Posted on 03/21/2006 10:08:04 AM PST by Marxbites
The US trade deficit is often viewed with alarm and has attracted considerable attention from both the public at large and policy makers. [1] Much of the uneasiness about the US trade deficit can quite simply be attributed to the term "deficit" itself, which holds with it many underlying negative connotations. However, in answer to these concerns, one may take the perspective, drawing on the theories of Ludwig on Mises and Friedrich August von Hayek from the Austrian School of Economics, that the US trade deficit is merely a reflection of the competitive advantage that the United States has been enjoying over the past decades.
Opting for a relatively free-market system, the United States appears to have succeeded in providing an environment more conducive to investment and growth than other currency regions, most notably Europe and Japan. This is evidenced, for instance, in its higher growth and capital return rates. In the words of Mises, "[…] the tremendous progress of technological methods of production and the resulting increase in wealth and welfare were feasible only through the pursuit of those liberal policies […]" [2] That said, the current deficit in the United States may very well be a result of its adherence to a more efficient economic model than many other currency areas.
"The idea that there is a third system — between socialism and capitalism, as its supporters say — a system as far away from socialism as it is from capitalism but that retains the advantages and avoids the disadvantages of each — is pure nonsense." [3] "The idea of government interference as a "solution" to economic problems leads, in every country, to conditions which, at the least, are very unsatisfactory and often quite chaotic. If the government does not stop in time, it will bring on socialism." [4] Building on what Mises termed the infeasibility of pursuing the idea of a third system, Friedrich August von Hayek in his Fatal Conceit (1988) asserted that such attempts would interrupt the natural operation of a market economy and individual freedom and yield worse results than a spontaneously working economic order. [5] In contrast to the fairly strong degree of government interventions in the market system practiced in many Western industrialized countries — be it via taxation, regulation, redistribution of market generated incomes, etc. — the United States may still be inspiring confidence among investors that liberal economic principles and, as a result, a systematic economic outperformance might be preserved.
The upshot of such an interpretation would be that the United States continues to attract funds from abroad as long as internationally scarce resources are allowed to be used most efficiently. As long as demand for US dollar-denominated assets from abroad exceeds US residents' demand for assets from the rest of the world, we should see the United States continue to accumulate capital surpluses — here regarded as merely the flip side of trade balance deficits; an interpretation which echoes the work of Eugen von Böhm-Bawerk (1914), who wrote that the capital account would reign over the trade balance. [6] To shed some more light on such a conclusion, we must take a closer look at the economic precepts underlying our understanding of the US trade deficit.
A country's transactions with the rest of the world within a given period of time are recorded on its "balance of payments". Goods transactions are shown in the trade balance. A country records a trade deficit (surplus) if the value of its exports to other countries falls short of (exceeds) the value of imports from abroad. However, the trade balance shows only "one side" of total transactions, namely a country's goods transactions. The other side comprises capital flows, which are recorded in the capital account.
The capital account provides a contrast between a country's capital imports and exports. If, for instance, foreigners buy more stocks and bonds in the United States than US citizens purchase abroad, the capital account balance records a surplus. Japan and Germany, for example, are "chronic" capital exporters, meaning that the amount of assets they acquire abroad exceeds foreign demand for Japanese and German assets. As a result, the capital account deficits of these countries corresponds with US trade surpluses.
Importantly, when one has a free floating exchange rate, a deficit (surplus) in the trade balance will by definition be accompanied by a surplus (deficit) in the capital account, and the balance of payments will always be balanced — i.e., the amount of goods and services bought and sold equals the amount of money spent and received from abroad.
To better understand why a trade deficit is widely viewed as "dangerous," it is useful to look briefly at the period when the gold standard prevailed. Under such a monetary regime, countries' trade balances tended to be zero, with temporary trade surpluses or deficits ironed out over time. For example, think of a country accumulating a trade surplus during this period. It would receive gold inflows from importing countries. The increase in the domestic stock of gold, in turn, would make the domestic money supply "looser," thereby stimulating output and employment.
The rise in the domestic money supply would then translate, sooner or later, into higher domestic prices, which caused exported goods to be less price competitive and imported ones more attractive. As a result, a country's exports declined and imports rose. The trade balance "deteriorated," that is to say the surplus declined (and even became negative), as did the stock of domestic gold (i.e., money); the latter declined to the same extent to which the trade surplus declined. So over time, a country's trade balance tended to follow along the line of a "zero mean reverting" process.
Figure 1 illustrates this point. It shows the US current account as a fraction of total output on a historical basis. On average, the ratio was less than 0.5% (close to zero) from 1870 to 1973, after which the gold standard (i.e., the system of fixed exchange rates) finally broke down. Since then, the trade deficit has embarked upon a widening trend. In 2004, the deficit ratio amounted to 5.5%, the highest proportion from 1870 to 2004.
Source: Historical series is from International Historical Statistics, The Americas 1750-1993, 4th Edition by B. R. Mitchell; graph is taken from Pakko, M. R., The U.S. Trade Deficit and the "New Economy," in: Federal Reserve Bank of St Louis, September/October 1999, pp. 13. — For the period 1998 to 2004: current account in percent of GDP. Under the gold standard, any build-up of export surpluses — and the accompanying "boom" for the domestic economy — was seen as something that needed to be reversed, a process accompanied by unwanted swings in growth and employment. This explains to some extent why to this day a country's trade imbalance continues to be seen as calamitous. However, such concerns are no longer justified in the post-gold standard era. The "gold automatism" for balancing
Whose this mystical 'they'? And just which 'surplus' are so sure they are complaining of? The capital put into private investments, R&D, etc....or the ones put into U.S. and State Treasuries for the financing of still more government spending.
---they say the best way to eliminate the excess capital is by raising taxes,
Again, who is they? And you believe they want to get rid of "excess capital"? My, my. Such heathens. And they want to "raise" taxes? What if all they want to do is end income taxes, capital gains taxes, and so on. Ending the PUNISHMENT on income, savings, capital gains and so forth, and instead tax consumption in the alternative. Particularly the kind of consumption that erodes U.S. independence, self-reliance and industrial preparedness. I, for one, am all in favor of ending the 16th Amendment...and going to a straight set of consumption taxes and tariffs.
---these tax hikes are supposed to benefit people who don't want to do anything that free people want to pay them to do
So you're telling us that for most of the history of the U.S. our Congress hasn't had any powers to tax anybody in any way shape or form...because that somehow implicates that we free people would not be free?
Are you stepping off into Posse Comitatus land here?
""Japan and Germany, for example, are "chronic" capital exporters, meaning that the amount of assets they acquire abroad exceeds foreign demand for Japanese and German assets""
Yet some here think that lack of demand for assets in foreign countries is somehow proof of american economic weakness
just ask yourself why arent thy investing i ntheir own countries???
It is no coincidence that the US trade deficit really began to go negative right after Reagan's 1981 tax cuts...cuts in taxes on capital, thus raise the rate of return to capital in the USA...ironically it is Paul Craig Roberts who is responsible for americans huge trade deficit as he was the designer of reaganomics...that was then, this is now and Paul Craig Roberts currently currently inhabits a padded room
this also explains the folly of the gold bugs...if we went back on the gold, our standard of living would decline substantially...with a deficit we would have gold outflows, this would cause a sharp contraction in the money supply and thus lower employment and output...the gold standard would thus reduce US GDP by at least 6% and probably more like 10%
100% correct..problem is they think that gold has some God given value, forgetting that it is supply and demand that determines prices..prices for gold and for money
""Gold has value in and of itself - are you saying paper money has the same ?""
Gold has value because humans give it value through their economic interactions.....paper money does have value..again for exactly the same reason..there is no difference between gold and paper..printing money and doubling the money supply, will lower the value of money by roughly 50%.....likewise hitting a giant vein of previously unknow gold that results in doubling the supply of gold will likewise cut the value of gold by,all things being equal, 50%
if we were all paid in gold ( 2oz per week say) we would have considered the period of the 1980s as a time of rampant inflation, rather than the 1970s....the 1970s, rather, would have been a period of deflation
I also abhor Gold for similar reasons. But that predictable affect which you outlined...using a relatively stable currency...should give you pause as to what is really going on with our currency...and thereby all savings and measures of income and wealth in the U.S.
It's not what its been cracked up to be. The fact of 'competitiveness' is showing the truth of the fundamentals. We can't match the Third World labor prices...nor should we want to. But ever more encroachment on U.S. goods and services is being forced into our markets as they ramp up more constantly do so.
And high supposed employment rates don't equate to things being hunky-dory...when we lose the core essential industries of all advanced industrial nations. Semiconductors. Circuit Boards. Aerospace. Automotive.
Going. Going. Gone.
""We can't match the Third World labor prices""
interesting how you say that because US wages relative to say Indian wages are lower today than they were 30 years ago..thus India is less cost competitive today than it was 30-40-50 years ago.
So the gap there is closing. India, while socialist, is not communist. Slight difference, but it does translate into more freedoms. China, on the other hand is not seeing your closing gap. The Reds are quite content to expend $195 billion annually...they're own official statements...just to keep their currency pegged. And they use their other powers of communist tyranny to keep wages at slave levels...below all other third world nations. Which of course is what it is all about for them.
my point is this: labor prices arent what makes a nation competitive.
Great article. Thanks.
Any talk about righting wrongs in China would need another thread. We're talking about whether the American economy is in danger or not. We buy oil from China. If Chinese slave labor is selling us oil below cost and reducing our bills at the pump, then I say it's not a problem that needs to be fixed by higher import taxes.
--goes back to 3. Whereas Polleit's essay says 'deficit' scares people, I say it's the scared people hiding behind tariff protection are using the word 'deficit' to drum up support. They know if they complain about a record Capital Account Surplus then nobody will listen.
What if all they want to do is end income taxes, capital gains taxes, and so on.
No they don't. They want higher import taxes, and call for eliminating Bushes tax-cuts while their at it. Back when GW Bush signed the import tax hikes on steel, I didn't hear anyone saying "Oh golly, we forgot to lower the other taxes first!"
So you're telling us that for most of the history of the U.S. our Congress hasn't had any powers to tax anybody in any way shape or form...because that somehow implicates that we free people would not be free?
No I never made that statement, and if you sincerely don't realize that it was first written by you then we've got bigger problems here then just econ issues.
Paper money only has value because of the TRUST in the institution behind it. Years ago it was paper money issued by individual banks (I had a great-uncle who owned one), today it is the Federal Reserve backed by the US Treasury (ie taxpayers). If that trust goes, there is nothing backing paper except more paper. At least with the gold/silver reserves of years ago, you could get hard metal in exchange.
You are 100% correct - it's been a while since I studied economic theory - nothing has value in and of itself, it is only human endeavours that give it so.
But that is precisely the opposite of what they are doing isn't it? First, they aren't selling us oil. They are indeed driving up oil and all other essential energy and commodities resources necessary for great power status...in direct competition against us. Indeed, they tried to snap up UNOCAL and divest our country of a major set of oil supply for the future.
Second, their sales to us instead of supporting our infrastructure, are destructive....they are taking U.S. manufacturing plant, relocating it to their country, either directly with their own purchases, or with the willing accomplices amongst those who would rather switch than fight.
The only advantage the U.S. receives is temporary, and potentially costly in the extreme to undo the damage already done. But it will have to be, as soon it becomes inescapably clear that China doesn't care about remaining a footstool for their western stooges...and won't. They are simply biding their time to reverse the roles.
Tell it to G.E. or Bechtel, and the whole raft of other Fortune 500 multinationals falling all over themselves to close U.S. operations and relocate them to these nations.
We're importing 14,000 barrels of oil per day from China (here).
Wrong.
Back when GW Bush signed the import tax hikes on steel, I didn't hear anyone saying "Oh golly, we forgot to lower the other taxes first!"
So? Those trade adjustment sanctions were government actions to counter explicit foreign government actions. All very much in accord with Adam Smith.
I am talking about general replacement of the entire corpus of the tax system with one that imposes instead a general revenue tariff and a national sales tax. This rewards U.S. production, savings, investments, etc. Pure supply side. And why don't you ask Malcolm Forbes if he would prefer this to what we have now...or even his flat tax if he thought we could move it through Congress?
PR: So you're telling us that for most of the history of the U.S. our Congress hasn't had any powers to tax anybody in any way shape or form...because that somehow implicates that we free people would not be free?
E.P.: No I never made that statement,...
You came pretty damn close. You keep exaggerating some perceived slight of revenue tariffs, demanding they be totally zeroed out, and pretending that you have no responsibility for the punitive taxes that took their place historically. So now you try and back away?
and if you sincerely don't realize that it was first written by you then we've got bigger problems here then just econ issues.
Well I guess YOU do, anyways. Sigh.
So you don't even have a "net" number.
And further, since your numbers are deminimus, your point was effectively demolished in the previous argument you made.
Furthermore, you also don't know what 'price' they are selling at, either. High spot oil prices? Considerably higher than their Iranian oil suppliers price no doubt.
So the argument for our getting lower prices at the pump...would appear to be wishful thinking on your part.
We're going around so much that I had a little trouble remembering what the 'point' was, so here's what we got (tell me if I missed something):
29 China, on the other hand is ... ... content to expend $195 billion annually...they're own official statements...just to keep their currency pegged. And they use their other powers of communist tyranny to keep wages at slave levels... 32 If Chinese slave labor is selling us oil below cost and reducing our bills at the pump, then I say it's not a problem that needs to be fixed by higher import taxes. 30 they aren't selling us oil.... 37 We're importing 14,000 barrels of oil per day from China (here).
I still don't see how higher import taxes on Chinese exports like oil is going to either help us or rescue the oppressed slave laborers. The only thing I can see is that import taxes on Chinese oil will cost me money.
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