David R. Henderson  

Weird Economics at G-20 Summit

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From the September 22 Wall Street Journal:

Those countries running current account deficits, most notably the U.S., would have to define ways to boost savings. Nations running surpluses -- China, Germany and Japan, among others -- would detail how they propose to reduce any reliance on exports. The U.S. would likely need to commit to a sharp deficit reduction by government.

The goal here seems to be to have every country have close to a zero deficit on the merchandise balance of payments and close to a zero surplus on the capital account. But think about the economics of this.

Consider the United States' perennial trade deficits. In spite of the widespread condemnation they receive in the mainstream media, there are two problems with saying that these deficits are bad.

First, the offset to a trade deficit is a capital account surplus. This can take the form of more purchase of bonds by foreigners, more purchase of stock by foreigners, and more direct investment. One reason investors invest in the United States is that it still has, despite Bush's and Obama's attacks on capital markets, a large and vibrant economy and a stable political environment with a tradition of property rights.

Second, abundant and cheap imports are good for American consumers. What if Chinese companies send toaster ovens to American stores and we send paper dollar bills back and these bills are subsequently burned. That would be a huge boon to Americans. Jay Leno, in a 1980s add for Doritos, said, "Crunch all you want; we'll make more." Similarly, the cost of printing is only pennies per dollar and, more important, pennies per hundred-dollar bill. We can easily and cheaply print more dollars and get something valuable in return.

If these foreign firms didn't burn their dollars, they could invest them or spend them. These invested or spent dollars would eventually come back to this country or not. If they never came back, it would be the same as if they were burned. If they came back, then they could be used to buy GE stock, Treasury bills, or real estate. All of these assets could have been purchased by Americans, but the Americans decided they wanted toaster ovens instead. The American consumers are better off, getting their desired toaster ovens. The American sellers are better off, selling something they preferred less for what they preferred more: money. Likewise, the foreign sellers and purchasers are better off too.

For more on this, see Herb Stein, "Balance of Payments," Mack Ott, "International Capital Flows," and Mack Ott, "Foreign Investment in the United States."

H/T to Charley Hooper.


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CATEGORIES: International Trade



COMMENTS (3 to date)
Gary Rogers writes:

I could buy that argument if we were truly investing the dollars coming into the United States. Instead, the money is going into consumption, a different animal, which is pleasurable in the short run but extremely painful for those who must pay back the debt. When we spend dollars to buy products overseas, they would normally find their way back to buy our exports, except we provide an alternative by borrowing on a grand scale to finance our consumption.

In your last paragraph you do describe the way the system balances out. When we reach our credit limit, we start paying back our loans and the dollars eventually find their way back to purchase our goods. Says law is satisfied and products are finally exchanged for products. We then have a trade surplus. The problem is that working to make products to sell in order to pay back debt is the lot of impoverished populations. It is the life of slaves and third world countries. It would have been so much better had we not gotten ourselves into this mess.

Gary Rogers writes:

As usual I went off on a tangent on minimizing the importance of the trade deficit and did not address the issue at hand. On the issue of controlling trade imbalances by boosting savings for those with deficits or stimulating consumption for countries with surpluses, I agree that this is bad policy that will cause more unintended consequences than remedies. On the other hand, if the government would control its spending, the trade deficit would take care of itself. of course that brings up the Triffin paradox, which is a whole new discussion in itself.

Max writes:

Where does Germany run a surplus? In the trade balance? Well, wow, that doesn't change much, when we see the size of government DEBT!

So, shouldn't governments with a debt save, too? If yes, then there is almost no government in the world that doesn't have to safe at least a bit(except perhaps certain arab countries, Norway and China)..

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