Understanding basic economics doesn’t require genius, but it does require genuine thought. It requires looking beyond labels.
Many people who rightly applaud commerce between two or more citizens of the same country get all confused and befuddled if the very same commercial transaction takes place between people living in different sovereign jurisdictions.
Consider this exchange yesterday between Kai Ryssdal, host of the radio program Marketplace, and stock broker David Johnson. Johnson is telling Ryssdal about a table in Wednesday’s Wall Street Journal that reveals that many of the 30 companies that make up the Dow Jones Industrial Average earn substantial portions of their revenues outside of the United States.
Johnson told Ryssdal that this was "just a remarkable table of how much revenue [earned by corporations in the Dow 30] comes from abroad. … Intel was number one….. How much of their revenue do you think comes from abroad."
Ryssdal guessed 46 percent. Johnson, with lots of "wow" in his voice, then reported that the real figure is 85.4 percent.
Ryssdal seemed less excited by these figures than was Johnson. So Ryssdal asked Johnson "if that troubles you or not that all these big American companies are so dependent now on revenues from overseas."
Johnson answered immediately and correctly: "no."
But Ryssdal’s question startled me. Usually we are assaulted with concerns that American companies aren’t selling enough to foreigners; that Americans generally are spending, spending, spending while foreigners are prudently saving, producing, saving, producing — that policy changes are needed to enable American companies to sell more to foreigners. (Regular Cafe patrons know that neither of the Cafe’s co-proprietors put much stock in such mercantilist concerns.)
Ryssdal’s question above, though, was the reverse of mercantilism; let’s call it msilitnacrem. It’s the worry that "our" domestic firms are "too dependent" upon foreign sales — that too many foreigners, relative to domestic citizens, are buying the outputs of "our" domestic firms — that "our" domestic firms are earning too much money from trading with foreigners.
Proving that there’s always a negative, ominous spin to put on almost any factoid, Ryssdal suggested that it might be cause for concern that American corporations "are so dependent" upon sales to foreigners.
If exports are good — more generally, if it’s desirable to earn revenue on sales of goods and services to foreigners — then why ask if such "dependence" is troubling?
Is Safeway supermarket "troubled" by the fact that it is "dependent" for almost all of its revenue on people who aren’t associated in any way (except as customers) with Safeway?
Listening to Ryssdal ask his question drove home to me the reality that many people in the news media see problems that don’t exist.
Of course, neither sales to foreigners nor purchases from foreigners are problems. It’s just commerce, pure and simple. And it should remain free of artificial obstacles — obstacles thrown up by greedy rent-seekers and applauded by those who cling to the ridiculous superstition that a political boundary makes voluntary trade suspect.
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Tim Graham on the Corner on National Review Online called that show MarxistPlace a few years ago: "RE: LEFTIST PBS [Tim Graham]
A friend replies jokingly to my Brancaccio "media reform" post:
Too bad — I liked Brancaccio on [the public radio show] Marketplace. Apparently now he's hosting Marxistplace. (Rim shot.) "
They always highlight to plight of labor, the dangers of foreigners, and the risks of people making more money than they should.
Long post warning:
Ryssdal's worry makes much more sense than the worry of too many imports.
Imagine if you will that the US exports $1,000,000,000,000 worth of goods and services each year, but we import nothing. Lou Dobbs would be ecstatic, as would the mainstream media, amongst others.
Now imagine we do that year after year after year. The question then becomes, what in the world do we do with all that paper (a.k.a. foreign currency) that "we" get in return for our hard earned labor? We can't spend it. We can't eat it. Who is going to take all those Yen and Euros and whatnot and trade it for dollars so "we" can pay our suppliers and workers in dollars, noting that only the dollar is legal tender in the US. (Besides, would you accept payment in Yen if you couldn't spend it?)
So we are sending overseas a trillion dollars worth of the product of our hard earned labor for absolutely nothing. Put another way, we are thus engaging in foreign aid to the tune of one trillion dollars a year. How stupid can we actually be? That said, how long can we expect to remain so stupid?
Hopefully this little exercise makes patently obvious something that ought to be clear but manages to get lost in the foreign exchange confusion. Namely, the one and only reason for "us" to export goods and services is so that "we" have the means to import goods and services.
"Ok", I hear the Lou Dobbs brigade saying, "but what about our massive trade deficit? If we are importing more than we export, doesn't this invalidate your theory?".
"Uh, no", I reply. "What difference does it make if we export those goods and services tomorrow instead of today? In fact, perhaps you have things backwards. Perhaps other countries in the world like Japan and Germany are saving more than they know how to invest domestically, and they looked around and decided the US was the best place to make relatively safe investments. At the same time, this investment inflow is greater than the sum of American money looking to invest overseas. Mathematically, in such a scenario the only way for that to happen is if the agree to export enough to the US so that they can get enough dollars (we don't take no stinking Yen or Euros in exchange for bonds or stocks or for wages) with which to invest."
"Sigh", says the Lou Dobbs brigade. "Haven't you been watching the show? Lou says the same thing day after day after day after day! One would think you'd have learned by now that we have a massive *deficit* because of our imports and will have to pay it back sooner or later. We can't keep this up forever!!!"
"Well, in theory you are right 'they' will want their money back, and then we will have to export more to them than they do to us in order for that to happen. But I have two other problems with that scenario. First, the British and the Dutch own a phenomenal amount of "the US" still, centuries after making huge investments in the US. It is not clear to me that this ever has to end. Second, why is it scary that foreigners might want their money back from their investments, but not scary when US baby boomers who retire will want their money back for their investments? Our consumption/investment ratio will have to change then too? I can make an argument that Americans aren't saving enough for their own good, but how exactly is that the fault of someone overseas?"
"Because Lou Dobbs said so, that's why. Gee juggler, stop trying to confuse the issue".
"The question then becomes, what in the world do we do with all that paper (a.k.a. foreign currency) that "we" get in return for our hard earned labor?"
We increase foreign "investment". For instance, we could buy up foreign land and keep it out of use, waiting for it to rise in value. Eventually, we'll own the whole country.
I think the real concern is when people talk about "our companies" selling too much to foreigner, or somebody is selling "our" land companies to foreigners. The speaker never really owns the company, but is claiming ownership of assets simply because they are located in this country. Let's remind people not to use the phrase "our companies" unless they truly own the companies.
"Eventually, we'll own the whole country."
You mean like the British and Dutch own the whole of the US?
You missed the point of my argument though. Assume you do own all of a foreign country's real estate. You still can't spend it, since that country's currency is worthless to you. No one in the US will trade your foreign currency for their US dollars either since with zero imports what would be the point? They can't spend it either. The only way your ownership "of the whole country" pays off for you is if you import.
Thus the only reason to export is to be able to import. Therefore there is nothing bad about imports. And there is nothing at all good about exports in the absence of imports, indeed such exports are very bad. They are two sides of the same coin. That's why it is called *trade*, giving someone something in return for nothing is a gift, not a trade.
It is important to understand that when you add up exports, imports and cross border investments by individuals and governments, that the sum total is $0 each year. The system is always in balance.
One more example. Let's say that in a world of (artificial of course) zero trade balances, there exist some who save a lot and some who save little. In the world you outlined where someone could feasibly buy up "all the land", then the Japanese savers own all the land in Japan, and the US savers own all the land in the US. How is an imbalance of savers "owning everything" worse internationally than domestically?
When foreigners can't figure out how to invest intelligently in their own country with all their savings, their investment location of choice is the US. Some Americans also invest overseas in addition to the huge amount of investments they make domestically. But the amount foreigners invest in the US is greater than "our" investments overseas, therefore mathematically we have a trade deficit.
Let's say new domestic investments by Americans added up to two trillion dollars last year, while foreign investments added up to one trillion dollars. (I'm making these numbers up for illustrative purposes, they can be any number and it works out the same). We thus had three trillion in new investments in the US that year.
Suppose that "they" invested all their US investments in US Treasury bonds, thus enabling the government to "invest" (Democrat term) or "waste" (my term) a trillion dollars it would not have been able to otherwise. Now imagine that we had a trade balance of zero that year and there was no net foreign investment also. Now the trillion dollars worth of US government bonds has to be financed by Americans. If Americans still invested a net new two trillion dollars domestically, then that means that there is "only" a trillion dollars left over to invest in what I would call "real" investments, as opposed to investing in government paper. How are we better off with a trillion dollars less in new investments thanks to Lou Dobbs and the Democrats scaring off foreign investment in the US?
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And mercantilism is the opposite of what we ought to have in international trade. Or something like that.
Jason,
I bet once you get past 8 letters or so, the efficiency of decoding must drop quite fast.
On the same note, my wife was watching a movie in Chinese with English subtitles. The subtitles were only barely visible. I could only see the top 35% or so. The strange thing is that I could read nearly every word almost as easily if I had seen the whole thing. Because she is Chinese, my wife could understand the dialogue, but when she tried to read the subtitles she couldn't. Mks y wndr hw mch nfrmtn w rlly nd t mk a pnt.
isn't this just a naive belief in syndicalism & autarky, something that has been written about since Aristotle? Ricardo's gains of trade argument is very non-intuitive.
Don,
You are clearly missing an integral datapoint:
NPR, although funded by American taxpayers, is (ironically) de facto anti-American ergo anti-capitalist.
Anything that can be spun as such, will be.
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Public radio is the only non-music station that I can get clearly in my work place, so public radio it is. And nothing they do anymore surprises me, as far as their sentiments go.
They are always just short of what could pass for a full blown comedy skit, spoofing a bunch of college age Leftists attempting to make a serious broadcast.
In other words, they are perfect caricatures of themselves.
In general when you talk about the foreign earnings of a US business you are not talking about the profits on the exports of US goods and/or services to another country.
Rather you are talking about the profits the US business earns on it production and sales in other countries.
Foreign earnings has little or nothing to do with US trade.
Spencer,
I don't understand your point. Revenues earned from foreign operations are revenues earned from foreign operations. Mercantilists and other protectionists think it to be just great when American firms sell lots of things to foreigners. What difference does it make if the goods and services are shipped from the U.S. or if they are produced by U.S. firms abroad?
The point is that mercantilists think that the U.S. economy is better the greater the amount of sales these companies make to foreigners. It's a silly measure of U.S. economic vigor — but it's equally silly to worry about "dependence" on sales to foreigners regardless of the physical location of production of the things sold to foreigners.
Also, you're not quite correct that "foreign earnings has little or nothing to do with US trade." Boeing earns nearly 30 percent of its revenue from sales to foreigners, and I know that many (all?) of its commercial airliners sold to foreigner carriers are produced in the U.S.
If I am evaluating a company I want to know the source of its profits. If the profits stem from exporting US produced goods — what dominates Boeing earnings — it a very different company than Ford, for example who earns more profits manufacturing and selling cars & trucks in Europe then it does in the US.
When we start looking at the returns from direct foreign investments — a major component of the "black box" argument –
it makes all the difference in the world
that Ford will have major returns from past investments abroad. But in contrast,
Boeing aircraft are delivered in the US for dollars and Boeing has extremely limited foreign direct investment in other countries. So while Boeing makes a major contribution to US exports it plays virtually no role in US returns from foreign investment.
When you are talking about the foreign EPS of a DOW or S&P company what you are taking about are the returns on previous foreign direct investment by those firms. It has little or nothing to do with their exports from the US. If you read the BA annual report they do not consider foreign earnings important enough to break it out as a separate line item even though they are a major exporter.
Do you see why I think it is important to look at foreign earnings — returns on past direct foreign investment — as very different things then revenues from US exports.
Sorry — I do not know why I said "black Box" when I meant "dark matter".
Thank you, Spencer. You made the point I was aiming for. But let me add one more issue. If a company's foreign sales result from exports, there are domestic jobs resulting in salaries spent and saved, taxes paid, suppliers engaged, etc.
It seems to me the beneficiaries of profits from foreign investment are very different from those who earn wages by producing exports. For this reason, I think some Americans might care about the percentages in the Wall St. Journal chart afterall.
"Imagine if you will that the US exports $1,000,000,000,000 worth of goods and services each year, but we import nothing…what in the world do we do with all that paper"
Sell it, duh! Of course USD would appreciate against the foreign currency, look at the CAD vs. USD over the past few years for example…
Your question is dangerously hypothetical though, just what exactly do you imagine we would be exporting (consuming) in this strange and beautiful world of perfect and complete US self-dependence?