I sent this letter this morning to the Wall Street Journal:
John Engler rightly
defends NAFTA against political-candidates’ misrepresentations of this
trade agreement ("What Nafta Trade Deficit?" April 21). But he
stumbles into a common error when he asserts that much of the U.S.
trade deficit is caused by U.S. imports of oil.
A trade deficit
reflects decisions made by persons on both sides of a border. If
foreign suppliers of oil to America spent all of their dollars on goods
and services produced in the U.S., Americans’ imports of oil would not
raise the size of the U.S. trade deficit. America’s trade deficit
grows not just because Americans import lots of things (including oil),
but also because foreigners choose to invest their dollar earnings in
the U.S. For this reason, Mr. Engler’s conclusion that it would be
"good" if America’s trade deficit were lower is questionable. I, for
one, welcome capital inflows into the U.S. Such inflows of capital not
only directly fund private investments in America, but help to lower
Americans’ cost of financing Uncle Sam’s reckless habit of spending
beyond his means.
Sincerely,
Donald J. Boudreaux
If it’s true that Americans save too little, we Americans should be especially pleased that foreigners save and invest much of their savings in the United States.
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"If it's true that Americans save too little [Is less than zero little enough?], we Americans should be especially pleased that foreigners save and invest much of their savings in the United States."
Oh, they're investing, all right; it's just that they haven't switched yet from keeping the US government afloat to buying up the US on the cheap.
David White: "Oh, they're investing, all right; it's just that they haven't switched yet from keeping the US government afloat"
David, even if some foreign investment is in U.S. government securities, the net effect is increased investment in the private sector.
The federal budget deficit is not dependent on the decisions of foreign investment but rather on the decisions of 535 members of Congress. If foreign holdings of U.S. dollars were used entirely to buy U.S. goods and services, the federal budget deficit would not magically go away.
When foreigners buy U.S. Treasury securites, the U.S. debt does not crowd out investment in private enterprise. The emple demand for U.S. treasury securites allows a lower interest rate than would otherwise be possible.
The form of investment of foreigners just doesn't matter. It will continue to help the U.S. private sector.
Christopher Neely of the St, Louis Fed explains this very well in Why are economists unconcerned about foreign investment in the U.S.?
Benjamin Powell, economist at Investors Business Daily, explains the trade deficit in one short paragraph in Trade Deficit Is Really A Capital Surplus
"As long as our country remains a good place to invest and we have a low saving rate, foreigners are going to invest in the U.S. more on net than we invest overseas. That will generate a capital account surplus and the resulting trade deficit. This is a good thing."
I just had another thought. When foreign investors increase the investment in the U.S. – either through direct investment, purchase of corporate debt and equity, or purchase of government debt that would otherwise crowd out private investment – they increase the total investment in our economy. By doing so, those foreign investors grow our U.S. tax base, increase government revenues, and should reduce the federal budget deficit. Of course, it hasn't worked that way because Congress has increased government spending even faster than government revenues have increased. But if Congress could hold the line on spening, then wouldn't foreign investment eventually reduce the federal budget deficit?
Now if we could only get our presidential candidates to understand that our federal deficit isn't all just a matter of "buying foreign oil" or "trade with China," we'll all be better off.
If foreign holders of U.S. dollars should zero out the so called 'trade deficit' by purchasing U.S. created goods and services, then U.S. consumers would experience even higher prices for goods and services.
If any of you have studied capital formation, you might ponder the investment inflow to Russia following the 1917 Revolution. Or, the capital accounts of the NEP during the '20's.
The "lab" is available right now, in Venezuela. Want increased domestic cement utilization? Well, Mr. Chavez has determined the way to do this is to nationalize the cement industry. Want to guess how much foreign investment this policy will encourage?
Government reaction to OPEC in the first oil war was to inflate our currency…affecting the real value of contracts. The problem was, inflation affects banks, too.
The current strategy of forcing foreign holders of US cash to evaluate their decisions to peg to US currencies is interesting…and you can already hear the "intelligent" opinion-makers start to crow about how we've abandoned the dollar. Have we, really? Aren't our european trading partners going to step in, without Treasury intervention? And, will the Chinese adjust the yuan?
It's interesting to watch.
Maybe your counter-intuitive angle on debt is right, though David White might like this very old cartoon:
http://theylaughedatnoah.blogspot.com/2008/04/trade-deficit-undesirability-of.html
I think that there are an awful lot of people out there that want a net trade outflow (i.e. a trade surplus) while simultaneously wanting a net investment inflow. They bemoan the trade deficit, and they bemoan increasing US investment overseas.
Unfortunately for them, and for those of us who have to deal with them, such a dual wish is mathematically impossible. This is ultimately the heart of the problem in my opinion, so many people don't understand simple trade accounting and thus suffer from cognitive dissonance on trade.
"I think that there are an awful lot of people out there that want a net trade outflow (i.e. a trade surplus) while simultaneously wanting a net investment inflow. They bemoan the trade deficit, and they bemoan increasing US investment overseas."
To understand how economic issues are reported one need only know that from the media's perspective "all economic news is bad news especially when a Republican is President."
That is why it is reported as bad news when the dollar rises (i.e. exports are more expensive abroad)and bad news when the dollar falls (i.e. imports are more expensive at home). That is why rising unemployment is bad news (i.e. for workers) and why falling unemployment is bad news (i.e. inflation is around the corner). Similarly, rising interests rates are bad news (to consumers) and falling interest rates are bad news (for investors.)
No doubt if the trade deficit starts to fall when a Republican is President, then the MSM will quickly point out that the US has become less attractive to foreign investors.
PaulD,
The media bias against Republicans is not surprising. What amazes me is the economic ignorance of many conservatives who buy into the Lou Dobbs and Pat Buchanan rhetoric on trade.
"I think that there are an awful lot of people out there that want a net trade outflow (i.e. a trade surplus) while simultaneously wanting a net investment inflow"
Happyjuggler is exactly right. It's not surprising, really, as it's just a consequence of lack of economic knowledge.
"from the media's perspective "all economic news is bad news especially when a Republican is President"
PaulD, that's a bit of horseshit. All economic news is bad news for two reasons: (1) most reporters have very little education in economics, and (2) bad news sells so damn much better than good news.
The anti-conservative bias in the media is a myth caused by selection-bias and confirmation bias. Through selection bias, people looking for liberal bias persistently ignore the large amount of conservative media out there (talk radio, WSJ, Fox, Washington Times, etc.), and pretend they aren't part of the population we should sample when looking for media bias.
Through confirmation bias, counter-examples are simply not noticed, while every confirming example is noticed, recorded, and repeated ad nauseum.
You should consider Hanlon's Razor: "Never attribute to malice that which can be adequately explained by stupidity."
That adequately explains the media.
And I don't attribute your comments to malice, which leaves only…
Re:
What amazes me is the economic ignorance of many conservatives who buy into the Lou Dobbs and Pat Buchanan rhetoric on trade.
Perhaps it is due to there being a foundation of truth to it. Next, not all conservatives buy into all the economic philosophies of Reagan. There are plenty that would rather work with what we have, first.
Allowing every country to buy up the US does not end the problem. That dependency only masks the problem of low/negative savings. Fine if you want nations calling to apologize when they hear truth about their goods, but not here. Our nation needs to be in the drivers seat when it comes to trade, not the back seat.
Foreign investment can only go so far. That is part of why Dobbs and Buchanan have an audience, and it being a large one. Our nation first, trade only for what we do not have. That does not include gutting our nation to put them in far, unreachable corners of the earth.
Oh Yes, truly a libertarian, free market, environment where we have foreign central banks buying the debt created by the federal government.
Correction:
That does not include gutting our nation to put jobs in far, unreachable corners of the earth.
sethstorm: "Allowing every country to buy up the US does not end the problem."
What does that mean? Do you believe other nations are "buying up the U.S.'? U.S. household wealth has been steadily increasing just as trade has increased. There is not a fixed amount of wealth in the U.S. Why limit our growth to the amount of investment made by our citizens and residents?
If Toyota wants to build an auto plant in San Antonio, and Thyssen-Krupp wants to build steel mill in Alabama, and Siemens want to build a wind turbine factory in Iowa, why would we ever want to stop them?
If retiring baby boomers want to sell their U.S. stocks, why would we ever restrict their sales to only U.S. residents and citizens?
If foreign governments want to purchase our government debt, freeing up U.S. savings for other more productive uses, how can that be a bad thing?
sethstorm: "Our nation first, trade only for what we do not have."
Why? If the workers of another nation can produce something at lower cost, why should the consumers of this nation not be allowed to take advantage of those lower costs?
Seth, do you understand either absolute or comparative advantage? Do you understand that consumers of different nations trade in order to increase the wealth of both nations?
U.S. GDP has continued to increase just as we have increased our foreign trade. The wealth of all the world, including that of the U.S., will continue to grow with free trade. Protectionism advocated by Dobbs and Buchanan is the biggest threat to our properity.
If foreign governments want to purchase our government debt, freeing up U.S. savings for other more productive uses, how can that be a bad thing?
But US personal savings are zero.
So how do you free up zero?
Next, not all conservatives buy into all the economic philosophies of Reagan. There are plenty that would rather work with what we have, first.
True. And Huckabee would make a much better president than Reagan ever would/could have. Presidents do so much and control the economy at the same time, too.
Allowing every country to buy up the US does not end the problem. That dependency only masks the problem of low/negative savings. Fine if you want nations calling to apologize when they hear truth about their goods, but not here. Our nation needs to be in the drivers seat when it comes to trade, not the back seat.
Must. Have. Capital-controls. Now! It ought to be prohibitted to sell assets to the damned foreigners.
Foreign investment can only go so far.
Yes foreign investment can only go so far. But, i hear that the sky does not have that much further to fall and that we should sound the alarm. I heard this from a hen named Penny.
That is part of why Dobbs and Buchanan have an audience, and it being a large one.
I think that Bryan Caplan has found four very good explanations as to why Dobbs and Buchanan (and many others) have an audience. But, I think that Caplan is full of !@#$, speaking for myself.
Our nation first, trade only for what we do not have.
Damn it, enforce this through legislation if necessary. Don't we as consumers know that consumption of foreign goods are in our worst interest. Stupid people need to start watching Dobbs: maybe there should be legislation for that, too.
That does not include gutting our nation to put them in far, unreachable corners of the earth.
What? Listen; all I really know is that people trade with one another to make themselves worse off than they were prior to the exchange…unless, of course, they both speak the same language or are of a 'familiar' skin color/origin.
[/Tongue firmly planted in my cheek]
BushCo, BushCo, BushCo, BushCo.
That's all you need to know. Keep the meme alive!
/muirdiot
LCJ,
You are truly gifted. That was brilliant. Thank you for that post!
[wiping tears of laughter from my eyes]
Add me to the list of people who don't understand why trade deficit = capital surplus. I read the articles by Christopher Neely and Benjamin Powell, and I still don't understand why if we purchase goods and services from overseas, why it tautologically must be that those foreign firms must send the cash back the U.S. as investment. Couldn't they invest in in some other country?
Yes, I get your joke.
However, the point would stand that altering trade to fix a savings problem is still "capital control". Whether it is pushing "free trade", protectionism, or a mix in between – it is still a control.
As for comparative advantage – it leaves little room for quality in products/services. How can there be a case for quality if the nation in question is overwhelmed by another? If one is to move production out to be able to do more design- product quality should not necessarily go down. However, it has – and that the US ends up with quality level determined by another nation with lower standards(such as some FTA/MFN status nations).
That is where my objection to it lies – another nation with lower quality has too much incentive to cut corners internationally as well as domestically. If they have large enough influence, then they can get away with very slow change.
That translates into our nation being driven largely by another country's demand turned into a small special case. There are improvements, but they are not in quality per dollar.
China has a huge inflow of investments, don't they? They also have a trade surplus, don't they ?
I still don't understand why if we purchase goods and services from overseas, why it tautologically must be that those foreign firms must send the cash back the U.S. as investment.
Cash is not wealth. What they have is paper. If it never comes back to the U.S., then the devaluation of the dollar is somewhat mitigated. That cash represents debt to them for what we have purchased. If it comes back, then the debt is either paid off or, if it is invested, the repayment is postponed.
Try eliminating the cash from the equation and see if that helps.
Trade has nothing to do with our fiscal problems, they are of our own making from the cost of entitlements, subsidies, and empire.
Perhaps, but then the frame, walls, roof and windows are a rickety assemblage of falshoods. Now, what is it that they say about broken clocks? I do not suggest that you plan your life around one even if is right twice a day.
Add ME to the list of people congratulating LCJ for a great post.
Trade has nothing to do with our fiscal problems, they are of our own making from the cost of entitlements, subsidies, and empire.
The way it is currently being done, it is certainly not helping those "problems". It merely defers them. Trade is a mutual exchange, not a battle of attrition against your own followed by erosion of quality.
For the large part, citizens do not need training in their own language. Citizens do not need to be flown to another country to anger citizens of another country. Citizens do not require training to use alternate identities (no matter what ethnic origin) to converse with customers. Citizens do not need a business lobby to pay a government to betray citizens 3 decades and 2 separate economic classes(1981 and 1994 for lower end work, 2003 for information work) over.
What would be the cost of investing in our citizens first versus spending it all on the measures taken against citizens? If it is about comparative advantage, is the cost of business(in terms of money, time, PR) trying to defend its position ever factored into the cost?
Add up all the costs of hiring expensive law firms, guards(and their training to antagonize workers), lobbying firms, fighting communities with expensive PR campaigns, building places only to close it when you've lost negotiations, buying campaigns for representatives that do not favor the citizens, ensuring that education is too costly for the masses that have passed compulsory education(but cannot find/earn funding), and the costs of any other measures that have the intent of making those non citizen "low cost, low quality" workers sound good at the betrayal of the citizens.
Compare that to the cost of having a good-faith effort of working with citizens.
Then perhaps you would have a more friendly base to talk about trade and deficits. The long shot is that it may get rid of labor unions – without more "RTW".
Re: Lee Kelly
Now, what is it that they say about broken clocks? I do not suggest that you plan your life around one even if is right twice a day.
Failing that, you use what natural light is out there for a good approximation.
As for your comment about my post.
I've heard that you catch a lot more flies with honey than vinegar though. That even applies especially when wanting to create economic change – even if the truth is bitter.
"I still don't understand why if we purchase goods and services from overseas, why it tautologically must be that those foreign firms must send the cash back the U.S. as investment."
Of course, a foreign country can invest its dollars in another foreign country. What does the foreign county do with its new investment of US dollars?
Eventually, US dollar will make it back to the US in the form of trade or investment because the US dollar is a claim against US assets.
Think of US dollars as a check drawn on the US economy. Investors can trade checks, but the check eventually must be cashed to realize its value.
If there were US dollars that did not make their way back to the US economy, those dollars would be similar to uncashed checks. It would be great if I could write a check to obtain a product with a check that the producer would never cash. I get goods, he gets a piece of paper. That would be the equivalent of dollars not coming back to the US.
Still Stumped: I find myself posting a link to to this every other month or so. Start at the point of the medium-lengthed blog entry that reads "How do the Dollars Get Back?" and perhaps it'll help you understand the balance of payements thing that is stumping you. Of course, you will likely not be damaged in any way shape or formif you read everything, including the linked stuff.
Trade is a mutual exchange, not a battle of attrition against your own…
Yes!
…followed by erosion of quality.
Oh no. Huge let-down. A broad-based errosion of quality of goods is a myth that should have died long ago.
What would be the cost of investing in our citizens first versus spending it all on the measures taken against citizens?
One obvious cost would be for those firms that currently market themselves as jingoists (entirely made in America; America firsters). Think of the new competition that they'd face if the state subsidized their competitiors. It would be devestating! Some of those firms are only marginally profitable because consumers, no matter what they'll tell you publicly, seek value.
More legislation, if that's what it would take, is not something that someone of the limited government, conservative persuasion should be endorsing. You did allude that you were conservative, correct?
If it is about comparative advantage, is the cost of business(in terms of money, time, PR) trying to defend its position ever factored into the cost?
Rhetorical question: do you really believe that companies ignore costs when they calculate the bottom-line?
Add up all the costs…
Nevermind, you answered the question. Whether you're correct or not is highly debatable.
and the costs of any other measures that have the intent of making those non citizen "low cost, low quality" workers sound good at the betrayal of the citizens.
Betrayal? Just who in the world would a multinational corporation betray if they did not seek to maximize their profits over the long-haul. As a worker in this day and age, one must think of themselves as a seller of their labor services to business managers who have employment opportunities that they wish to fill. In fact, this type of mindset should have been adopted long ago…somewhere along the line, too many Americans started this false belief that they were just entitled to things like employement opportunities (jobs).
Compare that to the cost of having a good-faith effort of working with citizens.
Free markets are the best way for true cooperation ("working with") to flourish.
Then perhaps you would have a more friendly base to talk about trade and deficits.
Perhaps if the more people understood and appreciated liberty, they wouldn't be a !@#$ing bitter base now would they.
If they have large enough influence, then they can get away with very slow change.
Posted by: sethstorm | Apr 21, 2008 7:35:58 PM
Imagine that, simple minds thinking alike.
Quote from sethstorm: "Our nation needs to be in the drivers seat when it comes to trade, not the back seat."
Ah, another collectivist. I wonder if we'll get to see the democracy banner unfurled as well?
For the large part, citizens do not need training in their own language….Citizens do not require training to use alternate identities (no matter what ethnic origin) to converse with customers. – Sethstorm
I really wish I could agree with that.
If I am Hayek then I beleive in business cycles. Therefore the equation:
Current-Account Deficit = Capital-Account Surplus
Is only valid over the cycle integration period.
So, if a Hayekan says, great, the accounts are balanced, then he does not mean they are balanced today. Or if they are balanced they are only balanced because investors are estimating value by time averaging over the cycle.
Thanks, all – question answered. The Coyote Blog is particularly well done – thanks for the link.
Add me to the list of people who don't understand why trade deficit = capital surplus. I read the articles by Christopher Neely and Benjamin Powell, and I still don't understand why if we purchase goods and services from overseas, why it tautologically must be that those foreign firms must send the cash back the U.S. as investment. Couldn't they invest in in some other country?
They do, but through Leheman Brothers, Bank of America, Goldman Sachs, etc. The US is simply a better or more trust worthy investmentor than other countries. Investment houses make products from bonds, equities, futures, funds, etc., from all over the world, and eventually sell them to people from Thailand, Ecuador, Nepal, Djibouti, etc.
Money is an accounting system.
If people in other countries prefer to use dollars for their accounting, it signifies the relatively low worth of their own money.
But money is not wealth. It is a medium of exchange.
But money is not wealth. It is a medium of exchange.
Posted by: Sam Grove | Apr 22, 2008 4:29:27 PM
EXACTLY [all caps warranted]! Just a tool that helps facilitate exchange and severely eliminates the double coincidence of wants problem.
"why it tautologically must be that those foreign firms must send the cash back the U.S. as investment. Couldn't they invest in some other country?"
Is it possible for holders of dollars to invest in other countries? Of course it is. How do they do this? The most common way would be to sell the dollars and purchase the currency of the country being invested in.
Who would buy the dollars being sold? People who purchase dollars would be people who want to buy something from the U.S. with dollars or who want to trade dollars with people who want to buy something from the U.S. economy. So these dollars would eventually come back to the U.S. in exchange for goods, services or investments.
In some cases, a person holding U.S. dollars could arrange a transaction to invest in another country using U.S. dollars as the medium of exchange. Why would a foreigner be willing to accept U.S. dollars as the medium of exchange rather than the currency of his own country? He might do this if wanted to use the U.S. dollars to purchase something from the U.S. or to trade with someone else who wanted U.S. dollars to purchase something from theU.S. Dollars can pass between numerous foreigners but they ultimately have real value only because they can be used to purchase goods, services or investments in the U.S.
If the dollars never come back to the U.S. this is a good deal for U.S. citizens. This deal would be that the U.S. government creates money out of "paper" or "bookkeeping" transactions that is sent to foreigners in exchange for real goods, services and investments. The U.S. benefits when foreigners are willing to hold "pieces of paper" in exchange for providing the U.S. with tangible goods, services or investments. This is not such a good deal for foreigners, which is why most dollars are eventually exchanged for something real from the U.S. economy.
I expect to be married next year. If my fiancee doesn't change her mind again, she'll sell a house in the U.K. and buy one here. I suppose the transaction affects the current account deficit somehow, but I'm not sure how.
Does the transaction lower the trade deficit, because a foreigner buys something produced in the U.S.? I don't think so. I suppose merchandise must cross borders to qualify as "trade". She'll obtain dollars for pounds for the transaction. If she obtains them from someone who sold something to the U.S. (so that the transaction does affect the trade deficit), dollars subtracted from the trade balance renter the U.S. without adding to the trade balance, and that's just the end of the line for these dollars in terms of their cross border circulation.
When my fiancee moves here and occupies the house, I suppose she has no effect on the trade deficit either, so the dollars never add to the trade balance. They were counted on the negative side of the ledger when they left, and they'll never be counted on the positive side on a return trip.
We can run a capital account surplus forever, as long as we're more sparsely populated and more resource rich per acre and attract more immigration and investment than the rest of the world. I hope we will.
That said, I'm highly skeptical of the seignorage we earn by effectively exporting the dollar as a currency. We could lose this advantage practically overnight. It happened to the pound. It can happen to the U.S. dollar, and I suppose it will happen at some point. I think we're approaching to this point now.
I'm not sure this statement is true. Dollars can circulate indefinitely outside of the U.S., and the quantity of dollars in circulation can increase indefinitely, just as the quantity of dollars circulating outside of the Federal Reserve increases indefinitely.
Regardless, again, I am extremely skeptical of the idea that the Fed can be the world's central bank or that U.S. consumers can indefinitely gain seignorage this way. It's just too good to be true, and ideas that are too good to be true are not true.
And I'm certainly not interested in maintaining an empire for this purpose.