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Roubini on the “Twin Deficits”

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

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

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

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

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

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

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

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

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

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

Even more troubling are passages such as this one:

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

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

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

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

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

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

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


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