Posts Tagged ‘Trade Deficits’

Consumption Data Indicates Trade Deficit May Be The Real Drag On Economy.

Wednesday, October 31st, 2012

Ever the iconoclast, Dean Baker over at the Center for Economic and Policy Research uses some data that shows consumers are on a tear right now, and that what’s really holding our economy back is our chronic trade deficit, much of which comes  from our need to import hundreds of billions of dollars in petroleum.

On the arithmetic front, the piece comes up with a story where consumption of durables is $267 billion below the long-term average, while consumption of non-durables are $127 billion below their long-term average. While it has consumption of services somewhat about the long-term average, the next effect is that weak consumption is a big drag on the economy and accounts for a large share of the shortfall. It tells us:

Consumers are holding onto their wallets — a continuing burden for the weak economy.”

Wow, that isn’t what the Commerce Department is telling my spreadsheet. I get that the average share of consumption (all categories together) in GDP was 67.3 percent in the years from 1985 to 2005. I get that it was 70.8 percent in the most recent quarter. This means that consumption was 3.5 percent higher than its longer period average as a share of GDP. This means that consumers are not hanging onto their wallets at all. In fact, they are spending at very ambitious rate. (Boys and girls, you can check this one for yourself by going to the National Income and Product Accounts and clicking up Table 1.1.5.)

This is consistent with the data showing that consumption is higher than normal relative to disposable income. (The adjusted consumption line has to do with the treatment of the statistical discrepancy in the national income accounts.) This means that consumption is not holding back the economy, it is actually unusually high.


Source: Bureau of Economic Analysis.

The amount of excess consumption is even more than this comparison suggests, since one reason that consumption is high relative to GDP is that tax revenue is low relative to GDP (i.e. we are running large budget deficits). If the deficit starts to come down, then disposable income will fall relative to GDP, which means that consumption will fall relative to GDP, even if the saving rate stays constant.

The other error along these lines is that imports should be expected to rise relative to GDP as the economy moves back toward its potential. If GDP were to rise by 6 percent to bring it back in line with its potential then imports would rise by roughly 20 percent as much or 1.2 percentage points of GDP. This would make it more clear that the biggest factor that is out of line with our historical experience is the trade deficit. That would be even more clear if we took a longer period as the basis of comparison that was not so distorted by asset bubbles.

Of course given the Washington Post’s unabashed celebration of recent trade agreements its reporters are probably not allowed to call attention to such facts.

Beezer here.  I pass this article along because it might challenge our belief that household savings is the biggest drag on our economy.  Can households be spending this much AND saving too?  Or is the consumption figure really one of spending on petroleum, which is sucking money away from other productive enterprises?  If that is the case, then a push to boost our own resource use could mitigate that drag a lot.  Of course I would prefer we use sustainable energy rather than fossil energy, which imposes very expensive costs on society that never appear on those companies’ bottom lines because these costs happen after they’ve sold their product.  Which means we pay the costs in other ways, to other vendors, like health care providers who make money treating chronic problems like asthma.  Robert F. Kennedy gives a good explanation below as to why we might be a lot better off using alternative energy resources.

China Owns Us. Republican Lie No. Infinity.

Friday, August 31st, 2012

The remarkable thing about this presidential campaign is that the public is beginning to, correctly, suspect Republicans pretty much lie about everything, all the time.

Latest case in point is that China owns us, bigtime, because they hold a lot of Treasury securities and are financing our deficits.  Unfortunately for Republicans, there’s an economist named Paul Krugman who writes from a very big podium called the New York Times, and he’s becoming famous pointing out how wrong the Republicans get  just about everything.

Ah. Let’s give thanks to Rob Portman, who offered a nice break from all the lies in Tampa, and instead offered us some good old-fashioned bad macroeconomics.

In his speech, Portman castigated the Obama administration for not taking a tougher line on China — which is actually something I’ve complained about too — then offered a completely wrong explanation. Obama won’t take on China, Portman said, because

Obama could not run up his record trillion dollar deficits if the Chinese did not buy our bonds to finance them

OK, let’s ask the question: how much overseas financing does the United States as a whole need?

The answer is that it’s determined by an accounting identity: capital inflows = the current account deficit, a broad measure of the trade balance including income on investments. (Trade can adjust to capital flows instead of the other way around, but that’s a longer story).

So what has happened to the current account deficit as a share of GDP in the Obama era? Um, it’s way down:

(I multiplied by 400 because the current account data are quarterly, while GDP is stated at an annual rate)

How is it possible that we’re borrowing much less from foreigners when the government deficit has gone up so much? The answer is that the private sector is deleveraging, having moved into massive surplus as consumers try to pay down debt and corporations hold back on investment in the face of weak consumer demand. All those government deficits have only partly offset this move, so that overall national borrowing from overseas is down, not up.

But what would happen if the private sector stopped deleveraging? The answer is, we’d have a strong economic recovery, which would among other things greatly reduce the budget deficit. A side implication of this point, of course, is that for the time being that deficit is a good thing, helping to support the economy while the private sector unwinds its excessive leverage.

So who’s actually financing the US budget deficit? The US private sector. We don’t need Chinese bond purchases, and if anything we’re the ones with the power, since we don’t need their money and they have a lot to lose. In fact, we don’t want them to buy our bonds; better to have a weaker dollar (a point that the Japanese actually get.)

To make excuses for Portman, lots of people keep getting this wrong, even after all these years. But really, truly, the last thing we need to worry about is whether the Chinese love our bonds.

Beezer here.  The simple truth is that Krugman has called out the Republicans on almost every major policy initiative, and in the process shown that they have their economic understanding of our nation’s economy almost precisely wrong.  They’ve been wrong on just about everything the real world has done the past four years, and Krugman has been right.  So who are you going to believe has a better understanding of our position?  Apparently a lot of people still cling to old, obviously wrong, theories.  Pride before the fall, and all that.



Why Not Include Tax Policies In Trade Agreements.

Saturday, January 14th, 2012

There are many ways individual countries can compete for export markets:  Currency manipulation, labor income differentials, regulatory laxity and tax policy including subsidies are just a few.

Subsidies are already part of ongoing trade relations and they are frowned upon.  But what’s keeping two countries from coordinating tax policies aimed at balancing tax incomes based upon export sales in their respective countries?  Right now in the US there’s a debate over whether or not the US should give US multinationals a ‘tax break’ aimed at encouraging these multi-nationals to repatriate back to the US profits made from export sales.  The amount of money involved is not trivial, it’s in the trillions of dollars.

Coordinated tax policies based upon sales, say between China and the US, would allow both countries to share proportionately in profits and remove tax barriers keeping multi nationals from freely shifting assets between countries.   Take Apple as one example.  This Cupertino, California based multi national makes all of its products outside the US.  While the US may still be Apple’s largest market, the Chinese market potential is huge and inevitably will become Apple’s largest market.

If the two countries coordinated their tax policies based upon sales in each country of Apple products, they could both reap higher revenues without distorting Apple’s business model or inhibiting Apple’s sales in either country.  And because Apple’s tax rate would be ‘equalized’ in both countries, again based on sales, the company would have zero incentive to retain profits in either country.   Apple would be free to shift assets between the two without the constraint of tax differences.

Natural Gas Discoveries Can Reduce Trade Deficits, Create Jobs–And Create Room For Sustainable Energy Too.

Saturday, November 5th, 2011

The inevitable rise in the cost of fossil fuels and the pressure these price hikes put on economies is going to force companies to bring jobs back to their home countries.  For America that’s good news, but not unalloyed good news.  That’s because America has yet to politically come to a national energy policy.

For the first time, however, this lack of an energy policy may be reversed.  The reason: Drilling technology advancements are unlocking a Saudi sized expansion of domestic natural gas.  Of all the fossil fuels natural gas is considered the cleanest and this may close the divide between the fossil fuel advocates and advocates of sustainable, environmentally less expensive energy systems.   Natural gas looks very likely to become the ‘bridge’ fuel between these two competing forces.   

If this happens politically, America’s huge and chronic trade deficits will diminish.   Domestic employment will begin to recover as American multi national companies choose to expand production at home because price hikes of traditional fossil fuel prices, such as petroleum, push up the cost of offshore production.     

Using natural gas as a ‘bridge’ fuel while America continues to develop and build out a more robust, sustainable non-fossil fuel energy system, may become the compromise solution between competing political views.  On one side pro-fossil fuel advocates can gain acceptance because of the natural gas discoveries, while on the other side, sustainable energy advocates can gain acceptance of continued support for efforts at developing non-fossil fuel systems.    It would be a win-win for the country.

About The ‘What If The Chinese Stopped Buying Our Debt?’ Question.

Thursday, July 14th, 2011

The Chinese government buys US Treasuries in order to peg its currency’s value beneath the dollar.  That and because the US Treasury market is the only market large enough, and liquid enough, to easily recycle huge Chinese surpluses.

If the Chinese stopped buying the Treasuries, then they wouldn’t be able to peg their currency’s value beneath the dollar, and the currency would skyrocket in value:  Not a good thing when your entire economy is based on exports.  

But who would step in to buy our debt, or Treasuries?  Wouldn’t interest rates rise and make our existing debt harder to sustain?  Possibly, but recent history indicates no weakness in demand for Treasuries when a big buyer steps aside–which just happened when the Fed finished its $600 billion Treasury purchasing program called QE II.  The result?  Interest rates dropped even further with new 10 year Treasuries going for 2.9%

So threats of disaster if the Chinese stop purchasing Treasuries have no merit.  The Chinese themselves don’t want their currency to rise much less skyrocket and buying Treasuries is what keeps that from happening.  If they did, US exports would increase and imports decrease, thus alleviating the US of one of it’s most pressing problems, the trade deficit.

Actually, if the Chinese did stop buying Treasuries it would help the US economic and fiscal health.

Great Explanation Of Trade Deficits And Surpluses By Michael Pettis. A Must Read.

Monday, June 27th, 2011

I’m going to start reading this guy regularly and I’m posting a link to China Financial Markets,  his blog, particularly a recent piece explaining national trade and how various policies affect who’s going to have trade surpluses and who’s going to have deficits.  Here’s Pettis’ resume.

Michael Pettis is a Senior Associate at the Carnegie Endowment for International Peace and a finance professor at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets. He has taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business.  He is also Chief Strategist at Shenyin Wanguo Securities (HK). 

Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.

I’m particularly interested in having Capt. read this post, entitled How To Become Virtuous And Save More.  So read it Capt!  Here’s a small sample from the piece.

For this week’s blog entry I want to go a little abstract in order to suggest how different countries that participate in the global imbalances are going to adjust.  The debate over the root causes of global imbalances is as fierce and as confused as ever.  The confusion isn’t helped by the vast army of moralizers who like to contrast the hard work and thriftiness of households in high-savings countries with the laziness and binge-buying behavior of households in high-consuming countries.  The world cannot possibly rebalance, they argue, until the later become more like the former…

There are nonetheless some obvious flaws in the argument.  First of all, if the high-consumers become as virtuous as the low-consumers, that just means that global demand will decline, and with it, global unemployment will rise.  In that case global savings won’t go up.  They will go down, since rising unemployment causes income to decline faster than consumption.

Second, lazy spendthrift Americans are actually more productive and work longer hours than people in almost any other rich country, including the harder-working and higher-savings counties in Europe.  Still, the argument does anyway fit in with a lot of cultural stereotypes about Spaniards and Greeks, with their wild lifestyles, long siestas, and dissolute charm, or about Germans and Dutch, whose tasteless food, boring sex lives, and grim movies leave them no choice but to work away at office and factory.

But is this really why people in some countries love to save and people in other countries love to consume?  No, it isn’t.  Aside from the satisfaction it brings, this moralistic argument is almost meaningless.  Individual preferences may cause some of us to save more of our income than others, but we have to be very careful about generalizing.  When entire countries have abnormally high or low savings rates, individual preferences are never the reason.  Abnormally high or low savings rates are almost always caused by trade, industrial or tax policies at home and abroad that distort the relationship between consumption and production.

As with any well written article, particularly one that seems to dismisses cultural tendencies, the article sparked a terrific series of comments, pro and con.  One in particular details a specific German company that the author says exists because of German culture.  My take is that culture does matter, but in most cases not as much as most people assume.  Here’s one of the exceptions.

I really value your blog and read it regularly. But with a caveat: like almost all modern economists you configure the world into monetary relationships and disregard culture, education et al into a black box.
Unfortunately the real world is very different. Spain might devalue its currency as much as it likes; it simply has nothing to the world to sell.
Conversely Germany (or Japan where the Plaza accord of the Eighties had no long term effect on the trade balance) can consistently hike their currencies (as Germany did with the mark appreciation from 4 to the Dollar in 1973 to 1,5 to the Dollar in 1979 and will still run a surplus (in this case with the States).
Case in point is a factory complex making low voltage circuit breakers near Mannheim in South West Germany, which I helped to evaluate for a bank loan. It was formerly called Stotz then became a unit of ABB. (Won´t be more specific for obvious reasons)
The product is not high tech but these 2000 employees churn out a good part of circuit breakers in the world and forced from the market factories in the US and in GB and companies like GE. The workers at ABB are all unionized, get huge salaries, five weeks paid vacations a year and can´t be fired without a very, very good reason.
Now people who are for unions say that is the reason for the success and other people might say it is, because workers are represented in the workers council of the factory. But the real reason why they manage to dominate the market for such a low technology product that could – theoretically – be produced everywhere (they just try in Shanghai up to now in vain) is very simple if you look closer.
It is their production line called Goliath and that was preceded by David. These are in house developments costings upwards of a hundred Million Euro. These are hugely complex machines requiring the harmonisation of workers and engineers skilled in anything from cutting metal to a thousands millimeter to an advanced knowledge of chemistry and take years to build. (Three years in the case of Goliath) These production lines take huge up front investments but once they are in place they deliver a quality product with unbeatable low productions costs. No matter how low the wages anywhere else as wages are anyhow only a small fraction of production costs as soon as something like Goliath is up and running.
And these are not machines like a car that anybody can drive. Only the people who built them can operate them as it just turns out in Shangahi where they shipped David.
First, that something like that is possible has something to do with German business culture. In the US after a take over by private equity they would have never renewed the line but squeezed profits from it until it fell apart. That would have been the end of the factory and it happened in a good many cases which are well know to their German competitors. But that is only one and not even the main point regarding culture.
Goliath and all the other in house developments in German factories are the result of a combination of fabulous in house training of the shop floor people; strong emphasis of tradition (old teaching the young) and the non existence of barriers between engineers and the people implementing their designs.
These are not simply reproducible around the world. ABB is a multinational with branches all over the world and they would love to relocate and get rid of the pesky German wages and workers rights. But they tried and didn´t succed.
In Great Britain you can´t build something like that because there´s no vocational training that´s good enough. Also there´s the problem of the cultural barrier between engineers and workers. (In Mannheim they all talk the same dialect). In the US (as BMW has discovered in its plant in Savannah Georgia) only college graduates have the required reading and mathematics skills to do, what shop floor workers in a German factory are expected to do. But these people are difficult to motivate to get their hands dirty.
In Spain there are similar problems.
These are cultural problems and in China at the moment the greatest problem is, that shop floor workers are afraid to think for themselves. But without it you can´t operate a machine like David.
About China I believe they will learn and eventually become a strong competitor. But only if there is a cultural and probably concurrently also a political shift. Right now the hierarchies are too rigid and there´s no chance for workers to think for themselves. I am confident about China because the Japanese managed this as well. And their culture is ultimately derived from China.
I don´t really see a way out of the crisis along the line that Michael Pettis has sketched. I see no way out in fact. Regarding the situation now in Europe there´s only one solution: for Germany to pay up and shut up. For indeed the advantages of Germany are not due to harder work (they work less hours that Spanish workers) but simply the product of a unique set of historical and cultural circumstances. Best would be for Germany simply to pay the Spanish to buy their products. And the Chinese (which do have the advantage of extremely low wages) to pay the US to buy theirs. Which both did until now in a way. But that will not happen I am afraid so there´s only one solution: default.

How come?

Beezer here.  Pettis writes clearly and I believe very accurately.  That said, the comment reproduced above, clearly shows that culture does matter.  This doesn’t negate Pettis’ arguments but it does show that strong cultural preferences (another comment points out the Japanese and Chinese preference for liquidity) do matter and cannot be dismissed entirely.  Great post and several great comments too. 

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