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Politics : View from the Center and Left -- Ignore unavailable to you. Want to Upgrade?

To: Dale Baker who wrote (15599)	3/31/2006 12:35:43 PM
From: TimF	Respond to of 541960

I was referring to both deficits, budget and trade I was mainly focusing on just the budget deficit. Trade deficits are a bit more complex then budget deficits. I'm not saying they are something that we should totally ignore but I don't think you can just look at the level of the trade deficit and reliably come up with any meaningful conclusion. Also I believe many ways to try to reduce the trade deficit will do more harm then good. Reducing or eliminating the budget deficit would tend to put downward pressure on the trade deficit, and I would be for that measure, but I would oppose protectionism, or a big government effort to weaken our currency. In the process they are told that tax cuts are good and even a mention of an increase is bad, and it will undermine the consumer boom we enjoy today. I share the opinion that tax cuts are (generally) good, and that increases are bad, but it has little to do with trying to encourage consumer spending. s I recall, the old imperial powers made a point of selling stuff to their colonies and presumably didn't pay much for the raw materials they took out Mercantilism wasn't as successfully as its supporters believed it would be, but it held sway for a long time. I think the metaphor holds up. I don't, at least not very well. It isn't totally inappropriate, but its far from a perfect fit.

To: Dale Baker who wrote (15599)	4/4/2006 12:43:06 PM
From: TimF	Read Replies (1) \| Respond to of 541960

Is the U.S. Trade Deficit a Problem? An important issue facing the U.S. economy today is the trade deficit. There are at least three points of view among professional economists about the trade deficit and the associated inflow of capital that the United States has experienced in recent years. One point of view suggests that the trade deficit is no big deal. If Japan were to start buying large quantities of steel, lumber, glass, and furniture from the United States, we would call that an export and our trade deficit would shrink. But if instead Japanese investors buy office buildings in New York made of American steel, lumber, glass, and furniture, that purchase is a capital account transaction. Because there no reason to prefer that Japanese buyers take delivery of their steel, lumber, glass, and furniture in Tokyo rather than New York, one can argue that we shouldn’t be terribly concerned about the trade deficit. As far as I can tell, this is close to the view that Ben Bernanke has expressed when he suggested that the U.S. trade deficit reflects a “global saving glut.” With so much saving in the rest of the world, it is natural that foreigners would want to invest some of that saving in the United States rather than on their own shores. And there is no particular reason that we should object to their doing so. (A similar view is expressed in this article by economist Donald Boudreaux.) A second point of view is that the trade deficit and the accompanying capital inflows are a problem because they are a financial crisis waiting to happen. Paul Krugman has pushed this perspective in his New York Times column. More than two years ago (January 6, 2004), Krugman wrote: "The traditional immunity of advanced countries like America to third-world-style financial crises isn't a birthright. Financial markets give us the benefit of the doubt only because they believe in our political maturity — in the willingness of our leaders to do what is necessary to rein in deficits, paying a political cost if necessary….If this kind of fecklessness goes on, investors will eventually conclude that America has turned into a third world country, and start to treat it like one. And the results for the U.S. economy won't be pretty." In essence, Krugman is saying that we risk a hard landing of sudden capital flight. Of course, this catastrophe scenario hasn’t materialized, lending some credibility to the Bernanke “What-me-worry?” hypothesis. The nice thing about such crisis predictions, however, is that they are probabilistic, so Paul would surely just say we’ve been lucky—so far. My own view of the trade deficit and capital inflows is somewhere between Bernanke’s and Krugman’s. I don’t rule out the Krugman financial crisis scenario, although I would bet against it. In fact, I am betting against it in my personal portfolio, where I am happily holding U.S. equities and dollar-denominated bonds. But I am not quite as sanguine as Bernanke has been. My view is that the trade deficit is not a problem in itself but is a symptom of a problem. The problem is low national saving. Given that national saving is low, I am not eager for the trade deficit to disappear, because that would mean that domestic investment would need to fall to the low level of national saving. But I do think it would be good if the trade deficit were to disappear accompanied by an increase in national saving. gregmankiw.blogspot.com