Posted on 03/24/2005 8:01:13 AM PST by The Great Yazoo
Last week’s news that the 2004 U.S. current-account deficit had hit an all-time high was met with the expected negative commentary. Lehman Brothers chief economist Ethan Harris called the ’04 number “abysmal”; the Wall Street Journal’s Justin Lahart pondered whether “the rest of the world will tire of writing IOUs”; and USA Today cited Warren Buffett’s recent quip that the U.S. could become “a sharecropper society” if its transfer of assets to foreigners continued.
Buffett’s comments merit special attention in that it is precisely because the U.S. is moving away from low-value sharecropper jobs that the current-account deficit is so high. In truth, the impressive performance of Buffett’s Berkshire Hathaway is directly related to the fact that the current-account deficit has been rising almost continuously over the last 25 years.
The explanation for this is very simple. When Americans send dollars overseas to import low-margin products such as paper clips, t-shirts, and CD players, the current-account deficit rises.
What the Buffetts of the world apparently miss is the great economic success story that allows us to be such prolific consumers to begin with. That story has to do with the dynamism of U.S. companies and their focus on what they do best, and how these companies send overseas the low-value work that hogs limited resources and crowds out innovation at home.
The above is the flipside of the outsourcing controversy. It has to do with the messianic devotion of U.S. companies to wringing as much efficiency as possible out of their limited resources. Importantly — as evidenced by the fact that foreign purchases of U.S. stocks more than doubled in January to $16.5 billion — this drive for profits attracts capital.
As for the current-account deficit, our export of shares in U.S. innovators such as Google, prominent “outsourcers” like Eastman Kodak, and low-margin product importers such as Wal-Mart does not factor into current-account/trade-deficit calculations. On the other hand, our imports of goods that are decidedly not in our economic self-interest to make does factor into the number. This explains why the current-account deficit continues to rise.
This is a very positive development. The willingness of others to make $37 DVD players for U.S. consumers means that U.S. consumers can continue to move up the economic ladder in terms of the work they do. All trade must in the end balance. We’re trading shares of Apple and Google for goods we could surely make — but only if we’re willing to see our wages drop and capital inflows to companies like Apple grind to a halt.
Those who disagree need only look to Germany — a country that protects low-value jobs and runs a current-account surplus. Labor laws there repulse worldwide capital, thus cultivating a 12.4 percent rate of unemployment. The latter insures a continued trade surplus for Germany, but only because a capital deficit makes German citizens weak consumers.
Warren Buffett wrings his hands over asset transfers to foreigners and the fact that Americans are the recipients of so many foreign goods. But his discomfort is a certain sign that the transfers he speaks of are moving both ways; that shares in U.S. assets are moving out (and funding our companies) while goods we’re too evolved economically to make move in. We could reverse the accounting abstraction that is the current-account “deficit,” but doing so would only serve to impoverish us, all while making the world’s second-richest man much less wealthy.
— John Tamny is a writer in Washington, D.C. He can be contacted at jtamny@yahoo.com.
To all the chicken littles who are upset about the trade deficit, I'll send you another copy of the memo since you didn't get the first one:
We got rid of the gold standard 70 years ago. Wealth is not leaving the country. All you can do with those dollars is either invest them in America or buy American goods and services. Otherwise foreigners are giving us cars, consumer electronics and sneakers in return for little piecs of paper with pictures of dead presidents on them.
In other words, the same reason we have this downward spike right now, is the same reason we had one at the turn of the century. We're getting rid of old jobs, and people are transitioning into the modern market.
Like a drop in speed when you change gears.
Of course, we all already knew that ups and downs are part of what makes our system work (if it were all up, it'd be inflations) But now I have a useful metaphor :)
Otherwise foreigners are giving us cars, consumer electronics and sneakers in return for little piecs of paper with pictures of dead presidents on them.
Thats the way I see it. Eventually all those dollars have to come home and be spent here. Same with sending billions of dollars to mexico...they eventually have to come home. But then maybe I see things too simply.
Jib,
You're mistaken, and so is Tamny.
The current account deficit, of course, is a liability on our economy, as is the misunderstood capital account.
It is wholly true that a current account deficit can be a sign of a healthy economy, but it is not a decidedly favorable condition, as Tamny asserts.
Frankly, I'm surprised that Kudlow, econ editor of NRO buys into this. It's one thing to be a supply sider, another to make wild assertions.
These disequilibrious conditions must correct. The problem is we don't know when. Much more important is that in most cases (under floating exchange regimes), corrections have been orderly, not precipitous as under fixed regimes. Still, the Asian economies hold vast dollar reserves. Any decision to revalue, especially by China, will least to a faster, more precipitous decline.
Last, but not least, this type of information gets used by investors, who are fooled by the bold assertions of a man like Tamny. It's bad information, and shouldn't have made it to the NRO.
I love to see articles explaining this concept so well. Intuitively I have felt [that good liberal word] that trading green pieces of paper for goods has been a win-win on the world economic stage. I look at Canada, which always has a trade surplus, and compare their economy with ours. They mostly sell natural resources - which can be measured in dollars and volume. We mostly contribute increasing technology to the world which cannot really be placed on the balance sheet anywhere.
All I know is that we are a very wealthy country and a productive country.
I think it Walter Williams who said "you probably have a trade deficit with your local grocery store - how can this imbalance be maintained?" in what was a great commentary on how the trade deficit "problem" is overblown.
thanks for the great post.
Yazoo,
You touch on a number of discrete topics here.
The Chinese have pegged (through buying and selling in the open market) their currency to the US dollar for a number of years (I believe it was 1994). By allowing their currency to float (removing the peg) their currency will revalue (appreciate) versus the US dollar, which will devalue versus that currency: the markets, without the peg, at what point we know not, will correct any diseqilibrium. Note that it can persist almost indefinitely. Without removing the peg, declining US dollar value would indeed impact the $165 billion portfolio of dollar assets now held by the Chinese.
But it's not as simple as 'not taking more US dollars.' We're on a subject far afield from currency exchange at the local bank branch. The Chinese central bank owns dollar assets (bonds) which of course are liabilities of ours to them. We pay interest on the bills, notes, bonds. That's why economists call this willingness to hold dollar assets 'financing our spending habits,' which their commitment is in a literal sense. Many people think of central bankers as portfolio managers, trying to make the most of their portfolio of reserve currencies. Nothing could be further from the truth. They peg to keep their goods and services competitive, and the price is holding dollar assets.
You're correct in that sourcing is will ultimately benefit us. After all, our most recent data suggests that where 8.2 million jobs are sourced overseas, some 5.4 million are insourced, to all fifty states. We're the most productive, most innovative, most inventive economy in the world, and a net beneficiary of job sourcing. The dollars may indeed by spent here. But they may not. Whatever the case the dollar out there is a liability.
Which brings me to my final point. Alan Greenspan said last year, twice, that our trade imbalance (part of the current account) cannot be separated from our capital account, that there is no unidirectional causal relationship between the trade balance and capital flows. What this means is that foreigners' willingness to hold dollar assets may in turn further our current account deficit.
But make no mistake, our current account deficit and our capital account surplus are both liabilities. And so Tamny is wrong. Some of what he says is of value, to be sure. But he's just plain wrong in a fundamental way.
The wisest people in the game know that the dollar is dramatcially overvalued. And so I would ask: you gonna believe Tamny? Or Alan Greenspan, Roger Ferguson, Ben Bernanke & the Board of Governors of the Federal Reserve, all twelve Federal Reserve Bank's economists, central bankers from around the world, etc., etc.
Your call.
Furthermore, I bet Tamny never tried to stiff a steakhouse. See http://www.freerepublic.com/focus/f-news/1370095/posts
Yazoo,
Thanks for the reply.
You're right on the money here. And so I would reiterate one of my original points, which I told Tamney weeks ago, when he first raised this in a column on NRO: that the deficit can be a sign of economic health, but of itself is a liability.
Who needs Tamney? Looks like we can get 6-700 words done in a heartbeat. And good stuff too.
Thanks too for the link.
My bet would be that Crazy Al was called away by the domestic pressure (Mrs. Andrea Mitchell Greenspan) rather than inflationary pressure.
Sorry about the disappearance of the tagline.
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