Arnold Kling  

Economic Nationalism, once more

From the Quaint to the Bizarre... Lenin and Goebbels: Can You Te...

Don Boudreaux writes,

Now consider a slightly different example in which I live, not in Virginia, but in Maine on the U.S. side of the Canada-U.S. border. My neighbor is a Canadian living in Canada. He mows my lawn; I pay him 25 U.S. dollars.

...statisticians count my purchase of his lawn-mowing services as a U.S. import but, because my neighbor doesn't spend his earnings on goods or services made in the U.S., these statisticians find no U.S. exports to "balance" my imports.

So we cheer when the American saves and invests in America, but quake with anxiety when the Canadian does so, fretting about the "imbalance" in American trade. But no economically significant differences separate these two scenarios.

In the 1970's, Freddie Mac was created in order to let savings outside of California be used to fund mortgages issued in California. In a sense, the point was to finance a California trade deficit with the rest of the United States.

Actually, I do not know whether or not California ran a trade deficit with the rest of the United States. We measure international trade statistics, but we do not measure interstate trade statistics. Nobody thinks that interstate trade statistics matter.

For Discussion. Why do international trade statistics matter?

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The author at Cafe Hayek in a related article titled Statistical Illusions writes:
    The argument – or, at least, my argument, and I dare say Arnold Kling's argument – that the trade deficit is a red herring is not an argument that an individual, a family, or a firm that consistently spends more [Tracked on February 25, 2006 1:52 PM]
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Bob Knaus writes:

To help markets set prices for currencies, just as publication of sports statistics helps bookies and bettors set the odds.

Of course, expecting currency prices to track trade deficits is just as silly as expecting the spread to track offensive yardage. Invisible hands have many, many strings attached :-)

spencer writes:

Part of it is history, they were the first data collected. And part of it a carry over of Mercantilism.

But as long as the individual country has an independent currency and independent monetary and fiscal policy you need the trade data to evaluate the economy. When you look at the economy as a closed system, something the US use to do, you get one set of policy response to fiscal and monetary policy.
But frequently if you look at the economy as an open economy the rules of the game change drastically . I'm sure you have studied Mundell on this.

We saw this in the 1980s with the original fears of crowding out when many forecast that the Reagan fiscal deficits would crowd out investments. but because we are an open economy the inflow of Japanese capital kept rates low but forced up the dollar. Consequently, the crowding out impact worked through the dollar to damage the tradeable goods sector rather then through higher rates to damage the interest sensitive sectors.

But just look at the way we calculate gdp. We do not directly measure production. Rather we measure consumption and adjust that for changes in inventories and trade to indirectly estimate production. So we add exports back in and subtract imports -- unless you are Larry Kudlow who keeps claiming that is a silly way to do it without giving another way to do it.

Donald Boudreaux recent post on trade are probably a great example of this:

The late Rudi Dornbusch said that one of the infallible warning signs that we are near the collapse of an overvalued currency associated with an unsustainable trade deficit is when highly intelligent and respected economists begin evolving plausible theories that--this time--the trade deficit is sustainable.

Karl Smith writes:

Why do International Trade Stats matter -

Two big reasons

First, currency is generally used on a national level. Trade between currency blocks (typically nations)requires a currency exchange at some point. This creates a market in which trade is international trade is the quantity and exchange rates are the price.

Changes in exchange rates create winners and loser so it may be important to study this market.

Second, taxation power is limited to the national level. The income of Americans can be taxed by America. In general the income of Candadians cannot. Therefore, there is an externality to changes in the wealth of your countrymen which does not exist between countries.

Trade should be linked to your Net Foreign Assets and hence a measure of your wealth. The strength of this link has of course be called into question recently.

However, in principle if we run a correctly measured trade deficit then the our Net Foriegn Assets should decrease. This implies an external loss to citizens in the US because a smaller fraction of wealth in the world is taxable by the US government.

Pedro Bento writes:

Karl, re: taxation

You're assuming the net social marginal benefit per capita from US Gov expenditure is positive. Is this plausible?

Fazal Majid writes:

International statistics matter because of immigration controls. Americans can move freely in and out of California. The Chinese can't.

Karl Smith writes:
You're assuming the net social marginal benefit per capita from US Gov expenditure is positive. Is this plausible?


One - I am not sure that it is necessary to assume this. It depends on the decision function for government expenditures. If, on one extreme, marginal government expenditures are independent of revenues then increases in the base will be offset by decreases in tax rates.

If we are looking at the US government then we mean increases in the base reduce the deficit which implicity reduces future tax increases.

Its hard to imagine decreases in tax rates, holding expenditure constant, not having a net positive effect.

I do think that, holding the cost of public funds constant, it is reasonable to assume that the marginal social benefit of government expenditures per capita is positive.

What might produce a loss? I am not sure.

To clarify, for their to be an externality to my countrymen getting richer it doesn't have to be that the marginal social benefit of government expenditures exceed the marginal cost of public funds.

On net we could all be better off with less government. However, given that we do have government and it does raise revenue, there is an externality to growing the base. At minimum, it lowers the amount I have to pay.

Sean S. writes:

International trade stats do not matter.

The market could still set prices and volatility would be lower without them.

The market has little difficulty setting a price for oil even though OPEC's published oil production and reserve numbers are easily manipulated for political reasons.

You could argue that more information helps the price discovery process, but that sounds like a stock exchange that insists that 24 hr trading is essential. Everything reaches a point of diminishing returns.

Jon writes:

If we need resources beyond our own we don't go to the Chinese government or Chinese Citizens--we go to our own government and our own donors.

What fraction of the aid to New Orleans is coming from economic activity originated in foreign countries? How many Chinese tax dollars are going to fight forest fires in Arizona? In the 1950s-1980s how many foreign dollars went to protect us against the Soviet Union and how much of that foreign economic activity would protect us should some other country become such a threat? Will Chinese business' not operating in the US pay tax dollars for police in New York City?

Finally, when people in the US donate money --what fraction goes to US institutions vs Chinese ones? Likewise when people in China donate some of their wealth--what fraction goes to US institutions vs Chinese ones?

I think the answer to these questions explains why international trade balances matter.

T.R. Elliott writes:

I think Arnold Kling and many of those commenting miss the point. Trade statistics for a bounded region can be considered a measure of economic health for that region. Since Kling and many of similar mindset consider the world to largely be one of independent economic agents, the idea of community or bounded region doesn't matter.

Here's an example. If I read that all my neighbors are going deeply into debt, deep into poverty, I use it to tell me something about the current and future state of my neighborhood. Kling will argue that somewhere, someone is getting wealthier as my neighbors indebt themselves. True, but I'm still interested in what is going on in my neighborhood. Kling might say to move to the wealthier area. Sure, good point. I'm still concerned about my neighborhood. The friends, families, etc. What is happening.

So when Kling sees a nation indebt itself, selling off assets in order to consume goods, operating with enormous trade and current account deficits, he looks at the entire world and says "all is good."

In other words, Kling has no home. He is an independent economic actor. It's an ugly world to live in, a sad way to view the world, but hey, that's his prerogative.

Don Boudreaux writes:

T.R. --

Why do you assume that the relevant community is the nation? And why do you suppose that Arnold cares little or not at all about his neighbors?

Suppose someone calculates trade statistics for the town that Arnold lives in, and suppose that those statistics show that that town has a trade surplus. Even if it were the case (as it isn't) that a trade surplus is unambiguous good news and a trade deficit is unambiguous bad news, why should Arnold care more about the nation than he cares about his town? What is so right, so obvious, or so noble about someone who lives in Maryland giving as much weight to the fortunes of people in Oregon and Florida as he gives to the fortunes of people in his local community? And what's so wrong about someone who gives as much weight to the fortunes of strangers living in foreign lands as he gives to the fortunes of strangers living in his own country?

Bob Knaus writes:

T.R. - posting from my sailboat in the Bahamas, as I take a break from writing a report for Los Angeles County, I posit another view of a world without boundaries... it's a beautiful place.

My utopia would have people free to choose their own communities and identities. We are not there yet, for a host of practical reasons, but it is an ideal I pursue as best I can.

And, along the way, I try to help my neighbor, teach the young, assist the poor, and support the old. It doesn't matter to me where they are, or what community they belong to. We are all human.

I think that if you take progressive communitarian philosophy full circle, to its logical end, you wind up in a borderless world far freer than anything we have today.

T.R. Elliott writes:

Bob Knaus: Your positing a world without boundaries does not negate the need for the ability to define metrics and measures (economic health or otherwise) that are applied to pockets (communities) within that world. Most people have and always will live in communities. Individual, family, friends, neighborhood, geographical community, interest community, city, county, state, nation, world. Something like that. People are interested in measures such as crime within a given community. You may be having fun on your sailboat, but I can easily introduce you to communities in Columbia, for example, in which you would not likely make it out with your life. Seriously. Measures of the healthy of a community are important irrespective of one's utopian idealistic predilections. Kling argues against one particular measure of a community, and I generalize it because I want to and I see no reason not to. He has to tell us why measures of the health of a community, whether economic or otherwise, are not important. He's just picked one particular measure and one particular community (actually two, state and nation).

Bob: If I remember Kling's argument correctly, he complained about the nation as a measure of economic healthy by drawing on an analogy to the state. Therefore I can use his argument to argue down to any community. That's all he's done. He's said he doesn't like a measure applied to a community.

And to both of you: I did not argue against sharing wealth with others. Nor against non-US communities. I've never said that. I've said that measures are important for communities. And they mean something. To ignore them or complain they are meaningless is itself meaningless. They are important. The US, for better or worse, is selling its assets in order to maintain a lifestyle, relying on the savings of others in order to both (a) consume, (b) maintain existing infrastructure and (c) invest for the future. It means something, and should be considered.

To me, it means that capital holders will benefit from globalization, irrespective of the location of the capital, and those without capital, particularly those with higher standards of living based on labor, will not benefit as those benefits leak to those laborers with less. I think there is a tradeoff. I'm not arguing for trade barriers. I am arguing that untrammeled globalization may result in political reactions that will throw a monkey wrench in your utopian plans. I think rising energy costs, which I see as inevitable, will exacerbate this process, one that has been underway since perhaps the 70s or so. I see no silver bullet.

But I live in the real world. Not a utopia floating in the middle of nowhere. So I read broadly and then follow my gut. And that's what my gut tells me. Current account deficits tell us something. Kling just chooses not to listen.

Alan Gunn writes:

Alas, here in Indiana there are those who worry about interstate trade balances. Our last gubernatorial election featured a governor who boasted of cancelling a data-processing contract with an Indian company so he could spend several million more by hiring a US company. The challenger then complained that Indiana had bought some office furniture from an out-of-state company; he promised not to do such a bad thing if he won. Unfortunately, one of them had to win.

Karl Smith writes:

For Kling and Boudreaux -

While I appreciate the notion that the utility of my countrymen is no more (and there are reasons to think less) important that the utility of goat herders in Africa, stubborn facts remain.

The wealth of my countrymen is important in determining my wealth. It is important because it determines the world wide value of dollar denominated assets: the largest of which is the present value of my wage stream.

It is also important because it determines the tax base of my government. Net Foreign Assets do matter.

This may not be the logic of economic nationalists but being right for the wrong reason doesn't make one any less right.

daveg writes:

Why do you assume that the relevant community is the nation? And why do you suppose that Arnold cares little or not at all about his neighbors?

Because the political relationship you have with your fellow countrymen is substantially different than then one you have with a Chinese citizen.

This has been stated over and over again, including in the comments just above your comment. Either you are obtuse or you are just choosing to ignore this information because it interferes with your econ-religious beliefs, to coin a phrase.

Roger M writes:

Trade stats can be dangerous. Sir John Cowperthwaite, the first administrator of Hong Kong said that his most important act was to abolish the collection of stats, because he knew socialists and central planners would use them to try to control the economy. (see the article in American Spectator Online 2/2/2006)

Also, CommerzBank in Germany thinks the data is too bad to be useful. See "Trade Balance Becoming Obsolete Concept at

daveg writes:

Here is another country that beleives strongly in economic "nationalism". But this is all just a waste of time according to Arnold. AIPAC might as well just stay home.

Since 2002, Israel has changed from being a borrower to a lender. At the end of 2005, the world owed Israel over $23 billion, compared with $12 billion at the end of 2004, the Bank of Israel reported today. Global debt to Israel rose 92% in one year.

Most of the world’s debt to Israel is to the private sector - over $22.7 billion. The world owes Israel’s banks just over $3.1 billion. Israel’s public sector, headed by the government, continues to borrow on international markets, in order to recycle debts and cover budget deficits.


T.R. Elliott writes:

I agree with the comment above that trade stats can be dangerous or misused. All measurements or statements or generalizations or concepts or any other creations of the human mind can be misused. E.g. the Govt CPI numbers and unemployment numbers are not very accurate, but we know how they are inaccurate. So we deal with it. We correct. That something can be misused is not an argument to not use it.

Here's some more data on why we should be concerned about trade statistics:;_ylt=Am5T5dxS2nkNFXpuf.VNZE934T0D;_ylu=X3oDMTBjMHVqMTQ4BHNlYwN5bnN1YmNhdA--

Younger people are not keeping up. It's inevitable folks. Those who think globalization will raise all boats are delusional. It will raise a lot of boats a little--and that is good--but there is no doubt in my mind that it will bring down the standard of living of the mass of people in the US. I'm not saying we can do anything about it, but economic free market libertarians, those who operate by faith rather than actual critical thinking about respective issues, need to be honest. The standard of living of younger people is dropping. It will continue. We are in an economic up-period because of the housing boom and other factors. That will soon end. So during an up period, economic good times, people are falling behind. They will fall further behind when we can no longer borrow from the future.

I dont' have a free market ideology to argue for. I'm not socialist. A communist. A libertarian. I just look at the facts.

It would be really nice if people would take off their ideological glasses and actually look at the world. That was in fact my first post on the board, when I read the misleading comments about shale oil. I called it irresponsible. And it is. So is pretending that the standard of living in the US isn't going to drop. Look at how 10% are getting all gains, 90% standing still. These are facts. Can we do anything about it? Probably not. But stop pretending for PR purposes that everything is grand. It isn't.

Roger M writes:

Sometimes, ideology is just shorthand for a set of conclusions based on years of research and hard work. Using the shorthand makes communications easier. The effects of free markets have been studied for over 200 years by thousands of economists looking at the facts. The vast majority have concluded that free markets are much more beneficial than harmful. It would take a lot of real estate to cite all of the thinkers and statistics involved in reaching those conclusions, so we use the shorthand that free trade works. Those who argue against free markets haven't studied the issue in enough depth. However, I'm in a minority who think that free trade is an effect of economic growth, not a cause.

daveg writes:

The effects of free markets have been studied for over 200 years by thousands of economists looking at the facts. The vast majority have concluded that free markets are much more beneficial than harmful.

Whether free markets are good or bad is not the question. Neither the US nor the world has a "free market".

The question(s) that need to be asked are whether a particular policy or activity is good or bad given the current state of the market including all the free market distortions that currently exist.

That is, given the fact that nations exist, with all the politic baggage that goes along with them, is a certain type of trade a good or a bad thing?

In another example, is deregulating the savings and loans banks a good idea while preserving FDIC insurance for S&L accounts?

Finally, I won't go into a discussion of externalities such as pollution, but they do exist.

James writes:


" market libertarians, those who operate by faith rather than actual critical thinking about respective issues..."

These are two different groups. Quit asserting that they are the same.

"I just look at the facts."

Anyone can cite descriptive statistics and claim that they warrant their preferred conclusion. So what?

Spot the hypocrite writes:

"economic free market libertarians, those who operate by faith rather than actual critical thinking about respective issues" - T. R. Elliott

"I live in the real world... So I read broadly and then follow my gut. And that's what my gut tells me. - T. R. Elliott


T.R. Elliott writes:

Spot the hypocrite: You misunderstand my statement. My point is that I am not beholden to an ideology of communism, libertarianism, or any other such set of tenets. And my comment regarding following the gut is simple: if you've experience with real world business and related matters, you will find that those at the top cannot prove their strategic goals using the tools of high school logical debate. I can get two economists to argue until they are blue in the face opposite sides of trade statistics, employment numbers, etc. Therefore, at some point, each individual must decide. And I will decide based upon looking broadly across a complex set of factors, not based upon the tenets of communism or libertarianism.

Hence my point earlier that Kling brought us no information when he discussed Shale oil. He had nothing to add, because he discussed it from a libertarian free market position that was less factually based than wishful and faith based. In contrast, I've read broadly on the issues associated with Shale Oil and other energy technologies and, with that knowledge, made a financial decision maybe a year ago that oil at $30 was cheap (and debated that issue with Stephen Moore--another zealot who has found an appropriate home at the WSJ opinion page). I was right, he was wrong. He used no facts to motivate his thinking. I did. He used ideology to motivate his thinking. He told me about Julian Simon--yeah yeah, whatever.

That is my point. I suggest reading broadly and deeply, not just buying into this or that ideology. Your pocket book will thank you, and it will lead you to what I believe will be a more accurate view of the world.

T.R. Elliott writes:

James: I'll openly admit confusion if my use of the phrase "free market libertarians" confuses different groups. I fail to understand, though, how a libertarian can be anything but a proponent of free markets since the basic tenets of libertarianism lead to free markets. I see them as the same.

What am I confusing? A free market is goods and services, based upon negotiations between willing participants, seems to me the basic of libertarianism, and vice versa.

Roger M writes:

Back to the issue of trade statistics, Frederic Bastiat demonstrated 150 years ago that trade statistics are misleading. He wrote that if France would simply load ships with French goods, sail them out to deep water and sink them, trade statistians would record the export of those good with no offsetting imports. So France must become wealthier by sinking it ships at sea in order to prevent them from returning with goods from foreign countries and creating a trade deficit.

T.R. Elliott writes:

Roger: What, for the life of me, does your example show? Sending out ships with goods, that are then sunk? Who paid for the sunk goods? Since the apparently aren't purchased by anyone abroad, I take it that you are describing a keynesian public works program? That has costs, pushing out other more productive investments.

That example just shows that anyone can create a diversion with a bad example. James Hamilton also considers the current account deficit. He's not as blindly accepting that it means nothing. Though I'll not put words in his mouth.

James writes:


Believe it or not, there is a tiny group who call themselves libertarians but oppose free markets (Chomsky, for example). The libertarians here are certainly not in that group. I agree with you though, the name doesn't make much sense for anyone who would hold this view.

Anyway, my original point was that "free market libertarians," are not the same group as "those who operate by faith..." Your statement seems to intend that these groups are one in the same. While there undoubtedly are some people who are free market libertarians that accept libertarian ideas as articles of their faith, it's disingenuous to speak as though both sets of people are identical.

For that matter, it's a misleading use of the word faith. If you want to say that libertarian ideas rest on assumptions, fine. So do your ideas. But don't use a religious term as a pejorative.

You seem to place a high degree of confidence in your ability to engage in some undocumented process whereby you look at a few data points, make some anecdotal reflections and suddenly, out from your gut comes a belief about economics that you take seriously. To the untrained, this might seem no different than the religious experience of conversion after witnessing a miracle. Maybe this is really the right way to do economics; I can't say until you describe the process in greater detail. But I wouldn't insult you and say that nonlibertarian beliefs about economics and policy are based on miraculous conversion experiences.

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