Arnold Kling

Why Do They Love Us?

Arnold Kling, Great Questions of Economics
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After September 11, some headlines screamed "Why do they hate us?" Since then, there has been much made of the antagonism toward the U.S. expressed in Europe and elsewhere.

To economists, the question is, "Why do they love us?" This love is expressed in the large waves of immigration and also the huge inflow of capital. That capital inflow in turns drives a large deficit in our balance of trade. As Paul Krugman once put it,

The "sustainability" question...- is whether the market seems to be properly allowing for that required future currency decline. If not, the dollar is doing a Wile E. Coyote, and is destined to plunge as soon as investors take a hard look at the numbers. (For those without a proper cultural education, Mr. Coyote was the hapless pursuer in the Road Runner cartoons. He had the habit of running five or six steps horizontally off the edge of a cliff before looking down, realizing there was nothing but air beneath, and only then plunging suddenly to the ground).

Since that was written, the dollar has remained high and the trade deficit has worsened. And the problem that Krugman raised--the fact that the rest of the world does not appear to be able to increase its demand for products to offset a turnaround in the U.S. balance of trade--persists.

Discussion Question. If the large capital inflow to the U.S. were to stabilize or reverse, are there automatic mechanisms that would increase foreign demand for U.S. goods, or would the result be a worldwide recession?

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