China's inaction is the best America can hope for.
Thank you, President Hu
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James K Galbraith and Warren Mosler
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The US trade deficit just hit $686 billion (annual rate), prompting yet another round of hand-wringing, especially about American indebtedness to China. In a recent comment, economist Thomas Palley blamed the trade deficit for the alleged weakness of American economic growth, and China specifically for fueling the housing bubble by keeping US long-term interest rates low. Echoing this view, President Bush implored President Hu to do something. Mercifully, Hu promised no particular action.
Suppose (let's say) China decided NOT to sell us the $200-odd billion in goods they sold us last year. What would happen? Immediately, inflation would escalate, as exactly that many billions of dollars sought goods no longer for sale. Our Federal Reserve would respond with higher interest rates, and Congress might cut spending and raise taxes. We'd be out the goods, and China out the money. Would anyone be better off? Of course not.
Or suppose China decided to spend its dollar hoard, said to be nearing a trillion dollars, on oil, wheat, machinery and the good life. Inflation would then ignite as a boom in world prices for whatever China decided to buy. Once again, American living standards would fall - and our policy makers would again react quickly, making matters worse.
The conclusion is obvious. China does America a huge favor by shipping goods and hoarding the securities we hold for them in return. This has real costs for China, even though the Chinese do it for their own good reasons - it helps them manage their massive ongoing urbanization. But however you count it, the benefit to America and Americans is enormous.
Ah, but might it all come to a crashing end? Well, yes, it might. And some day the sun will explode and the universe collapse under the weight of the cold dark matter. But that's no reason to bring on the apocalypse if it can be postponed. So long as China wishes to sell goods and accumulate assets, why not accommodate and enjoy? Nothing stops them from giving or us from receiving, in mutual agreement.
Especially, in contrast to much rhetoric, there is no limit to the amount China can lend us, because in fact they aren't "lending" at all. When a US consumer buys a cell phone with a credit card, for instance, she borrows the funds from a domestic bank. That credit creation provides the dollars that are paid to (say) Motorola (China). China then may exchange the dollars for a Treasury bond. That's purely an American portfolio shift. No "foreign capital" is involved.
The net result: we do not depend on foreign savings to fund our trade deficit. As a matter of accounting and not theory, domestic credit funds foreign savings. The foreign sector depends on the US consumer's sustained ability to borrow, so that she can continue to purchase the goods they wish to sell to us, in exchange for the financial assets we hold for them. The only resources committed from China are the labor and components which built the phone in the first place.
And if some day they have two trillion in U.S. securities instead of one trillion, how exactly will that change the relationship between our countries, from what it is now? If some day China chooses to stop exporting above its imports, that will be because it needs the goods at home - not because it has more US securities than it wants.
What about national security? Those who fret over lost capacity in strategic sectors overlook a simple solution. Why can't the US government buy strategic goods from home producers, paying the premium necessary to maintain the desired domestic facilities? This is far less destructive than imposing inflationary tariffs or quotas, to keep out cheaper foreign products (such as steel) used by domestic manufacturers (such as of automobiles).
Finally, do imports cost American jobs? Yes they do, and those hurt by expanding trade should get help. But any failure to replace jobs lost to trade with better jobs is also entirely domestic. It lies in our failure to fund the new jobs we need for Americans willing and able to work. These can be private or public: that's a political choice. The US needs up-dated infrastructure, public spaces, cultural centers open and affordable to all; it needs better schools and the possibility for ordinary working people to live decent lives while working shorter hours; it needs stronger prevention and better preparation for disasters like Hurricane Katrina. China's willingness to furnish toys and TVs and cell phones at low cost makes it easier, not harder, to meet all of these needs. And if we fail to rise to that challenge, we have only ourselves to blame.
The "innocent fraud" of "borrowing from abroad" to fund our trade deficit diverts attention from real problems to false ones. And should one day those false problems disappear, then the real problems would become much worse. So, let's hope they don't, and in the meanwhile, we might say a word of thanks to the Chinese, instead of blaming them for what they do. |
