2006 February 11 Saturday
US Trade Deficit For 2005 Was Over 725 Billion Dollars

The mind boggles.

The $725.8 billion deficit, announced Friday by the Commerce Department, was a 17.5 percent leap from 2004's then-record deficit of $617.6 billion. The 2005 trade deficit equaled 5.8 percent of this country's gross domestic product, up from 5.3 percent of GDP in 2004 and 4.5 percent in 2003.

When I hear some argue for lower trade barriers my reaction is they are arguing for the freedom to send the whole nation deeply into debt.

The US runs large trade deficits with most (all?) of its major trading partners.

The $201.6 billion trade deficit with China in 2005 was a sharp 24.5 percent jump from 2004's $161.9 billion gap, prompting critics of free trade to concentrate their ire on that country. (Japan was second at $82.7 billion, up 9.4 percent. Canada was third at $76.5 billion, up 15.1 percent.)

If foreign banks were not buying US debt to push up the US dollar I'd be more sympathetic to arguments for letting the market work it all out. But foreign trade isn't free trade when currency valuations are manipulated by governments.

China sells the US 6 times as much as the US sells China.

America set a record for the value of goods exported to China - $42 billion - but that was dwarfed by the almost $250 billion travelling in the opposite direction.

...

Also contributing to the record figure was the $176 billion of crude oil imports, with America paying an average price of $47 a barrel.

By the way, if the US dollar declines in value that will lower the real cost of oil to the rest of the world since holders of their currencies will be able to buy US dollars more cheaply. That will increase demand for oil in the rest of the world and hence eventually lead to higher oil prices in US dollars. A sharp decline in the US dollar could cause a bout of inflation in the United States.

Organized labor says the trade deficit is doing real economic damage.

"Such a huge trade gap undercuts domestic manufacturing and destroys good U.S. jobs," said Richard Trumka, secretary-treasurer of labor's AFL-CIO. "America's gargantuan trade deficit is a weight around American workers' necks that is pulling them into a cycle of debt, bankruptcy and low-wage service jobs."

Sen. Byron Dorgan (D-N.D)., said the new deficit figure showed that "our trade policy is an unbelievable failure that is selling out American jobs and weakening our economy."

Amazingly, the dollar's value rose even as the US trade deficit broke new records.

The dollar recovered from an initial decline against the euro yesterday. It appreciated 14.4 percent against the 12-nation currency in 2005 and climbed 14.7 percent versus the yen.

I can remember a college economics professor explaining to us how we didn't have to worry about trade deficits since currency values would adjust to cause exports and imports to approximately balance.

Back in 1991 the trade deficit was only 30 billion dollars.

The trade deficit, which has risen more or less steadily since 1991 when it was $30.7 billion, widened 17.5 percent in 2005 to set a record for the fourth year in a row.

The increase in the US trade deficit in 2005 was over 4 times bigger the total US trade deficit in 1991.

Such a huge deficit seems crazy to me and I'm not persuaded by arguments that this is not a problem. I agree with Warren Buffett. Americans are living in Squanderville. The question in my mind: Why is this happening? Wider availability of consumer debt? Some demographic trend in the US population? Foreign governments manipulations of the US dollar? US capitalists shifting their capital abroad to get cheaper labor? Other?

Robert Musil argues that we should see the trade deficits as a massive purchase of political risk insurance by people in other countries. But does that explain our trade deficit with Canada for example? Still, an interesting idea.

What if anything should be done at the level of US government policy about the US trade deficit?

Share |      By Randall Parker at 2006 February 11 11:01 PM  Economics Trade


Comments
John S Bolton said at February 12, 2006 1:10 AM:

One point to especially notice is that a deficit of this size cannot be financed without colossal aggression. There is no voluntary flow of investment of this magnitude which can be attracted. The world is not full of savings with no alternatives but US gov't paper to go into.
Central banks, especially that of Japan, are buying well over $600 billion in US gov't paper and sitting on it. They can't allow it to ramify in their financial systems, since that would cause huge inflation. When the dollar falls, they will have multitrillion dollar losses on their holdings of this kind, perhaps. So they throw good money after bad.
If $500 billion of this dollar support per year were to be no longer provided after five years, and there is recession during one of those years, and 1% population growth continues; America would have to average over 3% growth during the non-recession years, to have any per capita growth.
If the dollar support continues at the same level, Japan will go well over 50% reserves in its banking system; not a practical scenario.

John S Bolton said at February 12, 2006 1:24 AM:

Free trade/ globalization, in this specific context of receiving stolen goods on such a vast scale, is morally untenable and highly impractical longterm. These tranzi globalizers are incompetent. The dollar support is accomplished by aggression on the savers and borrowers of the countries whose central banks support the dollar in the above manner and volume; they are forced to take in US gov't securities indirectly. It is not investment but current consumption, like lending money to the Congo. These debts cannot be repaid without causing an economic disruption, on both sides, of great magnitude and long duration; and such as to preclude the possibility of repayment.

Kenelm Digby said at February 12, 2006 3:45 AM:

Randall,
Do you realise that the enormous sum of 725 billion dollars is equivalent to every income earned by every worker (from janitor to CEO), in Great Britain last year, a country that is usually not regarded as poor?

Kenelm Digby said at February 12, 2006 3:56 AM:

Randall,
To answer your question, the simple answer to why the USA has such an enormous trade deficit is that in a World "governed" by free trade, China and the other East Asian nations are simply more industrious and productive than the USA.No oher explanation is needed.
I know some here will argue the toss as to what "productive" and "productivity" actually mean,using all kinds of subterfuge and sophistry, but I would like to keep the definition rational, pure and simple ie the ability to produce goods that the consumer actually wants to buy at reasonable cost and quality. The knub of the whole argument here are the words "consumer wants to buy" - this explains everything,all other words are wasted.
Whether the deeper reasons are higher East Asian IQ, better business management and strategy, a better disciplined hareder working workforce etc etc are all moot, but the point is all these varaiables are factored out by the wish of the consumer to exchange hard cash for what he believes to be a worthwhile purchase.

Randall Parker said at February 12, 2006 8:06 AM:

Kenelm,

When one country is more productive than another country the theory is that the first country's currency is supposed to rise in value until their trade is in balance.

Why should the Chinese just sell stuff to us and not get any goods and services in return? What is smart about that?

Ivan Kirigin said at February 12, 2006 8:37 AM:

Wow, this is some of the most economically ignorant commentary I've seen on this blog yet.

Tell me, who here is running a trade deficit with your local grocery store? All of you?

Certainly those Americans who go into debt to finance their purchases are in an untenable situation. Fortunately, the average net worth of Americans has been significantly increasing.

Further, any government bonds purchased using dollars are only a problem if the government cannot finance the interest. That is ENTIRELY a fiscal policy issue. Those bonds would be no problem at all if we didn't have a budget deficit. As it is now, the solution to any problems there is also entirely fiscal. We need to raise taxes and/or cut spending. It's that simple. There is ABSOLUTELY NOTHING with respect to trade that needs to be done. Certainly, limiting trade will limit the engines of wealth creation, and you'll have even bigger fiscal issues.

You all should read what Don Boudreaux has to say about it, in his essay here or his blog, Cafe Hayek. Here is a sample:
"
A trade deficit isn't debt. My young son, for example, received for Christmas several Chinese-made toys. These were bought with cash. If the Chinese toymakers invest their newly earned dollars in, say, that factory in Utah, the U.S. trade deficit rises but no debt is created. Neither I nor any other American owes any foreigner anything as a result of my purchase of toys from China and the corresponding Chinese purchase of equity in a company located in America.

More generally, whenever foreigners buy American real-estate or equity, or when they simply hold dollars in their portfolios, our trade deficit rises without creating debt.

Nor is it true that a higher trade deficit means that Americans are selling off assets. Whenever, for example, IKEA builds a new store in the U.S., a new asset is created. No Americans had to part with assets as a pre-condition for this Swedish investment in America.
"

Randall Parker said at February 12, 2006 9:19 AM:

Ivan,

You think you know arguments I haven't heard or understood before. I probably first grasped these standard laissez faire free trader arguments before you were born.

"A trade deficit isn't debt": Well, we are building up very large debts to the rest of the world which we wouldn't be building up if we weren't running a trade deficit.

You seem to be missing what Warren Buffett, wealth accumulator extraordinaire, grasps intuitively: We are accumulating debt faster than our economy is growing. The trade deficit in percentage of GDP terms is higher than the growth of the economy in percentage of GDP terms. Do you not see the obvious implication of this fact?

If IKEA builds a new store some Swedes own it. If an American builds a new store an American owns it. We get wealthy by accumulation of assets. We get wealthy by spending less on immediate consumption and more on assets that produce a positive rate of return. That's what the Chinese are doing. That's what our ancestors did. That's not what we are doing now. Surely you can grasp this idea.

gcochran said at February 12, 2006 9:44 AM:

I guess I would be surprised if Kirgin really understood economics better than Buffet.

David Lajaunie said at February 12, 2006 9:59 AM:

Actually I suspect Mr. Kirigin needs a lesson in economics, specifically "what is a balance sheet". Furthermore, I suspect Mr. Boudreaux never ran a business. Purchasing a commodity from overseas is indeed not incurring a debt, however you are buying a consumable or depreciable asset/service. The profit from that exchange goes overseas, a fraction possibly returning to the US via the purchase of US securities for which we pay a premium. Excluding the utility factor of the goods/services provided the net difference accrues to the country providing the service or item. In our case the advantage of $700 billion or so dollars circulating within our community is lost, along with the skills and technology necessary to produce those items. In some cases the skills lost are irreplaceable (see the effect of free trade on British agriculture in the late 19th, early 20th century). The fact that China for example, benefits from this trade is clearly seen in their increase in GDP, not to mention the alarming modernization of their armed forces.

The fundamental fact is that whatever value we derive from cheaper goods and services from overseas is overwhelmed by the additive effects that money would have had in our economy i.e. jobs, capital investment, taxes etc. The example proffered in Mr. Kirigin's post is bogus. The money I pay to my grocery store tends to stay in the larger economic community. It pays for local goods and services, some of which I supply (engineering services, housing, office space etc). I derive an indirect benefit from supporting my local grocery store. The same can't be said if I purchase those goods offshore.

Now, I don't deny that internal free trade has been the engine of the US economic success. But then we have a common language, currency, regulations and an equitable means of adjudicating economic disputes. Moreover racial, religious and geopolitical issues rarely enter into a commercial exchange in this country. That can't be said for international trade, witness the cartelization of oil. In the final instance we have to ask ourselves… are our "international free traders" right on this issue or rather our myriad mercantilist trading partners?

Ivan Kirigin said at February 12, 2006 10:44 AM:

Randall, you're falling under the "fixed quantity of wealth fallacy". There is nothing about an investment providing a return to a foreigner that makes anyone else any poorer.

"We are accumulating debt faster than our economy is growing."

Who is "we"? The government? That is a fiscal issue which requires less spending and increased taxes (ideally in such a way that doesn't hurt economic growth).

If the US is not engaging in inflationary monetary policy, there is little reason to distrust the value of the dollar.

"Amazingly, the dollar's value rose even as the US trade deficit broke new records."
That is totally begging the question. You're assuming the dollar will fall because capital investments and government bonds are held by foreign bodies.


But let me simply ask: what do you want to do about this "problem"?


"I probably first grasped these standard laissez faire free trader arguments before you were born."

I might not be up to snuff as far as the math goes, but I think Adam Smith was born before you. I'm pretty sure Marx was born before you too. Rather than comment on how long you've been familiar with the ideas you disdain, how about you say why they're wrong. Or is it just so blazingly obvious that you can't even express it in words?

gcochran,
-There are 3 ‘i’s in my last name
-Did you make a statement about the topic? Before replying, make sure you're actually saying something. Reading the essay I linked might help.

gcochran said at February 12, 2006 10:50 AM:


Kirigin, even a pinhead like you deserves to have his name spelled correctly.

Ivan Kirigin said at February 12, 2006 10:56 AM:

"The money I pay to my grocery store tends to stay in the larger economic community. "

The dollars that foreigners get from our purchases is most often invested in capital goods and government bonds. How does it leave the system?

Further, might I continue to invite arguments to be drawn that are not ad homonim attacks about age, profession, or experience?

"But then we have a common language, currency, regulations and an equitable means of adjudicating economic disputes."

The beauty of international trade is how you don't really care about anything but value. Mutual exchange dictates both parties benefit. End of story.

Ivan Kirigin said at February 12, 2006 10:58 AM:

"Kirigin, even a pinhead like you deserves to have his name spelled correctly."
Lovely. I still haven't heard an argument.

I love the way the blogosphere opens up the world to meaningful debate. Enjoy your lazy sunday.

gcochran said at February 12, 2006 11:02 AM:

You're not worth arguing with, judging from past comments. Tendentious. Dishonest. And your predictions never come true. So there's no point.

Randall Parker said at February 12, 2006 11:15 AM:

Ivan whines:

Further, might I continue to invite arguments to be drawn that are not ad homonim attacks about age, profession, or experience?

This complaint comes from the guy whose opening line in this thread was:

Wow, this is some of the most economically ignorant commentary I've seen on this blog yet.

Appeals to age and experience: You act like you are presenting arguments that are going to be great revelations. But I've read Rothbard, Von Mises, Friedman, etc. I know the theory of comparative advantage. But I also see economists making lots of wrong predictions and know enough about human nature to see that they make basic assumptions that are flawed.

You erroneously state:

The beauty of international trade is how you don't really care about anything but value. Mutual exchange dictates both parties benefit. End of story.

No need to know anything about systematic large scale intellectual property theft? No need to know that currency values are manipulated by governments? No need for courts to adjudicate contract disputes? The market makes everything go well like magic? Do you really expect me to believe this foolishness?

I take this as a standard attempt to claim we are all just individuals with no collective interest:

Who is "we"? The government?

Ways the collective we matters:

- If lots of other people have kids out of wedlock and abuse those kids those kids grow up to be problems for the rest of us.

- If mom is on alcohol or methamphetamine or other neurotoxins while pregnant junior's more likely to be a ward of the state or a criminal or not able to produce much.

- If dumber people have more kids than smarter people then the smarties pay more in taxes, crime, corruption and other ways.

- If the group of all voters elects idiots then we get bad government (noticed the size of the budget deficit or the Iraq Debacle?). The collective "we" prevents the libertarian paradise that many libertarians assure me could lie just around the corner if only "we" could stop government from messing things up.

- If businesses are foreign owned then less taxes will be paid here because less profits will be earned here. So then what happens? We pay higher tax rates. What, the health of the collective affects the health of the individual? Say it isn't so John Galt.

Ivan Kirigin said at February 12, 2006 11:34 AM:

The mutual exchange comment should have specifically been addressed at the cultural concerns of international trade. Clearly adjudicating bodies are needed, and do exist, to resolve disputes. You'll note they're needed for the free trade with inter and intra-state commerce.

Saying you're economically ignorant, presenting reasons why, then getting no response, I make no ad homonim attacks. It isn't a character attack to say that you are wrong.

Feel free to continue to comment on the effects of methamphetamine on a post about trade deficits. I'll assume the response I'm waiting for will never come, and end with this comment.

gcochran,
Bothering to insult but not bothering to offer a meaningful statement is a waste of time. Regardless of how wrong I a have been in the past, ignoring a statement isn't a way of refuting it.

David Lajaunie said at February 12, 2006 11:58 AM:

"The dollars that foreigners get from our purchases is most often invested in capital goods and government bonds. How does it leave the system?"

I guess the operative word is "most". Moreover, we pay a premium to attract investment to the US. Regardless, the net flow of capital which normally would have remained in the States goes overseas to the tune of $700 billion plus yearly. Only a fraction is returned.

Randall Parker said at February 12, 2006 12:08 PM:

Ivan,

I did respond to some of your points. You of course ignored my responses.

Again: The economy is growing as a percentage of the GDP that is lower than the percentage of our GDP that is our trade deficit.

Your answer to this highly relevant response: Who is "we"?

Hence my response that the collective "we" is an important abstraction and examples of how this is so.

You want to get all philosophical and project libertarian ideological values in your responses. I answer you at your level challenging your underlying libertarian assumptions. You tell me I'm going off thread. Really, this is pointless. Greg is right.

Ivan Kirigin said at February 12, 2006 1:02 PM:

I know I said I'd keep quiet, but I'm just too curious and you're right that I didn't fully address your response. The reason for the related comment was to defend myself, in that I didn't make a personal attack, which I still think is correct.

"The trade deficit in percentage of GDP terms is higher than the growth of the economy in percentage of GDP terms."

What are the supposed implications? I see little difference between a person across the street and a foreigner across the ocean holding American assets. Like the article I linked mentioned, the level of investment is what is important, not the owner.

As for the "who is we" issue, the point is that I'd like you to identify who holds the debt with a trade deficit and why it matters. Where is it? I've already mentioned that bonds are a fiscal issue, not a trade issue. There is no "debt" when the money from the purchase of an imported good is used to invest in what Boudreaux calls 'dollar dominated assets'. That leaves individuals falling into debt from excessive spending.

Having many people with too much debt is bad, but it also isn't really a trade issue. You owe CitiBank, or whoever, not someone from China.

So once again: who is "we"?

Break down the possible ways the money can flow in purchasing an imported good. Who owes whom money in a way that is unsustainable? How is a value derived from the nationality of producers of goods sold, and its relation to GDP growth, important?

---


David, the dollars not used for investments or US bonds sit in a bank or affect exchange rates. That is very self correcting as the dollars used to pay for goods become less valuable and trade is decreased. The doom & gloom scenarios where the dollar collapses would require hundreds of banks to act in a coordinated fashion, and certainly not in their self interest. So unless the US starts on an aggressively inflationary monetary policy, there is little reason to "dump" dollars.

Some might claim that the massive dollar holdings of Chinese banks could be used as a weapon. I find such scenarios unlikely because they don’t fit with the portrait of Chinese ambitions found over the last two decades: more growth.

Cicero said at February 12, 2006 1:12 PM:

The USA's twin deficits are insane. Besides the trade deficit, the US government's budget deficit for 2005 may well top $500 billion after Katrina calculations are included, which puts our overall national debt not too far away from $9 trillion and growing fast. And now Bush and his fellow idiot in the Democrats' aisle-- Hillary Clinton-- both want to start another war against Syria? And against Iran??? We're already paying close to $450 billion every year on interest on the debt alone, and that's going up as interest rates rise, so it's nearing the point when we'll be like a debtor who's run up $40,000 in credit card debt and maxed out 5 different cards, using one to pay off the interest on another. We're essentially having to borrow still more money from China, Japan, India, South Korea, Indonesia and Saudi Arabia just to pay off the interest we owe on the debt we already have!!! It's unfsckingbelievable!!!

When an Empire in world history has collapsed, it's almost always been preceded by a massive run-up in both public and personal debt. The Spaniards were ruined by it in the 1600's-- their Empire fell apart primarily not due to military problems (the Spanish beat England in almost every land and sea battle after the Armada, though apparently the Dutch and French both whipped Spain pretty good and decisively in the mid-1600's), but due to the massive debt (financed by inflation) that the addle-headed and profligate Spanish kings and queens aggressively ran up by the 1680's. The British Empire collapsed after the World Wars with the same pattern-- the disastrous defeats of Gallipoli and the Somme in World War I, in addition to depriving Britain of over 1 million of its most productive young men, transformed Britain overnight from the world's biggest creditor nation into a humiliated debtor. After the bombings of WWII and the British fiascos in Norway and Singapore against the Japanese, the British fell even further into debt, basically into bankruptcy, which destroyed the British Empire by both ruining the British trade balance at home and wrecking the British economic system overseas.

Now, it's happening to us, only far more rapidly and for even stupider reasons than previous Empires. Spain, after all, had tough competition from France and the Dutch, as well as the lure of easy (yet inflationary) New World silver to damage their Empire and ruin their economy. Britain had the misfortune of being in the crosshairs of the deadly Prussian War Machine after the British decided to enter WWI (even though the Germans didn't really have much intention of targeting Britain in 1914-- sometimes, not fighting is the only way to victory), plus the brutal Japanese assault in 1942. But the US? We have no such excuse. We are the undisputed military and economic superpower after the USSR's fall, and we're squandering it on stupid, useless wars that do nothing for our national interest, while throwing open our doors to tens of millions of immigrants who either cause our jobs to outsourced to East and South Asia, or flood us with masses who drain away our services.

It's the wars, though, that are dragging us down, plunging us even further into debt. China's essentially been paying for the Iraq War by buying up our T-bills, and now we're about $750 billion in hock to them. Yet the insurgents still kill and maim our soldiers on a wounded basis, even as Iran begins to stir things up in Baghdad, so there's no end in sight for that war. The thing to do when you already have your hands full, is to stop cluttering your hands with even more things to carry. This means not engaging in yet another open-ended Middle Eastern War. Yet Bush, Hillary Rodham Clinton, and the neoconservatives just can't resist sending us even deeper into insurmountable debt with yet another idiotic Wilsonian foreign intervention. (Taking foreign policy lessons from Woodrow Wilson is like getting voice lessons from Milli Vanilli.) All this, while we still continue to spend $500 billion on useless new-age weapons systems and idiotic nuclear weapons designed to fight the last war (against the Soviet Union) rather than the one we're currently facing. It's stupid, and there's nothing to be done about this.

Schess81 said at February 12, 2006 1:20 PM:

Randall, I noticed in an earlier post that you briefly mention "systematic large scale intellectual property theft" It got me thinking; are there any estimates floating around concerning the loss of dollars this has on US economy, from a global perspective? One the major exports of the united states is culture, and in many places around the world they seem to be getting it for free- movies, music, video games (plus all types of other software). If certain other countries had more respect for our intellectual property laws, would this have any meaningful effect on the trade deficeit, or are the numbers too miniscule to make a noticeable difference?

Bob Badour said at February 12, 2006 1:37 PM:

Ivan,

Not having Greg's and Randall's history with you, I will venture to make a couple of observations. I think my observations support my opinion that when you say things like "Wow, this is some of the most economically ignorant commentary I've seen on this blog yet" you are just projecting your own limitations.

Your own posts provide the hints to the flaws in your arguments. I think if you better understood the material, you would see the flaws yourself.

the average net worth of Americans has been significantly increasing.

Using what measure? The USD in constant 2025 dollars?

If the Chinese toymakers invest their newly earned dollars in, say, that factory in Utah

That's a very big if. All evidence suggests those dollars are going into the USD cash reserves of foreign central banks.

Nor is it true that a higher trade deficit means that Americans are selling off assets. Whenever, for example, IKEA builds a new store in the U.S., a new asset is created.

Like a general fighting the previous war, you seem to be arguing against the US-Japanese trade deficit circa 1985 when Japan was buying up American assets like nobody's business.

If the US is not engaging in inflationary monetary policy,

The US has lost control of the actual money supply and have been pursuing an inflationary monetary policy for years and years. Due to the enormous USD cash reserves of various foreign central banks, the foreign central banks have effective control of the US money supply even right now.

Let me give you an analogy. The US controls the money supply through the fractional reserve system. This is like the US controlling the rain at the top of the mountain to control the flow of water out of the river at the bottom. Ordinarily, increasing the rain at the top affects the flow of the river at the bottom.

Any large cash reserve outside of the fractional reserve system acts like the reservoir behind a dam on the river. All of America's trading partners have built dams on the river and for years they have been slowly filling the reservoirs.

The US is interested in the flow at the bottom of the river, which is what they measure using various economic indicators. They have been turning on the rain more than they would have if the dams did not exist in order to get the flow they want at the bottom.

At some point though, the dams will fill. At that point, the US will no longer have any control of the money supply. The supply of money will depend on how quickly the foreign central banks drain their reserves. Even if the US turns off the rain at the top entirely, the foreign central banks will be able to supply enough money to drive inflation by opening the floodgates.

In fact, the current situation where the reservoirs are largely full but still with plenty of room is the worst possible situation. Foreign central banks have full control of the US money supply. They can reduce the supply by increasing their reserves or increase the supply by selling their reserves.

I think Adam Smith was born before you

I believe the key figure for this discussion is Ricardo and not Smith.

The phenomenon of comparative advantage, which Ricardo demonstrated, relies entirely upon the exchange of goods of intrinsic value. Trade using a currency backed by the gold standard is essentially just a convenient way to trade gold--a good of intrinsic value. The current fiat currency has no intrinsic value, though.

Thus, the phenomenon of comparative advantage does not appear when we trade using the USD fiat currency. During the gold standard, foreign cash reserves did not matter because they were really just reserves of gold held in Fort Knox. Eventually, cash would get exchanged for something of value owned or produced by an American.

Since America no longer has its manufacturing base and is losing its high value added service base, what choice will America have other than to buy these things offshore even after China devalues the US currency? Devaluing the central bank's cash reserves will reduce the value of those reserves, but will drive up the value of the manufacturing base developed as a result of filling the reserve in the first place. Americans will have to give up more and more of their real wealth for the same goods or services.

As such, the current trade deficit is a very real transfer of wealth overseas.

The dollars that foreigners get from our purchases is most often invested in capital goods and government bonds

That may be true for the dollars paid to the factory that makes the goods. It is not at all true for the money the central bank of China has stashed away in its cash reserves to drive the buyers to the Chinese factory in the first place, which is what causes the trade deficit.

The beauty of international trade is how you don't really care about anything but value. Mutual exchange dictates both parties benefit.

The key word is value as indicated above. Your statement is only true when trading goods of intrinsic value. It does not apply at all to fiat currencies.

Saying you're economically ignorant, presenting reasons why, then getting no response

As I said above, I believe your own posts suggest you project your own limitations onto others.

Cicero said at February 12, 2006 1:42 PM:

I might add, I've been noticing a very fascinating phenomenon recently, which is the substantial emigration of large numbers of US professionals, from US shores to European countries. This seems to be especially heavy from states like California, Florida, New Mexico and even Illinois for some reason. We've all probably heard of the "white flight" from California to the Rocky Mountain states like Montana and Idaho (or to Oregon/Washington, the Midwest, and a portion of the American South)-- IIRC something like 200,000 or more Caucasians leave California every year (though similar high numbers of African-Americans are leaving, heading for places like Chicago, Atlanta or Louisiana-- even after Katrina). To my surprise, though, a large number are leaving the States entirely, going not to near places like Canada or the reasonably wealthy South American countries, but instead to Europe.

I met up with an old college buddy who moved with his wife to Hannover in Germany (where they're raising their kids), along with another currently in Milan and a third now resident in Nantes in France. The general impression I got from them, is that in the USA they felt like they were trapped on a train hurtling off the tracks while there was nothing they could do about it. They said they just couldn't take it anymore-- all the crowding in California, the stupid wars and foolish foreign policy, the downgrading and idiotizing of US pop culture and the lack of a sense of history, and the national debt which they knew their kids would have to pay off if they stayed in the USA. They said that despite the higher taxes in Europe, they were nothing compared to the double-whammy of crushingly high taxes and higher interest rates that the US would soon be facing as the trade and budget deficits continue to move upward, and the US continues to fight one stupid war after another. They didn't have any problem picking up French, German or Italian while working there, so it made sense to relocate.

To make matters worse, the US is full of an extremist branch of evangelical Christians (Dispensationalists? Christian zionists or something, can't remember the name) who believe that Armageddon is a'comin' and care not one whit about things like clean water or environmental protection since they think the Big Battle is soon to come in a decade. Not only this, they're actively pushing for this battle-- in the form of a major US war in the Middle East. It's obvious that this war would utterly bankrupt us, but the ultra-fundamentalists in the US don't care, they see the bankruptcy as insignificant since the Armageddon battle is coming anyway. Unfortunately, they number in the tens of millions and are politically powerful, which means that they're dragging the rest of us into their own delusions-- and there's little that we can do to halt the march toward still more ruinous wars in the Mideast. (Irony is, the extremist fundies here in the US, like Pat Robertson, they fantasize about an expanded "Biblical Israel," but not even most Israelis care much about that.) On top of this, we have Defense Department officials who are still like little boys with their GI Joe sets, buying up useless and antiquated weaponry (like over $200 billion for thousands of nuclear weapons, despite the fall of the USSR 15 years ago-- WTF?????) that further generates red ink.

So the upshot is, the US is hurtling toward bankruptcy and I don't think there's any way to stop it. The political factions pushing us along this path are too powerful and too entrenched. I've even started to consider moving to Europe myself, maybe to Salzburg in Austria-- my wife and I are major Mozart junkies, so what better place to connect up with our interests while getting off the sinking ship than the US economy? Sure beats seeing our kids forced into indentured servitude in the US to pay off the debts incurred by the Bushes and Clintons who've run our country into the ground.

Randall Parker said at February 12, 2006 2:18 PM:

Ivan says:

I see little difference between a person across the street and a foreigner across the ocean holding American assets.

I suspect you are not interested in stretching your brain to see the differences. I figure it is pointless to me to tell you the differences.

As for factories in Utah or Idaho: The Chinese have no interest in building factories in America. Your comment seems irrelevant. They are buying our debt.

Cicero,

We face more financial problems besides the twin deficits of trade and government spending. Other major financial problems:

- The unfunded government liabilities for old age beneifts. These are in the neighborhood of $70 trillion last I read. Medicare is the biggest. Medicaid for the growing Hispanic population is another problem. Half of America's babies now are born on Medicaid and WIC.

- The dumbing down. Dummies are reproducing faster than the smarties and the average immigrant is driving down the nation's average IQ. Dumb and dumber.

But your friends in Europe are facing a rising (and not bright either) Muslim population and a shrinking population of smarter people.

Ivan Kirigin said at February 12, 2006 2:25 PM:

Bob Badour,
Good points. I'll try to address them soon enough.


"I suspect you are not interested in stretching your brain to see the differences."

I'm interested in hearing things based on facts. Rather than racism, pointing to consistent IQ tests is reasonable. Rather than fear of foreigners, pointing to high immigrant usage of government services and high crime rates is reasonable.

But you're probably right. I'm not interested in calling foreigners and their actions bad for the fun of it. I'm affraid I'll need a reason.

JT said at February 12, 2006 2:52 PM:

Randall, what solution would you suggest to the trade deficit problem? Tax cuts? Tarrifs? More trade barriers?

Cicero said at February 12, 2006 3:43 PM:

"But your friends in Europe are facing a rising (and not bright either) Muslim population and a shrinking population of smarter people."

Very true, but in Europe at least, some Right parties that celebrate Euro culture and are working to halt the inflow of Muslims, are actually starting to get some traction. Although Le Pen didn't win the French election, he garnered enough votes to show Chirac that the country was serious about the Muslim immigrant problem, and the recent French riots have ironically been a blessing for French culture-- it's finally convinced the fence-sitters that Muslims cannot and will not join French culture, with the result that Muslim immigration to France is down sharply. Also, France has the world's toughest anti-terrorism and anti-radicalism laws, and thousands of would-be Muslims are deported every few months back to their home countries. Now, I still think that France has major problems, but I sense that they're moving more in the direction of solving them by finally restricting the inflows of poor, angry, unemployable Muslims and replacing them with Eastern Europeans. The rest of Europe is moving in a similar direction, and in some cases has moved much faster than France. Norway and Sweden are finally waking up to the fact that Muslims there will never become good, law-abiding Norwegians and Swedes. The Danes and Dutch have had this figured out for a while-- they've been on the forefront of restricting Muslim immigrants. Germany recently passed a more restricted immigration law requiring special skills and other factors for would-be immigrants, while increasing the share of immigrants who come from Eastern Europe, at the expense of Muslim nations.

I guess partly because European nations are smaller than the US, and partly because they really are the original Western countries with a home-grown, indigenous Western culture, they don't seem to be quite as squeamish about recognizing it and defending it-- especially with radical Islam knocking on the doors. The one exception is Britain, which I've found to have the most intense, corrosive anti-Western campaign of almost any country, even more than the US in many cases. Furthermore, Britain has a continuing large stream of immigrants from the Caribbean and Sub-Saharan Africa who wind up getting into drugs and crime, a greater proportion than other European nations. Continental Europe, though, I think is in better shape-- even France, which probably has the most problems of any country on the Continent in this regard. In contrast, I just sense that the US is well beyond the point of no return. Our most populous states will soon have "majority minority" populations, and the schools, roads and public services in places like California and New Mexico are worse than abysmal-- they're already third-world countries in many ways, and due to quirks in our political system, the problem is becoming worse, not better. Caucasian Californians are leaving the state in part because they don't want to be effectively contributing to a culture that spells the demise of what they hold dear, and while most are moving to places like the Mountain States, a surprising number really are emigrating, mostly to the European Continent. And from what I've heard thus far, they're all very happy with their choice, and feel much more at home and secure in the culture there.

Randall Parker said at February 12, 2006 3:50 PM:

Ivan,

I've provided plenty of pointers to evidence about interracial IQ differences in the past. But if you didn't click thru and read on them here is your chance to start familiarizing yourself with the psychometric research on intelligence and race.

JT,

What we should do depends at least in part on why the trade deficit is happening. Why is it happening? I've argued about this at length in another venue. But this remains a question for me. Possibilities I'm considering:

Is Robert Musil right in arguing that trade deficits are a massive purchase of political risk insurance by people in other countries?

Is the trade deficit due to currency manipulations? If so, why the large deficit with Canada?

Is the trade deficit due to large flows of foreign government money buying bonds and lowering interest rates so that people (and the US government) are more inclined to borrow and spend?

Have the foreign bond purchases caused the real estate bubble and therefore caused people to feel more affluent and more inclined not to save and hence to spend more on consumer goods?

Have computers and financial deregulation so lowered the costs and other barriers to finding would-be borrowers that the credit markets have become like drug pushers pulling tens of millions of people into making financial decisions that are not in their best interest? Has natural selection produced a lack of desire to save for the long term that is being exploited by credit card companies and mortgage companies to wipe out the US savings rate whereas more regulated economies with less mature credit markets are selling less "crack cocaine credit" to borrowers?

Why is it happening? It strikes me as an incredibly important question. Depending on the answer the intervention points to fix it change.

Invisible Scientist said at February 12, 2006 3:52 PM:

The following web site lists the wealth distribution statistics:

http://www.cooperativeindividualism.org/wealth_distribution1999.html

I can also assure you that the US trade deficit is not being distributed democratically either. The US trade deficit is being accumulated in the upper classes of the nations that have a surplus with us.

WHEN the US trade deficit is ultimately reduced (either by recession in the United States or by political methods), this will cause severe recessions in the rest of the world, because these countries were geared for exporting to the United States. These countries will not be able to switch to internal consumption to compensate for the lack of exports, because the export surplus money was accumulated in the upper class. This means that there will be a lot of political tension in the world. One reason the US dollar was imporatant because the US currency was the transmission mechanism to buy raw materials, and so far the ability of Europe to replace the dollar is not clear. Iran is talking about pricing the oil in Euros instead of Dollars, but given that Europe is developing political tension against the Middle East, this is questionable also...

But if the US dollar is no longer available for purchasing raw materials, the question will be how exactly Japan and China will be able to get raw materials... By bartering goods?

Jorge D.C. said at February 12, 2006 5:51 PM:

...and so far the ability of Europe to replace the dollar is not clear...

HA HA HA. Here is the formula for achieving and maintaining status as the world's default currency:

Start with a large population of white Anglo-Saxons. Allow them their Christianity (implement the US Constitution) which along with their genetics and inherited British culture produces the work ethic and sense of fairplay.

Implement the Common Law system.

Foster competition by embracing free market principles domestically: reject socialism.

Practice a degree of mercantilism abroad.

Maintain a warrior spirit. Force the conclusion of a world war. Win another world war. Win a cold war.

--------

Today the USA is on the downside of the greatness curve apparently. We are abandoning the formula in the following ways: Demographics: the browning of the nation. That in itself is enough to crash the currency. We are also embracing socialism. And we have suicidally submitted to a permanent regime of international free trade. And we are no longer able to wage ruthlessly decisive warfare.

Therefore it's logical to assume the value of the dollar must change to reflect the new character of the nation.

But the EU and its Euro will not be the successor. If it is then the world is in a world of hurt.

Both the Europeans and the Asians will be poor successors to the dollar's reign. It all comes down to natural dynamism, morality, legal culture. The Europeans are post-Christian socialists with a Napoleanic legal framework. The Asians lack transparency in their legal cultures and a Christian sense of fairplay.

No, I'm not a Christian. But to all the anti-Christian intellectuals that cruise this type of website you need to face obvious facts: Protestant Christianity is the key building block in the foundation of American culture. It infuses the character of the nation and a currency is in the end a reflection of the character of the nation.

Jorge D.C. said at February 12, 2006 6:26 PM:

Ivan,

You remind me of the guy who assaults a champion boxer in a bar, a hotel lobby, or just out on the sidewalk.

Arguing with Warren Buffett on the issue of debt/equity makes no sense. While having your jaw wired you should ask yourself "why? why? why would I do such a thing?".

Cicero said at February 12, 2006 6:53 PM:

"Iran is talking about pricing the oil in Euros instead of Dollars, but given that Europe is developing political tension against the Middle East, this is questionable also..."

That really won't make a difference-- this "Iranian oil bourse" story has been overplayed. Iran and several other countries already do sell a portion of their oil in Euros, and in fact, oil *is* sometimes effectively priced in Euros by exporters since so many countries use the common currency for purchases. The currency of pricing does not matter; what does matter, is where the oil-exporting countries decide to invest their proceeds from oil sales. Thus far, the US has been a favorite destination for the Saudis, Kuwaitis and others, but an increasing fraction of the profits are now being invested in Europe or plowed into the domestic economies. I also question whether exporting countries really are so vulnerable to a major downturn on the heels of a US drop. That might have been true about 5 years ago or so, but South Korea, India, China, Taiwan and other big exporting countries have been diversifying a good deal more and they really have been plowing more of their resources into their domestic economies. They'd certainly feel a nasty pinch if the US were to plummet in recession, but they aren't utterly dependent on our own economy for their economic health.

"But if the US dollar is no longer available for purchasing raw materials, the question will be how exactly Japan and China will be able to get raw materials... By bartering goods?"

That's really not a problem. FOREX markets have the highest volume of any in the world, and if one currency falters, another rises up on the FOREX markets to be used as a vector for the exchange of goods. The Euro is one alternative but one of many-- there's also the yen, won, and countless others. There's this fallacy sometimes that there can only be one major reserve currency to allow a stable financial system, the old Bretton Woods fallacy, and it's not the case. If the dollar really does belly-flop in the world markets, there'll be a stir and then other methods of exchange-- currency basket sorts of things-- will pick up the slack. The British pound sterling used to be the world standard, and nations across the globe shifted away from that currency with little fanfare.

"Maintain a warrior spirit. Force the conclusion of a world war. Win another world war. Win a cold war."

Most of what you said before this is true, but there's been a pretty decent consensus among quite a few intellectuals that US intervention in WWI was, in fact, the most disastrous foreign policy decision this country's ever made, possibly the single most disastrous blunder for the Anglosphere in general. Had the British avoided WWI, they would not have had the full brunt of the Central European war machine turned against them, would have stayed out of debt, and very likely still be maintaining a very large, thoroughly Anglicized world empire today. At the very least, the British (and everybody, for that matter) would have been better off w/o seeking the "home run" against the Central Powers that led to Versailles. Without Woodrow Wilson's intervention, Europe was sort of heading to a stalemate and a negotiated peace, much like those ending most pan-European Wars in the 18th century, which didn't make radical changes-- and in this case, each nation, reeling from the shock of WWI's technology, would have almost certainly been happy to agree and realize that a new war was not worth waging. There may still have been skirmishes and border wars here and there, but it's questionable whether a WWII-style massacre would have ensued-- the conflict that, of course, led to further severe casualties and tremendous economic damage for Britain, spelling the doom of the British Empire. Also, there were efforts under way (by both the Allies and Central Powers) to assist the anti-Bolshevik White Russian forces in the Russian Civil War by 1918, and without Wilson's foolish decision, it's quite possible that both sides (after managing a negotiated peace), may have been able to focus more on the Communist threat rising in Russia, which they realized was a menace to all of them in common. Oh, how history would have benefitted by nipping the Bolshevik threat in the bud. Plus, sans Versailles, Britain and France may have been more tepid about wading into the Middle Eastern morass after WWI, which contributed to the destruction of their empires and, of course, has snared the US today. (Iraq, remember, was a post-WWI creation of the British government.)

"Both the Europeans and the Asians will be poor successors to the dollar's reign. It all comes down to natural dynamism, morality, legal culture. The Europeans are post-Christian socialists with a Napoleanic legal framework. The Asians lack transparency in their legal cultures and a Christian sense of fairplay."

Eh? One can fairly say that unfortunately about a good chunk of Europe's ruling elite, but I've been surprised by the attitudes at the heart of many Europeans themselves-- they have a much stronger sense of their history, of pride and their culture, and *efficient productivity* with high-quality goods than the USA. (They work fewer hours overall but I was amazed at how much they get done in any given day there. They're no slouches.) And Asia??? Are you kidding? Japan, South Korea and Taiwan all have quite robust and very transparent legal cultures, and China is evolving in the same direction from the admittedly repressive system they do have now. It's an evolutionary process-- remember, in the early days of what became the US, we used to burn "witches" at the stake on a regular basis. China for its part had one of the world's most ancient legal codes by the late Qin and early Han dynasties, reasonable for its time and very much interested in ideas of fairplay and justice for its citizens-- a parallel, sort of, for the early Roman codes. While I would definitely agree that the US at present has a much more open, fair and transparent legal code than China, I don't doubt for a minute that China's will continue to improve with each passing year. There's nothing intrinsic in the culture that militates against that, and there's a level of economic dynamism, individual entrepreneurship and creativity among the Chinese and other East Asians that's truly mind-boggling. They still have structural problems there that are interfering with their economic and legal advance, but they're learning from us and from the West in general while adopting the best of their own indigenous systems to improve.

Randall Parker said at February 12, 2006 6:54 PM:

Jorge D.C.,

Ivan's logic appears to be that it does not matter if we own a shrinking fraction of our economy (which is not compensated for by owning more of foreign economies unless I'm missing something) and get investment income frmo a shrinking fraction of the capital in the US as long as we have jobs as employees.

I prefer being the owner of capital myself. But maybe the libertarians have some sort of reason to want to be employees. I figure he's entitled to his preference to work as a wage slave.

However, what about the more important question here? Why is the US trade deficit so large? I've listed some possible reasons. Can you think of any others?

Randall Parker said at February 12, 2006 6:56 PM:

Cicero,

You are digressing away from the real issue here: Why is the US running such a huge trade deficit?

Jorge D.C. said at February 12, 2006 6:59 PM:

I guess partly because European nations are smaller than the US, and partly because they really are the original Western countries with a home-grown, indigenous Western culture, they don't seem to be quite as squeamish about recognizing it and defending it--

And partly because the great majority of their gentile-hostile Ashkenazi Jewish populations either parished or moved to the states. The US has 6 million Jews and only a small minority are the relatively gentile-friendly Sephardic. Since the Ashkenazi immigrant population arrived the country has experience a left wing (anti-Christian, anti-traditional culture) movement on steroids. Without Ashkenazi money, intellectualism, organization skills and media penetration, the radical Left would be a marginal movement in America.

Instead we have undergone a Maoist cultural revolution and are lurching further to left all the time no matter the whining about Fox News and Bush (the Right in America has been mostly hijacked by Troskyite neocons). The Left at it's core is a destroyer of traditional culture and the fabric of a nation. That is the process underway now.

Yes the European nations underwent the same program but as noted the program is more successful in certain locations. The anti-Western revolution has been exported throughout the Western world by this "intellectual" network. Wherever the greatest control over society (media, publishing, education, politics) is exerted by Ashkenazis you will find the greatest squeamishness in defending Western culture. It is brainwashing on a mass scale or more correctly it is Judaicizing.

Of course the average high-minded Jewish American will disagree vehemently. Yet the bookstores and the internet are full of Ashkenazi triumphalism describing the grand project (almost complete) of remaking the culture of the USA.

...so we have the sad state of affairs of a truth that can only be "legitimately" discussed by Jews among other Jews: the post-Christian Judeo-topia means national decline for Western nations.

Jorge D.C. said at February 12, 2006 7:10 PM:

Why is the US running such a huge trade deficit?

I'm not so sure Cicero is running away from the real issue. When a nation's commercial elites become culturally untethered (internationalized) from the homeland - there are consequences.

The businessman in pursuit of profit at the expense of national interest was always BARELY kept at bay in the USA up until the great turning point: 1960s. Now the business class and political class are free of racial solidarity with the nation, religious solidarity, cultural solidarity...really any kind of solidarity.

In this environment it seems the desire for profits will go unrestrained and if it comes at the nation's expense well that's just another cost of doing business.

Remember that while the nation as a whole is digging deeper into debt the elites are getting fabulously wealthy. I think the "New Patriotism" i.e. no national patriotism at all among elites is one reason the trade deficit is growing.

A mercantilist trade strategy carries the whiff of jingoism - to the committed internationalist.

Stephen said at February 12, 2006 7:56 PM:

Schess81, the kind of IP theft you're talking about (ie movies & computer games etc) is certainly only a fraction of the amount claimed by Hollywood. Hollywood merely estimates the number of illegal copies and multiplies it by price - ie they assume that everyone who has a pirate copy would have bought the real version if the illegal copy wasn't available. Of course the truth is that the purchaser wouldn't have bought the real version at all.

Invisible Scientist said at February 13, 2006 1:56 AM:

One way the United States is (so far) able to get away with the trade deficit, is by actually legislating so that those foreigners who own American dollars, are actually allowed to purchase not only American stocks and bonds, but in addition, various corporations and also unlimited amount of real estate and land. Europe would not allow Middle Eastern and Asian individuals to purchase a certain amount of real estate and land, but with some restrictions. In Switzerland, a foreigner would find it almost impossible to buy real estate... Japan just bought Westinghouse, which was previously sold to a British company, but note that Westinghouse is the main civilian nuclear reactor maker in the United States, and so far the most advanced commercial reactor (the most efficient version of the pressurized water reactor) is made by Westinghouse. General Electric is behind Westinghouse. This kind of sale to foreigners, is just one step behind selling the future of the United States to foreigners... Basically, thanks to this unique legal loophole which does not exist to this degree in other countries, by allowing foreigners to buy almost anything in the United States, the value of the dollar is maintained (so far) despite the huge trade deficit which is growing much faster than the M2 (which grew less than $300 billion during the last year!)
Clearly this will ultimately reach an untenable situation. One reason this scheme can work for a while, is due to the fact that the foreign owners of the dollars, are usually the upper class people abroad, and these individuals can be made as American as apple pie. But ultimately, this globalization will become a problem.

Kenelm Digby said at February 13, 2006 3:40 AM:

It is interesting that Germany a White, (for now), European nation with a mature economy and well established industrial base, that pursues socialist policies (that are castigated in vitriolic terms by many Americans, neocons and others included), manages to produce for its population size and living standard massive trade surpluses, despite importing cheap East Asian goods at the same rate as the USA.
The key factor, is of course, that Germany has specialised,using its highly skilled and educated workforce in producing high-value highly engineered goods that are sought after by the rest of the World.
This indeed was the course the USA was taking (up until Kennedy and Johnson destroyed the nation with their "civil rights" bullsh*t).
A factor that is unfairly and with disasterous consequences that is ignored in discussions of international econmics is race.
America saw stratospheric economic growth and innovation during the WASP lead eras of the 19th and 20th centuries, which coincided with massive "ethnic" European immigration.That is when the roots of American prosperity, so squandered today, were laid.It is no accident that the rot set in after 1960 (Kennedy appointment), when the USA was the most White it had ever been.
Alas, as the White proportion of the American population shrinks and the non-White grows to majority staus, we will only see an intensification of this trend.
I believe the warnings of the Japanese premier, Nakasone, way back in 1986 were more deeper and apparent than most think.

Jorge D.C. said at February 13, 2006 3:43 AM:

Cicero said:

Are you kidding? Japan, South Korea and Taiwan all have quite robust and very transparent legal cultures, and China is evolving in the same direction from the admittedly repressive system they do have now. It's an evolutionary process...

Well I strongly disagree Cicero with these characterizations. Japan: a banking system so institutionally corrupt that they (and the world) just soldier onward with the realization that the fix is in -- it's just the Japanese way. The mafia over there is so entrenched it's not even mafia. It's just...the Japanese way.

China is evolving in regards to transparency? That is truly wishful thinking. Their corruption remains off the scale. The luxury of burning through a humongous undeveloped worker population has given them the veneer of economic respectability. They are history's biggest economic basketcase waiting to hit the fan. The concept of China ever becoming the world's trusted currency safe harbor is bizarre. That will literally be the day the Chinese cease being Chinese. But hey I believe in Darwin and his wacky evolutionary ideas so given enough time it could happen.

As far as smaller players like South Korea: they are way too far down the list of transparency located here:

http://ww1.transparency.org/cpi/2005/cpi2005_infocus.html

Taiwan is not much better.

And politically SK implements the dreaded proportional democracy system (racket). Besides that it lacks along with most every Asian nation a track record which is something I tried to convey in my list but didn't think to list it outright. But investors look for a track record. Britain and its pound had a great run. The dollar is a rock of ages compared to the non-British competition. Japan and Germany are both only 60 years into the modern democratic experiment (yes I know what Weimar was).

You didn't mention Hong Kong but they are real players with the British cultural base to work from. If only they could just keep out the Chinese permanently.

...there's a level of economic dynamism, individual entrepreneurship and creativity among the Chinese and other East Asians that's truly mind-boggling...

Well I agree with you on this point Cicero. I don't deny the East Asians those qualities. But it's not enough. Asia has a long way to go. Investors want stability and a society with a strong sense of fair play. The "tigers" have almost no track record. The Europeans are socialists with crappy balance sheets - even after 50 years of a peace dividend (USA paying for their security). The EU is already completely corrupt.

If the dollar does go into permanent decline then things look really dicey. But of course if America goes into permanent decline the same can be said for the world.

You'll notice the USA is ranked at #17 on the transparency index. What a damn disgrace that is! Sorry but I believe we are being dragged down by the imported values of our immigrant flood especially from south of the border. I wonder if California will ever have a AAA bond rating again. This nation is actually at least two separate nations. The whites/Asians are performing at a high level but most every national index is weighed down by the blacks/mestizos. Obviously the cure for that is more socialism!

Jorge D.C. said at February 13, 2006 4:01 AM:

The key factor, is of course, that Germany has specialised,using its highly skilled and educated workforce in producing high-value highly engineered goods that are sought after by the rest of the World.

The German people are in a class with the Japanese and few others. Very high IQ, extremely conformist, extremely capable. We are lucky they didn't win WWII. They are the ultimate highskill workforce apparently the economic powerhouse of Europe regardless of whether Jewish commercial dynamism is present or not.

Germany does create goods that the world wants to buy. I believe we still do that here in the USA but are being sabotaged by unchecked greed from within i.e. I agree with Lou Dobbs.

Kenelm Digby said at February 13, 2006 4:02 AM:

Randall,
The simple answer as to why the Chinese are busy accumulating dollar denominated assets (which seems conradictory given the huge oversupply of dollars), is to purchase assets abroad ie oil, minerals, timber etc that are needed to fuel the breakneck industrial expansion - and also to provide an income stream and security for the future.
Perhaps a majority of the US population will soon be in "Global terms" second class, but the WASP elite, overlawyered as they are, and in the hands of those with the deepest pockets, will ensure that property rights are sacred- and will be enforced.Therefore any move to establish "nationalisation" of assets or socialism wil be thwarted.
The Chinese have long envied America and American natural resources since the first railroad laborers were imported into California - the beautiful country they called.
Now you can see, "There is method in their madness".

Invisible Scientist said at February 13, 2006 7:41 AM:

Kenelm Digby,
Please see the following web site about the US population statistics:
http://www.infoplease.com/ipa/A0762156.html
Your WASPism is not enough to explain how the trade deficit increased so much. For one thing, the Hispanics is less than 15 percent, and the Black population is less than 13 percent. Most African Americans did not immigrate to the United States after Kennedy, and in any case since most Blacks and Hispanics are very poor, it follows that most of the avid consumption that resulted in $700 billion of trade deficit last year, was due to the spending of the White 75 % majority.
Another factor is that although the United States is making considerable progress in science and engineering, the highER IQ Asian countries are making even more progress in all areas, which is why the things that they export became superior and cheaper, which makes these goods and services more competitive. After World War II, most of Europe and Japan were damaged, and this gave the United States 25 years of advantage until these countries became able to compete, and this is also one reason the United States was a net exporting country until recently.

Quequeg said at February 13, 2006 2:29 PM:

Why is the US trade deficit so large?

Here's my humble opinion.

1) Dropping the gold standard in 1971.
I've read articles by various gold bugs who suggest this is a big factor in trade deficits. Without the gold standard, the government tends to create high inflation, which results in the cost of production becoming relatively high compared to other countries. Also, a country on the gold standard can only run trade deficits for so long, before the country runs out of gold. We've had trade deficits since 1975.

2) Low interest rates. Too much credit availability.
This encourages borrowing and discourages saving. The availability of credit (e.g. credit cards, housing bubble) allows people to borrow money to continue their standard of living, even though wages are not keeping up with inflation.

3) Cheap labor.
About 70% of business costs are labor-related. Even a slight decrease in the cost of labor can be a big boost to corporate profits. As countries around the world have opened their labor markets, 3 billion people have become available to work for low compensation.

Labor is a commodity like soybeans and oil. When you increase the supply, the price goes down (assuming demand doesn't go up commensurately). And since so many countries are so poor, there's just a large number of people who are willing to work for low wages.

4) Free Tade Agreements, Most Favored Nation Status, Tax Laws
It appears that these FTAs encourage movement of production to other countries.

Also, there may be other issues like taxes too. Whenever Senator Byron Dorgan is on the Lou Dobbs show, he always says that he's tried for 3 times to introduce legislation to take away the tax breaks that corporations get on overseas profits, but he can't get it done in the Senate.

5) Class Warfare
While class issues are not a direct cause, I read somewhere that the process of lowering tariffs began in the 1960s. Incidentally, this is about the same time that immigration was increased. Also, we went off the gold standard a few years later. I think these policies benefit the wealthy more than the lower/middle classes.


So, I think we need to get back to some kind of gold standard. We should have some "free market" mechanism for controlling interest rates in order to balance the needs of borrowers and savers. (We should prohibit foreign governments from buying our treasury bonds, which artificially keeps interest rates low and the dollar high.)

Also, tariffs would help. This website has an interesting idea:
http://www.saveamericanjobs.us/sa-jd-sp-040609-balancedtrade.shtml
"Since Red China has the greatest imbalance of trade, 124 billion dollars in 2003, we should apply a ten-percent balancing tariff on their total value of exports. In 2003 this was 152.4 billion dollars."

"If ten percent were not sufficient, it would be increased to 15 percent then 20 percent and increased until the balance of trade is obtained. A tariff of 20 percent would provide the U.S. government with 30.5 billion dollars in 2003."

David Ricardo is often cited when supporting free trade. But even Ricardo said that free trade only works when the factors of production are internationally immobile.
http://www.vdare.com/roberts/trade.htm

Often, people warn against tariffs by citing the impact of the "Smoot-Hawley Tariff", but the situation was reversed then. We had a trade surplus in the early 1930s, whereas today we have a trade deficit.

Also, there are energy costs to globalization, which may reduce its viability as the price of energy continues to rise.
http://www.financialsense.com/fsn/BP/2005/1224.html
"And then we basically end globalization as we know it today, which is effectively a really flawed plan of breaking manufacturing components down into their smallest parts, and finding the cheapest place in the world to manufacture the parts, and then zinging them around the world to be assembled into bigger, and bigger units, until they finally arrive on the showroom as a piece. If you make stuff close to home, you can have a major savings in fuel efficiency."

Randall Parker said at February 13, 2006 4:08 PM:

Kenelm,

The total US trade deficit is over 3.5 times bigger than the US trade deficit with China. So an explanation about China really provides at best part of the explanation for why the US has such a large trade deficit.

I listed several possible reasons. To repeat those hypotheses with better emphasis:

  • Is Robert Musil right in arguing that trade deficits are a massive purchase of political risk insurance by people in other countries?
  • Is the trade deficit due to currency manipulations which overvalue the US dollar? If so, why the large deficit with Canada?
  • Is the trade deficit due to large flows of foreign government money buying bonds and lowering interest rates so that people (and the US government) are more inclined to borrow and spend?
  • Have the foreign bond purchases caused the real estate bubble and therefore caused people to have higher net worths that in turn make them feel more affluent and more inclined not to save and hence to spend more on consumer goods?
  • Have computers and financial deregulation so lowered the costs and other barriers to finding would-be borrowers that the credit markets have become like drug pushers pulling tens of millions of people into making financial decisions that are not in their best interest? Has natural selection produced a lack of desire to save for the long term that is being exploited by credit card companies and mortgage companies to wipe out the US savings rate whereas more regulated economies with less mature credit markets are selling less "crack cocaine credit" to borrowers?

Quequeg,

But why hasn't the US dollar dropped in response to some of your reasons to make imports more expensive to Americans and exports cheaper to foreigners? Why haven't market mechanisms balanced out the trade deficit? That's how it is supposed to work in economic theory (faith in which far exceeds its predictive value).

Jim said at February 13, 2006 5:08 PM:

my perception of answers to RP's recent questions:

- for china, yeah they've been accumulating t-bills as a sort of modern-day gold reserve, which has the double benefit for them of suppressing the yuan value. providing cheap goods for u.s. consumers and preventing their citizens from sharing in the fruits of their labors. this depressed yuan value provides a game of international chicken for other exporting nations to buy t-bills to minimize appreciation of their currencies. source of much of the global dislocation.

- currency manipulation plays a role. but it's a fools game for other countries to build up t-bills gauranteeing repayment of easily printed green pieces of paper by our treasury. all currencies are losing value vs. real assets (gold, oil, nickel, etc.). the looney has appreciated relative to other currencies because it has huge exportable natural resources.

- yes. you can't force people to borrow and spend though, just entice them with easier credit and cheaper goods.

- yes. increase in money supply happens mechanistically from credit creation, which neccessarily needs a borrower on the other end. lax credit standards/low rates in real estate are a classic expansion of credit acting as a cause of the asset bubble in real estate today. also it's been a few generations since the great depression, people have forgotten about depression and deflation. real estate and stock values can only go up, right?

- yes, more or less. using your drug addiction analogy... you need to hit bottom before recovering.

- and your question for quequeg implies that the dollar hasn't been dropping - it has. look at a 5 year chart rather than 1 year. the decline will resume and with a vigor. better yet, look at the dollar vs. something not fiat (gold, silver, oil) and you'll see it's been plumetting. u.s. downturn in spending was put off by the tax breaks and cheap money over the past five years or so. and some of the free market action has worked - look at the u.s. steel industry over the last 5 years, from heavily unionized and expensive to bankruptcy and re-organizing for cheaper supply, especially when measured in euros or some foreign currency.

really there are only two (broadly simplified) choices here to deal with the ongoing deficits
1) increase money supply to allow additional borrowing and spending, thereby putting off the day of reckoning, and making it worse when it arrives.

2) continue raising interest rates until the economy cries uncle. the massive debt build-up will hurt, and people will respond by stopping borrowing and spending. deflation will set in (defined as contraction of money supply) and most obvious in the most recent asset bubble (read housing). the ridiculous over-capacity in china in particular will hurt them a lot (because their own economy doesn't want to consume most of it) and the value of the dollar will drop substantially. the dollar will cease to be the world's gold standard, and with that we'll lose much of our imperial power.

my recommendation - buy some gold coins, easy on the big mortgage and overly long stock market positions.... save yourself, prepare for the inevitable.

trade barriers won't help, in my opinion. no putting the global arbitrage cat back in the bag.

a consumption tax might help. punish spending, not savings.

Bob Badour said at February 13, 2006 5:08 PM:

With respect to the trade deficit with Canada:

Part of the trade deficit with Canada traditionally has been driven by the Auto Pact. Recently, I suspect the high price of petroleum drives part of it too.

Shipping costs are an impediment to Canadians wanting to buy US goods from smaller retailers, which would help balance the deficit. Small companies in Canada have an incentive to make shipping to the US cheap. US companies have less incentive to do the same to reach Canada.

I, myself, just refused delivery of a book I ordered from the US. The publisher charged a significant premium to handle shipments to Canada and then the shipping company added another $5 C.O.D. handling charge (ostensibly for collecting $1.44 in sales tax.)

Between the publisher's handling fee and the additional C.O.D. handling fee, the handling charges were over 80% of the original price of the book.

And finally, I suspect at least some part of the trade deficit is balanced by smuggling to avoid import duties.

TangoMan said at February 13, 2006 6:00 PM:

You guys should take a look at my post on US SIC export categories and see the nature of where our trade surpluses and deficits lie. It's one thing to look at the aggregate statistics, as Randall is doing, and another to go through the looking glass and see the specifics.

Randall Parker said at February 13, 2006 7:14 PM:

Jim,

The looney (Canadian dollar) has risen against the US dollar and yet Canada's trade surplus with the US has risen as well.

See the 2003 top 10 countries for the US trade deficit and compare it to the 2005 top 10 countries for the US trade deficit. Canada ran a $55 billon surplus in 2003 but $76 billion in 2005. Hard to attribute that to a weak US dollar or a flight of Canadian investment money to a safer haven.

Is credit card availability in the US and Canada all that different?

Looking further back in 2000 Canada had an almost $53 trade surplus with the United States.

The Census Bureau site only shows the top 10 list as far back as 1998. Check out December 1998 and compare it to the December 2005 link I show above. Canada's trade surplus with the US was $20.7 billion back then. Why has the deficit with Germany more than doubled? Why a $19 billion deficit with Ireland at the bottom of the top 10 list?

My point here is that it is hard to assign the trade deficit as solely the result of trade with China or even with East Asia.

Oil producers have obviously moved up on the list with Mexico, Venezuela, Saudi Arabia, and Nigeria on the top 10 2005 list.

Ah, that explains part of Canada's picture: oil exports and higher oil prices. 1998 was the bottom of the oil market wasn't it? Or 1996? When did oil hit $12 per barrel?

Still, what about Germany's exports to the US? Not oil.

What has changed so rapidly? I'm mystified.

Randall Parker said at February 13, 2006 7:25 PM:

To repeat a point I've already made: When the US dollar does finally fall the price of oil in US dollars will rise even more as the rest of the world basically sees its energy costs fall in their own currencies. The resulting surge of demand for oil in the rest of the world will contribute to US inflation.

rtove said at February 13, 2006 7:41 PM:

I agree with Kirigin that this Buffet/mgd. trade post citing organized labor is a low for parapundit. The .7 trillion dollar trade deficit is a big number. So is a 13 trillion dollar economy. The Buffett camp, seeing tangible wealth and corporate profit but not the workforce expertise resulting in trillions in annual income, ignores that we have become a wealthy society primarly as a result of productivity improvements which are increasing incomes at $250 billion or so per year (productivity growth times the value of non-farm business output, which is like 80% of the total economy). Cap that number at 10 if you want, and that's a $2.5 trillion asset (i.e. value of $250 b. a year going forward), Mr. Buffet, that we are adding every year. Add that to the actual return on at least $30 trillion of non-human capital, say 5% in real terms, or $1.5 trillion, maybe 20% of which is foreign owned, so $1.2 trillion for domestic investors/homeowners, etc., and you get $3.7 trillion. Annually. Like playing the intuition card? When you look around you, do you see an upswing or a downswing? Progress or retardation? Engine of wealth or growing poverty?

Happy to ignore the careful, sometimes subtle meditations of Greenspan and Bernanke on this subject, who not only have a foundation of economic expertise appropriate to address the subject, but, in addition, have spent perhaps thousands of hours studying today's facts and details? Content to dispense with the experience of the 80s and trade with Japan, in which Reagan/Greenspan stood pat? And look where it's got us. In the thick of another series of trade deficits!! (though with twice the per capita income of Great Britain). Are you ready to regulate?!? Are you ready to regulate!!! Who can we interfere with first? How about Wal-Mart?

It's probably fair to say govt. is more likely to make us poorer implementing policies based on half baked thinking, than it is to make us richer with wisened economic planning. U.K. govt., on behalf of its people, swapped suburbans for leather jackets and rides on the tube. And as for those hard working Chinese. They do work hard but they also work dumb.

rtove said at February 13, 2006 8:46 PM:

and to add a clarifying point, there is net positive savings in the U.S. That figure includes a subtraction for consumption of foreign goods (and all other consumption). It does not include an addition for appreciation in asset values (i.e. total return minus dividends and interest), which in the case of the stock market in a typical year might be 7% or so in nominal terms or something like $1 trillion. And it doesn't include the value of productivity improvements I'm ballparking at $2.5 trillion a year. I know someone may want to say, well, cap. the trade deficit. But the point is we're substantially net positive in wealth accumulation after taking the trade deficit into account. And even if we were break even at that point, we still have this massive productivity related asset to add on top of that. I think the survey of household finances has the data before what I'm calling a productivity asset, which includes asset appreciation (as well as interest and dividends) in the worksheet showing household net worth. this is a fed document. the fed adds something for consumer durable purchases (like cars), but they probably still understate investment.

Sure, China owns U.S. govt. bonds. But if they bought stocks instead or took their money to Europe, capital would migrate from other investments into those bonds. According to Greenspan, the effect of a sea change in foreign central bank policies would be minor. The markets are too interconnected, too sophisticated. Long term interest rates are probably low because productivity gains mean the govt. won't have to inflate the economy to pay for social welfare programs in the future (a la latin america). The market (that is to say, thousands of people with Harvard degrees and such) is judging that the U.S. will be able to pay all its obligations comfortably. Whoops. Pull down those hysterical Medicare drug benefit posts. There is also Bernanke's savings glut, which is contributed to by mgt. being better stewards of capital; getting better returns on investment partly by avoiding low return investment sinks they used to be all too fond of. Another way to put it is to say that have become more Buffett like! Believe me, the markets move fast enough that if the economy were going to be in a terrible state, foreigners would not be putting money in to the country and long term interest rates on govts. would be a lot higher. Also, when I said the Chinese work dumb, I meant that their economy is still so discombobulated writhing out of statism, its people so poorly educated, etc. that China has very low labor productivity, which is why per capita income levels in China are low. And let's keep in mind that restrictive monetary policy AND a massive tariff bill were principally responsible for the depression. Finally, why are they putting in the $700 billion? Keep in mind that foreigners buy a huge volume of U.S. exports, $1.5 trillion or so, so this isn't the kind of collosal mystery it might be if they put in the whole $2 trillion or $2.2 trillion of exports. The biggest reason is that the U.S. is a good place to invest. There is no political risk. Asian govts. know the money will be pissed away if it's repatriated back and left in the hands of imaginative apparatchiks. (So they take negligible real return on treasuries to ensure that they don't lose money; they could buy stocks, but there are potential political problems associated with buying faster appreciating assets; if I were the whitehouse I would strongly discourage govts. buying our good assets). Private investors look at Europe, Japan, China, and it's either slow growth socialism, subtle predation, or serious political risk. So let's build on IKEA, only in North Carolina, not Stockholm.

Anyhow, we're running a deficit in hysteria. We need to save up some hysteria reserves for future parapundit posts because the same people who brought us free trade and prosperity are going to take us to war in Iran.

Randall Parker said at February 13, 2006 9:14 PM:

rtove/Robert Pernin,

Growing poverty? I see growing indebtedness. People can live high on the hog while they run up debts. Therefore your appeal to outward appearances strikes me as irrelevant.

Citing organized labor: How dare I! But sometimes organized labor can be spot on. Never mind that they are defending their interests. Everyone does that including business groups.

As for citing Buffett: He's only the most successful investor in human history. How dare I cite him! What does he know about investments and wealth accumulation?

I have a strong preference for citing people who have proven track records for making correct predictions in the topic area in question. The Sage of Omaha has a track record on wealth and investments that would make you a fool to ignore him. I'm very willing to listen to my betters. I would suggest that you would benefit from adopting a similar attitude.

Subtle meditations of Greenspan? Surely you jest.

We have twice the per capita GDP as Great Britain? The CIA World Factbook reports Britain has a $30,900 per capita income using Purchasing Power Parity (PPP) and the US has $41,800. So we are making about 35% more, not the double of your imagination.

The 1980s? I recall we were well ahead of Great Britain in per capita income then too. I can't find figures from the mid 1980s (after 20 minutes of Googling) but in 1995 the UK had $19260 per capita income PPP and the US had $26908 per capita PPP. Get this: In 1995 the US was 40% ahead of the UK and now we are only 35% ahead of the UK. The Brits are closing the gap. Your triumphalism strikes me as unwarranted.

BTW, the UK trade deficit, while large, is still smaller than the US trade deficit in terms of percent of GDP:

It looks likely that the trade gap for goods and services was 4 per cent of gross domestic product, a figure exceeded only in 1989, when a 4.1 per cent of GDP deficit helped lead to sterling's ejection from the European exchange rate mechanism a few years later. The other time it reached a similar levels - in 1974, just after the first oil crisis - was the trigger for one of Britain's nastier recessions since the war.

As for your "cap that number" factor of 10 reasoning: I do not buy it. Our outlays are growing faster than our incomes. When investing in companies that'd be a reason to lower what what we'd be willing to pay for them unless they were using the money to invest. But we are on a consumer goods consumption spree.

Productivity growth? US productivity grew a measly 1.8% in 2005 which is not enough to pay for the debts we are accumulating.

The times of extraordinarily high U.S. labor productivity growth rates are over, at least for now, according to a report released today by The Conference Board, the global business research and membership organization.

Though still healthy compared with many other developed nations, the
productivity growth rate slumped to 1.8% in 2005 in the United States, down
from 3% in 2004.

"The U.S. performance is still good compared to Europe," says Bart van
Ark, Director of The Conference Board international economic research program
and co-author of the report with The Conference Board Economists Catherine
Guillemineau and Robert McGuckin. "What is striking in these new numbers is
the sustained productivity acceleration in the emerging markets of Central and
Eastern Europe and Asia. In fact, economies such as China and Poland are
accelerating to around 8%."

The Conference Board is one of the few providers of comprehensive
worldwide measures of labor productivity, which is a powerful indicator of
economic efficiency. Labor productivity, which measures the amount of output
obtained for each hour of work, determines a nation's living standards
(measured by per capita income). The more hours people work and the higher the
level of productivity, the higher is per capita income.

Most countries in the developed world (North America, Europe and developed
Asia) experienced a slowdown in productivity growth rates in 2005, with growth
rates in the 1.5% to 2% range. Compared to the U.S., productivity was about
the same in Japan (1.9%), but much worse for the average of the EU-15 (0.5%).

Again, your triumphalism strikes me as unwarranted by the facts.

Bob Badour said at February 13, 2006 9:15 PM:

Randall,

Germany's currency is held artificially low by the other members of the EU. Even though the Euro has probably increased with respect to the dollar recently, I suspect it has not risen enough to prevent a wide trade deficit. ie. German goods are artificially cheap.

Invisible Scientist said at February 13, 2006 10:53 PM:

Note that the EU also has a trade surplus with the US, and this surplus is over $100 billion per year, which is 1 % of the
US GDP, and it is half the Chinese trade surplus with the US. Now if the US balances the trade deficit against the EU, then the Europeans will definitely feel the pinch, and they will be forced to become more self-protective against Asian imports.

Bottom Line: The US is financing the European well-being by means of trade deficit. Same story with the rest of the world. The microsecond the US balances the trade deficit (either by internal recession or by politics), then the world will experience a depression, not a recession.

rtove said at February 13, 2006 11:20 PM:

1. you concede that things look rosy, but feel the country is going into debt to support consumption. I believe this is wrong. The data demonstrate it. My second comment addresses this saying that output minus spending is positive, plus output per capita is going up substantially in typical years and our base of assets is appreciating (total return minus dividends and interest which are counted in income). Sure the govt. sector may add to its debt, or some individual consumers may add to their debt. They are spending more than others. But for the country as a whole, there is positive savings plus the productivity asset, net of all spending including spending on foreign goods. I'll concede I'm the only one who has ever mentioned a "productivity asset"; Buffett didn't address this issue at all in his fortune article. Just propounded his view, though to his credit, if I remember, he was cautious in his introduction and conceded he could be wrong. I respect Warren but believe he is wrong.

2. the problem with citing organized labor is that they are consistently, intentionally dishonest. They may tell the truth once in a while, but they have no credibility.

3. As an investment analyst/investor, I have followed Buffett since the 1980s, as well as reading Roger Lowenstein's biography which I highly recommend. There are some next generation accolites as well, most notably Eddie Lampert, and a lot of private equity players and a good part of the basic business school curriculum reflect Buffett's correct focus on return on invested capital. However, Buffett isn't a macroeconomist. If you polled the smartest hedge fund investors I bet at least 90% of them would prefer Greenspan's view to Buffett's on economic issues. The "subtle meditations" are reflected in various speeches obtainable at the fed website. Among other things, Greenspan dismisses the idea that consumer debt is out of hand. Total consumer debt includes home mortgages which are secured by underlying properties and consumer credit is like $3 trillion. Not massive vs. $40 odd trillion in household net worth. Greenspan shrugs at the trade deficit as being self-correcting and not terribly important, but considers trade protection potentially very damaging. One reason productivity has surged forward has been that intense competition (not least from foreign goods) has motivated management to do more, for less, and increase efficiency. Buffett is also old and potentially mistake prone out of his territory. I have a lot of respect for George Soros and a good understanding of his personality, views, and investment history (Soros on Soros, and Soros: The Unauthorized Biography are recommended); however he's gone a bit nutty in his older age, urging Euro-style liberal left approaches with messianic intensity which, however, simply aren't logical. Buffett deserves his due, but his wrong view on this issue just proves that even a smart person can make a misstep, particularly in the area of abstract macroeconomics. One aspect of Buffett's personality is that he is a Dikensian accumulator type. Bill Gates rejected Buffett's idea not to make philanthropic gifts of any magnitude, seeing many positive effects he might have in the world. Buffett makes a reasonable argument of the social benefits of good capital management through Berkshire Hathaway, however his accumulation orientation, which he is carrying over into the economic policy sphere, doesn't translate well.

4. The basic reason for this is that the U.S. has become wealthy primarily as a result of massive consumption, which results in a lot of business activity, which under competition produces big productivity gains over time. Buffett only focuses on the capital part of the equation, but the personal income factor is more important. All those white collar types adding 10k to their income each year.

5. Another problem with the hell in a handbasket theory is that it dismisses a lot of sources of solid value in our country. What about hyper efficient retail? What about sophisticated, disciplined capital allocation and all the developed investment channels from venture capital to bank lending. What about all those stressed out white collar people working overtime? I remember Robert Reich on PBS back in the early 1990s, shaking his head about, well, on the one hand, all these people are knocking their heads in to improve things, companies are spending so many billions on R&D, etc. yet, there just aren't any productivity gains to show for it. It's the same with the left wing which doesn't believe that working people will improve their situations over time. The idea is that no matter how much you do, nothing positive will happen. It just doesn't make sense. You have millions of white collar people striving to offer the most, the fastest, for the least, effectively organizing things as efficiently as possible, mostly unfettered by govt. People making the big decisions sometimes get it wrong, but mostly are saavy. Having it all add up to scratch is not only at odds with the evident reality but not very sensible.

6. The CIA world factbook, the world bank, and various EU organizations aren't credible sources of information. Sometimes people will twist the data in an anti-U.S. way, but mostly they are just sort of credulous and unquestioning, or apt to apply some poorly specified factor that vastly changes the data. You need an organization like the fed, bank of england, etc. where more sober minded analytic types are handling the data. That said, a Power of Productivity pg. 2 chart shows the U.S. at like 36k and U.K at like 27k per capita for 2002. 33% more. However, we may have more dependents/workers (children driven). A straight up comparison of, say, average income for a 40 year old white male may show a bigger difference. Even so, 33% is significant. In addition, Europe has benefited from U.S. technology and management practices. We haven't had a pure experiment comparing Euro-style and U.S.-style policies because technology flows both ways (mostly to them) (Greenspan talked at one point about the more or less pure experiment of state controlled eastern Europe/Russia vs. the west). Also, Europe has some top flight companies, and logic/info. are free; anyone can use them. There's no reason that Europe/Japan can't generate some significant productivity gains, too, and the sooner the better. More world wealth means more investment in science and technology. However, I've talked to a pensioner from Denmark and a biologist from Britain both visiting. I always ask an open ended question: what are the differences. Both mentioned basically that the U.S. seems to operate on a very prosperous scale, while Europe seems more meager. Does that impression reflect the 33% or something more?

7. 1.8% productivity growth is solid. Multiply 1.8% by 80% of 13 trillion, $190 billion or whatever. That's $190 billion worth of extra stuff going to be produced every year into the future. A few years of this pays for the baby boom entitlements. How much will productivity grow in the future. How is it's estimate biased? These are the great questions.

8. The biggest threat to the system and global progress is a nuclear Iran. If someone ran an ad saying that your 2020 social security benefits and home value are crucially dependend on disarming Iran, war support would probably increase substantially. But nobody explains it this way. I'm not a triumphalist and I disagree that neocons are fools. Democracy may fail in Iraq, but it probably won't. If it does, it doesn't matter. War costs are a drop in the bucket. The large number of anti-U.S. middle easterners aren't much concern if they are conventionally armed and stupid. Iran's leadership must go. They cannot get the bomb. Both because getting the bomb would be dangerous and because it sends the wrong message to other rogue groups. This is what Cheney sees (when he isn't hunting). He weeds out the background noise, as he says. Parapundits antiwar crusade seems irresponsible by comparison. Iran's going to get popped. Public is supporting it. What are the odds that, if the public supports a war, the Bushies won't fight it? 0%.

Jorge D.C. said at February 14, 2006 3:41 AM:

Bill Gates rejected Buffett's idea not to make philanthropic gifts of any magnitude, seeing many positive effects he might have in the world.

And what percentage of Bill & Melinda Gates Foundation philanthropic gifts are actually a Microsoft marketing push? Just wondering.

Kenelm Digby said at February 14, 2006 3:42 AM:

One is reminded of pre-Castro Cuba in which the American registered United Fruit Company owned virtually every fixed and non-fixed asset in Cuba worth owning.
On coming to power, Castro, who like most Cubans, railled at this "injustice",by fiat "nationalised" (ie confiscated), all American owned assets with no compensation.
Severed diplomatic relations with the USA stand to this day.

Jorge D.C. said at February 14, 2006 3:47 AM:

rtove said:

Buffett only focuses on the capital part of the equation, but the personal income factor is more important.

I'm not sure why you choose the word "capital" here. Maybe you're referencing a specific link or Buffett discussion? The Buffett hyperlink on the frontdoor post doesn't pertain to "capital". And Buffett's macro-economic ideology is not about capital but net worth - whether it be individuals, corps, or nations. I hope you're not claiming that "the personal income factor is more important" than net worth in assessing wealth. After all you claim to respect Buffett.

If you polled the smartest hedge fund investors I bet at least 90% of them would prefer Greenspan's view to Buffett's on economic issues.

And why the heck would the "smartest" do that exactly?

Genius Greenspan is a government employee who owes most of his 15 year track record to being in the right place at the right time namely the key world timeline event known as the personal computer. You rtove are big on productivity gains. You must understand where most of those gains came from and that a trained monkey could "steward" an economy forward at this juncture in technological history (the same guy positioned in the same job Fed Chairman in the much more challenging period from 1965-1980 goes down as a footnote).

I'm not saying Greenspan isn't highly competent. It's just that comparing him to Buffett really is apples and oranges.

Genius Buffett is a self-made billionaire who has been kicking butt in the Wall Street shark tank for 50 frigging years(!) The Buffett track record on building and protecting the true measure of wealth - net worth - is unassailable. Yet that track record is assailed daily on the internet and elsewhere by blowhard egomaniacs.

The smartest thing any hedge fund investor can do is listen to Warren Buffett. That obvious wisdom is only challenged by commission hungry sharks and the aforementioned blowhards.

Yeah, Buffett's not an expert in all fields. But the trade deficit is definitely within his purview. And your insinuation that he is going senile is simply not reflected in Buffett's annual reports. His thinking is crystal clear.

Jorge D.C. said at February 14, 2006 3:55 AM:

rtove said:

The CIA world factbook, the world bank, and various EU organizations aren't credible sources of information.

The CIA world factbook isn't a credible source of information? Really? After extensive googling I can't find anyone except angry Arabs who agree with that statement.

The CIA might be less than credible on a lot stuff but the factbook is mostly just dry data. The CIA Factbook editors seem to be conservative i.e. letting the reader know when absolute facts aren't obtainable.

Are you saying the entire project is politicized? Biased? Slanted? What exactly?

Jorge D.C. said at February 14, 2006 4:37 AM:

Invisible Scientist said:

Your WASPism is not enough to explain how the trade deficit increased so much.

How about the collapse of WASP nationalism? The US government up to the 1960s was filled with WASP nationalists of varying degree. I see a connection between the lack of border enforcement and the trade deficit and really any other issue that is international in scope.

In the past the game board was slanted to the USA by our govt officials who were nationalist in mindset as a result of their education and the prevailing culture.

Incredibly today the game board is slanted away from USA by our own govt officials. Their mindset has become internationalist. That is the core issue. Look who is in charge. Look at the people making the decisions. It is no surprise that the borders remain open and nation's manufacturing base is being shipped overseas.

Randall asks the question as if the trade deficit is a mystical unpenetrable conundrum. It is not. A patriotic government could begin reversing the situation immediately. And just like standing up to the open borders crowd it means standing up to the free trade crowd who will howl to no end.

The free trade skunks are delivering economic growth...all they ask for in exchange is the nation's middle class.

If you disagree with this argument are you not essentially saying that the USA could've risen to economic superpower status using the modern era free trade / massive household debt formula? And so we should've been doing it like this from the beginning 1776?

HA.

Ned said at February 14, 2006 5:33 AM:

I'm not saying the US trade deficit isn't a problem, because I think it is. But here are some countries with healthy trade surpluses. Germany - where 1% annual growth rates and double-digit unemployment have become as much a part of the country as Wurst and Strudel. Japan - just emerging from a decade-long depression, with a little deflation added for spice. Russia, with a nice trade surplus thanks to massive oil and gas exports, still an economic basket case. Anybody want to trade places?

Jim said at February 14, 2006 9:06 AM:

"the U.S. has become wealthy primarily as a result of massive consumption"

the above statment strikes me as ass-backwards. more like massive u.s. consumption has fueled worldwide demand for manufactured goods, providing an engine of growth for all low-cost manufacturing.

greenspan was a hard-core gold standard guy, especially before he was a gov't employee and could freely speak his mind. up until the late 90's and onward, his moves in interest rates were very closely correlated with moves in gold price, giving our economy a defacto gold standard. the fed is now quite a bit behind the curve, forcing additional rise in short term interest rates, and thereby putting the pain on all leveraged debtors. the deflation end game will probably start in housing with many arm loans triggering defaults, less demand for housing, lower prices, etc.

note: by deflation i mean the less $ in the economy definition. this will painfully be accompanied by higher prices for real assets such as gold, oil, industrial metals.

RP - yes the canadian$ has risen along with trade imbalance with canada. this is largely due to natural resources (i.e. natural gas, nickel, etc.) which is pretty inelastic. canadian manufacturers are probably feeling quite a bit of pain lately, much like u.s. manufacturers in the late 90's especially. most of the self-correcting trade imbalance / exchange rate effect will show up with a country like china or japan that sell a lot of manufactured products to the u.s. .... once they stop soaking up all u.s. issued debt in a defacto currency manipulation.

Bob Badour said at February 14, 2006 9:55 AM:

Middle-east investment at home might explain some of the trade deficit.

We spend our money on cheap chinese goods. The chinese spend the money on their growing consumption of energy. The Saudis build hospitals and schools and other businesses at home.

Randall Parker said at February 14, 2006 4:03 PM:

rtove,

You make various claims with just assertions, no links. I took a single claim you made, googled the data, and it turned out to be very wrong. I'll take your arguments more seriously if you back them up with evidence.

Then there's this:

If you polled the smartest hedge fund investors I bet at least 90% of them would prefer Greenspan's view to Buffett's on economic issues.

Few "professional" investors who invest other people's money beat the market. I used to prepare the monthly and quarterly reports for a multi tens of billions of dollars retirement fund and I saw all the managers they hired and fired for almost ten years. What did I learn? The passive indexes beat the active managers. All the active managers were worse than the passive managers. All the big name managers were hired by this fund at one time or another. They all fell short.

So when you point to active managers of other people's money and make assertions (which you of course provide no evidence for) even if your assertions were correct about their opinions my reaction is to discount their opinions vis a vis Buffett. Buffett beat them all for decades. Big name active managers can't beat the market.

Yes, we have had great growth in retail efficiency. But we are going into debt to the rest of the world and we are not doing that in order to invest more and get returns later. We are just living in Squanderville.

Randall Parker said at February 14, 2006 4:14 PM:

Also rtove, I have to agree with Jim that this comment is totally wrong:

the U.S. has become wealthy primarily as a result of massive consumption

No, we got wealthy because of a sufficiently intelligent population, a relatively free market, and values that caused people to work and save and innovate.

Take away the innovators and wealth accumulators and put in some people who would inflate the money supply Latin American style and we'd be a whole lot poorer.

Greg Meadows said at February 14, 2006 5:29 PM:

How to end the trade deficit? Return to the gold standard. That'll end it. It will also end this fantasy world we've been living in. The real world will be tougher, but at least it would be honest.
The current system is corrupt. That's why it's failing. When you have to pay your debts with REAL
money is the time when you stop running up the tab. All we're doing now is playing with monopoly money.
Enjoy the game while it lasts, because it won't last forever.

Quequeg said at February 14, 2006 6:33 PM:

I created a table showing the trade with Germany.

Trade with Germany
Euros/USD - I just eye-balled this graph to get the numbers for the column in the table below
         Exports   %   Imports   %     Deficit   %     Euros/USD    %
1998    26,657           49,842         -23,185              0.85     
1999    26,800   1%    55,228 11%  -28,428  23%       0.99  16%
2000    29,448  10%    58,513  6%  -29,065   2%       1.10  11%
2001    29,995   2%    59,077  1%  -29,081   0%       1.13   3%
2002    26,630 -11%    62,506  6%  -35,876  23%       0.95 -16%
2003    28,832   8%    68,113  9%  -39,281   9%       0.80 -16%
2004    31,416   9%    77,266 13%  -45,850  17%       0.75  -6%
2005    34,149   9%    84,813 10%  -50,663  10%       0.83  11%
98 to 05          28%             70%             119%              -2%

Our exports to Germany have increased by 28%, but the exports have increased by 70%. I'm not seeing that the deficit is affected by fluctuations in the exchange rate.

http://www.census.gov/foreign-trade/statistics/highlights/top/top0512.html#total
Out of our top 15 trading partners, the Netherlands is the only country in which we had a trade surplus in 2005.
The surplus was about 11.6 billion.

http://www.census.gov/foreign-trade/statistics/historical/gands.txt
This table shows the trade balance since 1960. It also has a breakdown by goods & services.
Our exports are increasing, but not as quickly as our imports. Yet, some of these exports may just be of raw materials which go to offshore factories and then are turned into imports. So, this may explain why imports are outpacing exports.

For example, in 2005, we ran a trade deficit in food (for the first time in 50 years). There are probably several reasons for this, but I've read that one reason is that food cannery is increasingly done outside the country in order to save money. So, we export food to be processed, which is then imported.

Also, the CAFTA trade agreement provides a very small market for our goods. We will probably export raw materials there to be processed and then exported back to the U.S. So, our exports to Central America may increase, but not as fast as our imports.

When our imports increase, this makes it look like we're overconsuming, even if the consumption is done by business.

Still, this may not explain Germany or the EU in general, where labor costs are more level. I don't know what the EU import/export stats are, but from an earlier post from Invisible Scientist, I learned that the trade deficit is 100 billion.

Is it possible that all regions of the world just do a better job of practicing mercantilism than the U.S.?
http://www.theglobalist.com/DBWeb/printStoryId.aspx?StoryId=3397
"Japanese trade barriers blocking exports generally from the United States are by now legendary, as are EU agricultural trade barriers. (EU industrial barriers are less well-known, but longstanding tariffs on goods such as automobiles and semiconductors are succeeding in blocking imports and luring production and jobs from the United States as well as other countries.)"

Are we just consuming too much? But why would excess consumption result in losing industries/jobs? I guess it could drive up the cost of real estate, health care, etc, and thus encourage relocation to cheaper locales. But still, I don't think it totally explains it. I mean, wages haven't gone up much, and wages represent 70% of business costs.

I guess the obvious explanation is that too much consumption takes away from productive investment. People who save money would put it into stocks/bonds or into a new business. Yet, I think any investment in goods production is going wherever the labor is cheapest.

For example, Delphi auto parts has factories in China where workers make $3/hr in total compensation which compares to the U.S. which I read somewhere is about $60/hr. Why would a new factory be built in the U.S. with that wage differential, unless the factory was totally automated?

http://americaneconomicalert.org/view_art.asp?Prod_ID=2151
Alan Tonelson thinks the focus on over-consumption is an inaccurate "morality play".
-- "The Asian workers dutifully pour most of their earnings into personal savings, while their bosses plough them into research and development, as well as new plant and equipment. Their American customers, meanwhile, provide robust markets by irresponsibly buying more than they earn."
-- "At least Blustein doesn’t parrot the line that the resulting imbalances represent the best of all possible economic worlds. But his treatment of trade flows as a morality play whoppingly distorts reality."
-- "For example, it certainly doesn’t explain that well over 50 percent of all U.S. goods imports over the last decade have not been consumer products at all, but industrial supplies and materials, and capital equipment."

Are lower/middle class Americans over-consuming or are they just borrowing money to maintain their standard of living to cope with rising inflation and stagnant wages? Has consumption risen evenly across all class levels? What about business consumption of imported goods?

By the way, I learned on Lou Dobbs that Boeing agrees to produce more and more of the work in China with every sale of aircraft. I wonder if some of this production is done in China and then shipped to the U.S. for final assembly. Does this qualify as an import? If so, then this would reduce our dollar value of exports of aircrafts. Anyway, the corporations don't seem to care, because they get access to cheaper labor and to a growing consumer market.

mik said at February 14, 2006 7:33 PM:

The current global trading system exist because of US Navy and US Marines. US Navy keep ocean shipping line safe and
US Marines reduce investment risks for GE, GM, MS and others. Without US Armed Forces hovering on the horizon investment risks of building factories in China, India, etc would be much higher and, as result, many of those investments would not be made.

In effect Euros, Japan, SKorea and The Thirld world outsorced the defense tasks to the US at no cost -may be very small - to themself. If we could identify a single genius who came up with this global defense welfare schema paid by Joe Taxpayer, I would like to see that individual spent the rest of his life in a jail.

In ideal world, the USA would impose world-wide tax on global trade to offset expenses maintaining environment suitable for trade. I'm convinced that support of US currency by Japan, China and Euro central banks is an under-the-table payment of such tribute to the US. It does two things: 1) helps maintaining Joe Taxpayer happy and willing to pay (why?) to keep the world happily trading and 2) keeps exporting industries in China, Japan and EU humming, unemployment low and allow ChiComs plenty of funds to modernize their own army to eventually take on a Great (but not very smart) Satan. Doing tribute this way, our trading partners avoid political problems of having open tribute payments.

That under-the-table tribute keeps $US stable no matter what trade deficits. This is at least partial answer to Mr. Parker question.

Randall Parker said at February 14, 2006 7:46 PM:

Quequeg,

Your shortcut of not duplicating the URLs inside the a tags as href values made your last 3 links not work even though they were in blue. DO NOT DO THAT AGAIN. Take the trouble to do it the right way. I had to go fix the HTML to make it work.

Randall Parker said at February 14, 2006 7:50 PM:

Jorge D.C.

You state as if you are explaining something:

I'm not so sure Cicero is running away from the real issue. When a nation's commercial elites become culturally untethered (internationalized) from the homeland - there are consequences.

I grant you the lack of loyalty by the American capitalists. Fine. But how does that cause a large US trade deficit while lots of other Western countries do not suffer from such trade deficits?

Why does the US run a large trade deficit? Why doesn't the dollar adjust to stop this? Why have imports from a large assortment of countries grown so much more rapidly than exports? Why hasn't the dollar adjusted to prevent the imbalance?

Invisible Scientist said at February 14, 2006 10:18 PM:

Randall Parker wrote:
"I grant you the lack of loyalty by the American capitalists. Fine. But how does that cause a large US trade deficit while lots of other Western countries do not suffer from such trade deficits?
Why does the US run a large trade deficit? Why doesn't the dollar adjust to stop this? Why have imports from a large assortment of countries grown so much more rapidly than exports? Why hasn't the dollar adjusted to prevent the imbalance?
Posted by Randall Parker"
----------------------------------------------------------------------------------
There a few reasons the US runs a higher deficit
1) The way the dollar is supported as the international currency (no matter how much Bush is officially howling and telling foreigners to devalue the dollar, in reality he is happy that the Americans are able to consume voraciously with impunity, since the higher standard of living that is temporary, might temporarily get the Republicans elected again next time...
2)But more importantly, outside some specialty areas such as advanced science, medicine, high level software, most of the average manufacturing in the United States, is of poor quality in comparison to the European and Japanese made goods. You cannot find an American made watch, radio, LCD computer screen, fax machine, telephone. The only reason is not simply because it is cheaper to manufacture these abroad, but it is also true that the quality would have remained low if these average things were manufactured here. It seems that the best educated and most motivated manufacturers do a good job here, but somehow for more average level goods, we are behind the Europeans and Asians... Basically, we need a national emergency program to raise the standards in high school education, legislate draconian laws including life sentences without parole against drug dealers who sell IQ lowering things to high school kids (There should be forced labor at the prison for the drug dealers to pay for the cost of keeping them in jail.) We need a national IQ police to raise the IQs of children.

Kenelm Digby said at February 15, 2006 3:50 AM:

This all reminds me of a (possibly) apocryphal story I heard from a friend, who had a relative who was once a relatively prosperoos farmer.
But alas, the said farmer develpoed from early manhood onwards a severe alcohol problem, in consequence his farm was badly run and he was in a permanent state of intoxication.To pay his bills and to keep him in liquor, he was reduced to selling off "small pieces of land" piecemeal, when ever the opportunity availed itself.
Of course, by the time the farmer reached late middle-age, the farm that had been passed down through generations, had simply "vanished".

Jorge D.C. said at February 16, 2006 2:21 AM:

But how does that cause a large US trade deficit while lots of other Western countries do not suffer from such trade deficits?

Most other Western countries are deceptively nationalist i.e. blood & soil. For all the moral authority driven tolerance on display the Euros are all extremely tribal much like the Jews. That's why those groups didn't get along. And that's why I have argued on this website that the whole Eurabia idea is nonsense. The Muslims will be expelled eventually. Mark Stein is funny.

I don't know the specifics but I doubt that the Euro capitals are the wide open lobbyist bribery carnivals that Washington D.C. appears to be. US industries that spend/bribe the cash to fight back do get protected that is obvious. But there is no one who naturally looks out for the US interest in trade matters generally obviously. I mean by "naturally" that the cultural perspective of the average US trade rep or congressman is extreme sensitivity toward foreigners as a default position.

Also I would say that the world's largest economic market (USA) is going to be targeted the most aggressively by every exporting nation on earth. It's hard to be the top dog. It takes extra vigilence to maintain the top position.

I know you are commenting on some short term spikes in trade balances with specific countries but the important thing is the long term recent record of chronic trade deficits overall. It is now business as usual.

I think future historians will note basic markers of decline in the US timeline like the Romans. We had a Leftist cultural revolution in the 1960s. The govt took us off the gold standard and into permanent debt. Then they opened the borders and elected a new people.

Another poster notes that having a trade balance doesn't guarantee a happy economy at home. Well it seems obvious that it's just one key component of prudent economic stewardship. Citing Germany just makes me think well yes any economy as socialized as Germany is going to remain at "10% unemployment" and "1%" growth etc no matter what the trade situation is. I put scare quotes on those because in a socialist system who really knows what the numbers are.

Why doesn't the dollar adjust to stop this? Why have imports from a large assortment of countries grown so much more rapidly than exports? Why hasn't the dollar adjusted to prevent the imbalance?

Non-adustment of the dollar is a head scratcher. Banks around the world are holding onto their dollars no matter the policies of the US Govt apparently. On the other hand the price of gold is way up (but I notice the headlines don't adjust the gold price for inflation: it's not as high as the '80s peak). I think that reflects more than instability in the middle east.

I don't believe in a super currency but that is sort of what it looks like right now. Compared to other national currencies that were devalued in the past. Perhaps it is the character issue I talked about earlier.

We don't realize it living here in the US but the Asians have a real bi-polar view of America. On the one hand they see us as lazy barbarians. On the other hand they are in awe of our ability to lead and break new ground or rise to a challenge or bounce back from catastrophe. Perhaps this is the correct view.

I have read that it is really the Asian central banks which are refusing to the ditch the dollar. They simply won't do it. Perhaps they are counting on the character of the nation to right our financial ship very soon. Perhaps they are in denial - giving us too much (ingrained) respect left over from the WWII victory.

But I have also read that the Japanese especially are concerned with the browning of America and what it means for world economic stability. This is a reasonable concern. A view completely unvarnished by our PC atmosphere here at home.

Immigrant-swamped California has not had a AAA credit rating since 1989 I believe. Will the CA govt get it all together in the future? I think we are looking at a mestizo baby-boom of huge numbers in the southwest in the next twenty years. Huge. And they will graduate high school at an abysmal rate.

poster Greg Meadows said:

Enjoy the game while it lasts, because it won't last forever.

I agree. We so far beyond an adult-supervised government at this point you can only laugh. That is a non-partisan comment. We have been moving to the Left for 100 years. But we have been swerving hard to the Left for four decades. A de-nationalized elite will dismantle a nation.

Jorge D.C. said at February 16, 2006 3:09 AM:

Randall said:

Is it possible that all regions of the world just do a better job of practicing mercantilism than the U.S.?

Yes it is. I went to the wiki page on mercantilism and stopped reading at this point:

Today, mercantilism as a whole is rejected by all serious economists, though some elements are looked upon favorably.

HA. Maybe the above should read "...serious American economists...". And the word American there really means multiculturally indoctrinated of course. And the "serious economists" seem to be leading us where exactly? We do have the famous 4% growth but along with it we get continually increasing debt. What a deal!

Holy crap. Mercantilism is enthusiastically practiced around the world - but not here in the U.S.

Mercantilism is a form of nationalism. How can our govt representatives practice it - or defend against its use by foreigners - when nationalism is forbidden in modern day America?

Kenelm Digby said at February 16, 2006 3:34 AM:

Well Vancouver is not nicknamed "Hong-Couver" for nothing.
But seriously the only corrective possible is the mass purchase of fixed assets such as land, buildings, indiustries, utilities etc etc by East Asian investors.
As the saying goes the most likely Black or Brown American of 2050 might "own" the streets, but all the houses will be owned by East Asians.

rtove said at February 16, 2006 2:29 PM:

I wrote that the U.S. became wealthy "primarily because of massive consumption, which results in a lot of business activity, which under competition results in big productivity increases over time". What I meant was that compared to saving, consumption has been a more important driver of prosperity, and that's the first of the two big issues here. The other issue is whether we are getting richer or poorer.

(Obviously there are a number of important factors underlying growth in U.S. prosperity such as competent monetary policy, free trade, light regulation, relatively low taxes, change tolerant initiative taking character of an immigrant population, management science, etc. and more specific ones such as sophisticated capital markets and efficient retail).

It's my view that, because most (though not quite all) of the $12-$13 trillion of annual economic output is consumed (reflects work to produce on the one hand, consumption on the other), hard work and high consumption is a very important feature of the economy. I think there is a connection between the most obvious feature of the system and one of its most important results, high productivity growth. If there is a connection, tinkering with consumption by, say, instituting a consumption oriented tax to replace the income tax, or creating big tax incentives to save, etc. may have the significant negative effect of denting productivity growth, which, though very important, is small in percentage terms and at least possibly subject to influence by a significant change in the consumption/savings decision or other variables. From a pure, Burkian conservative standpoint, altering a well functioning economic system based on simple, "man in the street" intuition isn't advisable. This is what governments tend to do, and they usually have it wrong. The other key feature of the system is a mostly unfettered business sector which has produced significant efficiency gains and earnings growth, and which now has a towering $15 trillion or so aggregate market cap. Anyhow, these are the two standout features of the American economy vs. others.

Well, what is it about consumption that I find so dear? Why would consumption drive productivity growth better than thrift? Keep in mind that to have productivity growth, whatever is produced has to actually have more value than what went before. One positive is that consumption directs resources (investments by companies and employee labor) more specifically and exactly into business activities producing high value products (things people will pay for). This direction is important especially considering that businesses develop organizational capabilities and individual employees develop skill sets and relationships over time enabling them to do a better job of producing what they've been producing. The countries with the high savings levels in Asia have tended to waste capital on infrastructure, real estate, and industrial policy projects. It's not fair to say America with higher savings would do the same, and I'm not saying that, but a higher savings/investment society necessarily invests in more conjectural long range projects and compared to the immediate discipline on businesses of consumer decisions, there is a lot more room for error. Right now, the good long range stuff gets financed, but just enough foolish long range stuff gets financed that I don't know that I want a lot more of it. Remember, if you go to the savings/investment society you lose the advantage of some of the day in day out up or down consumer votes that reward good products and punish the not as good, and give everyone an incentive to develop the best stuff for the forward period. Because savings comes out of higher income white collar people (say, 60k and up annual income), if you go to the thrift economy you lose a lot of the spending on upper end products that drives incremental progress in technology. For example, a good part of the market for luxury cars wouldn't have existed in the thrift economy. There is a big difference between the Lexus or BMW of today and 15 or 20 years ago, and the technology, directed and funded by white collar consumption, has filtered down into lower priced models and the industry generally. In the thrift economy you also lose the advantage of relatively smart white collar people making these key consumption decisions. You could say that you lose the very best of consumption.

Seeing some people get rich motivates entrepreneurs, an economy awash in all kinds of worthy consumer options motivates people to generate more income; this only happens if people become more valuable as employees, i.e. become more productive. (For a lot of people, the desire to buy things and the purchase come first, then the realization that they need more money to be able to affort all the things they need besides, then the determination to work. It may not be a conscious "I need to work to buy that" kind of thought process. But what matters is the increased motivation, not the thought process).

The consumer economy results in highly motivated employees; the work of these employees is channeled into areas valued by consumers (relative to assigning them to more conjectural, long range projects, there is a higher level of certainty that their work will ultimately have value); right steps and wrong steps in product decisions are quickly rewarded and punished by up and down consumer votes (seemingly meaningless consumer decisions having sometimes very positive, sometimes brutal consequences for producers). A virtuous circle of good things producing motivation and work, producing even better things sets in. If this seems like a can't miss recipe for generating productivity improvements, i.e. substantive added value from work, that's the idea.

The official savings rate, reflected in the National Income and Product Accounts, dropped substantially from 8-10% historically to like 1% or something in the 1990s just prior to the surge in productivity growth, which had been in the 1% neighborhood with a higher official savings rate during the 1970-1990 period. The low savings rate/higher consumption/high productivity combination also coincided with reaching "full employment" in the 5% neighborhood vs. higher levels under the higher savings rate prior to the mid-1990s. Because of some complexities, causation issues, lag issues, etc., I don't think the data necessarily prove the worth of the consumption economy. Yet the data would seem to be consistent with the basic outline I'm sketching of motivation, productivity growth etc. under high consumption.

As Buffett pointed out recently (it may have been in his fortune article which is the basis for my view of his position on trade) an investment is merely an agreement to give up current consumption in exchange for a higher level of future consumption (including the total return on the investment). Say productivity growth in a year adds $250 billion to continuing annual output and income. That extra money can be spent or saved. Equally, you could have investment assets returning $250 billion (real dollars), which return could be spent or saved. At a 10% nominal rate of return, or roughly 8% real, you would need $3.1 trillion in investment assets to generate an equivalent level of savable or spendable money (10% is probably a bit high, the rate of return on a basket of all investment assets is at least arguable as the discount rate, and that would fall below 10%; also the rate assumes 0% real growth but it might be appropriate to assume population growth of 1%, which would increase the value of the annual $250 billion). Computed annual net savings of the country might be about $500 billion in a typical year, including the feds upward adjustment for consumer durables investment. $12.5 trillion economy minus $12 trillion spending, ballpark. However, this figure excludes capital appreciation of stocks which equals maybe $900 billion ($15 trillion total market cap. x about 6% net of dividends and inflation), about 80% of which is domesticly owned, or $720 billion, real dollars. Then about $20 billion of real estate is appreciating at at least the rate of economic growth, say 3% real, $600 billion, and assume the same foreign ownership, leaves $480 billion. So add it up and there is $3.1 trillion in productivity asset, about $1.2 trillion in stocks and real estate appreciation (in a typical year), and $.5 trillion in computed savings, net of all spending on imports, or $4.8 trillion, back of the envelope. That's about $16,000 of "effective savings" for every man, woman, and child in the country in a typical year. Richer or poorer? I think richer. I disagree with Buffett that the white collar people who work so hard should be ridiculed for living in Squanderville. I place a high value on both their work and consumption decisions. You see the result everyday with the biggest consumer smorgasboard in history laid in front of you. It's easy to say, "productivity asset? I just don't buy it." Well, if it's not worth anything would you feel comfortable just subtracting $250 billion from every year's output this year and on into the future? Just wipe away the new laptop and the private pre-school for the kids. No biggie, you guess. (By the way, the year-to-year household balance sheet is like Exhibit 100 or something in the flow of funds report from the fed, not the survey of household finances).

To be honest, I'm not sure what a thrift economy would look like. I kind of have a mental image of ancient people sitting on their hands, storing up bushels of wheat. Continuing with the consumption economy suggests a virtual guarantee of continued productivity growth in my mind, however. In a thrift economy, the cost of capital would be lower which would make projects yielding cash flow in the long run more valuable and economic (these long term projects would involve people conjecturing about what thrift economy residents might want to buy years into the future, should they ever break down and spend any money). However, a lower level of demand would make revenue projections lower for the average project, which would reduce values. It's conceivable that the level of business activity would be lower (teenaged Buffets would not collect much cash from their owned pinball machines; everyone would sit around waiting for someone to play). A good part of the virtuous circle of good things creating motivation and work productive of more good things would be subtracted. Of course, everyone was very thrifty during the depression.

A few years ago, when I was wondering about this savings/consumption issue, Greenspan also wondered about the value of taking steps to increase savings and its effect on demand and the economic system. I felt like the fed probably had the answer on this and I was trying to figure it what that was, but instead they evidently hadn't developed a firm view either way. This was during one of those periodic media agonies over the low official savings rate. It was in one of his speeches or one of the reports to Congress.

As far as foreign investment goes, the trade deficit/current account amount adds to the base of assets in the U.S. While a lot of the foreign investment goes into Treasury bonds, the effect of that investment is that domestic funds leave Treasuries and end up in other assets, including direct investments. If the U.S. is growing substantially more wealthy each year, then who cares if, on top of that, there is foreign investment adding to the stock of productive assets?

With respect to a few minor points, there seems to be this view that Buffett stands alone. This is true in terms of wealth accumulation, but in terms of annual return there are a number of probably equally savvy people and investment groups. A few that come to mind are Texas Pacific Group, Bain Capital, SilverLake Partners, KKR, ESL Partners, and I could probably list 5 more. One thing about the companies on my short list is that they often work together. If you run out past returns to the big partners in these operations, even at more modest rates of return suiting the size of their assets, they may be worth $20 billion by age 75 themselves, making the comparison to Buffett clearer. With respect to "smart" hedge fund managers who, I estimate, would vote 90% for Greenspan over Buffett, I meant Bruce Kovner, Paul Tudor Jones, Stanley Druckenmiller types, to pick some famous names. It may be hard for a typical person to see how seemingly sophisticated institutional investors, for the most part, aren't that smart or motivated, yet it's true. The problem starts not with the investment managers but with the pension and endowment trustees who make muddle-headed decisions about who to hire. A classic case of the wrong people choosing the wrong people. You don't get sharp people in these positions, with a few exceptions like the old Harvard endowment people, who of course were driven out by the knuckleheads who will now choose the wrong managers. Also, even if a manager like Kovner gets just the market one year, he earns a big fee anyway; the smartest people aren't necessarily trying to beat the market; sometimes they just rake in fees if they can coast on credibility. A mediocre record on a big pile of capital earning 25% of the return in fees doesn't necessarily mean the managers are mediocrities or average intellects. The guys I mentioned I'm pretty sure are both very smart and would choose Greenspan for economics.

Quequeg said at February 16, 2006 2:59 PM:

Randall Parker wrote:
"Why does the US run a large trade deficit? Why doesn't the dollar adjust to stop this? Why have imports from a large assortment of countries grown so much more rapidly than exports? Why hasn't the dollar adjusted to prevent the imbalance?"

Over the period from 2004 to 2005, the increase in the trade deficit was due to China and oil.

epinet.org - 10 feb 2006 - Rapid growth in oil prices, Chinese imports pump up trade deficit to new record
(The following quotes come from this link.)

Rapid increases in the price of oil and related products were responsible for 63% of the increase in the deficit. The growth of the trade deficit with China, which reached $202 billion in 2005, was responsible for the entire increase in the United States’ non-oil trade deficit.

Neither China nor oil is affected by fluctuations in the exchange rate. China pegs its currency. As for oil, a drop in the dollar may actually increase the dollar-value of imports, to the extent that the price of oil goes up in response to a drop in the dollar.

Total U.S. imports of goods and services reached $2 trillion in 2005 for the first time, 57% more than the $1.3 trillion in exports. To keep the trade deficit from widening further, the growth rate of exports must exceed the growth rate of imports by 57%.
The dollar must fall by at least an additional 30% to 40%, or more, to achieve the needed increase in export growth relative to imports. Imports grow rapidly and export growth slows when the dollar is increasing in value. Increases in the value of the dollar make imports cheap and U.S. exports more expensive on world markets. When the dollar appreciates, the rate of growth of imports typically surpasses the growth of exports (after a year or two). This pattern emerged in the early 1980s and has been the case since the mid-1990 when the trade deficit also grew rapidly (as shown in Figure A).

If you click on the link shown above, there's a figure which shows the impact of fluctuations in the exchange rate on the trade deficit over the years from 1980 to 2005.

This bilateral deficit with China increased $40 billion in 2005, more than accounting for the entire increase in the United States’ non-oil trade deficit. China has prevented any appreciable increase in the value of its currency, which has caused the bilateral trade deficit to balloon for a number of years. China’s intransigence has encouraged other Asian nations to prevent or slow increases in the value of their currencies.
The United States has had a deficit in ATP [Advanced Technology Products] products since 2002, and the balance in this sector has fallen steadily since 1997, when the United States had a surplus of $33 billion in these sectors. Imports of high-tech goods from China were responsible for the entire U.S. deficit in ATPs.
Trade deficits and manufacturing job losses will continue to expand unless the dollar is brought down to a sustainable level. If these adjustments do not take place, the threat, according to the International Monetary Fund (see World Economic Outlook: Building Institutions, 2005, pp. 75-6), of an “abrupt and disorderly adjustment” could grow, leading to a “sharp contraction in economic activity,” otherwise known as a deep recession that would reduce the trade deficit by sharply reducing consumption (and employment) in the United States.
The U.S. Department of Commerce today reported that the international deficit in goods and services trade reached a record level of $726 billion in 2005, an 18% increase over 2004.

Oh, about that 4.7% unemployment rate:
Paul Craig Roberts - 11 feb 2006 - Jobs News Even Worse Than We Thought

No sane economist can possibly maintain that a deplorable record of merely 1,054,000 net new private sector jobs over five years is an indication of a healthy economy. The total number of private sector jobs created over the five year period is 500,000 jobs less than one year’s legal and illegal immigration! (In a December 2005 Center for Immigration Studies report based on the Census Bureau’s March 2005 Current Population Survey, Steven Camelot writes that there were 7.9 million new immigrants between January 2000 and March 2005.)

The economics profession has failed America. It touts a meaningless number while joblessness soars. Lazy journalists at the New York Times simply rewrite the Bush administration’s press releases.

Paul Craig Roberts - 15 feb 2006 - Their Own Economic Reality

Consumers deeper in debt and fresh from their first negative savings rate since the Great Depression show high consumer confidence. It is as if the entire country is on an acid trip or a cocaine trip or whatever it is that lets people create realities for themselves that bear no relation to real reality.

When manufacturing moves abroad, engineering follows. R&D follows engineering, and innovation follows R&D. The entire economy drains away. This is why the "new economy" has not materialized to take the place of the lost "old economy."

The latest technologies go into the newest plants, and those plants are abroad. Innovations take place in new plants as new processes are developed to optimize the efficiency of the new technologies. The skills required to operate new processes call forth investment in education and training. As US manufacturing and R&D move abroad, Indian and Chinese engineering enrollments rise, and US enrollments decline.
The process is a unified whole. It is not possible for a country to lose parts of the process and hold on to other parts. That is why the "new economy" was a hoax from the beginning. As Popkin and Kobe note, new technologies, new manufacturing processes, and new designs take place where things are made. The notion that the US can lose everything else but hold on to innovation is absurd.
Randall Parker said at February 16, 2006 4:28 PM:

rtove,

You write really long comments claiming vague facts from your memory. I doubt that anyone is reading most of what you write.

Write less and provide sources for supposed facts.

Kenelm Digby said at February 19, 2006 3:52 AM:

That wily old sage Milton Friedman is credited for the saying (really a truism), that "there is no such thing as a free lunch".
This saying is coming to haunt the British with a venegeance.In the the past few months the price of natural gas (which well over 90% of Britons rely on for their heating and cooking), has sky-rocketred in price to the limits of affordability.It rises in price, of course, in tandem with the spot oil price - which as we all know has been propelled recently by the increase in Chinese demand - due to Chinese psooperity and ultimately Chinese industriousness and management.
Of course, Britain maintains an enormous trade deficit with China which our dumb-ass "economists" keep saying is "healthy", and will strenously deny the connection between these two economic phenomena,


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