The Presumptions of Ptolemaic Economics Die Hard, Part II

by Don Boudreaux on October 4, 2011

in Balance of Payments, Country Problems, Myths and Fallacies, Seen and Unseen, Trade

Addressing here again this e-mail to me yesterday from C. Fred Bergsten:

Professor Boudreaux,

Your comment on my op-ed for last week is ridiculous.

Of course the American seller of land to the Chinese COULD buy US pharmaceuticals.  But she could also save all the proceeds.  Or use it to buy more imports from China and elsewhere.

We would never have a trade deficit in the first place if your postulated scenario were to occur in the real world.  Come on!

Sincerely,

C. Fred Bergsten

In this post yesterday, I addressed the most serious flaw in this e-mail, namely, a U.S. current-account (“trade”) deficit is simply another name for a U.S. capital-account surplus.  (Mark Perry has more precise data.)  So even if we accept unalloyed Keynesianism – that is, the most vigorous case that economic health is positively promoted by more spending – Mr. Bergsten’s allegation that eliminating the U.S. trade deficit is a costless (!) means of increasing the employment rate in America remains naive.  Reducing the current-account deficit would simultaneously reduce capital inflows into the U.S.

(Note: I will not deal here with arguments that an increasing U.S. capital-account surplus threatens America by turning over more assets in the U.S. to non-Americans.  That argument is entirely different from the one that Mr. Bergsten makes, which is that the U.S. trade deficit means that there is less aggregate demand in America and, hence, American unemployment is thereby kept unnecessarily high.)

Take another look at Mr. Bergsten’s second paragraph where he says:

Of course the American seller of land to the Chinese COULD buy US pharmaceuticals.  But she could also save all the proceeds.  Or use it to buy more imports from China and elsewhere.

Yes.  He’s correct.  But note that:

(1) If she (the American seller of land to the Chinese) saves all of the proceeds the problem is hoarding (which I will assume here is, in fact, a problem).  The nationality of the hoarder is irrelevant.  Suppose the dollars that the Chinese person used to buy the land had instead never gone to China as dollars spent by Americans on Chinese exports.  Suppose instead that the American buyers had bought their goods from American producers and then these American producers then hoarded the dollars.  The result would be the same (problem or not) that Mr. Bergsten mistakenly attributes to the U.S. trade deficit but without any resulting increase in the U.S. trade deficit.

(2) If instead, as Mr. Bergsten postulates as another possibility, the American seller of land then buys “more imports from China and elsewhere” – so what?  What do these foreign exporters do with their newly earned dollars?  Answer: they either spend these dollars buying American exports, or invest these dollars in dollar-denominated assets (including possibly hoarding dollars themselves).  With this possibility, Mr. Bergsten has simply added another round to trade – a round to be analyzed just as we analyze the first round.  (Hint: in the second round the dollars in any increase in the U.S. current-account deficit return to the U.S. as investment, unless they are hoarded – in which case, see my above point that there is nothing unique about foreigners’ ability or propensity to hoard dollars.  [I ignore here, for the sake of argument, the real-cash-balance effect.])

But the paragraph that I find most mysterious in Mr. Bergsten’s brief e-mail is his third one:

We would never have a trade deficit in the first place if your postulated scenario were to occur in the real world.  Come on!

This claim is simply wrong.  If Americans buy, say, $1M worth of goods from China and then the Chinese exporter uses this $1M to buy land in Texas or Florida or Maine – or if the Chinese exporter uses it to buy stock in American corporations – or lends it to Uncle Sam, to the Fairfax County, VA, school district, or to me personally – or uses it to fund FDI in the U.S. – those purchases are recorded in the capital account (not the current account).  The transaction I describe in my initial letter – my “postulated scenario” – will in fact increase America’s trade deficit (or, to be precise, if the U.S. had a trade surplus, it would reduce that surplus).

…..

I understand that Mr. Bergsten’s e-mail to me is short – and probably dashed off quickly.  One must be forgiving when evaluating the contents of things written and said informally.  But insofar as Mr. Bergsten actually believes what he wrote to me in his e-mail, he’s quite mistaken about the meaning, causes, and consequences of a U.S. current-account deficit (nee: capital-account surplus).

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SweetLiberty October 4, 2011 at 10:18 am

Forgive my natural skepticism, but while I can see how trade deficits are offset by foreign investment surpluses over time, Mark Perry’s graph looks too perfect! I would expect to see a close relationship, but not an exact mirror image. Given that a trade of dollars for foreign goods must first occur before those dollars can be spent, there must be some delay involved. Also, some US dollars would be hoarded for a time while the recipients considered how best to spend or invest them. How is it that Perry’s graph shows an immediate and precise turnaround as if the Chinese exporters handled US dollars like a hot potato bouncing back into the hands of Americans instantly? I’m clearly missing something.

vidyohs October 4, 2011 at 10:40 am

Graphing in 5 year increments can leave a lot of leeway for fluctuation over a substantial time and still not show up in the graph.

For instance sitting on capital 3 years before spending or investing it would to me be a long time.

Does make a pretty picture though, doesn’t it?

vidyohs October 4, 2011 at 10:55 am

Mr. Bergsten is just one of many no nothings who accorded some degree of attention and respect by such as his president Barrack Obama.

“asked Barack Obama about banks and their new fees. Of course, Obama could not accept any responsibility for that at all. And along the way he said something pretty damn amazing.

“You don’t have some inherent right just to– you know, get a certain amount of profit.

Actually, in the free market, on the supply and demand curve, you do have an inherent right to get a certain amount of profit — that certain amount of profit that you derive from your business practices that draw in the maximum amount of profit possible before customers decide you are charging too much or they are not getting value enough to justify their continued business with you.

Barack Obama has spent three years as President punishing those who take risks and taking from those whose risk leads to reward.

In this one quote we see everything wrong with Barack Obama’s world view and how it has broken the American job creation engine.”

While president Harry Truman famously said, “No experience in the world will qualify a man for this job.” I have to imagine Harry still assumed that a candidate would have a minimum level of intelligence and a minimum understanding of what made America great. Sadly Obama only had skin color as his qualification.

vidyohs October 4, 2011 at 10:56 am

vidyohs, you no nothing, that is “know nothing”. Thank you very much.

khodge October 4, 2011 at 11:59 am

Accounting 101. Every transaction has two sides, which is Mark Perry’s point. It has to be an exact mirror.

SweetLiberty October 4, 2011 at 12:40 pm

In the long run, I agree, but it’s not quite that simple when you consider the delay between transactions. When a business buys goods from China, say electronics, this gets recorded as a trade import. The company in China could then spend some this US currency purchasing something from another Chinese business or other country that is willing to trade in US dollars, or simply hold onto the US currency with expectations of making a future investment. In either case, there is a time delay between the initial trade and the US getting its currency back. Furthermore, there is no such thing as perfect accounting – some of the transactions will not get attributed properly and there will be discrepancies at some level. That’s my concern – the graph seems too perfect. However, as Vidyohs points out, 5 year intervals is a lot of time to work out these fluctuations, so maybe that’s all it is.

Economic Freedom October 4, 2011 at 1:20 pm

I agree, but it’s not quite that simple when you consider the delay between transactions.

Huh? Except for barter, there is always a “delay” between transactions.

khodge October 4, 2011 at 1:28 pm

Actually, it is that simple (unless you are dealing with government accounting); cash on one side of the entry (capital account), goods and services on the other side of the entry.

Surfisto October 4, 2011 at 12:30 pm

Would currency exchange be involved. Money does have a price. The company will not just sit on the money for 3 years or any time period. They would put it in a bank and interest rates and currency fluctuations will allow those who need dollars to use them almost imediately?

Political Observer October 4, 2011 at 11:01 am

Don:

It would only be hoarding if the saver stuck it in a mattress or buried it in the back yard. If the savings were deposited in a bank – additional capital to be lent out. Or if some other financial investment (stocks, bonds, etc.) same potential.

Bill October 4, 2011 at 11:57 am

Why do some people commenting on matters of economics have such a blind spot concerning investment expenditure? Whether it’s the ignoring of capital account flows in international trade or the consumption/saving division of income – where saving is treated as a “leakage,” but as your comment points out, saving is only a “leakage” from the expenditure stream if it is hoarded – logical errors are made by not integrating investment expenditures into the analysis.

Economic Freedom October 4, 2011 at 1:24 pm

Investment/saving is actually “future consumption”. I believe many have this blind spot because it’s yet another example of the “unseen” that Bastiat so often mentions.

vikingvista October 4, 2011 at 2:22 pm

Future spending is also the intent of hoarding.

Economic Freedom October 4, 2011 at 3:21 pm

I don’t think so. Hoarding implies the storing away of money to satisfy the simple “miserly” desire to possess it. “Possession” is the extent of the intent.

If there were a utilitarian intent beyond mere possession — such as “future consumption — it would be called “saving”, not “hoarding.”

vikingvista October 4, 2011 at 3:36 pm

So, you think Scrooge McDuck represents a real life personality type?

With the exception of currency collectors, whose collections have very low nominal values, people don’t hoard money for the pleasure of its company. They hoard it as a means of savings. Like the buried stashes of the ancients, it is more likely to never be spent than money deposited in an inheritable estate, but it is hoarded for its purchasing power, not its glitter.

Economiser October 4, 2011 at 3:43 pm

Even if there are real-life Scrooges, what’s the harm? All that means is that someone prefers the shinyness of money instead of whatever else it can purchase.

Heck, if the price of gold keeps on rising we may start referring to people who like gold jewelry as “hoarders.”

vikingvista October 4, 2011 at 4:15 pm

No harm. To each his own.

Economic Freedom October 4, 2011 at 5:17 pm

Like the buried stashes of the ancients,

You mean those buried stashes that were never spent at all on any sort of future consumption, and which were buried because “the ancients” (and thanks for being so precise with that term; appreciate it) believed the stash should NOT be spent so that they could get into heaven more easily by offering worldy wealth to the gods? THOSE stashes?

it is more likely to never be spent

If it is more likely never to be spent, then, ipso facto, its intention could not have been “future consumption.” The word “future” doesn’t include the idea of “never.” Can’t you wait two or three posts before directly contradicting yourself?

vikingvista October 4, 2011 at 6:46 pm

“You mean those buried stashes that were never spent at all on any sort of future consumption, and which were buried because “the ancients” (and thanks for being so precise with that term; appreciate it) believed the stash should NOT be spent so that they could get into heaven more easily by offering worldy wealth to the gods? THOSE stashes?”

No. I’m referring to the stashes planted for security. Was that not obvious from the reasoning in my post?

“If it is more likely never to be spent, then, ipso facto, its intention could not have been “future consumption.” The word “future” doesn’t include the idea of “never.” Can’t you wait two or three posts before directly contradicting yourself?”

Strange and disappointing. Usually you seem quite logical. So, if I start a college fund by investing in a local factory, but the factory burns down and I lose everything, you think that I never intended to spend those funds on college? How about if the factory returns a huge return, but I die before I can go to college, did not not intend to spend those funds on college? If I save funds by doing X for purpose Y, but die before Y is realized, then I never had that purpose? Or maybe you need to do some research on the phrase “more likely” and the word “intention”.

Not even a nice try.

Economic Freedom October 4, 2011 at 9:41 pm

Was that not obvious from the reasoning in my post?

Nothing is obvious in your posts, especially any “reasoning.”

Strange and disappointing. Usually you seem quite logical.

Perhaps you’re having one of your . . . you know . . . “lapses” again? They’ve been happening more frequently lately.

So, if I start a college fund by investing in a local factory, but the factory burns down and I lose everything, you think that I never intended to spend those funds on college?

Nice little bit of equivocation there, eh, what? Under consideration is hoarding and its intent by the hoarder. Then you proceed to post something about “investing in a local factory for the purpose of starting a college fund,” which has precisely zippo to do with hoarding or anything discussed so far.

How about if the factory returns a huge return, but I die before I can go to college, did not not intend to spend those funds on college?

Yeah, uh, that’s a great point. An unanswerable argument. Congratulations! I was hoping you’d let me off easy by say something like this:

“Hey, EF, what about the all too common case of someone who claims he wants to start a college fund, invests in a factory, starts to receive huge returns on said investment, and then buries the revenue deep underground next to carved stone icons of Jar-Gon — the Great God of Economic Techno-Babble (a truly jealous god) — and surrounds the growing pile of wealth with deadly iron spikes tipped with paralyzing curare; entombs the entire thing beneath a block of hewn granite, and then builds a lovely shrine atop the whole thing — something like a small Victorian gazebo, but with a narrow mail-chute that allows continued deposits from the original investment. Then imagine that as part of the rites and rituals performed in this Temple of Jar-Gon, he expressly forbids, in perpetuity, anyone from touching the buried wealth, lest he incur the god’s wrath. Then imagine this practice continues for the next thousand years, at which time the entire nation of Jar-Gon worshippers (the famous “Jargonauts”) dies from plague. Now: prove to me, EF, that had the Jargonauts survived one more day, some unsung scion of the original investor would not have violated his culture’s deepest religious taboos by using some of that wealth to go to college.”

You got me. You’re right. I can’t prove that the original “investor” was probably lying about “future consumption” and that he actually just wanted to hoard wealth for non-catallactic reasons. But listen to me, VV. You’re a sick man. You need help. I can recommend a well-known horse doctor: his name is muirgeo. He’ll give you a big horse pill and I’m sure you’ll feel a lot better.

vikingvista October 5, 2011 at 1:34 am

EG: “Hey, EF, what about the all too common case of someone who claims he wants to start a college fund, invests in a factory, starts to receive huge returns on said investment, and then buries the revenue deep underground next to carved stone icons of Jar-Gon — the Great God of Economic Techno-Babble (a truly jealous god) — and surrounds the growing pile of wealth with deadly iron spikes tipped with paralyzing curare; entombs the entire thing beneath a block of hewn granite, and then builds a lovely shrine atop the whole thing — something like a small Victorian gazebo, but with a narrow mail-chute that allows continued deposits from the original investment. Then imagine that as part of the rites and rituals performed in this Temple of Jar-Gon, he expressly forbids, in perpetuity, anyone from touching the buried wealth, lest he incur the god’s wrath. Then imagine this practice continues for the next thousand years, at which time the entire nation of Jar-Gon worshippers (the famous “Jargonauts”) dies from plague. Now: prove to me, EF, that had the Jargonauts survived one more day, some unsung scion of the original investor would not have violated his culture’s deepest religious taboos by using some of that wealth to go to college.”

EG: “You need help.”

Yeah. Right. I’m the one who needs help.

Look, there’s no sense making your position worse by going off the deep end with an uninterpretable rant just because you anonymously wrote something rather stupid in the comments section of a blog. Your statement: “If it is more likely never to be spent, then, ipso facto, its intention could not have been “future consumption.”” is quite clearly false. You don’t need a graduate course in logic to see that.

And the intent *IS* the issue. Whether I’m saving by burying money on my land, investing in a factory, dropping it in a safety deposit box, or making a bank deposit, really makes no difference. And whether I ever manage to realize my intent, also makes no difference. The difference with burying one’s savings, is only that there is a chance it will NEVER be found again. With the other methods, it is almost always passed on to heirs.

Whether hoarding or investing, the intent is almost always future spending (some actions of a few Egyptian pharaohs or Roman nobles notwithstanding).

For your own sake, take a deep breath before posting again.

“Perhaps you’re having one of your . . . you know . . . “lapses” again? They’ve been happening more frequently lately.”

Clearly not in this case, but perhaps in another. I’m sure if it is true, rather than merely a rash concoction of a bruised ego, you can point at least one of them out for me.

“I can recommend a well-known horse doctor: his name is muirgeo. He’ll give you a big horse pill and I’m sure you’ll feel a lot better.”

I don’t doubt that you are trying to say something important here, but I’m afraid I don’t follow. Maybe you can elaborate?

Economic Freedom October 5, 2011 at 4:27 am

@ vikingvista:

Yeah. Right. I’m the one who needs help.

We’ll just have to agree to agree on that one.

Look, there’s no sense making your position worse by going off the deep end with an uninterpretable rant

Too many three-syllable words for you? Try an online dictionary.

Your statement: “If it is more likely never to be spent, then, ipso facto, its intention could not have been “future consumption.”” is quite clearly false.

Only to the lobotomized. To those with functional left hemispheres, the intention that something is likely to be spent at some point affirms the idea that it is intended for the sake of future consumption; conversely if the intention is that it is unlikely to be spent at some point, then that intention disaffirms or denies that it is intended for future consumption. QED.

You don’t need a graduate course in logic to see that.

No, you don’t need a graduate course. You need a basics course. I can recommend some excellent books in predicative logic.

And the intent *IS* the issue.

Indeed. I’ve been saying that from the start. Thanks for waking up and smelling the coffee. In fact, genius, let’s repeat it so that everyone can smell it, too:

“AND THE INTENT *IS* THE ISSUE.”

You will very shortly contradict that very statement, but only after saying some brilliantly stupid things.

Whether I’m saving by burying money on my land, investing in a factory, dropping it in a safety deposit box, or making a bank deposit, really makes no difference.

Makes no difference? A wonder, then, that so few people choose to dig up their land to bury bags of cash simply as a means of “putting something away” for their children’s college fund. Could it be that from the wealth-owner’s point of view, there *IS* an ex ante difference?

And whether I ever manage to realize my intent, also makes no difference.

Only to *you* — an outside observer — ex post; not so for the wealth-owner, ex ante. For him, it makes a huge difference whether he realizes his intent or not. Proof? Ask him. Anyway, that statement contradicts what you wrote above while smelling coffee: THE INTENT *IS* THE ISSUE. If the intent is the issue, then it matters a whole lot if it is realized. Conversely, if it really makes no difference if his intent is realized, then intent could not have been the issue to begin with? Kapish, boobalah?

The difference with burying one’s savings, is only that there is a chance it will NEVER be found again.

WRONG! It will be buried in such a way and in such a place that it can ONLY be found by the one burying it. In fact, someone burying his wealth for the sake of hoarding it, will do far more research on where to bury it safely and conveniently than he would do on the financials of any bank in which he might put his wealth had he the intention of saving it for future consumption. Only someone completely clueless like you could bury a million in cash and then forget where he put it.

With the other methods, it is almost always passed on to heirs.

Assuming (i) one has heirs, and (ii) one has left a legal will bequeathing one’s wealth to them. Otherwise it goes to the Nanny State.

Whether hoarding or investing, the intent is almost always future spending (some actions of a few Egyptian pharaohs or Roman nobles notwithstanding).

Obviously not, unless everyone who practices abstention from consumption is as clueless as you. If a person’s intent is to save for the sake of future consumption, he will take into account the risk involved in possibly having to forfeit that consumption should he bury his wealth and actually forget where he did so (or risk giving up future consumption because of some natural disaster making retrieval impossible). No. He will reduce his risk by making use of legal institutions like banks to store his wealth as he abstains from consumption. Conversely, if he has no intention of consuming in the future, but merely wishes to store his wealth in such a way and in such a place that only he knows of its existence and only he can retrieve it, he might very well avoid legal institutions like banks and choose instead to bury it. Big difference between the two intents.

vikingvista October 5, 2011 at 3:47 pm

DU: “If it is more likely never to be spent, then, ipso facto, its intention could not have been “future consumption.””

DU: “the intention that something is likely to be spent at some pointaffirms the idea that it is intended for the sake of future consumption; conversely if the intention is that it is unlikely to be spent at some point, then that intention disaffirms or denies that it is intended for future consumption. QED.”

Even when allowed time for consideration, you make these mistakes.

The opinion that an event is likely implies no intent whatsoever. It never has, and nobody but you thinks it does. It implies only the expectation of some observer, such as you or me, but not necessarily anyone involved in the events. E.g. X intends to discover perpetual motion. Y thinks it unlikely.

You compound one illogical statement with yet another.

“QED”

Jesus. I can’t tell if this is more amusing or pathetic.

VV: “Whether I’m saving by burying money on my land, investing in a factory, dropping it in a safety deposit box, or making a bank deposit, really makes no difference.”
DU: “Makes no difference? A wonder, then, that so few people choose to dig up their land to bury bags of cash simply as a means of “putting something away” for their children’s college fund. Could it be that from the wealth-owner’s point of view, there *IS* an ex ante difference?”

Not only hopelessly illogical, but also completely without any sense of context. Other differences include: the spelling of the words in the descriptions, the locations of those descriptions on the page, and let’s see…the one I actually mentioned:

VV: “The difference with burying one’s savings, is only that there is a chance it will NEVER be found again.”
DU: “WRONG! It will be buried in such a way and in such a place that it can ONLY be found by the one burying it.”

On top of everything else, you think it is impossible for someone who buries something to die before he recovers it. Simply astounding.

VV: “And whether I ever manage to realize my intent, also makes no difference.”
DU: “Only to *you* — an outside observer — ex post; not so for the wealth-owner, ex ante.”

Uh, yeah. In that sentence, I am the wealth-owner. You don’t know the meaning of the word “my”?

VV: “With the other methods, it is almost always passed on to heirs.”
DU: “Assuming (i) one has heirs, and (ii) one has left a legal will bequeathing one’s wealth to them. Otherwise it goes to the Nanny State.”

Not sure what relevance this has to the point at hand, but yes, of course. The obvious point being, that the money stays in circulation. Again, that is the difference from burying one’s savings, dying, and losing it completely to posterity.

VV: “Whether hoarding or investing, the intent is almost always future spending (some actions of a few Egyptian pharaohs or Roman nobles notwithstanding).”
DU: “Obviously not, unless everyone who practices abstention from consumption is as clueless as you. If a person’s intent is to save for the sake of future consumption, he will take into account the risk involved in possibly having to forfeit that consumption should he bury his wealth and actually forget where he did so (or risk giving up future consumption because of some natural disaster making retrieval impossible).”

Wow. On top of everything else, you don’t even know the meaning of the word “risk”. Since you don’t know, I will tell you. Risk implies the possibility of both the event happening and NOT happening. Elementary stuff. Regardless of reducing risk, you may still lose it. And over the centuries, those losses did occur, much to the joy of metal detector hobbyists.

DU: “if he has no intention of consuming in the future, but merely wishes to store his wealth in such a way and in such a place that only he knows of its existence and only he can retrieve it, he might very well avoid legal institutions like banks and choose instead to bury it.”

Or, even if he DOES have the intention of consuming in the future. Faith in legal institutions over the centuries was not always was it is today.

This is one of the most embarrasing tirades of angry illogic and outright ignorance that I have seen in a while. I’ll never be able to read you the same again. Please tell me you are intoxicated.

Economiser October 4, 2011 at 2:25 pm

Why the hate on hoarding? Hoarding just reduces the supply of money and makes the rest of the money in circulation worth a little bit more. It’s not harmful.

vikingvista October 4, 2011 at 3:38 pm

Exactly. The only possible loser is the hoarder, if he never gets around to his plan to spend it. And that is entirely his business.

Stone Glasgow October 4, 2011 at 10:05 pm

Raising the value of money hurts people with long-term debt agreements that require payment in dollars. Hoarders negatively affect anyone with a mortgage relative to anyone without one, all else equal.

Rob October 4, 2011 at 11:31 am

Don,

Isn’t the major argument of trade skeptics precisely the one you refuse to deal with? Doesn’t their problem have everything to do with the fact that over time, they believe the US is simply selling off its assets to the Chinese? Why do yourself a disservice and not so much as direct people to where they can find information about that point? It seems to undercut your entire message.

Fred October 4, 2011 at 11:47 am

What does the nationality of the owner of assets in this country have to do with anything?

Let’s say the asset is an auto parts store.

Please explain to me how I the customer or Joe the employee are adversely affected if the owner is Chinese vs the owner being American.

kyle8 October 4, 2011 at 1:34 pm

Well if your last name started with an “R” then your employer would have a hard time pronouncing it.

Fred October 4, 2011 at 1:49 pm

Lacist!

muirgeo October 4, 2011 at 11:53 am

His entire message is already undercut by the real world economy. It’s to the point of being bizarre that we are told how good free trade is for us with no perspective to reality.

If this week we pass the Currency Exchange Rate Oversight Reform Act of 2011 and the trade deficit decreases along with a rising employment it will be that much more evidence showing just who is the real ptolemaic economist.

Ross Perot so many years ago was 100% right… a giant whooshing sound….

Slappy McFee October 4, 2011 at 12:05 pm

Blacks earn less, and are less wealthy than whites. Should we punish white people who hire or sell to blacks?

Or should you do it the progressive way? You should charge a “white premium” to all of your white ‘customers’. You can give all these extra proceeds to your black ‘customers’.

Even you should see the benefits of that system.

Invisible Backhand October 4, 2011 at 12:05 pm

Now, some people will ask, didn’t I used to be a free-trader? Yes, and under normal circumstances I still mostly am. But these are not normal circumstances! In an economy that isn’t in a liquidity trap, one can reasonably assume that jobs lost due to Chinese exports will be offset by jobs gained elsewhere, although that may be small comfort to the workers affected. Under current conditions, however, there is absolutely no reason to believe that there are offsetting gains — on the contrary, the losses to import competition are magnified through multiplier effects.

http://krugman.blogs.nytimes.com/2011/10/03/more-on-china-and-jobs/

Fred October 4, 2011 at 12:15 pm

As the price of Chinese goods rise thanks to protective tariffs, people have less money left after buying them.

Some of these people will value the Chinese goods more than other things like, say, eating out.

As they eat out less often, restaurants are forced to lay off some of their staff to compensate for the lost business.

So not only do you punish the people who want cheap Chinese crap by raising prices on them, you indirectly cause restaurant workers to join the ranks of the unemployed.

What a nice guy you are.

Invisible Backhand October 4, 2011 at 12:47 pm

You’re forgetting substitution

http://en.wikipedia.org/wiki/Substitute_good#Good_Substitution

Or put another way, we can substitute their plastic electronic crap for something else a lot easier than the Chinese can substitute our wheat and corn for something else.

Economic Freedom October 4, 2011 at 1:32 pm

Or put another way, we can substitute their plastic electronic crap for something else a lot easier than the Chinese can substitute our wheat and corn for something else.

How do you know that?

(Ah, yes. You just make this stuff up as you go along. I forgot.)

kyle8 October 4, 2011 at 1:37 pm

Substitution is a valid economic principle but misplaced here. If the Chinese have a comparative advantage in the production of items that are demanded, then any substitution will necessarily be either an inferior good, or a more expensive one.

This represents a dead loss to the consumer and a lowering of overall economic activity.

Invisible Backhand October 4, 2011 at 2:01 pm

I did have an implicit assumption that consumer electronics and whatever else china makes in quantity is mostly purchased with discretionary* income, where wheat and corn mostly is not. This is not official soviet doctrine, you are free to disagree.

*for the noobs: discretionary means things you buy because you want to but don’t need to. You don’t need a DVD player, you do need food.

Fred October 4, 2011 at 2:10 pm

In the case I presented both the cheap Chinese crap and eating out (paying someone to cook for you and do the dishes) are discretionary.
If Americans who once could afford both are faced with higher priced Chinese crap thanks to tariffs, and value the Chinese crap over paying people to cook for them, then they don’t eat out.

The result is that no new American jobs are created because people are still buying Chinese crap. They simply pay more for it. And American jobs are lost as people do not spend what’s left of their discretionary income on services provided by Americans.

It’s a lose lose proposition.

Economic Freedom October 4, 2011 at 3:35 pm

I did have an implicit assumption that consumer electronics and whatever else china makes in quantity is mostly purchased with discretionary* income, where wheat and corn mostly is not. This is not official soviet doctrine, you are free to disagree.

*for the noobs: discretionary means things you buy because you want to but don’t need to. You don’t need a DVD player, you do need food.

Thanks, moron. Try telling us something we didn’t know.

And while you’re trying to do that, try applying marginal utility to your thinking, eh? Any spending by a Chinese citizen for wheat and corn beyond his first, highest-valued unit — however that unit is conceived (it makes no differences) — is necessarily of lower utility. Ergo, the margins beyond the first can also be called “discretionary.”

To put it into truck-driver language for a know-nothing such as yourself:

The first unit of wheat — that unit which satisfies immediate hunger by means of purchasing one loaf of bread — might not be “discretionary”; but the second unit of wheat which satisfies a less urgent want (sandwiches for a family picnic on the weekend) is discretionary; the third unit of wheat which is purchased in the form of malt for making beer is even less urgent on this person’s preference scale, so any spending he does on it can also be called “discretionary.” Etc.

Try learning some of the fundamentals of economic analysis and then get back to us in five years. We’d love to hear from you.

Invisible Backhand October 4, 2011 at 3:45 pm

5 years is how long it took you? Marginal utility was in my first econ course.

Economic Freedom October 4, 2011 at 5:22 pm

Marginal utility was in my first econ course.

The difference is that I can apply the concept and you either can’t or won’t. Now, are you just plain ignorant or just plain dishonest?

The Other Eric October 4, 2011 at 1:21 pm

One, you think Ross Perot was right, about anything? (Look up the phrase wedding conspiracy and black helicopters…)

Two, you really, honestly think US employment rates are based on foreign trade? Really?

Don Boudreaux October 4, 2011 at 11:58 am

I don’t refuse to deal with this argument; I’ve dealt with it many times before here at the Cafe, and in my book. I just don’t deal with it here because it is not the argument that Mr. Bergsten deals with.

If, for example, someone argues that the U.S. current-account deficit is bad because foreigners are investing in the U.S., the appropriate response to that argument is not to point out that there’s no reason to believe that a current-account deficit has no effect on the U.S. rate of unemployment.

Here, for example, is one relatively recent post in which I address this issue:

http://cafehayek.com/2011/07/fletchers-zero-sum-presumptions-shove-him-into-unmistakable-error.html

Stone Glasgow October 4, 2011 at 10:09 pm

It’s impossible to “sell off” one’s assets; it is only possible to trade them for different assets. Trading dollars for toys, or trading a home for the US dollars held by a foreign citizen are both just that — trades of one asset for another, and nothing more.

Don Boudreaux October 4, 2011 at 10:15 pm

I’m not sure I agree. Sales and purchases of some things are recorded in the capital account (as “asset” sales and purchases); sales of other things are recorded in the current account.

More generally, it DOES make sufficient sense to me to say that if Jones sells (say) his piece of Manhattan real-estate and then spends the proceeds on a humongous one-night-long party for himself and his thousand closest friends, that Jones has “sold off” some of his assets – in this example, the sold piece of Manhattan realty. And it stretches beyond recognition the meaning of the term “asset” to classify Jones’s party (or the collection of food, booze, dancing-girl services, and other party accessories) as an “asset.”

Note that I would NOT say that Jones made a poor choice. (That’s for Jones to decide.) But Jones did, through this series of exchanges, sell off his assets according to any reasonable interpretation of that term.

Stone Glasgow October 5, 2011 at 4:49 pm

You have conflated two separate trades. The first exchanges real estate for dollars. The second trades dollars for party services.

It is illogical to calculate transactions without considering dollars to be assets. Even a non-smoker considers Marlboroughs to be an asset when using them as a medium of exchange or store of value. The reasons behind a dollar’s value don’t matter; if they are valued, they are an asset, not a mystical or imaginary force of nature.

Observer October 5, 2011 at 9:42 pm

Robert Dugger, Ph.D, bitch slaps Don:

Most observers point to the fall of the Berlin Wall on November 9, 1989, as the watershed moment when the global economy entered a new era. Symbolically this was important, but the more important economic event was January 1, 1994, when China devalued the yuan by 50%. On that day hundreds of
millions of Chinese workers were offered on the world labor market in a half-off sale and began drawing away the manufacturing jobs that were once the backbone of the American middle class. Since then, US median household income stagnated. The Census Bureau recently reported that median household income in 2010 was the lowest since 1997.
US politics have yet to adapt to this hyper-competitive global economy bulging with cheap labor. Instead, policymakers papered over cracks in the foundation of the American economy with tax cuts and stimulus checks starting in 2001. The Fed added its own plaster through low interest rates and eventually “Quantitative Easing”. There were no initiatives to make American workers more competitive. Nor was
there much effort to break away from a Cold War fiscal strategy that encouraged debt-financed consumption and suburban expansion. Today, old-growth sectors continue to enjoy the budget advantages of tax breaks and subsidies that are barriers for new sectors poised to grow in the future. As
special interests align with increasingly polarized parties, elected officials fight for remaining budget resources on behalf of their backers.

here is the link to the most important economic paper of the Decade:

http://www.hanoverinvest.com/pdf/HIGComment111004BudgetGridlock.pdf

SweetLiberty October 4, 2011 at 12:20 pm

…the US is simply selling off its assets to the Chinese

The US is trading its assets for Chinese assets. I think this is an important distinction. We get something we value, they get something they value – that’s trade.

I think some are concerned with the possibility that the US is trading its long-term assets (like real estate) for short-term assets which are quickly consumed. A quick Google search reveals the following…

Table 2: Top US Exports to China, 2010 ($ billion)

*Calculated by USCBC
Source: ITC

HS#
Commodity description
Volume
% change over 2009

85
Electrical machinery and equipment
11.5
21.9

84
Power generation equipment
11.2
33.6

12
Oil seeds and oleaginous fruits
11.0
18.1

88
Aircraft and spacecraft
5.8
8.0

90
Optics and medical equipment
5.2
31.2

39
Plastics and articles thereof
4.8
10.5

87
Vehicles, excluding rail
4.5
134.4

28, 29
Inorganic and organic chemicals
4.5*
34.2*

47
Pulp and paperboard
3.0
22.0

74
Copper and articles thereof
2.9
62.0

Table 3: Top US Imports from China, 2010 ($ billion)

*Calculated by USCBC
Source: ITC

HS#
Commodity description
Volume
% change over 2009

85
Electrical machinery and equipment
90.8
24.5

84
Power generation equipment
82.7
32.5

61, 62
Apparel
28.8*
18.1*

95
Toys, games, and sports equipment
25.0
7.7

94
Furniture
20.0
24.5

64
Footwear and parts thereof
15.9
19.4

39
Plastics and articles thereof
9.6
20.1

72, 73
Iron and steel
8.4*
4.4*

42
Leather and travel goods
7.5
24.4

90
Optics and medical equipment
7.0
25.7

source: USChina.org

It seems like we are importing some pretty good things from China – things American consumers and businesses demand. The difference (trade deficit) allows China to spend dollars they do not use on Imports for investing in US Bonds, Stocks, Real Estate, etc. But so what? How does this harm Americans? Regarding Real Estate, what is the case against Mr. Wu being a landlord vs. Mr. Jones (who sold his Texas land to Mr. Wu and moved to Florida)?

SweetLiberty October 4, 2011 at 12:49 pm

Ack. Table HTML didn’t translate as I thought it would. Sorry.

Don Boudreaux October 4, 2011 at 12:30 pm

It’s vital to keep in mind that capital is not fixed in amount. It can grow (or shrink). So a U.S. capital-account surplus (nee “trade deficit”) need not at all mean that Americans are “selling off assets to foreigners” as many people carelessly claim.

It CAN mean that Americans are selling off assets to foreigners, but need not – as I’ve explained in many posts here at the Cafe over the years. E.g.:
http://cafehayek.com/2011/02/observation-on-the-u-s-trade-deficit.html

More significantly (and also as I’ve explained in other posts) if your American neighbor Jones is selling off his assets to foreigners in ways that reduce his net pecuniary wealth (and if we also here concede that to be bad, for sake of argument), that fact neither means that you, an American, are selling off your assets to foreigners, nor that you must do so. And, importantly, it doesn’t mean that you are being made poorer. If Mr. Lee from China will use more productively the assets that Jones sold to him, you are likely made richer by this transaction because the economy of which you are a part is made more productive.

And, finally, even if we Americans as a whole are selling off our assets to foreigners in ways that reduce the pecuniary wealth of us Americans, as a group, the problem isn’t trade; the problem is that Americans (in this hypothesized scenario) have become grossly irresponsible – or, as economists say, have adopted much higher time-preferences. It’s very difficult to see how preventing Americans from buying goods and services from non-Americans will render Americans sufficiently responsible so that we husband our assets better.

SweetLiberty October 4, 2011 at 12:54 pm

Ha! You said what I said, only much better!

Don Boudreaux October 4, 2011 at 1:01 pm

Not sure that I said it any better.
The inability of so many people to grasp these simple points remains for me utterly mysterious.

Stone Glasgow October 4, 2011 at 7:47 pm

Perhaps because they don’t know the meaning of “pecuniary,” or understand what it means to husband an asset.

Stone Glasgow October 4, 2011 at 10:13 pm

It’s impossible to sell off your assets. You can only trade them for assets held by someone else. “Selling” is just a word we use for trading if it involves pecuniary wealth. Buying and selling is still always a swap.

Trading away dollars to foreigners could hurt your American neighbor if he has a mortgage and those dollars are not repatriated to the US.

Economic Freedom October 4, 2011 at 1:15 pm

Try reading his posts. Don has dealt with this issue many times in the past.

I think it was Milton Friedman who once remarked how silly the trade-deficit-mongers were. If a group of Chinese investors came to the US, bought a factory from an American owner, and physically removed it — brick by brick — back to Chinese soil, it would be seen as a simple economic exchange, no different from any other. If, however, the Chinese investors came to the US, bought a factory from an American owner, and physically kept the factory in the US, Ptolemaic economists suddenly whine “Boo hoo! The Chinese are buying US assets! China owns the US!”

kyle8 October 4, 2011 at 1:42 pm

What if the Chinese end up with a significant portion of their investments within the USA? Wouldn’t this have the salutary effect of making them less likely to cause trouble with us and create a near war situation?

(Granted it is the USA which has the unfortunate recent reputation for creating wars)

The Other Eric October 4, 2011 at 2:04 pm

Sadly Kyle, no. History is filled with bloody examples where your premise would seem obvious, but they pulled the pin anyway. The Franco-Prussian War, then it’s screaming love child World War 1. The Russo-Turkish War(s), and the last umteen Middle Eastern conflicts.

The PLA still struts, fumes, and wants to blow holes in the ocean over Taiwan despite the obvious losses in, well, everything.

Observer October 5, 2011 at 5:14 pm

the problem with our current account is that the Chinese do not buy our assets, for doing such would be directly contrary to their self-interest (closing American Businesses and moving jobs to China). The Chinese policy is to maximize employment in China. Hence they buy our bonds. Our gov’t spends the money, poorly. The way the system works the tax payers increasing goes on the hook to pay for consumption by others.

the problem with the current account balance with China is that it all goes into US Gov’t bonds.

Do a little thought experiment. What would the Chinese do if we printed 3 or 4 trillion in Ben Franklins, put the money on palletts, wrapped the stuff in celephone, packed up all the empty containers lying around any America port, and shipped the cash to Hong Kong. You are going to be 100% sure they are not going to spend the money. If they did it could only enter the US through a demand for something other than treasury bonds, like cars or airplanes, and they want no investment in the US—they want our factories idle and shut down. Same with the Petro dollars.

Be real for 10 seconds. With trillions available to invest (Asia and Petro Dollars) why are small businesses in America starved for capital?. Because the people who have the $$$ do not want small business in America to succeed.

Martin Brock October 4, 2011 at 11:43 am

… the Chinese exporter uses this $1M to buy land in Texas or Florida or Maine – or if the Chinese exporter uses it to buy stock in American corporations – or lends it to Uncle Sam, to the Fairfax County, VA, school district, or to me personally …

Buying land or another productive resource seeking profit is not remotely comparable to “lending” to Uncle Sam (purchasing entitlement to tax revenue and similar rents). Conflating these transactions is incredibly confusing.

“Lending” to Uncle Sam is not comparable to lending to you either, because you cannot repay a loan by confiscating your neighbor’s property … unless you’re a state employee or something. Oops.

Buying stock in a corporation is more difficult to characterize in this way, because the corporation could do practically all of its business with states and thus be hardly distinguishable from a state agency, like Lockheed-Martin.

Your critique of Bergsten is reasonable enough, but it doesn’t address possible ills of the trade deficit. You can address these ills only by demonstrating that much “foreign investment” is not simply code for the purchase of entitlement to tax revenue and similar rents imposed by statute and crowding out real, productive investment.

Of course, “domestic investment” can also be code for rent seeking, but this fact doesn’t address possible ills of the trade deficit either.

morganovich October 4, 2011 at 12:02 pm

bergsten’s augment is circular.

“We would never have a trade deficit in the first place if your postulated scenario were to occur in the real world. Come on!”

he is essentially saying that we have trade deficits because we have trade deficits. he used the assumption of their existence to try to prove their existence. that’s not valid reasoning.

further, the whole “hording” argument fails to stand up to even rudimentary scrutiny unless you are keeping the money in your mattress.

someone need to explain fractional reserve banking to mr bergen. the money gets loaned out or invested in productive enterprise. it does not sit in scrooge mcducks vault somewhere in a big unused pile.

kyle8 October 4, 2011 at 2:51 pm

Even in the case of hoarding you are pulling dollars out of circulation thus increasing the value of all the other dollars.

Chucklehead October 4, 2011 at 12:30 pm

I see two problems. First is static analysis. The author does not take the trade any farther than the first two steps.
The second is a problem of too much knowledge. Two parties make a trade beneficial to both. But a third person aware of the trade is now complaining that the trade did not benefit him,, and therefore hurt him. I am hurt because you did not trade with me. This presupposes a claim on the initial buyer before the trade. This exposes a collectivist view of property as recently illustrated by Elizabeth Warren. It is much the same with wealth disparity. It is not the fact that my neighbor is richer, but that I know he is richer, which makes me feel bad. Did you bring enough gum for everyone?
I know that this is based on morality and not economic thinking, but I think one begets the other. Otherwise it would be more efficient just to steel from our neighbor.
A penny hoarded is a penny earned.
I am continually befuddled by the concept that savings is bad, whether local or not. I understand the negative effect on velocity of money. Productivity,more than consumption is how societies become rich.but Savings is just a symptom.

SweetLiberty October 4, 2011 at 12:48 pm

Savings is necessary for capital investment. I don’t think it’s a symptom, I think it’s a cure. You nailed it when you said, A penny hoarded is a penny earned. The only caveat is that government and the Fed can so distort the value of money as to make saving hardly worth the effort.

Martin Brock October 4, 2011 at 2:50 pm

Ideally, “save” is just a synonym for “invest”, and “invest” means “purchase real, productive means seeking profit”.

In reality, “save” often means “purchase entitlement to tax revenue and other unproductive rents”. When you purchase a Treasury security, you do the latter, not the former. When you deposit money in an FDIC insured bank account, you do much the latter and not so much the former. When you purchase a mortgage backed security sold by Fannie Mae expecting a bailout, you do much the latter. When you buy a share of Lockheed-Martin, you do much the latter.

If you “save” by purchasing gold and burying it in your back yard, you don’t much organize resources productively, but at least you don’t pay the state to organize resources destructively while promising later to seize the fruits of other productivity and transfer the booty to you.

Because “save” describes all of this rent seeking, as well as describing productive investment, we can’t simply argue that “saving” is a good thing.

Economic Freedom October 4, 2011 at 12:56 pm

That’s an amazing graphic by Mark Perry. The important point is that the sum of the two graphs equals zero; meaning, the “trade deficit” is a myth.

GiT October 4, 2011 at 1:52 pm

This whole excursus seems to completely off the mark. Bergsten gives no indication of not knowing the difference between balance of payments as a whole as opposed to current accounts and capital accounts. References to trade deficits typically refer to some element of the balance of payments – current accounts.

The crux of Boudreaux’s argument seems to be that the balance between current accounts and capital accounts makes no difference as to levels of employment.

That may be the case – frankly, I don’t know – but if it is the case it’s entirely irrelevant to Bergsten’s argument.

It appears as if, at the mere sight of a mention of trade deficits, it must be that Bergsten assumes a particular composition of the balance of payments is ideal for employment – one where capital accounts and current accounts are equal. But while Bergsten does argue that in this particular case, decreasing the trade deficit would increase employment, at no point does he suggest this is a general law.

Now, if one pays attention to Bergsten’s proposed solutions, it should become rather clear what is going on. He offers three solutions, two of which have to do with government manipulation of the market, and one of which has to do with a stable regime of property rights, and none of which actually have to do with setting the current accounts deficit at some specific level. The solutions? Lower trade barriers, let currencies float, and shore up intellectual property rights.

What can we conclude by looking at his proposed solutions? That Bergsten attributes the sub-optimal employment in the US to coercive distortions of the market. Isn’t that the mantra in these here parts?

In fact, isn’t the whole government and finance manufactured crisis out of which we are still emerging a product of precisely this distortion? The fact that our ‘capital account surplus’ was largely supplied by Chinese purchase of US bonds to aid in keeping the dollar strong and the Remnibi weak? A surplus that fueled the supply of loanable funds used to prop up demand for housing and education?

Isn’t Bergsten’s essential point that what should occur is that the US and China should stop using their central banks to manipulate the values of their currency, a decision which would lead to divestment from foreign overinvestment in US treasury bonds, slackening the supply of easy credit (of which Americans have little need – they’re indebted enough as it is) and making US goods and services more competitive due to the effects of getting rid of such government distortions of the market?

Wouldn’t this have a reciprocal palliative effect on the Chinese economy, which would cease suppressing the purchasing power of its citizenry, and rather than spending their money for them on useless bonds let them allocate their resources in line with their own preferences, which would presumably be to increase their levels of consumption, or at the very least invest their money in something that actually guaranteed a decent return?

In sum, it seems clear to me that Bergsten is not saying that some particular arrangement of trade deficits and capital account surpluses is ideal. Rather, he is saying that the present arrangement between the US and China is distorted by government intervention, and that this intervention is a drag for the US (presumably, it’s a drag for everyone, but he’s writing about the US, not everyone.).

Bergsten’s incredulity is at the assertion that trade deficits would not exist, when by trade deficits he refers to current account deficits in goods and services in particular (hence the latter disaggregation between goods and services), not a national failure of basic accounting of the balance of payments.

Economic Freedom October 4, 2011 at 3:44 pm

Rather, he is saying that the present arrangement between the US and China is distorted by government intervention, and that this intervention is a drag for the US

Alas, he favors more government intervention, and therefore, more drag for the US. He believes that through government’s imposition of more drag on the US economy by trying to prevent, lessen, or reverse, future purchases of US assets by China, more jobs will appear in the US economy. Don has already posted on why that is a fallacy.

GiT October 5, 2011 at 12:42 am

The only point at which Bergsten suggests a pernicious government intervention in the economy in the article (unless you’re opposed to protections of intellectual property rights) is when he suggests a retaliatory tariff. But the claim is not that a tariff is good for an economy in the first instance. The claim is not that a tariff will increase employment. The claim is that protection of property rights and freely floating currencies will increase employment.

The claim about tariffs is that the threat of tariffs (given the failure of legal sanction) can induce a change in Chinese policy. Whether the US should or shouldn’t go through with a retaliatory tariff depends upon the net effect of issuing threats. What a threat would cause to happen is an empirical question, and it’s an error of diplomacy, not of economics. If a threat alone works, you’ve basically gotten something for free. If what you wanted to get was a lowering of a tariff barrier, you’ve gotten something good for free. Bergstrom is not operating under the illusion that threatening a tariff war is anything other than a game of chicken.

You can say the enforcement mechanisms Bergstrom proposes wouldn’t work in getting the desired results, but if you’re going to argue that his desired results wouldn’t, on their own, increase employment you have to argue that lowering trade barriers, letting currencies float freely, and protecting intellectual property exert negative effects on a free market.

Bergstrom’s diplomatic arguments may be bunk, but his economic ones are, as far as I can tell, unobjectionable from an Austrian perspective.

Perhaps before looking for ‘the unseen’ you could stand looking at what it is actually there.

Chucklehead October 4, 2011 at 5:49 pm

‘Mr. Bergsten’s allegation that eliminating the U.S. trade deficit is a costless (!) means of increasing the employment rate”
If Walmart can source the same product for the same cost, they would choose the domestic source just because of shortened lead times. They can not and do not. If Mr. Bergsten’s proposition is that we can justify a higher price for a domestic product because it will lower other burdens like taxes or debt, then he must have sophisticated models and data showing the net net effects are a wash. Even if he has them, which I doubt, and they are accurate, which I doubt even more, there will still be winners and loosers in the micro world.

Jim October 4, 2011 at 9:16 pm

The answer is simple: we must abandon any thought of simple accounting (where trade is by definition ALWAYS balanced) and adopt the mystifying conglomeration of Balance sheet, Income statement and on-and-off the books recording of GDP= g + i + x – m.

But only when we are dealing with people of yellow skin.

Further, we will denigrate our own dollar, and punish the yellow skins if they only allow their currency to slowly rise.

Anyone who disagrees is a racist and a luddite.

Observer October 4, 2011 at 9:53 pm

that the U.S. current-account deficit v China is bad is so self evident that to suggest otherwise is not even worthy of Ron Paul

Here are the facts:

1) Due to the size of our current account deficit with China, American Tax papers are now paying enough interest to China to pay for China’s defense. IOW, America’s tax payers are paying for China’s national defense.

2) as to what actually happens, here are the steps.

a) consumers buy goods from China, paying for such in American dollars.

b) factories close and incomes decline in America as sales are lost. Taxes rise as social costs—crime, drug abuse, divorce, etc. rise

c) Chinese exporters exchange dollars for Chinese currency to pay for labor and materials in China. Chinese state profits from sale because by force, prices or labor and materials are kept low. (HEREAFTER EXCHANGE MECHANISM) In addition, it is illegal to buy goods or services with US dollars: i.e, importing from US is illegal

d) China buys US Bonds

e) taxes go up to pay interest on US Bonds

f) US gov’t burns money by spending on defense and wars AND/OR

g) US gov’t disbursement money as transfer payments

h) recipients of transfer payments buy more from China.

I) MORE JOBS ARE LOST AND TAXES INCREASE

i) exchange mechanism is repeated.

IOW, Dept of Defense and RECIPIENTS OF TRANSFER PAYMENTS have been consuming, shifting all costs to taxpayers.

Don Boudreaux October 4, 2011 at 9:57 pm

You are a poor economist.

(Oh, please no one tell me that I’m obliged to explain to “Observer” why he or she is a poor economist. This blog is filled with nearly eight-year’s worth of such explanations by Russ and myself refuting the myriad flaws that infect Mr. or Ms. “Observer’s” observations and deductions from those observations. Sometimes when someone lets loose with such a barrage of nonsense as the above, it is the privilege of the house simply to yell “bullshit!” and leave it at that.)

Martin Brock October 5, 2011 at 3:13 am

Yelling “bullshit” and leaving it at that is always the privilege of the house, regardless of the merits of an argument; therefore, yelling “bullshit” in this case is irrelevant to the merits of Observer’s argument.

Observer seems to assume that China’s current account deficit purchases more Treasury securities, and similar entitlements to statutory rents imposed by the Federal government, than land in Texas and other potentially productive resources in the U.S. that China profits by purchasing only by realizing the potential productivity. True or false? I ask, because I don’t know the answer.

When the Fed purchases mortgage backed securities from banks, because the securities trade below par, because the mortgaged houses fall in value, how many of these securities does it buy from China?

You can ignore these questions and yell “bullshit”, but since your response doesn’t answer the questions, others continue asking them.

Economic Freedom October 4, 2011 at 10:24 pm

Mr. or Ms. Observer:

BULLSHIT!

Martin Brock October 5, 2011 at 3:14 am

Ditto.

Stone Glasgow October 4, 2011 at 10:35 pm

Observer, your capacity for childlike reasoning and dreadfully lacking ability to think logically is inspiring:

1. Due to the size of my account deficit with my bank, when I pay interest on my mortgage, the amount is now high enough to pay for the abortions of all the bank’s employees each year. IOW, I am paying for their abortions.

Martin Brock October 5, 2011 at 3:02 am

Well, part of the interest on your mortgage does end up paying for the abortions of bank employees, but I don’t have the same problem with it, because the bank’s employees don’t compel you to use their banking services. You choose their services, and they choose their abortions.

On the other hand, my debt as a taxpayer to holders of Treasury securities is not similarly optional. Why conflate the former with the latter?

Observer October 5, 2011 at 7:20 am

Dear Mr. Boudreaux:

“Bullshit” to you, back. My description of the gross income flows is absolutely accurate. The Renminbi currency is controlled by the Chinese gov’t. The only way that Chinese exporters can obtain Renminbi to pay for locally purchased labor and materials, etc., is to exchange their USDollars with the Chinese Gov’t (or its banks). Over the past 20 +/- years the Chinese government (and banks) have purchased north of 3 or 4 trillions in US Bonds. This is the “return” of funds that you claim has virtue. It could have been, but it hasn’t because we have spent that money in two ways: (a) burned it up fighting two stupidly expensive wars (no capital investment) and (b) transfer payments. The transfer payments could go to buy US goods and services (the virtue you claim (Texas land)), but has not. Instead, our consumers have turned around and bought even more from China. In sum, we have shipped our jobs to China (with all the attendant social costs) and incurred massive debt over time.

This has been made worse by all the private borrowing for consumption that was also spent in China.

This was made even worse because we consumed, instead of investing in capital, including infrastructure and education.

It seems to me that, if you have been posting so brilliantly for 8 years, and you lack a Noble Prize, that more than a few people have deduced that you have no idea about that of which you talk.

Lets take a simple example. If the current account meant nothing, Greece ought to be in great shape. If this worked so weel, Why is Greece bust and about to take down all of Europe.Why is the only solution for Greece leaving the Euro and devaluation?

Let’s look at the world, through your lens or theory. All the positives are at all time “highs” (which are sometimes “lows”):

1) Current account–all time highs—but that doesn’t matter

2) wealth of top .5%—all time high

3) income of top .5%—all time high

4) corporate profits—all time high

5) % of corporate costs as wages—all time low

6) federal debt—all time high in real terms (was a all time low as % of GDP under Carter)

7) annual federal deficit—near all time high

8) prices stable, but for health care, prices which are rising, which you favor.

9) Gold is a great investment.

With all this great news, why is the reality so different from what your “model” projects. It is because you are wrong.

Here is a link to a Nobel prize winner who does know what he is talking about, Joseph E. Stiglitz, who writes about how the build up of foreign reserves is a large part of our problems.

http://www.project-syndicate.org/commentary/stiglitz143/English#comments

“Globalization has been one, but only one, of the factors contributing to the second key problem – growing inequality. Shifting income from those who would spend it to those who won’t lowers aggregate demand. By the same token, soaring energy prices shifted purchasing power from the United States and Europe to oil exporters, who, recognizing the volatility of energy prices, rightly saved much of this income.

The final problem contributing to weakness in global aggregate demand was emerging markets’ massive buildup of foreign-exchange reserves – partly motivated by the mismanagement of the 1997-98 East Asia crisis by the International Monetary Fund and the US Treasury. Countries recognized that without reserves, they risked losing their economic sovereignty. Many said, “Never again.” But, while the buildup of reserves – currently around $7.6 trillion in emerging and developing economies – protected them, money going into reserves was money not spent.

Where are we today in addressing these underlying problems? To take the last one first, those countries that built up large reserves were able to weather the economic crisis better, so the incentive to accumulate reserves is even stronger.”

I’ll end with this question: Would you rather have China’s current account balances or ours?

Martin Brock October 5, 2011 at 9:00 am

Don refuses to address you, so I’ll jump in. I agree with you to some extent.

I don’t know how much the Chinese state suppresses the demand of its subjects for U.S. goods and genuine investment in the U.S., but I suppose it does. I don’t know how much the currency peg has this effect, but I suppose it does.

I do know that the Chinese hold many Treasury securities and similar entitlements to rents imposed on subjects of the U.S. state, but I don’t know precisely how much of the current account deficit reflects the purchase of these entitlements as opposed to genuine, productive investment in the U.S.

Quantifying these effects is difficult, for me at least. I’d like to know how “good” economists try to quantify them, and I’ve asked Don to address this point often, but he’s not interested. I’m happy to see you raise the points, if only to hear one more voice ignored.

Would I rather have China’s current account balance or the U.S. balance? I don’t know, because I don’t know the answers to these questions. I’d rather live in the U.S. at this point, but things change. These deficits are dynamic quantities, flows rather than stocks.

Don believes that free trade can only benefit parties to the trade, in theory. I accept this theory, but trade is not very free, so the theory is little comfort. Whether your story effectively characterizes the economic relationship between the U.S. and China is debatable, but all of the effects you describe exist to some extent, so I want to debate the proposition.

U.S. taxpayers don’t pay for Chinese defense any more than they pay for other expenses of the Chinese state, but simply dismissing your argument with “bullshit” certainly is not persuasive. Comparative advantage is real enough, but when a Chinese producer receives a dollar in trade and may not himself, individually, decide how to spend that dollar on consumption or investment in the U.S., the logic of comparative advantage does not apply.

If the Chinese producer must instead exchange his dollar for “people’s currency” issued by a central monetary authority and if the monetary authority then purchases entitlement to rents imposed on U.S. producers who also do not choose to bear these rents in their individual interests, the logic of comparative advantage again does not apply.

So what logic applies, and how do I know it applies? Don doesn’t address these questions, but he should, even if he doesn’t know the answers precisely either.

John October 5, 2011 at 1:50 pm

Martin,

The answer is that Don is not a good economist. He doesn’t answer your question because he cannot, for the answer is so adverse.

Trade theory means nothing in the real world, because the money doesn’t round trip in accord with the theory. And, because, as Keynes points out, in the long run we are all dead. For example, when you destroy a town by closing a factory, the social costs far outweigh any gain by alleged comparative advantage.

John Kay, of the Financial Times, has an excellent piece up at the link below, which I suggest you read, about economics in general.

http://ineteconomics.org/sites/inet.civicactions.net/files/kay-john-state-of-economics-v11.pdf

Martin Brock October 5, 2011 at 2:35 pm

I’ve read Don’s blog for years, and he’s a good economist, but he avoids this particular point. He understands the merits of free trade, and he associates any assertion of harm from a trade deficit with a call for protectionism.

When statutory restraints of trade compound the harms of economic change, Don’s approach seems counterproductive. He should instead emphasize the restraints and advocate even freer trade as an alternative to protectionism.

Economic change certainly can and often does harm some people while helping others, even if it helps more people than it harms, even if some other measure of “total help” is greater than a measure of “total harm”. If I’m the one harmed, any corresponding increase in “total help” is little comfort to me.

I have no interest in being the sacrificial lamb for the “greater good”, and I don’t blame others who feel similarly, but I do have an interest in economic change. I like my automobile. I don’t want to get around in a horse drawn carriage, even if many carriage makers lose their jobs in the transition from one to the other.

I also want Chinese people to enjoy the same economic progress that I enjoy. I prefer the welfare of my kinfolk to other welfare for natural reasons, and I don’t apologize for the sentiment; however, I don’t prefer the welfare of other people born in my hometown to the welfare of people born on the other side of the globe. Why should I?

The answers aren’t necessarily easy, but denying reality is no way to address the questions.

Observer October 7, 2011 at 11:59 am

Martin

I respect your trying to be reasonable, but the Chinese don’t

vikingvista October 5, 2011 at 3:52 pm

“The Renminbi currency is controlled by the Chinese gov’t.”

Only the supply, not the demand. For a fixed money supply, the Chinese government does not dictate prices.

Nemoknada October 5, 2011 at 1:13 pm

“Reducing the current-account deficit would simultaneously reduce capital inflows into the U.S.”

Of course it would, but if the money weren’t leaving, we wouldn’t need it to come back; it would already be here. For us not to have a trade deficit, the domestic multiplier for domestic spending would have to be higher than it is (because the domestic worker would be buying American goods), and there would be ample capital to finance whatever needs financing.

Not that a trade deficit is a bad idea. It’s how we exploit our comparative advantages in political stability, distributional infrastructure, etc. We are the best marketplace on earth, so people should be willing to pay us for the privilege of selling here. They do that by allowing us to run a trade deficit that they invest for a real return that pales relative to customary business hurdle rates.

If there were no trade deficit – at least if we achieved that goal through protectionism – prices would be higher, but more Aemricans would have jobs, at least until the robots took over. That’s not a win in my book: I prefer that fewer people NEED jobs, rather than more people HAVE jobs. But that’s not been an easy sell…

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