So Much Winning: Football and Trade
A certain football team drove the ball down to the other team’s 1-yard line, but failed to score on the first three attempts. So it was 4th and goal, on the other team’s 1, and the coach called a running play. The QB took the snap, handed it off, and the running back dove over the line for a touchdown. The crowd went wild.
After the game, the owner of the team called the coach in for a meeting. It went like this:
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OWNER: Jim, what did I tell you when I first hired you?
COACH: That you wanted me to win football games.
OWNER: Exactly. Now how do you win a game?
COACH: We score more points than the other team.
OWNER: Exactly. So, we agree that if the other team scores on us, that’s bad. Right?
COACH: Totally.
OWNER: Okay, now in today’s game, there was a point at which it was 4th and goal, and we were on their 1-yard line.
COACH: Yes, I remember it well.
OWNER: And then you called a running play.
COACH: Yes.
OWNER: Even though that meant we had a decent chance of scoring, meaning we would have to kickoff to them.
COACH: Uh, right?
OWNER: Do you agree with me, that it’s harder for the other team to score on us, if they start from their own 1-yard line, rather than receiving our kickoff?
COACH: Uh, sure. I agree.
OWNER: So, since we agree that them scoring on us is bad, and we agree that it’s harder for them to score on us when they start from their own 1, next time you’re in that situation, you tell the quarterback to take the snap and then kneel. I don’t want to have this conversation again.
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If you found the owner’s position compelling, you will also enjoy Steve Landsburg’s latest critique of the Trump Administration.
Rothbardians vs. “Free Bankers”
This was a new talk I gave at Mises U this year. Among other novelties, it contains an exchange between Dr. Evil and his subordinate, #2.
Potpourri
==> Lots of people are talking about this Mexican town that overthrew its government. Seemed like the moral was: Once they secured their border, everything got better. (Oh I kid folks I kid.)
==> On that Scott Alexander post on Piketty, I was glad to see David Friedman has material posted about the History of Economic Thought.
==> John Taylor links to pieces in the debate on the Fed’s balance sheet.
==> Someone (I think Jeff Tucker?) linked to this 1996 Mario Rizzo lecture on coordination.
==> I’m really getting into Malcolm Gladwell’s podcast (not sure if I talked about it before). Here are some good episodes if you want to give it a try:
— On Wilt Chamberlain’s foul shooting.
— On the alleged acceleration problem in Toyotas.
— On the pros and cons of political satire.
** Incidentally, my reaction to these podcasts is the same as to his books (the ones I’ve read, at least): I love the material that Gladwell digs up, but I often disagree with his take-away conclusion.
NYU Reminiscences on Mario Rizzo’s 70th Birthday
My contribution here. Be sure to go to ThinkMarkets and scroll down to see all the entries. (Thanks to the alert von Pepe for telling me about these!)
Murphy on RT on Energy Infrastructure
Fortunately YouTube (at least at the site itself) tells you under the screen that “RT is funded in whole or in part by the Russian government.”
AEI on Trade Deficits: The Stunning Conclusion
You have all waited with breath which is baited for the resolution. Last week I posted this AEI meme:
…and said I thought there was a basic flaw in it, but I didn’t have time to type it up then. (To repeat, I’m sure the economists at AEI know this nuance; my point was just that the above is not right and so that’s awkward in a meme that’s lecturing somebody on trade. Also, to avoid confusing anybody who missed my first post: I am NOT defending Trump’s policies or pontifications on trade here.)
In the comments some of you raised interesting points, but nobody hit the particular thing I had in mind.
So here it is:
A capital account surplus (i.e. net inflow of investment from foreigners) is equivalent to a current account deficit, not a trade deficit. The trade balance is only one component of the current account balance. A trade deficit is neither necessary nor sufficient to have a net inflow of foreign investment. Specifically, the U.S. could have a trade deficit as well as a net outflow of capital, and the U.S. could have a net inflow of foreign capital at the same time it runs a trade surplus.
Here’s the Wikipedia entry on the current account, but unfortunately I’ve yet to find an online treatment that is very good. (Also I’ve seen different definitions and ways to handle things like literal transfers of money between the members of countries. It’s also tricky if you look at the movement of gold back on the gold standard.) So I’ll just give enough intuition/rigor in the present post to show why the AEI meme above is not quite right.
We have
capital account + current account = 0
(Again, I’m defining those terms broadly. I’ve seen other treatments that have a separate thing called the “financial account” but in my mind that is confusing. So the principle of what I’m doing in this post is right, but my categories might not line up with other treatments.)
So a capital account surplus (which occurs when foreigners invest more in U.S. assets than Americans invest in foreign assets during the time period in question, let’s say it’s a year) occurs if and only if there’s a current account deficit.
The current account in turn consists of the trade balance (which itself is separated into goods and services, but I’m not worrying about that here), but it also includes the net earnings of Americans on foreign assets. So think of the current account as like “net income,” where Americans can earn income (a) from exporting more than we import, but also (b) from earning more interest, dividends, and profits on our foreign assets than foreigners earn in interest, dividends, and profits on their U.S. assets.
So if foreigners are investing on net in the U.S., we have a capital inflow or a capital account surplus. That means we have a current account deficit, i.e. the current account is less than zero. The AEI meme above would suggest we must have a trade deficit. But no, that’s not correct:
current account < 0
implies…
trade balance + net foreign earnings < 0
(exports – imports) + (American earnings on foreign assets – foreign earnings on U.S. assets) < 0
exports – imports < foreign earnings on U.S. assets – American earnings on foreign assets
OK so far so good. Now is the last line above consistent with a trade surplus? Sure, it can happen that:
0 < exports – imports < foreign earnings on U.S. assets – American earnings on foreign assets
Example #1: U.S. enjoys a capital inflow even though it has a trade surplus.
Suppose Americans hold $10 trillion in foreign assets that yield a 10% return, and that foreigners hold $40 trillion in U.S. assets that yield a 5% return. So Americans earn $1 trillion in foreign income from assets, while foreigners earn $2 trillion in income from U.S. assets. On net therefore the foreigners have $1 trillion in asset earnings coming to them from the U.S.
During the same year, Americans export $800 billion in goods and services to foreign buyers, while Americans only import $200 billion in goods and services from foreign sellers. Thus there is a U.S. trade surplus of $600 billion.
But there is still a net capital inflow of $400 billion into the U.S. Americans were supposed to, on net, ship out $1 trillion worth of goods/services as net income on the different asset earnings. But Americans only sent out $600 billion on net. So foreigners’ holdings of U.S. assets actually goes up to $40.4 trillion.
Example #2: U.S. has a trade deficit while still experiencing a net outflow of capital (i.e. a capital account deficit).
Suppose Americans hold $10 trillion in foreign assets that yield a 10% return, and that foreigners hold $10 trillion in U.S. assets that yield a 4% return. So Americans earn $1 trillion in foreign income from assets, while foreigners earn $400 billion in income from U.S. assets. On net therefore the Americans have $600 billion in asset earnings coming to them from foreigners.
During the same year, Americans export $800 billion in goods and services to foreign buyers, while Americans import $900 billion in goods and services from foreign sellers. Thus there is a U.S. trade deficit of $100 billion.
But there is still a net capital outflow of $500 billion out of the U.S. Americans were supposed to, on net, enjoy an influx of $600 billion worth of goods/services as net income on the different asset earnings. But Americans only imported $100 billion on net. So Americans’ holdings of foreign assets actually goes up to $10.5 trillion.
Conclusion: I’m not saying that in the real world, the AEI statement is wrong. But especially when I’ve seen an editor at the Wall Street Journal saying something that is flat-out false (after clearly being misled by standard free-trade rhetoric), I think professional economists should be a bit more careful when teaching everybody about trade.
How Christians Can Use the Bible to Disagree
I am traveling and took my son to a (Bible) church that isn’t our normal one. The people there were very pleasant and welcoming, but I personally had a doctrinal disagreement with one of the posters hanging on the wall. I explained the issue to my son afterwards, but it might be of interest to readers of this blog, especially if you think that religious stuff is “just how you feel about God.”
So, the poster had in caps, “FINISH HIS WORK” and the “O” of “work” was a globe. Underneath the big letters it gave the reference “– John 4:34.”
Now through the whole service that poster was really bothering me. It sounded like they were saying, “Hey you Christians, you need to go out into the world and finish the work that Jesus started.” (Also, the sermon and other posters were consistent with my interpretation. It was very much of the mindset that we had to go win souls for Jesus.)
I explained to my son that obviously, Christians should indeed go do good works. But that would not be construed as finishing the work of Jesus (i.e. His work), because Jesus accomplished His work on the cross, period. (He said, “It is finished” just before dying on the cross.)
Another way to see it is like this: If it were up to humans to finish the work of Jesus, then humanity would be doomed; we would fail.
The last loose end was for me to look up hat was presumably a quotation from Scripture, i.e. the reference they gave to John 4:34. Here it is in context (the NIV translation):
31Meanwhile his disciples urged him, “Rabbi, eat something.”
32But he said to them, “I have food to eat that you know nothing about.”
33Then his disciples said to each other, “Could someone have brought him food?”
34“My food,” said Jesus, “is to do the will of him who sent me and to finish his work. 35Don’t you have a saying, ‘It’s still four months until harvest’? I tell you, open your eyes and look at the fields! They are ripe for harvest. 36Even now the one who reaps draws a wage and harvests a crop for eternal life, so that the sower and the reaper may be glad together. 37Thus the saying ‘One sows and another reaps’ is true. 38I sent you to reap what you have not worked for. Others have done the hard work, and you have reaped the benefits of their labor.”
So you can see why both camps would feel vindicated by the above text. I saw that and thought, “Aha! It wasn’t Jesus telling His disciples, ‘Finish the work that I start while I’m with you.’ Instead, it’s Jesus saying He would finish God’s work. Totally different message.”
However, the people who made that poster would presumably say, “See? Jesus wants us to follow-up with all the seeds God has planted and cultivated. We need to go out into the world and reap the harvest.”
In summary, I still don’t like the vibe of the poster because I think a lot of Christians would assume the “His” means Jesus, not God the Father. But, I was more sympathetic after considering the full context of the quotation.
In any event, this is the kind of stuff that even Bible-believing Christians argue about…
AEI on Merchandise Trade Deficits
I follow Perry on Twitter and saw this:
So, standard disclaimers: Trump’s policies on trade are awful, and his framing of the issues when he speaks to the public is also terrible. His policies, other things equal, will make Americans poorer, and he conveys a very confused understanding of the topic.
Having gotten that out of the way, I think there is a basic mistake in the above treatment of (merchandise) trade deficits and capital inflows (on the level of, I might have put it as a bonus question on an Econ 201 exam). Which is awkward if it occurs in the midst of mocking someone for not being intellectual on trade.
(To be clear, I’m sure the economists at AEI are aware of the nuance I’m referring to. My point is just, you probably shouldn’t make a basic mistake in the midst of lecturing Trump on trade.)
I’m bogged down with day job stuff right now so I’ll see if any of you know what I mean…
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