Roubini on the "Twin Deficits"

In the latest issue of the Cato Journal, NYU’s Nouriel
Roubini offers again his case on “The Unsustainability of the U.S. Twin
Deficits.”

I agree with much of what Roubini says. Clearly, Uncle Sam’s deficit spending is
harmful, not least because it is the product of persons A, B, and C going on
spending sprees with the expectation that the bill, when it comes due, will be
paid by persons X, Y, and Z – whose identities today are unknown even to X, Y, and
Z. The current indistinctness – the
current absence of the specific identities of the persons who will become X, Y,
and Z – ensures that X, Y, and Z issue no complaints about being stuck with a
future obligation to pay for Senator A’s, and Rep. B’s, and President C’s
handouts to electorally important interest groups. Spending under such conditions of brilliant
irresponsibility is almost certainly both excessive in size and inefficient in
how it’s directed.

But “harmful” doesn’t necessarily mean “unsustainable.” I have no firm opinion about whether or not
Uncle Sam’s budget deficits are unsustainable over any reasonably relevant
number of years.

But I disagree with Roubini’s take on the trade deficit.

He’s right that the current-account deficit is unsustainable, but only

• if it is largely the result of foreigners buying debt issued
  by Uncle Sam, and

•  if Uncle Sam’s budget deficit is unsustainable, and

• if the foreigners who today are buying Uncle Sam’s debt will
  choose, when Uncle Sam is forced to stop running budget deficits and to begin
  reducing the value of his outstanding debt, to spend their dollars on American
  exports rather than on dollar-denominated assets other than U.S. Treasuries.

But recent evidence suggests that these are big ifs. Most significantly, as I blogged on here,
foreign purchasers of dollar-denominated assets recently began buying much less
of Uncle Sam’s debt and buying more corporate securities and other privately
created assets.

More fundamentally, I have a real problem with the
allegation of “excess savings” – as in this passage from Roubini’s article:

It is true that in 2005 the U.S current account deficit
worsened at a time when the fiscal balance was improving. Indeed, excess savings by China and oil exporters in 2005 and on may have
contributed to keep U.S. long-term interest rates lower than otherwise [p. 347].

What are “excess savings?” Surely the fact that the number of attractive investment opportunities
within a given country falls short of the amount of savings by that country’s
citizens does not mean that the difference is “excess savings”? (Ironically enough, the most coherent notion
of excess savings would be supplied, I think, by Austrian economists who worry
that government intervention might prompt certain investments to be undertaken
that prove eventually to be unsustainable. I get no sense that what Roubini means by the term “excess savings” is
anything remotely close to what, say, Mises or Hayek might have meant.)

Even more troubling are passages such as this one:

And since one can expect, at current trends, U.S. current
account deficits of at least $1 trillion a year from 2007 on, one can forecast
that, if an increasing fraction of the new desired inflow of capital into the
United States will go into equities rather than debt, an increasing fraction of
the entire U.S. capital stock will, in a matter of a decade, be owned by
nonresidents [p. 350].

First, this claim isn’t necessarily correct.  The size of the capital stock isn’t fixed; in
healthy economies it grows.  So the U.S. current-account deficit can grow
significantly over the next several years, through foreigners purchasing
equities, without an increasing fraction of the entire U.S. capital
stock being owned by nonresidents. Indeed,
the current-account deficit can grow through such purchases of equities and,
simultaneously, the fraction of the U.S. capital stock owned by
nonresidents can fall.

Second and more fundamentally, so what if an increasing
fraction of the U.S. capital stock is owned by nonresidents? Roubini
mentions this outcome and presumes that it speaks for itself.  But it doesn’t.

As I’ve asked before, if savings and investment are
desirable (and they are), what difference does it – or should it – make to me
if the factory in Alabama or the R&D lab in Utah is owned by someone
holding an American passport or someone holding a Swiss or a Sri Lankan
passport?  The important thing is that
the factory and the R&D are funded.

I suppose that the concern is that foreigners, not being
Americans, are less… less… less what? loyal to? interested in? America.  Foreigners who invest here are entrusting
large chunks of their wealth to the American economy.  Doesn’t that fact itself create a presumption
that these foreign investors are peaceful, productive people interested in the
stability of the political system and economy in the United States?  Doesn’t that fact make these foreign investors
more interested in the well-being of America?

Indeed, doesn’t that fact make these foreign
investors, in an economic sense, at least partly American?  Or, better yet, don’t such cross-border investments tend to break down purely political and nationalistic notions of citizenship by creating as the relevant society the global economy?  A hermit living in the Blue Ridge mountains of my home state of Virginia surely is less of a citizen of the same society to which I belong than is, say, a Parisian who owns a restaurant in Fairfax, VA, or a Chinese entrepreneur who, although perhaps never having set foot on American soil, owns a large stake in a factory located in Kentucky, some equity shares traded on the New York Stock Exchange, and a factory in Shanghai that makes electrical components for my laptop and my car.

Other problems plague Roubini’s article, including his seeming
acceptance of the cost-push theory of inflation.  But his implicit xenophobia is what is most
bothersome and unjustified.

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