not investment, unless you call destroying infrastructure in Iraq an 'investment'.
Posted by: andy | Mar 31, 2008 8:40:14 AM
mnm - no, it's both - budget AND trade deficit. If you get financing through equity and not debt, that would be trade deficit only. However, I doubt there is any fundamental difference - it cannot be called 'investment' in either case and it is not sustainable in either case.
If the US government runs a budget deficit and sells the bonds to foreigners, it is both budget deficit and trade deficit. And it is definitely not investment, unless you call destroying infrastructure in
Posted by: andy | Mar 31, 2008 8:41:06 AM
Technically, that's a budget deficit. The trade deficit is different.
No it's not. It's a trade deficit. A budget deficit would be if the man's government ran spent more than it took in. The man in his example is the country, not the government.
Even still, budget deficits cause trade deficits. Is Don B saying that budget deficits don't matter since they are offset by trade deficits? Yay for the Republicans' deficit spending! We don't care because the trade deficit will make up for it!
Posted by: brian | Mar 31, 2008 8:42:16 AM
That was an excellent summary of what has gone wrong with financial sector and a great explanation of how it's related to our trade deficit.
"You have to love Ben Bernanke's free trade capitalism. If you are an autoworker put out of work by Korean imports, he, as a good economist, tells you to go to school and find other work. If you are a New York banker caught paying yourself too much and run short of foreign investors to fleece, Ben will make you a loan and keep rolling until the bank finds a new game. "
BINGO!!!
It's claimed, " Mr. Morici, however, doesn't explain how allowing consumers to take advantage of bargains from abroad caused these calamities. "
No, actually he spelled it out very clearly. But a counter of his points were only attempted by taking the position that we need to just look at all the Capital inflowing to our country from our trade deficit..WHAT? Our economy is in a state of collapse only forestalled by a government bailout. The house is on fire and your wanting to show the neighbors all the nice new furniture you've bought?
"Alas, Mr. Morici doesn't know what he's talking about. America's trade deficit represents capital flowing into the U.S. True, some of this inflow finances Uncle Sam's Eliot-Spitzer-party-like spending. But that spending is caused by reckless politicians, not consumers."
Actually the trade deficit looks more like us exporting debt then Capital flowing in as confidence in our markets is plummeting and our lenders are wondering what to do with these pieces of paper we've given them to back up our purchase.
Blaming the problem on Eliot Spitzer and politicians while ignoring loans sharks, their securitized products and Wall Streets whines for socialism as their bubble burst is telling indeed. Wall Street.. what a dammed embarrassment to responsible children everywhere and to any thoughts of successful unregulated markets.
Likewise every post by the commenters here is inuendo or a pesonal attack. Absolutely nothing of substance to counter the points made by Morici. Not one significant rebuttal or explanation to sway my impression that we have a bankrupt economy run by a bankrupt philosophy..... oh but of course I must remember this doesn't represent a real free market. Only the cheap crap at Walmart is freemarket stuff. The debt and market collapse and government bailout that's Eliot Spitzers fault. LOL
Anyway thanks for pointing me to a great article I'll be sure to cite it whenever some one tries to tell me of the success of our "free trade" policies.
Posted by: muirgeo | Mar 31, 2008 9:02:15 AM
Bizzaro world: more consumer choice is equivalent to dictatorial corporatism. Congratulations on your understanding of an economy, Doctor Bellara.
Posted by: lowcountryjoe | Mar 31, 2008 9:23:27 AM
Here you go muirduck,
This is from a guy I know that was a political commissar in the old USSR, and is now currently living in the USA. He said it's the way they handled the problem back in the "bad old days".
Tax Rebate
This morning President Bush said each one of us would get a $600.00 tax
rebate. It was previously slated to be $800.00, but they dropped it to a
$600.00 tax rebate because of various budget problems.
Now, if we spend that money at Wal-Mart, all the money will go to China, if
we spend it on computers, most of the money will go to
Korea or India. If we spend it on gasoline it will all go to the Arabs
.....and none of these scenarios will help the American economy.
We need to keep that money here in America .....so the only way to keep that
money here at home is to drink beer, gamble, or spend it on
prostitution. Currently it seems that these are the only businesses still
left in the U.S.
Whad-da ya think, muirduck, the guy has a pretty good head on his shoulders doncha think?
Posted by: vidyohs | Mar 31, 2008 9:28:30 AM
brian: "Even still, budget deficits cause trade deficits."
How does a budget deficit "cause" a trade deficit? I don't see how the two are related.
A U.S. trade deficit arises when foreigners decide to use a portion of dollars gained in trade for some purpose other than purcahsing U.S. goods and services. Some, such as Toyota and Honda and Hyundai, use their dollars to build plants in the U.S. Some foreigners invest in U.S., real estate or equities of U.S. firms. Some, such as a few foreign governments, decide to purchase U.S. financial obligations, either private or government debt.
It is not the issuance of government debt that "causes" foreigners to not buy as much goods and services as the U.S. buys from them.
Posted by: John Dewey | Mar 31, 2008 9:51:39 AM
Muriego....loan sharks? American Dream Downpayment Act..... I think there were other red-lining laws in some states...
I don't get your logic. The whole problem was created by by voluntary action of people, whose money was taken (taxed, printed) by THE REGULATORS and this money was used as an incentive to lure people into these activities. The REGULATORS did support this behaviour.
Do you say that the problem could have been avoided if the regulators did regulate? THEY DID. They encouraged the behaviour. Acutally, the problem could have been much smaller, if the regulators DID NOT regulate - did not lower the interest rates but let the market set them, did not support these programs....
This seems to me the endless socialist debate - socialism could work, if the socialist did the 'right thing'. But they never do.
Posted by: andy | Mar 31, 2008 9:51:55 AM
The U.S.'s financial woes are due solely to two things: government spending outside of constitutional mandates and monetary inflation. And not just from direct effects.
Any monies that private sector crooks make off with are relative chicken feed.
Posted by: Sam Grove | Mar 31, 2008 9:57:44 AM
Here:
http://www.youtube.com/watch?v=-HQdFtrNc7I
is one man's idea of where our country is going.
Whatcha think?
Posted by: vidyohs | Mar 31, 2008 9:59:50 AM
Likewise every post by the commenters here is inuendo or a pesonal attack. Absolutely nothing of substance to counter the points made by Morici. - Muirdiot
That's right muirdiot, only you make substantive comments which can never ever be mistaken for stupidity or a personal attack. Muirpidities such as "derivatives are thievery" and "paper pushing Wall Street assholes, cocaine-addicted monkies, jerks" are just sheer genius analysis.
Mysteriously, though, you have no explanation for such muirpidities as:
Muirpid: But even the supposed independence of hedge funds is ridiculous when considering the many ties of their "products" (paper with varying claims of value) to the public treasury
what ties?
what products?
What are the claims and how do they vary?
what is the relationship of these mythical claims to treasury?
We are left with no explanation because idiocy, by definition, follows no logical path. It is no wonder, then, that Morici appeals to Muirdiot. Plus, the bow-tie....
Posted by: Methinks | Mar 31, 2008 10:06:34 AM
What's the best source of data for further analysis as to what makes up the US capital account surplus? I'm keen to know if we can quantify what type of capital it is made of...how much is consumer products versus plant&equipment, etc.
If anyone knows, please email me at joshnankivel@gmail.com
Thanks!
Posted by: Josh Nankivel | Mar 31, 2008 10:53:47 AM
Andy says to Muirgeo: "I don't get your logic. "
Welcome aboard Andy.
Posted by: Python | Mar 31, 2008 10:59:32 AM
ah, Python. I see you're off the Vicodin now.
Posted by: Methinks | Mar 31, 2008 11:07:05 AM
Statist: "This happen because we don't have enough regulations."
Free-Marketers: "This happened because we have too many regulations."
Reality: People will always make mistakes and bad people will always try to take advantage of others. No system will change that.
I would argue that less regualtion is likely to give us the best results, but lets not pretend that there is some sort of utopia out there.
Posted by: Deryl G | Mar 31, 2008 11:07:06 AM
Josh Nankivel: "What's the best source of data for further analysis as to what makes up the US capital account surplus?"
You can view the U.S. Balance of Payments accounts from 1960-2007 here.
Posted by: John Dewey | Mar 31, 2008 11:12:06 AM
"Do you say that the problem could have been avoided if the regulators did regulate? THEY DID. They encouraged the behaviour." : Andy
Exactly. The purpose of regulation is to protect established interests at the expense of everyone else.
Posted by: Randy | Mar 31, 2008 11:15:56 AM
Deryl, I think most people here can point to a specific regulation and a specific unintended consequence. However, I don't think anyone here believes that complete deregulation will usher in a period of utopia. Rather, we accept that (as you put it): "People will always make mistakes and bad people will always try to take advantage of others. No system will change that." Since no system will change that, it seems silly to pay the price of regulation to pursue changing this reality.
Here's a link to an Op-Ed by Allan Meltzer about regulation. Seems timely for this thread.
Posted by: Methinks | Mar 31, 2008 11:56:11 AM
Andy says to Muirgeo: "I don't get your logic. "
Vastly different premises.
Posted by: Sam Grove | Mar 31, 2008 12:08:51 PM
Deryl G: You are right - what we would call a "utopia" is not what many people would think it is - in the economic argument sense, it is usually prefaced by a ceteris peribus assumption. I think this is often lost on those who oppose free market ideas when they are presented with an analogy or examples used to counter protectionist ideas.
"Free Marketeers" are generally for natural and organic markets. Maybe we should call ourselves "economic naturalists". We generally assume that there will be both "good" and "bad" in any given marketplace. We do not hide this point - failure does happen. But we realize there is nothing that can be done to buoy any given position without having, to borrow from Newton, an equal and opposite effect. The more you attempt to subvert natural economies, the greater the natural consequence will be.
Posted by: colson | Mar 31, 2008 12:12:13 PM
Methinks adn colson-
To be clear, I'm a free-market advocate.
I don't think I did a good job of making my point, which is that just because one can find examples where bad thinks happened under a particular system does not mean that the system is "bad".
People seem to be claiming that the current situation with mortgages illustrates that markets need to be regulated. However, to expect to never have a bad outcome is ludicrous. Those calling for more regulation seem to think that if there are ever enough regulations there will be no more of these type of failures. The truth is that no matter what, occasionally there will be unfortunate events.
When statist claim this crisis is proof that free-markets don't work, the libertarians rush to the defense of capitalism and declare that this market is not free. While I agree that the market is not completely free, the implication seems to be that if it were really free that the crisis would not occur. It may be true that this particular problem would not have happened, but some other negative event would have occured.
So lets admit there isn't a perfect system, that mistakes will happen, but that more regulations won't "fix things. At best, more regulations will likely only cause different "failures", not stop them.
Posted by: Deryl G | Mar 31, 2008 12:40:11 PM
"Maybe we should call ourselves "economic naturalists" : Colson
That's good.
Posted by: Randy | Mar 31, 2008 12:56:54 PM
While I agree that the market is not completely free, the implication seems to be that if it were really free that the crisis would not occur.
A problem with a regulatory system is that when inevitable problems occur, they are blamed by regulatory perfectionists on insufficient regulation.
This tends toward a virtual government takeover thus eventually putting all our fiscal eggs in one basket.
In a pluralistic, spontaneous market...a free market, problems tend to be more scattered, asystemic, and the costs more easily absorbed due to being relatively small scale. This also makes bad actors more easily identified and brought to accounts than under the alternative of a totalitarian market.
Posted by: Sam Grove | Mar 31, 2008 1:24:45 PM
'Perfect' is not a useful descriptive in critiquing the market.
'Optimum' is more useful in this regard.
Posted by: Sam Grove | Mar 31, 2008 1:27:54 PM
Deryl,
I thought you did a great job of making your point the first time. You had some pretty rock-solid logic.
"There is no perfect system" depends on how you define "perfection". I'm willing to trade the probability of suffering a negative outcome of my decisions for the freedom to make my own decisions. That's MY definition of perfection.
As for this particular crisis, I don't think it was a crisis until the Fed and Treasury stepped in. Before the government stepped in, it was a market adjusting to a new equilibrium. Home prices were coming down and the mortgages issued on them were also coming down in price to a new, lower equilibrium. As that happened, credit markets seized up - waiting to see what the new value of the collateral will be. The Fed and Treasury stepped in and prevented mortgages and real estate from trading at their new market prices. Knowing that the market has not reached equilibrium, lenders continued their freeze on lending and/or increased their credit spreads to reflect greater uncertainty about the real value of the underlying collateral. So, the Fed stepped up its lending, it extended to investment banks and hacked away at the interest rate - all in an effort to prevent trading and, thus, to prevent the market from reaching its new, lower equilibrium. As long as markets are out of equilibrium, it can be argued that they are in crisis. And the Fed and Treasury are busy preventing that equilibrium.
The current mortgage issues were not directly caused by regulation (although, in the Op-ed to which I posted a link, Meltzer believes that Basel II helped "fan the flames"). However, the Fed and Treasury are working overtime to make this a full-blown crisis.
I'm over-simplifying to some extent, and without intervention, the adjustment would have been deep and painful for the people who took the most risk. But the outcome would have been borne by those who took the risk and the credit markets would have returned to normal liquidity as market prices could be measured because there would have been transactions.
Posted by: Methinks | Mar 31, 2008 1:37:58 PM
"Many of the greatest economic evils of our time are the fruits of risk, uncertainty, and ignorance. It is because particular individuals, fortunate in situation or in abilities, are able to take advantage of uncertainty and ignorance, and also because for the same reason big business is often a lottery, that great inequalities of wealth come about; and these same factors are also the cause of the unemployment of labour, or the disappointment of reasonable business expectations, and of the impairment of efficiency and production."
John Maynard Keynes
THE END OF LAISSEZ-FAIRE
Written in
(1926)
There will always be regulation. The key is to make it minimalist but effective. The biggest danger to effective regulation is allowing the regulated too near the process of making regulations and too near the process of enforcing them.
Posted by: muirgeo | Mar 31, 2008 1:41:01 PM
Your excellent cut and paste skills are noted, Muirpid. You get a gold star for the day.
Posted by: Methinks | Mar 31, 2008 1:53:12 PM
Keynes (quote-a-palooza
Thanks the implementation of the ideas Keynes expressed in the quotation Muirpid posted above...
"The avoidance of taxes is the only intellectual pursuit that still carries any reward." - John Maynard Keynes
So, it's a damn good thing that...
"In the long run we are all dead." - John Maynard Keynes
Posted by: Methinks | Mar 31, 2008 2:05:03 PM
muirgeo quoting "THE END OF LAISSEZ-FAIRE"
Have you read the whole thing muirgeo? Or are you simply quote mining progressive websites?
Why didn't you quote this part?
"The time has already come when each country needs a considered national policy about what size of population, whether larger or smaller than at present or the same, is most expedient. And having settled this policy, we must take steps to carry it into operation. The time may arrive a little later when the community as a whole must pay attention to the innate quality as well as to the mere numbers of its future members."
Can you say eugenics?
Posted by: Marcus | Mar 31, 2008 2:17:45 PM
British nobility has long exuded a certain disdain for those who acquire wealth via commercial effort.
The descendants of the conquerers share this disdain with the left.
Muirgeo,
Quoting Keynes around here is superfluous.
Backing your perspective with Keynes only reveals the source of your faulty economic perception.
Posted by: Sam Grove | Mar 31, 2008 3:01:06 PM
You might do better with Smith's observation that businessmen often gather to conspire against the public.
Of course you would seize upon that as validation of you prescription while we note that your prescription provides the means for business to effect their conspiracy.
Posted by: Sam Grove | Mar 31, 2008 3:06:04 PM
"The biggest danger to effective regulation is allowing the regulated too near the process of making regulations and too near the process of enforcing them."
-- Posted by: muirgeo | Mar 31, 2008 1:41:01 PM
Muirgeo, if government is going to pick winning and losing businesses it seems rather naive to me to expect businesses to not want to influence the choice.
Posted by: Marcus | Mar 31, 2008 3:20:05 PM
The biggest danger to effective regulation is allowing the regulated too near the process of making regulations and too near the process of enforcing them.
There is also the fact that a business represents real people with a legitimate interest in any legislation that may affect them. Muirgeo wishes to take away from citizens the opportunity to petition legislators merely because those citizens happen to be in business.
Then too, large corporations have many employees that may also have a stake in such legislation. Politicians actively court these voters with promises of transfers from taxpayers to the industry they work in.
What muirgeo proposes merely drives such influence into the background and totally disenfranchises those who don't have the position to play golf with politicians.
Think INCENTIVES, dude. Remove the incentives.
Posted by: Sam Grove | Mar 31, 2008 3:38:56 PM
That's well put Sam.
Posted by: Marcus | Mar 31, 2008 3:49:31 PM
Andy --
Thanks for saying that concisely. A trade deficit, by itself, is neither good nor bad. But, a trade deficit where we trade future obligations for crap, however, is bad.
Can anybody (preferably somebody with an econ degree) tell me what would happen to the trade deficit if the US were to eliminate the budget deficit? Does it matter if that elimination happens due to tax increases or cutting spending?
Posted by: Chris | Mar 31, 2008 3:59:28 PM
Methinks - trying to discuss this rationally with muirduck is like trying to deal with shit-slinging monkies in the jungle. It's an insane situation to begin with.
Posted by: FreedomLover | Mar 31, 2008 4:10:07 PM
Think INCENTIVES, dude. Remove the incentives. - Sam
Another beautifully written post, Sam. And again, Muirpid won't understand a word of it.
The only reason that Muirpid quotes Keynes is because he's a prominent 20th century economist who uses words that Muirpid likes but the implications of which he doesn't understand. He also quotes Hayek and proceeds to attribute totally new meaning to Hayek's words - usually the polar opposite of what Hayek meant.
John Maynard Keynes - by Milton Friedman:
"....As of this writing (1988), the status and influence of the book [General Theory]has changed. It continues to have a major influence on economic thinking and economic policy, and will long continue to do so, but for very different reasons and in a very different way than it did initially. The catalyst for the change was the inflation and stagflation of the 1970s. As Robert Lucas wrote in 1981, "Proponents of a class of models which promised 3 1/2 to 4 1/2 percent unemployment to a society willing to tolerate annual inflation rates of 4 to 5 percent have some explaining to do after a decade such as we have gone through [i.e., the 1970s, when inflation rose to 16 percent and unemployment to 8 percent in the United States, and to 30 percent and 6 percent in the U.K. Inflation rose as high as 25 percent in Japan and 7 percent in Germany, though unemployment remained relatively low]. A forecast error of this magnitude and central importance to policy has consequences, as well it should."
The only part Muirpid will get is: "It [ General Theory]continues to have a major influence on economic thinking and economic policy, and will long continue to do so..."
Muirpid will make certain to attribute this quote to Friedman but will never provide context.
Posted by: Methinks | Mar 31, 2008 4:17:06 PM
Methinks - there are a lot of reasons for permanent structural unemployment that have nothing to do with capitalism or market failures. Safe to say, if there were no mental illness, bad culture, laziness, we would have 0% unemployment.
Posted by: FreedomLover | Mar 31, 2008 4:26:07 PM
Chris: "Can anybody (preferably somebody with an econ degree) tell me what would happen to the trade deficit if the US were to eliminate the budget deficit?"
Sorry, I'm not an economist, so feel free to disregard my answer.
No one can know exactly the future effect of changes in fiscal policy. But we can look at recent history. The federal budget deficit was eliminated in 1999 through 2001. The U.S. trade deficit as a percentage of GDP continued to grow: from 2.1% of GDP in 1998 to 3.9% of GDP in 2000, and then to 4.0% of GDP in 2001.
The budget deficit and the trade deficit
Posted by: John Dewey | Mar 31, 2008 4:27:38 PM
Chris,
the trade deficit is a result of action. You cannot 'remove trade deficit', you will just observe the situation and at the end decide, whether you ran trade deficit or not.
How would I describe the situation of zero trade deficit?
- the US would have to import less and export more. Depriciation of US dollar and inflation would be the incentive to achieve such outcome
Personally, I think that the trade deficit is mostly caused by foreign central banks buying US debt at the expense of their citizens (it will be never repaid) and by stupid foreign investors who still considered the US a great place to make money, and considered a mortgage debt an 'investment'. If the foreign central banks stopped buing US debt and US money, the economy (including trade deficit) would probably correct itself to much saner values.
The problem is that the debts should be paid - and thus reverse the trade deficit to trade surplus. IMO there is no way the US can pay their debts (and future obligations) without greatly reducing their standard of living. The only way to evade it is to make foreign creditors to bite the losses. There are 2 ways to do it - default or depreciate(inflate). The first option would open the USA to ongoing legal action. The second option leads to inflation, possibly hyperinflation and is preferred by the politicians. However - even the politicans don't always get what they want, but they do have power to hyperinflate, all fiat currencies in the history did experience high levels of inflation...I think a bet on inflation would be a sound one.
Posted by: andy | Mar 31, 2008 5:12:26 PM
Of course, the other possibility is even more probable. That foreign investors aren't stupid and America is great place to invest money.
Posted by: Marcus | Mar 31, 2008 5:28:16 PM
Real quick observation (I do have an econ degree, and a masters in finance, but little time to discuss):
Whether or not you borrow (to spend) is not contingent upon how much you export (minus how much you import).
It can be, or it could be totally unrelated. The trade “deficit” has little or nothing to do with the budget deficit.
I’m fairly certain tracking budget vs. trade deficit is meaningless. As Don argues, the trade deficit itself is meaningless, as it is not a true deficit. And as Marcus stated, the US is (still) a great place to invest (U.S. Treasury risk free rate, etc.), so net capital inflow should continue.
Posted by: Mesa Econoguy | Mar 31, 2008 6:37:55 PM
Mesa... T-bill is not an investment. And the main reason why the US is able to run the trade deficit is, that the foreign government believe it is.
The USA is not a great place to invest. The DJIA lost something like 50% of it's value in last 7 years relative to other currencies and the dividend yield was miserable. Considering that it is going to lose more and the dividend yield is not going to change - no sane investor would consider the USA as a good place to invest.
If the stock makret doesn't collapse, the USA won't be a good place for investors. The only tragedy being that the government + Fed will do anything they could to stop the collapse with the unintentional effect of deterring investors.
Posted by: andy | Mar 31, 2008 7:37:46 PM
Ummm……no?
Not only are Treasuries the risk free rate for the world, they are the benchmark against which all other investment safety is measured. This is an investment fact.
It is based on the fact that we are the worlds largest economy and have never defaulted, nor are we expected to (in the near future).
Down the road a bit, this will change, and the US is in danger of losing it’s triple A rating, because upcoming entitlements will cost us more money than any lender would lend us.
This is why Social Security, Medicare & Medicaid are such dumb ideas.
You are certainly free to criticize the underlying policies and practices of the US Government, but stating that US Treasuries are not an investment at this time is ludicrous.
Posted by: Mesa Econoguy | Mar 31, 2008 8:30:40 PM
Thanks for #14, muriduck,
14. There will always be regulation. The key is to make it minimalist but effective. The biggest danger to effective regulation is allowing the regulated too near the process of making regulations and too near the process of enforcing them.
Posted by: muirgeo | Mar 31, 2008 1:41:01 PM
Stands alone muirpidity on levels that are mind-boggling.
Posted by: vidyohs | Mar 31, 2008 8:51:14 PM
And there is presented the bedrock belief of the statist, the dedicated socialist.
"The biggest danger to effective regulation is allowing the regulated to near the process of making regulation and to near the process of enforcing them."
The "worker's paradise" is to be a dictated one, not an equal one. But, we all knew that already and anyway.
If we could find the leader of muirduck's cell and show him the shit that muirduck writes in public, muirduck would probably have a third eye in 24 hours.
Try this out for size:
"There will always be slavery. The key is to make it minimalist but effective.The biggest danger to effective slavery is allowing slaves to near the process of enslavement and to near the process of enforcing slavery."
Posted by: muirduck March 31, 2008 1:41:01 PM
Posted by: vidyohs | Mar 31, 2008 8:59:51 PM
Can anybody (preferably somebody with an econ degree) tell me what would happen to the trade deficit if the US were to eliminate the budget deficit? Does it matter if that elimination happens due to tax increases or cutting spending?
Posted by: Chris | Mar 31, 2008 3:59:28 PM
As long as you know that the budget deficit is caused by the federal government spending more than it takes in -- especially worrisome since the collection of asshats known as congress are also spending the payroll tax surpluses not currently going out the door to today's Social Security and Medicare entitlement programs -- we'll proceed.
Presumably foreign holders of U.S. dollars -- those dollars acquired by them (foreigners) because of us buying their stuff -- would find alternative assets to purchase instead of the many billions in Treasury Bonds that they purchase today. It is far more complicated than this, though. There would be many simultaneous effects going on but the most likely scenario would have foreigners investing more repatriated USDs in stocks, corporate bonds, U.S. property, and U.S. production facilities and other capital expendatures.
The fact that many foreign central banks use Treasuries as a dual means -- one as a place to securely park repatriated USDs and the other as a way to manipulate currency exchange rates to make their goods more applealing in price -- only clouds what would happen. This currency-exchange rate manipulating angle being dampened could/might lead to a reduced trade deficit.
By the way, foreign central banks that play the exchange rate game are not getting a free pass. As Dr. Milton, "TANSTAAFL!" These foreign central banks are opting for maximum employment at the expense of higher than normal domestic inflation in their home markets.
Did you happen to catch the Econ Talk with Tyler Cowen a couple of weeks back?
Posted by: LowcountryJoe | Mar 31, 2008 9:23:58 PM
brian, andy,
Sorry about misunderstanding what you meant andy. I woke up late and was in a hurry to get to work. Reading what you wrote makes sense now that I'm awake. Alas, that's what I get for jumping the gun. ;)
Posted by: mnm | Mar 31, 2008 9:30:58 PM
"Many of the greatest economic evils of our time are the fruits of risk, uncertainty, and ignorance."
muirgeo
Then buy yourself a bubble and never go outside. You'll be safe. I promise.
"There will always be regulation. The key is to make it minimalist but effective. "
muirgeo
OK, how?
Posted by: mnm | Mar 31, 2008 9:50:42 PM
"Many of the greatest economic evils of our time are the fruits of risk, uncertainty, and ignorance."
Especially ignorance. Progressives seem to specialize in that.
Posted by: Sam Grove | Apr 1, 2008 12:55:31 AM
Has anybody thought of the fact that governments cannot merely do as well as free markets, but because of their overhead, must do *better* just to stay even? The people destroying value with their regulations ALSO want to be paid for it.
Posted by: Russ Nelson | Apr 1, 2008 3:44:50 AM
Mesa:
Not only are Treasuries the risk free rate for the world, they are the benchmark against which all other investment safety is measured. This is an investment fact.
(economic) Investment is defined as a retained consumption with the aim of bigger consumption in the future. T-bills are an investment from the standpoint of the investor (he doesn't consume and expects bigger return in the future), however economically they are not - the money given to the government is mostly consumed, not invested.
It is based on the fact that we are the worlds largest economy and have never defaulted, nor are we expected to (in the near future).
It did. In 1930's Roosevelt changed gold content from 25$/oz to 35$/oz. That is a default on 30% of the debt. In 1970's Nixon stopped the 'gold window'. That's default on the rest. Since 2000 till 2007 the dollar lost ~50% against euro. 50% default.
T-bills are an 'investment' in the same sense as lending somebody money to buy a plasma tv. 'Consumer debt' would be more appropriate term.
Posted by: andy | Apr 1, 2008 4:27:23 AM
andy,
I don't understand why you are using the economics definition for investment and not the finance/accounting definition. The trade deficit is determined by Balance of Payments accounting. It's an accounting for international cash flows. The accounting definition of investment is appropriate when discussing the purchase of government debt by foreign governments and the trade deficit.
You can correctly argue that not all government spending is economic investment. But I don't see how that is relevant to the discussion of financial flows between nations.
Posted by: John Dewey | Apr 1, 2008 6:38:50 AM
According to this pdf, foreign owned assets took the following form:
U.S. Treasuries: $600 billion.
Direct investment (factories and such): $2 trillion.
Securities other than treasuries (stocks, corporate bonds, etc.): $5 trillion.
Am I reading that correctly?
If I am, foreign investment in the private market far exceeds their purchases of treasuries.
Posted by: Marcus | Apr 1, 2008 8:55:41 AM
marcus: "Am I reading that correctly? If I am, foreign investment in the private market far exceeds their purchases of treasuries."
Well, yes, the value of private foreign investment consist of chiefly direct investment and ownership of corporate stocks and bonds. But the $600 billion in U.S. treasuries is only the private holdings of U.S. government debt. The line entitled "Foreign Official Assets in the U.S.", with a value of $2.8 trillion, represents the investment of foreign governments. That $2.8 trillion is composed primarily of U.S. treasuries and "debt securities of U.S. Government corporations and agencies".
The current value of foreign capital investment is different than the annual cash flows of such investments. As I understand it, the PDF you referenced shows foreign investment at market values. If market value of private securities investments have grown over time, then the portion of such securities in overall foreign holdings should be greater than the portion of funds initially invested.
Posted by: John Dewey | Apr 1, 2008 9:39:26 AM
OFF TOPIC
Pyhton,
Regarding our discussion on presidents and the economy, See Dani Rodrick's blog.
Posted by: muirgeo | Apr 1, 2008 1:34:38 PM
Marcus:
Don't bother with the facts. la-la-la I can't hear you!
Posted by: FreedomLover | Apr 1, 2008 2:04:28 PM
Colson--
"economic naturalists"
I'm stealing it.
.
Posted by: OregonGuy | Apr 1, 2008 2:55:41 PM
John, the difference is that if the trade deficit was run mainly because of 'economic investment', the USA could really run a deficit for a long time without any adverse effects. It would have been market in action.
But because much of this money was simply debt and not an economic investment, the creditors will want it back. And because the money was not used to invest - to obtain more product in the future, that can be used to pay back the debt, the result will simply be that in the future the USA must curb consumption to pay the debt. Or default and destroy it's reputation or money. I don't see any other option.
Posted by: andy | Apr 1, 2008 7:41:59 PM
Muirgeo,
Thanks for the link. I was "in the basement" for so long that I am still making up my real work, then I'll get to back to our discussion. It turns out that what I went in for was a symptom of another more sinister problem. So I'll be visiting more of your profession in the near future.
Posted by: Python | Apr 1, 2008 8:59:17 PM
Best wishes, Python.
Posted by: brotio | Apr 1, 2008 11:56:04 PM
Yep, Python get well soon!
Posted by: muirgeo | Apr 2, 2008 12:12:50 AM
Andy: "because the money was not used to invest - to obtain more product in the future, that can be used to pay back the debt, the result will simply be that in the future the USA must curb consumption to pay the debt."
I think you are confusing the budget deficit with the trade deficit. It matters not who purchased U.S. Treasury securities that funded the budget deficit. That debt must be paid back even if Americans had purchased all the U.S. Treasury securities. If Americans must curb consumption to pay back that debt, they would have to do so even if there were no trade deficit. The trade deficit did not cause the budget deficit, nor vice versa.
Foreigners also buy U.S. corporate bonds, another form of debt. Corporations generally use those bonds to fund real economic investment. Again, it matters not who buys those bonds, the debt still must be paid back. But those corporate bonds do not cause the trade deficit, nor vice versa.
Foreigners purchase of U.S. equities also contribute to the U.S. capital surplus/U.S. trade deficit. Those foreign investors expect the same returns as any investor in U.S. corporations. U.S. corporations have been able to fund even more economic investment as a result of the strong demand for U.S. corporate stock.
Foreigners also directly make economic investments in the U.S., and those contribute to the U.S. capital surplus/U.S. trade deficit. When Toyota builds an assembly plant in San Antonio, when Thyssen Krupp builds a steel plant in Alabama, and when Siemens AG builds a wind turbine plant in Iowa, these are positive developments for the U.S. economy.
The U.S. capital surplus is an indicator of the strength of the U.S. economy. Regardless of whether foreigners are using their capital to invest in government debt, in U.S. equities, or U.S. factories, those investors are demonstrating confidence in the U.S. economic engine. This is a good thing.
Posted by: John Dewey | Apr 2, 2008 5:10:29 AM
Muirgeo, I concur with a prior commentor that quoting Keynes isn't going to impress many people who read this blog. He's simply not taken that seriously on these issues anymore.
But beyond that, I noticed that the quote you used was just an assertion--it didn't provide an actual argument. That is, there was no explanation of the causal link between cause and claimed effect. Why would I take seriously a claim without evidence?
Posted by: James Hanley | Apr 2, 2008 4:06:42 PM
Why would I take seriously a claim without evidence?
Posted by: James Hanley
I'd say the same thing of the claims of liberal economists. Where's the proof? They always need to compare their positions to communism to come out on top. No one takes communism seriously now a days. How about an up and uup comparison of classic liberalism with modern puralistic democracies founded on regulated capitalism? Show me ONE example of a successful stable liberal society.
Show me one ounce of proof. I've been reading and listening here for very long and liberalism still seems a fairy tale in truth and all attempts towards it practice run rampantly into corruptin and greed and misery and unstable economies.
Posted by: muirgeo | Apr 2, 2008 4:32:13 PM
Python,
I hope your medical issue, though sinister, is short and easily treatable. I'm sorry you're going through this and I wish you a speedy recovery.
Posted by: Methinks | Apr 2, 2008 5:20:19 PM
I think you are confusing the budget deficit with the trade deficit.
No, I am not. The problem is that huge part of the trade deficit financed budget deficits either of individuals or government. And that's exactly the reason why the US dollar vanishes within some years. If the trade deficit financed investment, there would have been no problem.
The U.S. capital surplus is an indicator of the strength of the U.S. economy. Regardless of whether foreigners are using their capital to invest in government debt, in U.S. equities, or U.S. factories, those investors are demonstrating confidence in the U.S. economic engine.
No, the investor DID demontrate confidence in the U.S. economic 'consumer economy' and stupidity by 'investing' in debt of government of individuals. The U.S.A is going to lose such confidence and the investors will wise up.
The problem are not foreign investments - the problem is the huge debt.
Posted by: andy | Apr 2, 2008 8:21:53 PM
I've been reading and listening here for very long and liberalism still seems a fairy tale in truth and all attempts towards it practice run rampantly into corruptin and greed and misery and unstable economies.
Excuse me, please tell us about those 'attempts' at liberalism.
Posted by: Sam Grove | Apr 2, 2008 9:25:19 PM
"If the trade deficit financed investment, there would have been no problem."
Again, you seem to be confusing the trade deficit and the budget deficit.
If you are arguing that the budget deficit is unsustainable and represents a real threat to AMerica's future prosperity, I'm not going to argue with you. I'm not sure what level of budget deficit is sustainable, and I don't care that much to find out, so I'm not going to argue about it.
If you are arguing that the trade deficit is cause for alarm, then I will disagree. The trade deficit simply represents the fact that foreigners choose to purchase more U.S. debt and purchase more U.S. equities and invest more directly in the U.S. than the U.S. chooses to do likewise in the rest of the world. That's all it represents. The fact that a third of the capital flows into the U.S. are used to purchase U.S. securities is completely irrelevant to the trade deficit.
Again, please don't confuse the negative impact of the budget deficit for some negative imagined threat about the U.S. capital surplus.
Posted by: John Dewey | Apr 2, 2008 9:38:52 PM
The sentence in the last post should have been:
The fact that a third of the capital flows into the U.S. are used to purchase U.S. Treasruy bills is completely irrelevant to discussion about any suspected threat implied by the trade deficit.
Posted by: John Dewey | Apr 2, 2008 9:42:34 PM
John, the trade deficit simply means that the USA has exported 'less'(whatever less means) then imported. That might be because people invested in the US, companies from the US repatriated their profits from abroad or that the people in the US got indebted.
I have already mentioned it somewhere else - the trade deficit is just an indication how bad things are because you wouldn't expect a trade deficit of such magnitude in a healthy economy. It's like with heartbeat - there is a huge range of possible explanations for slow or fast pulse - and everything may be OK. But sometimes you just say - the heartbeat is not normal, there is something wrong.
Trade deficit is accounting of past actions. It cannot 'cause' problems. Current level of the trade deficit just isn't normal. It is probably caused by the budget difict and debt financing - which are 'the' problem. I'm not sure I disagree with you though, it seems to me that we might be saying the same thing?
Posted by: andy | Apr 3, 2008 4:30:18 AM
"Current level of the trade deficit just isn't normal. It is probably caused by the budget difict and debt financing - which are 'the' problem."
No, we are not saying the same thing. Yes, we agree that government deficit spending is (or may be) a problem for future Americans.
No we do not agree on what is a "normal" trade deficit and certainly do not agree on what "caused" the trade deficit.
Again, please do not confuse the government fiscal deficit with the the trade deficit (current account deficit). The current account and capital account are simply measurements of the amount of goods and capital that flow across our border.
Foreigners have chosen to spend a portion of the dollars gained in sale of goods on:
- U.S. government debt;
- corporate securities and debt;
- capital goods built in the U.S.
They didn't reach that decision because the U.S. government was running budget deficits. They did so because they wish to save rather than consume. The fact that they chose to save in the U.S. is a very positive sign, despite your continued insistence it is not.
There is no way you could have determined what is a "normal" level of debt purchases and investment in the U.S. by foreigners. Globalization has changed the world significantly the past 30 years. Capital flows much more readily. The economies of formerly third world nations are rapidly developing. What appeared "normal" 30 years ago or twenty years ago or even ten years ago is just not relevant anymore.
Posted by: John Dewey | Apr 3, 2008 1:01:57 PM
Whoever wrote the article is a moron. There's a reason it's called a deficit, and that's because it's money flowing out of the US. If it was money flowing into the US it would be a trade surplus.
Posted by: Joseph | May 6, 2008 1:39:59 PM
