Monday, May 8, 2017

Trade Haiku

George Shultz and Martin Feldstein, in the Washington Post
If a country consumes more than it produces, it must import more than it exports. That’s not a rip-off; that’s arithmetic. 
If we manage to negotiate a reduction in the Chinese trade surplus with the United States, we will have an increased trade deficit with some other country. 
Federal deficit spending, a massive and continuing act of dissaving, is the culprit. Control that spending and you will control trade deficits.
That's not an excerpt, it's the whole thing. Someday, I will learn to be this concise.



19 comments:

  1. Is the real culprit the dollar's status as the reserve currency? Does our trade deficit comprise the increase in reserves needed by the rest of the world to grow their economies (especially emerging nations)? Do we risk creating a reserve shortage for the rest of the world by reducing the trade deficit? Bottom line, do the US need a new Bretton Woods agreement before reining in the trade deficit?

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  2. John,

    "Federal deficit spending, a massive and continuing act of dissaving, is the culprit. Control that spending and you will control trade deficits."

    It's not the deficit, it's the debt. Federal budget deficits don't lead to trade deficits if they are financed internally.

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    1. Good point, selling bonds does not increase the amount of money in the private sector, bond holders are savers. However the recipients of the government could have particular spending habits, which could include imports.

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  3. And of course a Republican Senate coupled with a Republican House coupled with a Republican President have held the line against increases in government spending:

    https://fred.stlouisfed.org/series/FGEXPND

    Notice the period from 2011 to 2014 (federal expenditures were flat) - where oh where are you John Boehner?

    And of course the Republican Party (House - Paul Ryan, Senate - Mitch McConnell, President - Trump) approved a budget that cuts spending over any time frame?

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  4. "If a country consumes more than it produces, it must import more than it exports. That’s not a rip-off; that’s arithmetic." I'm not an economist, but even I can see that this is wrong. A country can consume more than it produces by drawing down capital--eating the seed corn, as it were.

    As for federal deficit spending: by the extent to which the government borrows from foreigners who get the dollars to lend by exporting to the U.S., there will be a contribution to the U.S. trade deficit during the period when that exporting takes place. To the extent that the government borrows from domestic lenders, or from foreigners who do not get their dollars by exporting to the U.S. in the relevant period, there will be no (first-order) effect on the U.S. trade deficit for that period.

    The U.S. can, and often has, run a trade deficit during times when the government was not guilty of deficit spending.

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  5. Yes trade deficits are not directly related to budget deficits, but government is a big, big player, so Schultz's argument is mostly true.

    The thing is, trade deficits supported by investment in private sector(ie us stocks) is the best thing it could happen to US citizens. Trade deficits supported by foreign investment in US state(us bonds), is a deadend.

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  6. "If we manage to negotiate a reduction in the Chinese trade surplus with the United States, we will have an increased trade deficit with some other country. "

    Nope.

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  7. I disagree.

    The United States can consume more than it produces (as we do) by financing imports through the sale of U.S. real estate.

    In fact, foreign investors (armed with dollars we sent them) are very fond of U.S. real estate.

    There is a rub in this----if real estate is zoned and supply restricted (and it always is), the extra demand leads to house price bubbles.

    https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr541.pdf

    The above paper by Andrea Ferrero was also published in the Journal of Money, Credit and Banking.

    http://onlinelibrary.wiley.com/doi/10.1111/jmcb.12204/abstract

    This is the unintended side effect of trade deficits and property zoning----exploding house prices.

    Sydney, Australia now has an average house price of $1 million.

    Then you have a problem of a central bank, alarmed at house prices, "cooling things off"….see 2008.

    I have yet to see the globalists wrestle with this reality.

    There is a solution---end property zoning in the U.S.

    That is another problem no one ever seems to want to discuss….

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  8. Besides which, the U.S, government ran surpluses during some of the Clinton years. Did the trade deficit vanish in those years?

    I happen to favor a balanced budget (though Japan's success in paying off, or monetizing, nearly 50% of its national debt, and still be in borderline deflation, is interesting).

    But surely the US can run huge trade deficits, sell real estate, and balance the federal budget.

    BTW, I have always wanted to ask John Cochrane: If the Bank of Japan holds interest rates at zero (as they are on 10-year JGBs) can it monetize the remaining 50% of its national debt without triggering inflation?

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  9. The first sentence is correct. But I think it is read as “if and only if a country consumes more than it produces, it must import more than it exports” – which is false. By ignoring the role of investment, Shultz and Feldstein are unable to tell WP readers everything they need to know about trade economics in 70 words.

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  10. I don't see why this is a problem. Right now the Treasury can borrow at a 1.1% annual rate, while inflation is running at 2%. 10-year TIP rates are around -0.5%. At these rates why shouldn't our government be borrowing from foreigners to finance domestic spending? Seems like a smart move.

    Unless you think the marginal dollar of government spending has a negative real social return. Some might call that a cynical view, but while I don't hold it I won't fault you for harboring such suspicions.

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    1. Jonathan,

      "At these rates why shouldn't our government be borrowing from foreigners to finance domestic spending?"

      Because those foreigners pay a 0% U. S. tax rate. Even 1.1% interest is still larger than 0% tax. It's real simple - does it make sense to pay U. S. benefits to foreigners while collecting no tax revenue from them? If so, then why shouldn't we just extend Social Security, Medicare, Medicaid, etc. to the entire world and have the U. S. taxpayer pick up the check?

      This is why some Republicans have been floating the idea of a border adjustment tax (or tariff if you prefer).

      "Unless you think the marginal dollar of government spending has a negative real social return."

      Show me the social value in bailing out banks and waging two simultaneous wars.

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    2. Also,

      The federal government collected about $3.5 Trillion in receipts last year. Federal receipts are growing at about 2% per year.

      https://fred.stlouisfed.org/series/FGRECPT

      Total federal debt outstanding is over $20 Trillion and growing at roughly 5% per year.

      https://fred.stlouisfed.org/series/GFDEBTN

      Do the math. Federal debt growth of 5% + even a measly 1.1% of annual interest outpaces tax revenue growth by about 4% annually. And that assumes that interest rates don't change.

      Steve Mnuchin has already indicated that Treasury is looking to extend maturity.

      https://www.bloomberg.com/news/articles/2017-05-01/mnuchin-to-wall-street-u-s-is-serious-about-ultra-long-bonds

      The central bank has indicated they intend to raise interest rates a couple more times:

      http://www.latimes.com/business/la-fi-federal-reserve-interest-rate-20170315-story.html

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  11. I think many commenters are missing the simple point. It's a haiku, not a treatise on trade and investment. The point: There is a capital account and current account. They add up. You cannot import less and export more unless you also borrow less abroad. This simple fact is too often forgotten.

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    1. "This simple fact is too often forgotten."

      It seems to have never been learned by Donald Trump, Peter Navarro, Wilbur Ross and Robert Lighthizer. Perhaps you could explain it to them?

      "I think many commenters are missing the simple point"

      The assertion that if the government stopped borrowing additional money then the trade deficit would disappear is sufficiently over simplified, partisan and ideological that it called for clarification. Back in the day, Japan switched from Treasuries to buying golf courses and Manhattan real estate.

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  12. Even more remarkably, the writers of this article have an average age of 86. Yet, rather than succumbing to waffle, they communicate with a clarity and efficiency 99.99999% of economists half their age are unable to match.

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    1. "the writers of this article have an average age of 86."

      Maybe, when you are 86 you have no time to waste.

      Delete
  13. All complex problems
    Have a solution that is
    Clear, simple and wrong.

    (Slightly misquoting Mencken to make the syllable count work)

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  14. "If we manage to negotiate a reduction in the Chinese trade surplus with the United States,"

    Another quibble. Part of the problem is the global savings glut. Sovereign wealth funds, corrupt African politicians, Russian kleptocrats, American multinationals parking allegedly international profits off shore and the Chinese government all want to hold US dollar denominated assets.

    Each of those sources of glut would have a different solution. Encouraging the Chinese to reduce the accumulation of foreign assets by the government, and by state controlled corporations, might well have some impact on the trade deficit. What we need is a reduction in the Chinese savings rate (estimated at 50%).

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