The Trade Deficit

This seems like semantics. They say “indebtedness”, but really mean that Americans own proportionally less domestic assets. If you think equity and debt as similar liabilities, the distinction from the macro perspective is immaterial.

I think the key is to explain why allowing Americans to consume more at the expense of relative asset ownership (ie, a trade deficit, so foreigners own more US assets), is better than constraining American consumption so that Americans don’t lose “market share” of domestic assets. I believe in the latter, but it’s not an obvious argument, and replacing “debt” with “equity” is a red herring.

“Either Don has made an error somewhere (and I do not see it) or most of what you read about our “growing indebtedness to foreigners” is wrong.”

Nope, Don Boudreaux has written a brilliantly insightful article. I cannot find even a minor mistake. It’s obvious that he never studied economics under the silly John Kenneth Galbraith. You know that you are talking to a well meaning idiot when confronted by someone overly concerned with our so-called trade deficit. This idiocy is nothing more than an invention of the union leaders and their economically illiterate political allies.

1. I hope the people who host this board are sending warnings to Mr Thomson the same way I received them regarding my style. Because he’s a broken record. As bad as me. Except he’s pro this board. So I suspect the style is OK in that case. Not quite a free market perhaps? I’m sure there will be an incentives justification provided ASAP. 🙂

2. Anyone notice that this article to which we were referred is entirely fact free. No numbers at all. Nada.

3. Trade deficits imply a flow of dollars back into the country if the receving country does not want to stuff them in matresses, smoke them, or use them in the lavatory. Therefore that they flow back is a given. A big duh for that one. This article reads like a tutorial for economic idiots. Is that the presumed audience of it?

4. Dollars flow back into either (1) property rights of some sort or (2) debt. We are not told in this article about the difference between the two.

5. Property equals power. By selling property, one is selling power to foreigners. In an international economy, one might not be concerned about handing power to Arab oil wealth or Chinese communists. Again, no facts provided to help us understand this selling of power.

6. The flow of dollars back into the US can lead to price imbalances in assets, e.g. price bubbles. This transfers wealth to a few who hold those assets and are luck or wise enough to sell them, but inflated asset prices per se do not necessarily improve the economy. Those inflated asset prices are then used to purchase more foreign goods, which are then reinvested in assets.

My overall assessment is that Boudrieux says very little of use.

And what’s the obsession here with Google? Yeah, I know, nice search engine, positioned well, but along with ebay and amazon they aren’t doing much that is truly innovative. Or am I missing something? I see the ebays and amazons and googles bottom line etched and chiseled through the years because there business models are based upon large numbers and horifically small margins. Ebay and Amazon have reach to give them years of existence, but I think Amazon’s contribution to the world of IPR is one click shopping (wow, impressive) and google the first to get what is actually a fairly standard information modeling technique into the public space.

“1. I hope the people who host this board are sending warnings to Mr Thomson the same way I received them regarding my style”

Are you possibly implying that I’m not a sweet and wonderful guy? I can assure everyone that I have not mugged any old ladies in over a week.

I get a kick out of the economic Cassandras. They conveniently ignore the stock market and the other economic indices. Investors are admittedly not infallible and sometimes make mistakes. Nonetheless, we observe an incredible number of people putting their own money where their mouth is. They obviously do not share the pessimism of the gloom and doomers.

“I get a kick out of the economic Cassandras. They conveniently ignore the stock market and the other economic indices.”

I would tend to agree with Mr. Thomson’s positions here, but he is using Cassandra in a way that contradicts himself. Cassandra’s warnings were not wrong as his statement implies. Her predictions were accurate. Her curse was that they would not be believed.

“I would tend to agree with Mr. Thomson’s positions here, but he is using Cassandra in a way that contradicts himself.”

Gulp, I best reread the Greek classics. Sorry about that.

“A year ago, I did some analysis on energy and, in contrast to the futures market which told me prices would be coming down, I saw nothing but higher energy prices. So I moved money into energy. I was fortunate. It was a great move. And now the “futures” market has finally caught up with itself.”

You are a superb reason why I’m so confident of our nation’s economic future. Our economic indices are being relentless studied. We will likely know if a real problem is occurring—and so far the majority of investors seem quite content. Please keep up the good work while I run along with Von Mises and the rest of the libertarian crowd. We are currently plotting the overthrow of the government so that we can become the nation’s autocratic rulers.

[David: Please respond to our webmaster email to you in order to retain your posting privileges. Functioning email addresses are required on EconLog.–Econlib Editor]

I need to add a third category in the recycling of dollars: (3) Goods and Services. Dollars are recycled into (1) Property (2) Debt or (3) Goods and Services.

Now note. Dollars that are funnaled into property will often inflate the values of those properties. Holders of those properties then borrow against those properties in order to purchase goods and services. E.g. the negative savings rate in this country.

The article to which we referred does not address any of these issues to the degree that makes it anything more than akin to a “people magazine” article for the economically illiterate. This argument about the current account and trade deficits is nothing new. It’s just gotten a little air time on TCS.

Elliot:

You write:
“And what’s the obsession here with Google? Yeah, I know, nice search engine, positioned well, but along with ebay and amazon they aren’t doing much that is truly innovative.”

As a computer science major, I can assure you that there is TONS of innovation with Google. Take the search technology alone — they have managed to develop some very brilliant algorithms for searching the Internet. To a non-computer science person, that may not sound like a big deal. But believe me, if you understood the details, you would realize that it is a very hard problem and finding better solutions is a big deal.

There is a reason that Google became the market leader position from Alta Vista, back in the day.

And Google is not just about search. They have been hiring the best and brightest software engineers for some time to work a variety of innovative projects.

In these discussions, I see terms being used somewhat loosely. Just to clarify the issue, I’m including a definition I wrote a while back. With apologies for a long post, I submit this as background and then put forth three points. But first the definition:

The Current Account is a measurement that is done by the U.S. Department of Commerce’s Bureau of Economic Analysis (BEA). The BEA summarizes all transactions involving flows of goods, services, income and unilateral transfers (foreign aid) that take place between U.S. and foreign entities, which include private individuals, businesses and governments. The current account balance is the difference between U.S. receipts from other countries and U.S. payments to other countries. If U.S. payments exceed receipts, then the U.S. is said to be running a Current Account Deficit, as it is right now. Trade in goods and services is the largest component of the current account balance and that is why you often hear the term Trade Deficit used more or less interchangeably with the term Current Account Deficit.

The trade component of the Current Account is made up of trade in goods and services. Typically, we import far more goods than we export, but we export more services than we import. The net result is a substantial Trade Deficit that has existed continuously for 20 years or so. Even though most commentators refer to the Trade Deficit, trade is not the only issue that has precipitated the huge increase in the Current Account Deficit. Perhaps the most important factor is that, as a nation, we consume and invest more than we save and we have done so for many years.

1. The first point I wanted to make is to emphasize the last concept–that we consume and invest more than we save. Most commenters focus on the consumption issue and ignore the fact that we also invest heavily too. That investment increases the Current Account Deficit because it reduces National Savings.

2. The second point is simiply to emphasize that the BEA uses statistical constructs that are arcane and confusing to most people. Use them cautiously unless you are sure what they mean. For example, the BEA definition of savings is very narrow and generally does not include much of what we would think of as wealth (capital gains, retirement plans, home equity etc.).

3. The final point is that the Federal budget deficit is the largest component in reducing National Savings. Yet, individuals have little control (other than voting) over the Federal deficit. Americans as individuals and families and corporations do save, even by the BEA’s very strict standards.

So, to reduce the Current Account Deficit, we could cut the Federal deficit which most would approve. Or, we could invest less, something few would see as positive. Odd, yes. But that’s how the BEA figures it.

This is how I commented Don’s article on the Cafe Hayek comment section:

“Don, your article would have been right on the mark hadn’t it been based on the implicit assumption ( that you made explicit elsewhere ) that the United States have a sound monetary system which don’t distort prices and thus economic behavior. But unfortunately, this assumption is false as Alan Greenspan have pushed down interest rates below their free market level which in turn have created a housing price bubble something which in turn have contributed to increasing the trade deficit.

The trade deficit is not the basic problem here, but it is a symptom of the distortions created by the Fed’s inflationary policies.”

Hey! if you spend more than what could be made, you are going out of business. Spend without making any of the money and you are out of business and that is a problem.

The question of whether America will see economic turmoil in the near future depends largely on future consumption, savings, and government spending decisions. If the American deficit is brought under control, then the position of foreigners is not as important. Otherwise, the American deficit can continue as long as investors or central banks are willing to put their surplus savings into America. For the near future, this seems to be what will happen. Gradually, foreigners may reduce the level of savings that they commit to America, which would put strain on the America economy. If America lowers its desired deficit position in tandem with foreigners’ decreased willingness to purchase American bonds, then a hard landing could be avoided. The debt-to-GDP ratio will be a determining factor, which will become a problem in the long-run if the deficit continues. For these reasons, the deficit must lower in the future, but there is no immediate need for this.