Mark Brady offers a worthwhile response (see Comments) to this argument made by Dan Griswold against those who lament the U.S. trade deficit. Mark says (in his comments to my earlier post on Dan’s argument):
But what he [Griswold] doesn’t mention is that foreign investors buying U.S.
assets must, ceteris paribus, drive up the prices of those assets. It
would therefore be equally true to say that "If you are among the
American families looking to buy a house or an apartment, you can curse
the trade deficit and the offsetting foreign capital surplus for
driving up the price of homes."
Mark’s point is worthwhile because it’s important to look at the larger picture, as Mark does in his comment. I agree that the particular example — lower home-mortgage interest rates — isn’t ideal. Because the prices of homes might rise to offset the fall in real mortgage interest rates, the size of the benefit, if any, to American home buyers might be quite small or even nil.
But maybe not. Let’s look at an even larger picture. Even if the prices of homes rise to offset fully the lower real rate of mortgage interest, won’t the result be an initial increase in the profits of home-builders? And won’t these higher profits spur builders to build more homes than they would have built had the interest rate not fallen? If so, the full price that home buyers pay for homes will indeed be lower in the long-run even though the initial effect was to bid up the price of homes to offset the lower real rate of mortgage interest.
The previous paragraph points to a deeper truth that, I believe, is implicit in Dan’s argument: the capital stock is not fixed. When savings increase, more capital is created. Some of this new capital might be in the form of new houses, but most of it surely is in the form of new or modernized factories, new office buildings, new and better IT equipment, more machinery per worker, more ships and trucks, more worker training, more R&D, new retail outlets — and on and on and on.
So as asset values rise because real rates of interest fall, more assets are created, increasing worker productivity, increasing total output, raising living standards regardless of the nationality of the persons doing the savings.
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Isn't it obvious that Americans have largely benefited from the real estate boom? And the boom certainly required low interest rates, lower than we'd have had if the Feds had to do all of their borrowing domestically.
The latest figures I've seen show that foreigners hold over 50% of U.S. long term debt, a percentage that climbed dramatically since 2000. Hence a trade deficit.
In a free market, probably, but in actuality, no. Zoning, developmental, environmental, and other severe restrictions on land development exist throughout CA, OR, WA, and most of the Northeast. Housing is in permanent undersupply in those areas, and many states (like FL) are following them in instituting comparable development restrictions along with stiff "impact fees". Anti-developer anger (really, in my opinion, success envy) and "keep our town like it is" luddites get fawning press coverage in local and national media. What gets built is almost independent of larger macroeconomic trends because they can't ever meet demand.
I remember an article written within the last two years that stated that the net wealth of Americans — that's all American owned assets minus all American owned debt to include shared public debt — was at $52 trillion. IF I remember correctly, the net wealth had risen since the last time it was calculated. Thank you, Savers around the globe.
I'm grateful to Don Boudreaux for his thoughtful post. He writes, "But maybe not. Let's look at an even larger picture. Even if the prices of homes rise to offset fully the lower real rate of mortgage interest, won't the result be an initial increase in the profits of home-builders? And won't these higher profits spur builders to build more homes than they would have built had the interest rate not fallen? If so, the full price that home buyers pay for homes will indeed be lower in the long-run even though the initial effect was to bid up the price of homes to offset the lower real rate of mortgage interest."
My first thought is that, given the number of new homes (net of depreciation and obsolescence) relative to the size of the housing stock, the effect he describes would be rather small.
My second thought is that, whatever the size of this effect (large or small), focussing on the gains that particular individuals receive from a trade deficit and its concomitant capital inflow can be countered by pointing to the losses that other individuals receive from the same phenomena. On the other hand, the argument from comparative advantage makes logical sense irrespective of particular gains and losses.
Third, I agree that the nationality (more precisely, the country of residence) of savers need make no difference to how their savings add to the stock of capital goods and thus economic growth.
Finally, with regard to Charles N. Steele’s comment, I'm not clear that "Americans have largely benefited from the real estate boom" in recent years. True, consumer demand is being satisfied but that's true of any good or service consumers choose to buy. If he has in mind the rise in the market value of existing homes, it would be more correct to say that some Americans (homeowners) have gained while others (e.g., would-be homeowners) have lost. Maybe there are more who have gained than have lost. (This doesn't of course mean that the gains outweigh the losses.) But so what? A change in the relative prices of assets (which is what the real estate boom is essentially about) does not of itself make Americans better off overall. Indeed, if the real estate boom were fuelled by an expansion of bank credit, the resulting malinvestments cause Americans to be poorer, not richer, overall.
Using Zillow my 23 year old house has appreciated at an annual rate of 2%(nominal).
My question in regards to this is: Does it really matter whether or not there are foreign and, for that matter, domestic savers?
It seems that the Fed controls, for the most part, the interest rate. If they believe that they can control economic growth with the interest rates won't they keep targeted rates low?
Eventually low interest rates will create malinvestment and then economy will eventually correct itself. Capital stock is fluid, whether its housing or industrial it will probably contract eventually. Thus driving down housing prices and other capital investment goods.
Lowcountry: if "Americans have largely benefited" means that the net utility gains are positive, then it's a meaningless statement, since interpersonal utility comparisons are themselves meaningless.
But since home ownership is at an all time high and homes are bigger and better than ever, it's hard to understand how most people could be worse off.