Is there a U.S. Economy?

by Don Boudreaux on February 24, 2006

in The Economy, Trade

While I don’t believe that it’s totally mistaken or misleading to speak of "the U.S. economy" or "the Chilean economy" or "the French economy," I’m convinced that the practice of anthropomorphizing countries has gone too far.  I explain in my latest essay published at Tech Central Station.

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{ 14 comments }

Ivan Kirigin February 24, 2006 at 11:23 am

What about federalism, or international federalism?

Political boundaries mark differences in sovereignty and law. Different countries try different laws. Policy can affect economic activity.

In that sense, it is useful to look at entire countries to examine how well their laws facilitate desired economic outcomes like gdp or productivity growth.

Otherwise, I would tend to completely agree with the essay.

Also, you might recall my concerns with immigration. That too was not a simple anti-foreign bias or anthropomorphizing (if that is the right word) the _American_ Economy. It was also concerned with the intersection of policy and the economy.

Policy is inherent to the sovereign entity: city, state, or country, so you need to pay attention to those boundaries when looking at how policy will affect the economy.

Max Born February 24, 2006 at 11:42 am

The answer is Kings and Queens (or shall I say governments). Kings cared about two things. One, is the amount of gold (money) in their treasury. Two, is the amount of gold they can collect in taxes every year. Since the tax is collected by imposing on your citizens- it really does matter who owns the assets. It is/was much easier to collect taxes from citizens of your own state than on foreigners. Similarly today tax havens like Mauritius are a big problem for nations like India and USA.

It is much 'cleaner' if all assets are locally owned and if all transactions are conducted between your own citizens- from the perspective of the tax collector- the King.

The King (government) therefore wants to retain this structure of economic exchange. But this wouldn't sell in democratic regimes. So it is 'logically' shown to the masses how they are losing when foreigners impose debt on them. When it comes to nationalism few people make the distinction between what is good for the government vs what is good for the people.

In summary, here is a thought experiment. If there were no taxes to be collected and all trade was therefore a matter of people to people exchange- do you think anyone would maintain statistics like GDP, GNP, trade deficit etc?

Yes, we have a problem. But the problem is overspending by the government and it has nothing to do with foreigners.

Randy February 24, 2006 at 12:20 pm

I think you're on to something there Max. Its the control freaks of all types who have issues with globalism. The free markets are escaping their grasp.

Matt February 24, 2006 at 12:51 pm

I think the important takeaway from this fine essay is that if a million people magically become billionaires tomorrow, unless I’m one of those million, I’ll be at work on Monday and will realize that I am no better off whether those million people happen to be Americans, Russians, Brazilians or Californians.

Aaron Krowne February 24, 2006 at 1:12 pm

More selective blindness. Once again you are assuming the criticism is an attack on free trade, and dismantling this straw man.

You cannot treat international transactions the same as intra-national ones because currency exchange is involved. This in turn is merely the surface manifestation of wealth traversing monetary system boundaries, which in is in turn highly dependent upon the political situations of nations.

This means that such situations are ripe for political manipulation.

The only reason politicans look upon international transactions with suspicion is because they suspect their counterparts abroad may be bilking more out of the system than themselves.

Randy February 24, 2006 at 4:30 pm

pcs,

But the same argument could be applied in a small town. What if the farmer stops farming and you have to grow your own corn? What if the construction worker stops constructing and you have to build your own house? We are wealthy because we trade. Its true that if we stop trading we will be less wealthy, but that is not a reason to stop trading. And what does it matter if the person I choose to trade with is in Tokyo instead of Detroit?

the Radical February 24, 2006 at 6:12 pm

At the point at which American $'s are worthless compared to Canadian dollars I think that getting the lawn mowed will be least of our problems!

the Radical February 24, 2006 at 6:16 pm

pcs,

Are you implying that a little bit of market freedom is beneficial but a lot of market freedom is destructive?

Mark February 24, 2006 at 8:43 pm

As people in economics are fond of pointing out, if something cannot continue indefinitely it will stop. That in itself is not a problem. The question is one of a "hard landing" versus a "soft landing." In my opinion, the threat of a hard landing has been known widely for long enough that it would have happened by now if it was a serious threat. Absent a nuclear attack on a U.S. city or a serious threat of government default, I don't see the U.S. dollar collapsing all of the sudden.
Yes, it is always possible that China will stop buying U.S. bonds tomorrow but if it did, the party that would stand to lose the most would be… China. The People's Bank of China already has an enormous quantity of U.S. government bonds in its possession and refusal to buy more bonds would send such a scare through international markets that the Bank would take a huge capital loss on its bond holdings.

Max Born February 24, 2006 at 11:54 pm

I have a question for Don.

Given that the (world/US/NYSE) economy is doing well but the government is going bankrupt. What precautions do we as individuals need to take? Over next 30 years, the government will need to pay back the debt and fund social security and take care of the ageing. This may lead to very high taxes and an attempt to forfeit 401(k) and Social Security payments due to the better off. Should the middle class not invest in any assets that the government can potentially control? Even then the govt may simply tax 401 K withdrawals at a very high rate. Any ideas?

Randy February 25, 2006 at 8:56 am

Max,

I realize your question was for Don, but I hope you don't mind my addressing it.

I've had roughly the same thoughts. My expectation is that the government is simply not going to hand out as much in benefits because the taxpayers are going to refuse to carry a heavier burden. I feel that the best investments I can make are in family, health, and education, because I will probably need to work into my 70s, and beyond that, I will need to rely on family more than today's elderly do.

gene berman February 25, 2006 at 6:55 pm

Mark:

Your deduction (or the extension of your analogy) is simply flat wrong but I hope that neither you nor I will see my point proven in practice.

First, before any analysis involving a sudden and catastrophic monetary end-state
simply as the result of China deciding to buy or hold less US gov't. debt securities than formerly–or even none at all–I want to make clear that, in principle, this has nothing whatever to do with China or even with debt or debt levels in general. What it does have to do with is the use of
MONETIZED debt as currency and, particularly, with the use of such monetized debt as the ONLY currency in use.

"Notes," i.e., promises to pay, have long been recognized as being able to serve as media of exchange; depending on the creditwothiness of the debtor, such notes might be "good as gold" or, being physically convenient, even preferable in some instances. At all times in the past, however, notes derived their value in exchange from the sum of "real money" for which they might be exchanged.

I don't want to go into a drawn-out monetary history or to involve explanation of the Federal Reserve System and the concept of fractional reserve banking. Suffice it to say that certain events have transpired over much of the past century which have, in steps, transformed the monetary systems of EVERY NATION ON THE FACE OF THE EARTH from systems employing a variety of things (precious metal coin, money substitutes or certificates, and notes convertible on demand) to a uniform system in which only INCONVERTIBLE notes are so employed.

There are two widely disparate "understandings" of the nature of money–including the nature of its origin and the source of its value and purchasing power at any given time. The least influential explanation is mine and that of the small group of economists called "Austrians," who insist (with a certain range and variations in opinion) that the use of money grew in an evolutionary way as a subset of exchange in general and that, while any money is, in the present, worth "what it will buy," it cannot be detached, in part or in whole, from what it was worth in the past with any expectation that it will not diminish in value progressively to the point of worthlessness (and that this process can go on even in a regime of convertibility characterized by progressive diminution of the "real money" aliquot "backing" the currency unit).

The majority, mainstream economic and monetary opinion is that money has been brought into existence by authority at various times during history and that "money is what the government says it is" and that the value of money is whatever the government decides it shall be. The foregoing is, perhaps, an over-simplification–but not by much. In this view, the gov't. "manages" the purchasing power of the monetary unit (as well as other aspects of the economy thought to be connected to prosperity) by periodically adjusting certain interest rates and by either buying or selling certain securities.

What must be emphasized is that the conditions now prevailing (and which reached their current state in 1974 when the US formally ended acknowledgement of any connection between gold or anything else and US$$) are completely new–uncharted waters.

Under older regimes of progressive debasement of currencies, the effects of inflation–the higher prices and the rate of their rise–at least provided a certain indication of what might be expected over the near term future. Some inflations, indeed,proceeded to catastrophic levels but were at all times preceded by less-rapid deterioration, times during which those so concerned and so inclined could afford themselves some protection against coming calamity by buying other goods they might need in quantities greater than usual and, especially, by buying the less-volatile currencies of other nations or even gold and silver in coin form.

But the looming threat in the present day is not of a steady deterioration followed by accelerating depreciation. Rather, it is of an entirely different character–of the type, potentially, resembling a bank "run."

Because of the nature of bank loans and deposits, no bank is equipped to pay any large portion of its depositors who might show up in the case that any believed the bank might not be able to pay them. There is no question of being able to pay; once any number are convinced they better get their money, the run's on and the bank is done (and, in case you've not noticed, your account gives the bank–or insurance company–the prerogative, under the certain circumstances of which we're speaking–of delaying any payment to its depositors for up to at least 6 months).

What would happen if it were to become generally expected that at some uncertain time but certainly in the near future, that the currency we use (and every asset denominated in such currency: cash, bonds both gov't. and corporate, life insurance policies, promissory notes of every kind, etc.) would lose half its value? How about all–worthless? Mind you that the identical situation exists everywhere! How quickly could it happen? That depends. MY OWN BEST ESTIMATE IS 4 HOURS for most places in the developed world. Remember, this is the internet age. Some of the current events
featured on the Drudge Report are those you'll hear later the same day on TV news.
It doesn't have to happen because China decides to diversify out of the interest-bearing securities they hold. In fact, they might be among the slower to understand what was happening. What would a commonwealth without a medium of exchange be like? With what are farmers to be paid for shipments of food? And the truckers to haul it to urban centers? And with what currency are to be paid those responsible for maintaining law and order when no one will give anything for any amount of it?

These are the things that have not seemed to have occurred (or if they've occurred, not to have caused much worry) to those responsible for monetary policy.

To those of my economic opinion, the collapse is INEVITABLE and can only be prevented in its worst form by timely action to recognize the progressive danger and avert it by returning to some more-sound monetary system. But neither recognition nor corrective action shows anywhere in serious official or public discourse. For at least some of us, the prospect looks at least fair that at least we won't be around anymore when the shit hits the fan. But, on the other hand, it could all happen tomorrow.

Rakeela Deskairn March 7, 2006 at 11:52 am

Gene Berman:

If everything went downhill like that, we'd fall back to a barter standard. Some famines and droughts would strike, farmers/weavers/water flow specialists would become relatively wealthy as everyone sought the basics for life and material goods flowed to those who could provide them, big agribusiness would become even more important, and the government would go into limbo. The economy would go through the mother of all corrections, would sink into a depression, and be set back two or three decades in development.

And after a few years, some new common currency would arise, and some new government would arise. Given the great political stability of America, the new government would follow the same form as old governments. It may have new policies, but it'll look the same and have the same constitutional structure. The biggest difference would be that those who produced necessities of life would be accorded more political power. Agricultural subsidies would probably grow, the government would probably try to make clothes production done here instead of in China, water distribution systems would expand and become more comprehensive.

It's unlikely such an event would occur, but just remember. The sun will always rise tomorrow. You could insure yourself against such an event by investing into technologies that bring about greater food production and greater farmer productivity. That way when the "fall" that you're predicting occurs, you'll be on the winning side. And in the meanwhile not only will you be contributing to the scientific progress of our nation, Congressional subsidies to big agribiz corps will ensure that you get a return on your investment.

Oh, and PS:
Scare-mongering of the sort your post looked like is not politically impressive. It only motivates sheep. Not only can I pick apart the things you say and suggest a course of action for you, if I had been so inclined I could've ripped it apart with a critical review.

I didn't want to do that. I wasn't impressed by the tactic, but it was pretty darned interesting to read, and interesting to respond to.

Dude Dean January 19, 2007 at 6:39 am

What USA Economy? What is made in the USA anymore these days?? Big Macs, Bombs and AR-15s? We import everything from China and Export nothing but war.

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