My article The Unsustainability of U.S. Trade Deficits has just been published in The Economists’ Voice along with a piece on government deficits by Ronald McKinnon. Although relatively new and oriented to a general audience, EV looks like being a high-powered journal, having already published Stiglitz, Posner and Akerlof among others, so I’m pretty pleased to have made it into volume 1. Thanks to everyone here and on my blog who helped me to sharpen my arguments on this topic.
Update One point in my piece that I thought was at least modestly novel was my observation that the US government has been shortening the term of the Treasury securities (bonds, notes and bills) it issues. Now, via Brad DeLong, I see that Nouriel Roubini has just covered the same issue in a lot more detail, offering what he describes as “A Nightmare Hard Landing Scenario for the US $ and the US Bond Market..”. And you all thought I was bearish.
{ 22 comments }
Darren 12.22.04 at 12:15 pm
Hasn’t this been done by every investment/finance webpage for the last couple of years? What is said in here that is different? (I don’t mean to be a snide but …).
pedro 12.22.04 at 2:39 pm
Congratulations John. And thanks for being nice to commenters, even those who don’t deserve it. Some of your CT colleagues can be quite condescending sometimes. I prefer both your civility and D^2’s endearing bluntness.
lth 12.22.04 at 3:19 pm
Good read, John, pitched just right for my beginner-economist abilities.
Andrew Boucher 12.22.04 at 4:12 pm
The argument that China might sell its U.S. holdings should there be some kind of foreign-policy spat seems to put on the onus of the U.S. to avoid a “dollar crash”. Why? China is not able magically to sell its dollar holdings at existing prices and then sit back and watch the dollar crash. On the contrary, if it tries to sell any significant part of its holdings, it will be selling while a crash is on, and thus will suffer a huge financial loss.
If you owe a bank 1000 dollars, its your problem. If you owe one trillion dollars, it’s the bank’s problem.
The best China is likely to do, is stop accumulating dollar reserves, meaning that it will take the new dollars the U.S. sends them and convert them immediately into euros and yen.
Hee Hate Me 12.22.04 at 5:18 pm
If China stops accumulating dollars then the dollar will crash anyway.
I think that there must be tempting for the nations with smaller dollar reserves to sell now, even thought it will strengthen their currency.
Deb Frisch 12.22.04 at 5:34 pm
Posner’s a dolt (see blog). So is Akerlof, as far as I can tell. He gave a talk at the National Science Foundation when I was there and the audience totally trashed him.
He allegedly was incorporating insights from other social sciences (psychology, sociology, criminology) into economic theory. But the experts in each of the imported domains thought his understanding was unbelievably shallow.
For example, the psychologists he cited were Freud and Sherif. He didn’t cite Kahneman, his colleague at Berkeley for 10 or 20 years. His understanding of psychology was based on 50 year old psychologists.
The criminologists and sociologists had similar critiques.
This is fairly common among economists – they get a very superficial and/or outdated understanding of another field and think they’ve got it.
But as far as I know, Stiglitz is a sharp cookie.
asg 12.22.04 at 6:30 pm
It’s also fairly common among critics of economists — in fact, I’d say economics is the field most often victim to people who think they understand it because they’ve mastered other difficult-to-understand disciplines.
ded fisch 12.22.04 at 6:31 pm
Wow, I’m sure Stiglitz will be _so_ relieved to have _your_ support Deb….
Meanwhile, congrats to John on his achievement.
don f 12.22.04 at 7:03 pm
John:
Very nicely done, and a good summary of the issues. One wonders at the distributional implications of a large crash in the dollar (apart from homeowners, which you mention).
Two sort-of quibbles: 1) I have always viewed the Plaza Accord (in late Septemeber, 1985) as more of a ratifier than initiator of the dollar depreciation. Both the yen and the D-mark had peaked versus the dollar in February. Granted, the decline in the dollar accelerated after Plaza, but the handwriting was on the wall.
2) On page 7, para. 2 of your article, do you really mean to say “depreciation” of the yen? Should it not mean “appreciation” (as applied to post-Plaza).
I enjoy your work and your worldview.
abb1 12.22.04 at 7:09 pm
The argument that China might sell its U.S. holdings should there be some kind of foreign-policy spat seems to put on the onus of the U.S. to avoid a “dollar crashâ€. Why? China is not able magically to sell its dollar holdings at existing prices and then sit back and watch the dollar crash. On the contrary, if it tries to sell any significant part of its holdings, it will be selling while a crash is on, and thus will suffer a huge financial loss.
What good are the holdings you can’t sell, anyway? I think if the time comes when the dollar is hanging on a thread (or maybe it has come already), they may as well write it off as economic asset and use it as political leverage. Invade Taiwan with impunity, for example – may be worth a few truckloads of paper that’s about to become useless.
Andrew Boucher 12.22.04 at 9:24 pm
If China were to invade Taiwan, then the U.S. would gain control over Taiwan’s foreign-exchange reserves, since any government-in-exile would almost certainly be based in the U.S. They’re not quite as huge as China’s but nothing to sneeze about.
Deb Frisch 12.22.04 at 9:50 pm
Dear as*:
That’s what economists would love to think, I suppose. Anyone who criticizes economics must not get it. An unfalsifiable statement. Exactly what you’d expect from the fellows who brought us “rational choice theory.”
BigMac Attack 12.22.04 at 10:29 pm
Does China really have a trillion dollars in US dollars in a tin can some where?
That can’t be right can it? I mean is their income that great that they can afford to save a trillion US dollars. I must be missing something.
What if they spent 100 billion a year over 10 years?
Wouldn’t that alleviate the trade deficit by about 20% per year?
Wouldn’t that make more sense than letting their dollars and their other US investments become worthless?
Is the US economy at full employment? Don’t firms have excess capacity?
Wouldn’t the same thing make sense for a number of other Asian nations?
How much would that alleviate the trade deficit over 10 years?
How much gentler would that make any adjustment?
Tracy 12.23.04 at 9:21 am
Dear Deb,
There are quite a few people who comment on economic matters without bothering to grasp the most basic of economic’s ideas – e.g. opportunity cost, marginal utility. People happily commit the broken window fallacy, or assume that the more work and the less labour-saving devices the better. One of my favourites was an argument that higher land prices would be a positive externality – the author had not taken the next step of thinking that if one person was getting an extra $1000 per acre then someone else must be paying an extra $1000 an acre, and thus there would be no extra wealth floating around. (You can construct more sophisticated arguments that could lead from land prices to external impacts on society, the author though had not, and frankly I can’t think of a sensible argument that goes from higher land prices in themselves to a positive externality).
It’s possible to criticise economics intelligently (though I don’t know how you could disprove some concepts like opportunity cost or marginal utility). It’s the people who criticise without showing the slightest sign of awareness that economics may have already addressed their point who provoke either laughter or irritation amongst economists. It’s the difference between e.g. saying that we should be concerned about US competition as the theory of comparative advantage does not apply here for the following reasons, and saying that the US is more productive than us at everything and there will be no work left for us.
John Quiggin 12.23.04 at 12:18 pm
Don. Thanks for the alert on “depreciation” – this kind of error is typical for me unfortunatley.
I’ll try to get this fixed, although I was made to swear in blood that my submission was final. I sort-of agree about the Plaza Accords, but I think the Accords helped to provide stiffening for the necessary policy adjustments, such as Reagan’s tax increases.
Tracy 12.23.04 at 3:52 pm
BTW, congratulations on your paper being published.
BigMacAttack 12.23.04 at 5:01 pm
I knew that couldn’t be right. I think the context lead me astray. It’s 158 billion in dollar reserves.
‘The Chinese central bank will soon hold the better part of a trillion dollars in U.S. government bonds. Even minor unpleasantness in foreign policy would create strong pressure for the Bank of China to diversify some of its existing holdings into yen and euros. To avoid a resulting dollar crash, it would be necessary to mollify the Chinese government. Could this be an acceptable situation for the United States?’
See it mentions the trillion number and than segues into China’s ability to create a dollar crash. But I don’t think the trillion dollars in bonds gives the Chinese any ability to crash the dollar.(To raise interest rates but not to crash the dollar and not really even that.) That ability is limited to their dollar reserves and their purchase of new bonds.
And really not even their willingness to purchase new bonds. Since an interest rate rise would very easily fix that. All of that assumes the US would be incapable or unwilling during a period of geopolitical unpleasantness to balance the budget.
On top of which we would have to believe that China would be unaware that the US could in retaliation repudiate it’s 1 trillion in bonds and eliminate it’s 150 billion dollars in annual trade and 124 billion dollar surplus.
So, ‘Geopolitical objections are even more serious.’, yea for China.
I am thinking that side trip into geopolitical considerations is confusing, not really thought out, and doesn’t belong.
Deb Frisch 12.24.04 at 3:15 am
Tracy: There are quite a few people who comment on economic matters without bothering to grasp the most basic of economic’s ideas – e.g. opportunity cost, marginal utility. People happily commit the broken window fallacy, or assume that the more work and the less labour-saving devices the better.
It’s possible to criticise economics intelligently (though I don’t know how you could disprove some concepts like opportunity cost or marginal utility).
Deb: The fact that some criticisms of economics are false alarms doesn’t imply that all are false alarms.
I’m not quite sure what you mean by “disproving a concept” such as opportunity cost or marginal utility. In general, scientists talk about proving or disproving theories, not concepts.
Economists have a theory that all risk aversion is due to diminishing marginal utility. Matthew Rabin claims to have disproved this theory, although there is growing realization that his 2000 Econometrica paper and his 2001 Journal of Economic Perspectives paper with Dick Thaler are comedies of mathematical errors.
What exactly do you mean by proving or disproving a concept?
Tracy 12.24.04 at 9:11 am
Deb,
By disproving or proving a concept I mean disproving mathematically. Though you could possibly attack some economic concepts by the way of physics too.
In some ways I do think economics is as much a way of looking at the world as a science. We all know that if you use a resource to do something that limits the other things you can do with the resource (opportunity cost). We all know that the same mouthful of good food is considerably more pleasurable when you’re hungry than when you’re full (marginal utility). But it’s amazing how many non-economists ignore these concepts in making policy proposals, e.g. saying that schools should teach computers without mentioning what subject should be dropped in order to do so (or the school day extended). Also, somehow, possibly as a result of all those supply & demand graphs, economists tend to wind up thinking more about both sides to the transaction, the house-buyer as well as the house-seller. Somehow us humans generally need explicit training to take these into account in our day-to-day thinking.
Of course there are economic theories that have been disproved, e.g. I remember a lecture on decision-making under uncertainty where the lecturer started off deriving the standard model of expected utility from basic utility-maximising theories and then went over the empirical evidence (including some tests on us, an even tighter connection between theories and labs than engineering school managed) that people don’t act that way and covered some theories that attempt to provide a more accurate explanation of actual behaviour. Or the idea that there is a stable relationship between inflation and unemployment, which was disproved in the 1970s.
Asg was saying that he thinks economics is the field most often victim to people who criticise without understanding it at all. This does not imply logically that Asg believes that all attacks on economics are false alarms, or even that most attacks are false alarms.
Deb Frisch 12.24.04 at 10:12 am
Tracy: By disproving or proving a concept I mean disproving mathematically.
I still have no idea what you mean. Mathematics provides a way to precisely define a concept. It does not provide a way to prove or disprove a “concept.”
What would it mean to disprove “opportunity cost” or “marginal utility?” You refer to the large body of empirical evidence showing that expected utility theory is false. But the vast majority of economists still pretend its true.
The fact that you think a concept is something that can be proved or disproved and that the way you do it is by “math” makes me think you do not have a grasp on what makes something science. Economists think that if it’s mathy, it’s science. This isn’t true.
I guess it’s possible to convert your concepts into hypotheses.
1. All actions have direct costs AND opportunity costs.
2. There is diminishing marginal utility of money and other goods.
In general, I’d agree with these claims.
Ian Welsh 12.24.04 at 4:10 pm
Marginal utility does not always decrease. Humans are not rational. The laws of supply and demand are not laws. Ricardo himself said that comparative advantage did not work in all circumstances. Premises used as the besis of a mathematical or logical system cannot be disproved by those systems. If the baseline assumptions of a system are inaccurate, the further up the chain you move in logic or math, the more incorrect your conclusions will become (as a rule).
Most economists would have benefited from a few classes in epistimology and metaphysics and a few less in math.
Economics has many insights which are useful, but it’s not a science as practised by most economists – using math doesn’t make something scientific.
That said, congratulations on the paper, the duration point was a good one.
Deb 12.24.04 at 4:40 pm
Ian,
I think most economists could use a few more real math courses but other than that, I agree 110% with your post.
Note: Before all you ankle-biters (e.g., as*, alex, dedfisch) mock, diss and dismiss me for not knowing that a subjective probability judgment can’t be greater than 100, the 110% above was a joke.
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