Tuesday, July 29, 2008

More 'trade deficit' nonsense

The Greens' Frog Blog croaks that NZ's latest trade deficit figure of $1.9 billion for the quarter shows New Zealanders are buying too much imported consumer stuff on too many lines of credit.  "Using one of those ‘bringing it down to a scale you can comprehend’ metaphors," says Frog, "means that you owe someone overseas $475 dollars for the stuff you bought this year."

Uh, no it doesn't.  To base a metaphor on the analsyis of the Visible Hand in Economics, it's more like we each spent $675 to start an oil well  in the back garden.  Read on to see why.

So is there a problem with global "trade imbalances" anyway? No, there's not. As George Reisman points out, so called 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.
D'you think he's talking about the likes of the Greens?

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3 Comments:

Blogger Pete Murphy said...

Our enormous trade deficit is rightly of growing concern to Americans. Since leading the global drive toward trade liberalization by signing the Global Agreement on Tariffs and Trade in 1947, America has been transformed from the weathiest nation on earth - its preeminent industrial power - into a skid row bum, literally begging the rest of the world for cash to keep us afloat. It's a disgusting spectacle. Our cumulative trade deficit since 1976, financed by a sell-off of American assets, is now approaching $9 trillion. What will happen when those assets are depleted? Today's recession may be just a preview of what's to come.

Why? The American work force is the most productive on earth. Our product quality, though it may have fallen short at one time, is now on a par with the Japanese. Our workers have labored tirelessly to improve our competitiveness. Yet our deficit continues to grow. Our median wages and net worth have declined for decades. Our debt has soared.

Clearly, there is something amiss with "free trade." The concept of free trade is rooted in Ricardo's principle of comparative advantage. In 1817 Ricardo hypothesized that every nation benefits when it trades what it makes best for products made best by other nations. On the surface, it seems to make sense. But is it possible that this theory is flawed in some way? Is there something that Ricardo didn't consider?

At this point, I should introduce myself. I am author of a book titled "Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America." My theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.

This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It's because these effects of an excessive population density - rising unemployment and poverty - are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.

One need look no further than the U.S.'s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!

Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable - nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. In fact, our largest per capita trade deficit in manufactured goods is with Ireland, a nation twice as densely populated as the U.S. Our per capita deficit with Ireland is twenty-five times worse than China's. My point is not that our deficit with China isn't a problem, but rather that it's exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one sixth of the world's population.

Ricardo's principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.

If you‘re interested in learning more about this important new economic theory, then I invite you to visit my web site at OpenWindowPublishingCo.com where you can read the preface for free, join in the blog discussion and, of course, buy the book if you like. (It's also available at Amazon.com.)

Please forgive me for the somewhat "spammish" nature of the previous paragraph, but I don't know how else to inject this new theory into the debate about trade without drawing attention to the book that explains the theory.

Pete Murphy
Author, Five Short Blasts

7/30/2008 12:18:00 am  
Anonymous Sean said...

Pete,

This is not a new theory. This is a hodge-podge of Malthus's theory on population and Keynes view that recessions are caused by under consumption. Both are economic nonsense.

7/30/2008 01:03:00 pm  
Anonymous LGM said...

Sean

I spent a little time on the Pete Murphy site yesterday. It didn't take long to confirm that your summation is correct. His theory is nonsense. Basically this guy wants to tax imports into the USA according to an arbitrary calculation. It all boils down to more big govt control, more regulation and legislative interferences, more technocrats and bureaucrats calculating and planning, more forcible expropriations of resource and other people's wealth and time. more "make them do what I want or else". He's reinvented a form of national socialism and attempts to justify it on the basis of a coincidental correlation of statistics with an arbitrary assertion. How banal.

LGM

7/31/2008 06:49:00 am  

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