On Trade Deficits: Murphy vs. the World, Part 1 of 3
I disagree strongly with the rhetoric and substance of Donald Trump and his top advisors when it comes to trade deficits. For example, Peter Navarro’s recent WSJ op ed (which relied on the accounting tautology Y = C+I+G+Nx) could just as well “prove” that increased government expenditures are the way to boost real GDP and create American jobs.
However, most free-market economists are bashing Trump & Co. nonstop on this stuff. So where I would like to make some points is going the other way, namely, where I think pro-free trade economists are putting forth non sequiturs that will actually do little to help the cause. I hope it goes without saying that my point here is to clarify our communication with the public, especially with people who are sympathetic to Trump & Co’s arguments for trade barriers.
In this current post, I want to focus on a recent post from AEI’s Mark Perry. I am going to give a screenshot of the title and then quote the entire post, because I want you to be sure I’m correctly conveying his argument. Perry wrote:
Here’s one way to look at our America’s international trade situation:
1. The US receives more of foreigners’ production of goods and services than they get of ours, which results in a net inflow of foreign-produced goods and services every year.
2. The US also receives more of foreigners’ investment capital than they get of ours, which results in a net inflow of investment capital from abroad.
Protectionists, Peter Navarro and Trump then complain about America’s “trade deficit” for merchandise, but never mention the surplus for services, nor the surplus of foreign investment capital.
Consider a country like Japan’s international trade situation.
1. Japan exports more of its domestically-produced goods and services to foreigners every year than it receives from abroad, which results in a net outflow of domestically-produced goods and services.
2. Japan also sends out more of its investment capital to other countries every year than it receives from abroad, which results in a net outflow of investment capital.
Protectionists, Peter Navarro and Trump then claim that they want the US to emulate Japan’s trade situation to “Make America Great Again.”
So that is the entirety of his post. I think it is entirely fair to summarize Perry’s argument as: “It is clearly advantageous to Americans that they are the recipients of both goods and capital. Only a fool would think it would help the country to transform that situation into one on which we are net exporters of both goods and capital. Yet that’s where Trump’s logic leads us, so he must be wrong.”
Now here’s my problem. Suppose a populist politician in Japan starts railing against the fact that they’re “getting killed by the Americans in our trade dealings.” He wants to pass a measure to “keep our savings here in Japan.”
In that case, surely Mark Perry and other economists would say that’s nonsense, that the voluntary transactions of Japanese manufacturers and investors only make the country richer. Nobody in Japan should look at their aggregate statistics about current account surpluses and capital account deficits and conclude that this is somehow dangerous for Japan.
But if that’s true–and it surely is–then Perry’s post above collapses. If a free trader would tell the people with a capital account deficit that they shouldn’t be worried about the situation, then free traders shouldn’t be telling Americans that having a capital account surplus is self-evidently a good thing.
He’s leaving something out isn’t he? Equity, i.e. future outflows are being traded for those inflows he mentions. As part of a functioning market. Trump is wrong to want to mess with those exchanges, but not because some particular parity signs on two of the elements being traded, (“two plus signs good, one plus sign bad”) but because market economies are pretty efficient. Murphy is entirely right here.
Hi commented extensively on that thread…
My problem with that post was that the entire transaction wasn’t accounted for.
For every dollar that flowed in due to the “capital investment” a dollar flowed out to pay for the trade deficit. So there was no net capital investment.
For every good that flowed in a capital asset was transferred out, so there was no equity advantage to the goods flowing in.
I’m not saying a trade deficit is worse than a trade surplus. I’m simply saying you can not judge it based on the information provided.
What matters is do the incoming goods (trade deficit) have a higher ROR than the assets transferred out (capital surplus). If so then it was in fact better to run a trade deficit. If the ROR on the capital asset was higher then it was better to run the trade surplus.
I got attacked repeatedly for people misinterpreting my position as being anti-trade deficit or anti-trade. I’m just spelling out the reality of the transaction. Without more information a determination can’t be made as to who was better off (financially).
“If a free trader would tell the people with a capital account deficit that they shouldn’t be worried about the situation, then free traders shouldn’t be telling Americans that having a capital account surplus is self-evidently a good thing.”
As long as the capital account surplus isn’t for things like government infrastructure spending – that is, as long as the surplus is due to voluntary transactions, Japan shouldn’t be worried either way.
As Ron Paul once noted (and I’m paraphrasing), when people voluntarily consume their capital away, they have to stop consuming and go back to work.
Voluntary trade deficits and capital account surpluses *are* self-evidently a good thing.
So if I voluntarily sell a kidney there’s no problem, it’s only capital. right?
Same for a hand or a foot I suppose. One day I might run out of capital, and then I need to go back to work… but by that stage I have no hands, no feet. no kidneys and I’m unable to work.
This applies to a nation too. If so much capital has been sold that the nation cannot compete because it’s reduced itself back to the stone age then there’s no point talking about “go back to work” because it ain’t gonna happen. Admittedly, no sensible person would do that, but doesn’t mean it won’t happen.
Tel
But unlike your body, which doesn’t replace lost parts, the capital stock in the US keeps increasing so effectively you now have more kidneys than you started with.
Foreign investment only changes the ownership of physical assets in the US. Real estate, factories,and other assets don’t physically leave the US, they continue to function as before, supplying jobs and output in goods and services. The sale of the asset means existing capital is freed up for other, potentially more efficient enterprises.
Do you think Honda, Toyota, BMW, and Volkswagen factories build in the US with foreign dollars and providing thousands of US jobs are a bad thing?
“… but by that stage I have no hands, no feet. no kidneys and I’m unable to work.”
Tetraplegics find work.
And retards find work because the government doesn’t enforce the Minimum Wage on them.
And if you invest well, you can make Keynes turn over in his grave.