Tuesday, 10 October 2006

More "enormous" trade deficits

New Zealand's "monstrous" trade deficits were in the news here recently if you recall, and much of the reporting was itself monstrous. George Reisman offers a master class in 'economic detection' as he exposes the paucity of analysis offered by Nobel-Prize winning economist Joseph Stiglitz in scaremongering recently about American trade deficits. "Enormous," Stiglitz calls them.
Stiglitz appears to believe [says Reisman] that the main problem of the global economy is ”global financial imbalances.” By this, he means “America’s enormous trade deficits,” which he states are close to $3 billion a day, and “China’s growing trade surplus of almost $500 million a day.”
The crux of Reisman's critique, which shows his fundamental disagreement with Stiglitz, is here: One of Stiglitz's proposals to "fix" this trade imbalance is "an increase in taxes on upper-income Americans" which he says will flush out the savings of upper-income Americans and allow the Government to reduce its own deficit. These savings, Stiglitz seems to be saying, would otherwise be "hoarded," and otherwise unavailable to production.

But this is absurd. "In typical Keynesian fashion,"says Reisman, "Stiglitz confuses saving with hoarding." For some reason (read Keynes) this fallacy still exists, even among Nobel-Prize winning economists, even though it was debunked by John Stuart Mill more than a hundred years ago. Saving is not hoarding: saving one's income does not take it out of production; rather, it makes 'seed capital' available to build and grow productivity.
The fact is, of course, as John Stuart Mill pointed out in the middle of the 19th Century, that what is saved, i.e., not spent in purchasing consumers’ goods, is spent. But it is spent productively, i.e., in buying capital goods and in paying the wages of workers employed by business firms. These workers, of course, then consume their wages.
In any case, concludes Reisman, the primary "problem" with trade deficits only exists to the extent that it finances the government's own deficit, which itself serves to keep capital froim being used productively by growing businesses. So is there a problem with global "trade imbalances"? "No!" says Reisman, "global “trade imbalances” are not a problem."
They are a profoundly important means of preventing problems. What will cause a problem is allowing wreckers, devoid of serious knowledge of economics, to “fix” things.
Ain't that the truth.

LINKS: Stiglitz in The Times: A study in confusion - George Reisman's blog
Monster deficits and economic nationalism - Not PC (Peter Cresswell)

RELATED: Politics-US, Economics


  1. That's some nice work there. Trade deficits do not matter! Amen.

    My observation with Rod Donald being dead this "issue" is no longer the live wire it used to be each quarter.

  2. what about debt. we've all seen the U.S debt clock in Times Square. Does it matter?

  3. When one says that trade deficits are not a problem it kind of depends on whose point of view you take.

    From the point of view of a disinterested observer they are irrelevant because a surplus from one country or countries will necessarily be offset by an equal amount of supluses from other countries. The net is always zero by definition.

    However from the point of view of someone within a country a persistent (but not a temporary) trade deficit does matter. A persistent deficit needs to be offset by an ongoing net inflow of capital which represents investment in the economy by persons from other economies. Those investors will expect eventually to be paid back and if trade deficits are ongoing their chances of being paid back reduce. This increases their risk and drives up interest rates in the economy and devalues the currency.

    Some people in the economy won't care about this but anyone who is being paid in local currency or who holds savings denominated in local currency is made relatively worse off in relation to their ability to purchase goods and services on the world market. Also, investment becomes more expensive as interest rates rise.

    Note that if you just live in the country but all your financial assets are overseas and you earn a foreign income you might well be better off with persistent deficits.


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