2010 August 21 Saturday
Questionable Value Of A Ricardian Advantage

In the comments section of a post by Menzie Chinn about the June 2010 trade deficit (bigger btw) C Thomson summoned the ghost of David Ricardo, presumably to indicate that all is well and the market will make everything to work out to our mutual advantage. W.C. Varones offers a pithy reply.

C Thomson,

I don't deny that we have a Ricardian advantage in producing debt, derivatives, and accounting fraud.
What I question is the value of that advantage.

Blessed be Ricardo. Can I hear an Amen from the free trader chorus? But that the US has been running a substantial trade deficit for many years and continues to run a large trade deficit is a bad thing. If this trade deficit is the result of the workings of the market then the market has some serious flaws.

Share |      By Randall Parker at 2010 August 21 09:20 AM  Economics Trade


Comments
ASPIRANT said at August 21, 2010 12:25 PM:

Money is just an abstract anyway. We assign it value, and it only has value because of our promise to honor it. Promises can be broken.

There were rumblings a few years ago of just defaulting on the US debt. If we decide to, there's really no consequence to us. They can't really retaliate; all they can do is refuse to trade with us, and even after such an event isolating us would still be detrimental to their interests.

Not quite Ricardian, but still an advantage. In the end I think they're going to end up having given us a lot of something for nothing. I pity the Chinese.

A.Prole said at August 21, 2010 12:59 PM:

Well said Randall.
What the ass-holes who bark 'free-trade benefits all!' and 'David Ricardo,Comparative Advantage!' at every opportunity fail to mention is that according to classical theory, trade deficits are supposed to self correct over time and persistent and intractable deficits shold not occur.
But funny how the ass-holes never mention that.

no said at August 21, 2010 1:11 PM:

No Aspirant you are wrong on that. They most certainly can retaliate.
If the US defaulted on its debts to the Chinese (and others) all those multi-national American companies investing in the far east would suddenly find their assets taken in lieu of the debt. And there would be little you could do to protest since its your debt obligation that has been broken. You could argue the difference between government debt and private ownership but other countries / people don't see things the same as Westerners.


This is one of the reasons for the bank bailout to stop them going officially bankrupt which could have caused them to lose a fortune in foreign bankruptcy courts.

miles said at August 21, 2010 4:33 PM:


Randall,

I wonder how much more tax revenue via income taxes we'd be taking in if we had 10 million more factory jobs in the USA? I wonder how much more income tax would be paid in if all our construction workers were legal and paid income tax (and didn't send a great portion of their income home to central America#. We seem to be losing out on quite a bit of income tax in this way.

Aspirant,

Ive wondered if our leaders plan to stiff the Chinese myself. The Chinese could nationalize every factory that our corporations have built in China, but that would make our corporations just have to borrow more money from the FED to build new factories here, or to re-open shuttered plants and install updated equipment within them. If we stiff the Chinese, it will make worldwide investors much more wary of lending to us. Frankly I wouldn't be suprised if we dont reach the point where we just print money and our leaders tell our business owners to get as much production/value out of employees as possible #read: work-the-hell-out-of-them, mandatory overtime, slashed benefits, etc) in an attempt to put as much value out there on the market with the same or less amounts of money paid out to the employed as a hedge against inflation****


****This is probably why we haven't seen more inflation in the past few years. Everybody you talk to tells you their place of employment is expecting 8 people to do what it took 10 people to do just a few years back, and not because of innovation. They simply expect one to do more. That is a good thing, but its not something that can be done again and again. At some point, you are getting everything out of a workforce that they can give.

Randall Parker said at August 21, 2010 8:07 PM:

A.Prole,

Yes, when I went to college our macroeconomics prof assured us that large trade deficits can't be sustained because relative values of currencies would change to rebalance trade. I've been waiting a long time for this to happen. Still waiting. I worry when the "market" (really, governments) get around to balancing trade that it'll be a traumatic experience due to its abruptness.

miles,

We wouldn't have to run as big a federal deficit for Keynesian stimulus reasons of we had about 3 percent more demand for domestically produced goods. Plus, yes, we'd have a lot more tax revenue paid to those employed workers. Plus, we'd have less welfare state outlays to support those unemployed workers.

Otherwise free trade is working great.

mkr1977 said at August 22, 2010 4:51 AM:

I think free trade could work. Just not with a welfare/warfare state albatross hanging around the neck of the USA.

JerseyGuy said at August 22, 2010 5:24 AM:

Randall,
The offshoring/outsourcing is only getting worse. Personal anecdote: I recently left a "Big 4" public accounting firm in New York City. About 4 years ago, the firm announced that they were implementing a plan to outsource some of our easier auditing tasks (formatting spreadsheets, recalculating client's formulas, etc.) to our India operations. Our India operations only bill 20% of what an American first-year associate bills. The firm justified this as saying by outsourcing our easier tasks, we can focus on "big picture, high level" aspects of the audit. However, there are now talks of outsourcing some of these "big picture, high level" tasks in order to compete with other mid size accounting firms, who are bidding lower prices for engagements.

Where is this going to end? Accounting is now one of the most popular majors in college. What happens when half of the work is outsourced?

James Bowery said at August 22, 2010 7:59 AM:

JerseyGuy asks: "Where is this going to end?"

No one seems to notice that the modern critique of Ricardo's Iron Law of Wages ignores the ground truth of the so-called "demographic transition" is nothing more than replacement of the earlier developing races by the later developing races. This is because -- in the context of the open borders/global labor arbitrage theocracy combined with birth control technology -- the definition of "subsistence wages" no longer includes the high cost of child rearing in more developed nations. The demographic collapse of earlier developing races is not having the upward pressure on wages among those races that modern economists predict.

Modern economic theory is genocide. And yes, I do mean deliberate. This is due to high IQ niche invasion by Jews with their historic animus toward native intelligentsia.

James Bowery said at August 22, 2010 8:32 AM:

BTW: Richardo invoked the distinction between "natural price" and "market price" of labor primarily to argue that a continually expanding economy could continually drive the market demand for labor high enough that the market price would sustainably exceed the natural price. Moreover he invokes decadance among laborers as driving the perceived subsistence price higher and higher. This demoralization of labor continues today in the form of comments that today's middle class lives like the kings of old. The reality is that men must compete for reproduction among a mating market driven by fertile women, and that in societies that place value on women, mating market demands by fertile women (primarily childless fertile women) is the foundation of the iron law of wages in the modern society. Add females to the labor market with demands for equal wages, as well as birth control, and you have an explosive brew.

There _is_ a positive correlation between a man's wealth and his fertility even in developed countries -- its just that the threshold where that positive correlation starts is far above the middle class level it was during the 1950's -- that decade hated by Hollywood almost as much as the Nazis the fathers of those middle class families fought in WW II.

Rohan Swee said at August 22, 2010 9:20 AM:

James Bowery: Modern economic theory is genocide.

Very pithily put. I like it.

We could argue about the "deliberate" though. I see rather thousands of actors (for example, in herd-offshoring behavior) trying to make a go of it with nothing but "modern economic theory" as a guide to action. For Westerners, "economic theory" is everything, because we have abandoned everything else. (IQ absolutism being merely a corollary of that dessicated, deracinated creed.) Having purged all other gods and set the "market" up as our Ba'al, then sacrifice our nations to Ba'al we must. (Just observe any Tea Partiers reciting their "free trade" children's catechism.) That others jolly us along on the road to the cliff-edge in no way makes them responsible for our folly. We are.

mkr1977: I think free trade could work. Just not with a welfare/warfare state albatross hanging around the neck of the USA.

And communism works very nicely in an ideal world, too. The purest "free market" practices won't work in a world of dedicated mercantilists straightforwardly pursuing their own (national, group) interests. Blind faith in universalist, abstract, pretty, pretty theories will be the death of Western man. There was a time when the denizens of the Anglosphere considered themselves above destructive anti-pragmatic ideology, but it comes to pass that we're the stupidest of the lot in allowing ourselves to be propagandized into destruction by just that.

no said at August 22, 2010 10:26 AM:

But Rohan its possible to be a big supporter of 'free trade' at the national level yet opposed to globalization. Which as J Bowery says is just global labor arbitrage.

Truth(er) said at August 22, 2010 10:43 AM:

"No Aspirant you are wrong on that. They most certainly can retaliate.
If the US defaulted on its debts to the Chinese (and others) all those multi-national American companies investing in the far east would suddenly find their assets taken in lieu of the debt. And there would be little you could do to protest since its your debt obligation that has been broken. You could argue the difference between government debt and private ownership but other countries / people don't see things the same as Westerners."

If they seize those American assets, then the solution is to bar trade with China. Remember, those companies setting up in China do so to practice labor arbitrage so they can sell cheaply back to the US. By barring Chinese imports, the asset value of those companies drops precipitously.

Rohan Swee said at August 22, 2010 11:25 AM:

no: But Rohan its possible to be a big supporter of 'free trade' at the national level yet opposed to globalization. Which as J Bowery says is just global labor arbitrage.

I'm not following you here. Are you saying that unilateral free trade polices will work as long as labor arbitrage is not permitted? Nope, not seeing it. Even if you set up incentives/laws that would sharply curtail the export of jobs, you still have...unilateral free trade. As long as other countries can tariff and subsidize out the wazoo, artificially suppress wages or consumption, manipulate currency, and outright prohibit import of foreign goods, you will wind up in the same position of intractable trade deficits. We began running chronic trade deficits long before labor arbitrage really took off.

Randall Parker said at August 22, 2010 1:29 PM:

Guys,

One of the interesting things a government of a smarter country (smarter IQ-wise) can do is to restrict imported consumer goods purchases of its citizens while using its trade surplus to buy up assets abroad. So it can funnel its foreign purchases into buying mines, oil fields, and companies that have intellectual property.

I expect China will balance its trade by doing this. It would give them a big long term living standard advantage. Meanwhile we'll be busy proclaiming Ricardo as the prophet for the modern era.

no said at August 22, 2010 1:58 PM:

Rohan, I didn't argue for unilateral international free trade.
I'm saying there is a difference between 'free trade' at the national level when operating under the same laws, regulations and currency, etc, compared to globalization which isn't really free trade in the sense that as you comment a huge amount of manipulation is taking place.


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