In my previous post on US trade, I argued that if the current account deficit is to be stabilised at a sustainable level, the balance of trade on goods and services must return to surplus in the next decade or so. In this post, I’m going to ruIe out a soft option and argue that, while a smooth market-driven adjustment is not inconceivable, it’s unlikely.
From the category archives:
Economics/Finance
I found this story of globalisation and soft power at charlotte street, via bertramonline. As bertram says, you can’t make this kind of thing up.
I had a look at related issues in this piece
I was surprised in the discussion of Anne Alstott’s No Exit to find so much enthusiasm for means-tested benefits which, I suppose, reveals more about me and the company I keep than about anything else. I am not completely opposed to means-testing: in some areas of policy, for example funding higher education, I think it can be an effective tool for benefiting the less advantaged. And sometimes it is, given the political constraints, the best that you can do in lousy circumstances. But as a general matter universal benefits are better, and more egalitarian, than means-tested benefits. I was going to write up a lecturely account of why, after that discussion, but fortunately got distracted by summery things like making Bakewell Tarts and hanging out with my kids. And a good thing too, because Shlomi Segall has subsequently published a nice brief account of the general reasons why people like me prefer universal benefits. I’ll add one thing that Segall does not emphasize: the perverse incentives of means-testing. So, for example, the UK government’s decision to rely on the means-tested Income Guarantee Support as a top-up for the state pension introduces a disincentive to save for those nearing retirement age who think they might need it; and the old AFDC in the US reduced dollar-for-dollar as recipients earned income; recipients faced an effective marginal tax rate of 100% which even lefties like me can see might be a disincentive to work. But Segall makes the rest of the case briefly, and has thereby saved me a lot of work (which I was evidently too lazy to do anyway).
I was looking at the latest US trade figures from the Bureau of Economic Analysis and thought, rather unoriginally, that this is an unsustainable trend. Despite the decline in the value of the US dollar against most major currencies[1], the US balance of trade in goods and services hit a record deficit of $55 billion (annualised, this would be about 6 per cent of Gross Domestic Product) in June. The deficit has grown fairly steadily, and this trend shows no obvious signs of reversal, at least unless oil prices fall sharply.
This naturally, and still rather unoriginally, led me to the aphorism, attributed to Herbert Stein “If a trend can’t be sustained forever it won’t be”. Sustained large deficits on goods and services eventually imply unbounded growth in indebtedness, and exploding current account deficits[2], as compound interest works its magic. So, if the current account deficit is to be stabilised relative to GDP, trade in goods and services must sooner or later return to balance or (if the real interest rate is higher than the rate of economic growth) surplus
But forever is a long time. Before worrying about trends that can’t be sustained forever, it is worth thinking about how long they can be sustained, and what the adjustment process will be.
Gosh, I remember this from my small collection of BCCI books, but had never realised it was the same John Kerry. This really ought to count in peoples’ minds a lot more than any tales of heroics in Vietnam. The fact that George W Bush borrowed money from BCCI in 1987 but John Kerry launched the investigation in 1988 that eventually brought them down really says about all you need to know about the character of the two men. BCCI was a really quite extraordinarily bad organisation and Kerry’s investigation opened the eyes of the whole world to the extent that it was possible to get away with corruption in high-quality financial centres. It was about this time, by the way, that the liberal media of the USA were smearing Gary Webb as a “crackpot conspiracy theorist” for reporting, accurately, on the fact that politically well-connected Nicaraguans were being allowed to get off easily on cocaine smuggling charges. The Washington Monthly story is well worth a read.
Link comes via Atrios, btw, who obviously needs the vast publicity that a CT link can generate.
I’m pretty sure that it was JK Galbraith (with an outside chance that it was Bhagwati) who noted that there is one and only one successful tactic to use, should you happen to get into an argument with Milton Friedman about economics. That is, you listen out for the words “Let us assume” or “Let’s suppose” and immediately jump in and say “No, let’s not assume that”. The point being that if you give away the starting assumptions, Friedman’s reasoning will almost always carry you away to the conclusion he wants to reach with no further opportunities to object, but that if you examine the assumptions carefully, there’s usually one of them which provides the function of a great big rug under which all the points you might want to make have been pre-swept.
A few CT mates appear to be floundering badly over this Law & Economics post at Marginal Revolution on the subject of why it’s a bad idea to have minimum standards for rented accommodation. (Atrios is doing a bit better). So I thought I’d use it as an object lesson in applying the Milton Friedman technique.
“Daniel Drezner”:http://www.danieldrezner.com/archives/001578.html posts an extract from a _Wall Street Journal_ article (subscription only, and I don’t have a subscription), suggesting both that there is a serious shortage of skilled machinists in the US, and that “U.S. apprenticeship programs have dwindled as the large American companies that once provided the bulk of such training have cut back to save money and now outsource some of the work.” As I’ve noted “before”:https://www.crookedtimber.org/archives/000689.html, there’s a serious case to be made that both these problems reflect underlying weaknesses in the US model of capitalism.
Paul Beard writes to ask what the economists and social scientists at Crooked Timber think of this interview with economist Ray C. Fair. His model that is predicting that Bush will get 57.5% of the 2-party votes.
Well, the economists and social scientists at Crooked Timber are in bed, so I’ll try. Here’s the model and relevant webpage. Fair is a Yale professor who has been tweaking his model, and successfully publishing papers on it, since 1978. I am a lowly uncredentialed blogger who has spent less than an hour looking at said papers. If I were a betting man, I’d have to bet that Fair is right and I’m wrong when I raise a criticism. If I’m lucky, maybe he’ll respond to my email and humiliate me in comments.
Having said that, a few comments:
The WashPost runs an Op-Ed piece byPradeep Chhibber and Ken Kollman, claiming that the failure of third parties to do well in the US is due, not to plurality voting or other institutional factors but to excessive political centralisation. The claim is that since third parties
once competed successfully in congressional elections, winning significant portions of the popular vote and often gaining seats in Congress. This was true for most of the 19th century and even the early part of the 20th
the cause of their subsequent failure must be something new – political centralisation[1].
Chhibber and Kollman seem to be well-regarded political scientists. But their argument here is riddled with errors, or at least large logical gaps.
Brad de Long points to a piece on the equity premium by Marty Weitzman and says,
Marty Weitzman is smarter than I am …This is brilliant. I should have seen this. I should have seen this sixteen years ago. I *almost* saw this sixteen years ago.
Weitzman’s idea[1] is the replace the sample distributions of returns on equity and debt with reasonable Bayesian subjective distributions. These have much fatter tails, allowing for a higher risk premium, lower risk free rate and higher volatility, in the context of a socially optimal market outcome. Here are some of the reasons why this is important
My immediate reaction is the same as Brad’s. Something like this has occurred to me too, but I’ve never thought hard enough or cleverly enough about it how to work it out properly. This is a very impressive achievement, and Marty Weitzman is very, very smart (which we already knew).
I looked this one up for an argument in comments to Belle’s post below, and I’ve been laughing and crying ever since. It’s a useful way to think about the extent to which “trickle down” economics has worked for the poorest in society. As we all know because people who know we’ve read Rawls keep telling us, the poorest benefit from economic growth. How much do they benefit?
The Onion “TechCentralStation”:http://www.techcentralstation.com/080904D.html on unleashing the power of the free market to capture Osama Bin Laden. Priceless!
Due to a sudden period of enforced idleness, my insomnia is back (my previous schedule of working five caffeine-fuelled 14 hour days a week and recovering at the weekend had cured it nicely. I can recommend this method to anyone although to be honest, my doctor frowned on it). As a result, I find myself thinking about the aggregativity of capital, labour theories of value, and so on. I therefore pass on this small question which may be of some amusement to those of our readership who indulge in either cannabis or value theory; the two groups may find it equally interesting.
If you had all the wealth in the world, ie you owned every single object of value that was known to humanity ….
what would you spend it on?
I’m preparing an introductory course on game theory at the moment, and selecting readings for the week on communication and games of limited information. One of the key contributors to this literature is Joseph Farrell (no relation) who has done seminal work on how “cheap talk” (costless communication) may affect rational actors’ behaviour when it conveys useful information about an actor’s type. He also shows that “babbling equilibria” are always possible, in which actors’ communication conveys no information about their type whatsoever, and is consequently always ignored by others. This seems to be a rather abstruse argument with little real world relevance – but I reckon that one nice way to bring it home to my students is to point to how it helps explain DC taxi-cabs. In many (perhaps most) cities, cabs use their cab-sign to signal whether they are available or not. A lighted cab-sign indicates that the taxi-cab is free; an unlighted sign indicates that the cab is occupied. Washington DC, for some reason, is different. As far as I can tell, whether or not a cab’s sign is lighted bears no relationship to whether it is occupied. Thus, after some initial confusion, newcomers learn to ignore whether the cab has a lighted sign or not, instead squinting as best they can into the interior, to see whether they can spot any passengers. This is about as close to a babbling equilibrium as one may reasonably expect to find in the real world. How this came about in DC, and not in other American cities, is anyone’s guess.
“Hunt Stilwell”:http://schemata.typepad.com/ has let me know via email that the “Netflix fallacy”:https://www.crookedtimber.org/archives/002236.html that I talked about last week seems to replicate a very interesting experiment on the psychology of intertemporal decision-making. His email (with permission, and some light editing) is reproduced under the fold.