Quick take on today’s US trade data
A key reason the US October trade deficit went up not down is a rise in the volume of US oil imports.
Oil imports were down 14% in volume terms in September and were up a bit over 2% in October. That is noise. The 3m rolling average for oil import volumes is still down 6% y/y — and the y/y fall is around 5%. But the rise in volume offset the fall in price (the average price of imported oil fell from over $107 a barrel to $92 a barrel), so the petrol deficit rose by $0.8b to $32.7 billion in October.
The good news is that the average price of imported oil still has a lot further to fall. I would guess that the 2008 petrol deficit (netting exports out) will be close to $400 billion. It could fall to $200-250 billion in 2009.
The bad news is that October exports were down $3b from September — and down $16b from their July peak. They almost certainly will fall more. The constellation that supported strong US export growth — strong global growth and a weak dollar — has disappeared. The really bad news is that real export growth is slowing faster than real import growth.
A longer time series shows the recent downturn in “real” exports and imports clearly.
The real deficit in October was over $46b — v $40b in q3 (this data is presented in 2000 dollars– it should not be compared to the nominal numbers, only to other “real” numbers). If the current trend continues and exports volumes shrink more than imports, net exports might even subtract from US growth in q4. Then again, the big fall in Chinese exports in November suggests that the pace of the fall in US imports could accelerate …
UPDATE:
As one would expect given the real data, nominal non-oil export growth is slowing more rapidly than nominal non-oil import growth.
And just in case there was any doubt, the non-oil trade deficit has started to expand in the past few months. If that continues, it is very bad news for the US indeed — even if the overall deficit shrinks as the petrol deficit falls.
Thanks to Arpana Pandey for help with the graphs,.
That brings me to a couple of additional points. Michael Pettis (note the new URL for his blog) has been emphasizing how the differences in scale (the US is 3 to 4 times the size of China) interact with China’s greater export dependence in ways that make a US slump especially bad for China. He is right.
But I would argue that his argument should be refined in two ways:
a) Much depends on what else is going in in the world. The US has been slowing for a while, and Chinese exports to the US weren’t growing even before the recent downturn. That didn’t matter to China so long as the US slump pushed the dollar (and the RMB) down and China could offset slow growth in its US exports with rapid growth in its exports to another large economic block — Europe. But now the RMB is up v the euro and both the US and Europe are slowing. So an economic block that is roughly 8 times China’s size (and whose consumption would be more than 8 times the size of China’s consumption) is slowing — which is bound to hurt China given that China’s pattern of growth over the past six to eight years has dramatically increased its exposure to the global cycle (look at the chart showing Chinese y/y export growth in $ billion in my previous post).
b) The argument really hinges on what happens to US non-oil imports, not the US trade deficit. The US trade deficit could fall if the oil deficit fell without impacting China much. Similarly if falling exports and imports keep the US non-oil deficit constant (or even increase it), China would still be hurt. What matters for China’s export sector is the growth in US (and EU) imports. China now has a big enough global market share that it is increasingly difficult for China to offset a big fall in overall demand by increasing its market share. That is a big difference between now and 2000 …
Do “import goods” include oil?
If not, do you have any thoughts on *why* non-oil exports are falling faster than non-oil imports? That’s different from past recession, I believe.
Interesting exchange with Menzie Chinn. What do you think are the biggest issues? For example, I believe that balance of trade is the biggest issue facing the US economy. The housing bubble and the credit crisis are mere side effects of the trade imbalances.
import goods should be import goods ex oil — tho is is in real terms, so oil is not as big a factor. as for why non-oil exports are falling, easy: this is a global not a US recession now.
The dollar’s strength being somewhat artificial, a result of high demand for dollar assets (read: Treasuries) and China based currency intervention, someone in U.S. Government might want to start thinking about how we deal with the markedly weaker dollar which could be just around the corner.
Obviously it would be good for import balances (I’d love to know how much of the trade deficit is based on preferences and how much on currency imbalances), but certain holders of U.S. Dollar assets may be annoyed.
I have been reading Betser’s blog for years, and the report of exports larger than imports being a blip rather than a trend has been repeated over and over again.
The long term trend is imports more than exports. That is not an accident. Japan and all the Asian countries that have had enough sense to follow the Japanese model, arrange EVERYTHING so as to maintain a trade surplus with the U.S.
No use trying to “negotiate” any other result. They know what they want; they know that a trade surplus with the U.S. has enabled their economies to grow faster than would be the case with equal trade. I do not blame them for taking care of their country.
What upsets me is the unwillingness of economists, residents of the U.S., who cannot bring themselves to question any part of the writings of Adam Smith.
Test
Do imports fall faster than exports, in past recessions?
I don’t know. But I know of one vivid case, where a recession coincided with appreciation of the dollar which then caused exports to decline. Maybe the answer depends upon what happens to the value of the dollar during a recession and whether some other factor is stronger than value of the currency.
Don’t know about all recessions. The classic case of appreciation causing a decline in exports is provided by the aftermath of the recession of 1980 and 1982 (1981 was a growth year).
Remember Paul Volker cranked up U.S. interest rates in 1979 to combat inflation. He broke the back of inflation but he also broke the back of the growth of the economy.
By 1980, interest rates were still high, but the economy was declining. Inflation was also declining, big time. The high interest rates at the beginning of the decade combined with decline in inflation caused the dollar to appreciate in value, despite the recession of 1980 and 1982. After 1983, the rapid growth of the U.S. economy fuelled any even more rapid increase in the value of the dollar. It kept growing until 1985, when it reached a peak (real, trade weighted broad index) much beyond any peak before or since.
Goods exports in 1981 had a numeric nominal value of 237 billion. DURING THE NEXT FIVE YEARS, THE VALUE OF GOODS EXPORTS WAS BELOW 237 BILLION. Up until 1982, goods exports grew every year, compared with the previous year, all the way back to 1960.
The lack of growth in exports was an anomaly, explained by the appreciation of the value of the dollar.
ReformerRay: What upsets me is the unwillingness of economists, residents of the U.S., who cannot bring themselves to question any part of the writings of Adam Smith.
Actually it’s David Ricardo and not Adam Smith that invented the idea of comparative advantage.
I think you are missing the big picture.
There is no reason for me to believe either Adam Smith or Karl Marx or anyone else. I take a look at my own life and my own job and then see who makes sense. I look at the sky, and if someone says that it is purple but I see blue, then that someone has to do some explaining why I’m seeing something different.
Anyway in my life and in the lives of people that I know, trade, even highly deficit trade is an extremely good thing. I see that they sky is blue, and when you are saying that a trade deficit is this massively awful thing, I’m not seeing it in my life and my job. So for you to have any credibility, you have to come up with an explanation for why that is. The closest thing is “class warfare” in which trade is causing an overall economic loss, and that the few are benefiting off of the many.
But if that were the case, you ought to be able to find the “many” and they should naturally agree with you. This isn’t happening, and if there were a few rich banks benefiting from trade at the expense of the vast majority of Americans, you should be able to give me the means of five (or rather 100) Congressman that have made their political careers out of being anti-trade, and by anti-trade, I don’t mean an ambiguous line in a speech that means different things to different people.
I mean big campaign posters that say “VOTE FOR ME AND I’LL TAKE THE US OUT OF WTO” and “RAISE TARIFFS.” The very fact that politicians when they are anti-trade talk in such ambiguous terms should tell you something.
Also, pointing to the recent crash doesn’t do it. There has been a trade deficit for at least a generation through boom and bust, and saying that the trade deficit causes current economic problems is like saying that gravity or oxygen is causing the current economic problems. You have to come up with a reason why things didn’t blow up twenty years ago.
There is no reason a priori to believe either Adam Smith, Karl
@Brad,
A bit of an off-topic question, apologies if you did touch on it previously…
The FED has asked Congress for the right to issue bonds dominated in foreign currencies. Not so long ago the Japaneses were suggesting the US treasury to do just that. Do you think these are related? In your view, is it a sensible idea? Also if the Fed does issues yen or euro dominated bonds do you see any significant impact on the dollar and treasury bonds?
did the fed ask for the ability to issue bonds in fx or just bonds? if it is in fx, could you paste in a link.
2fish — the recent deficits were larger in size than past deficits, and unlike past deficits didn’t correlate with an increase in private demand for US assets. Nor did it correspond with an increase in investment in the US economy — rather it was linked to a rise in consumption/ fall in savings (both by the government and households). For many — setting aside those who work in the tradables sector/ compete with labor released from tradables – the rise in consumption felt good. But debt ultimately has to be paid back.
Plus the process that led to the deficit — very low long-term rates b/c of artificial central bank demand — induced a lot of other distortions in the us economy and financial sector, distortions that in my view contributed to the current crisis.
given all that has happened, i find it hard to argue that the large deficits financed by CBs were a good thing …
…it could depend on what such new currency, sorry bonds, were backed by…
The benefits of globalization is not equally distributed between winners and losers in both US and China. The income gap between rich and poor has never been larger than any time in history. The system is also extreme volatile. If a country depends on importing food and energy to satisfy its basic needs, it is a disaster in current environment. US is probably OK to deal with the crisis by tightening their bellies up. Some developing countries will have hard to feed their people. China is a big challenge with its huge population base but probably OK if their is no major natural disasters.
Anyway, I don’t know if economists have any power or influences to change the course of economy. Especially in the US, the belief that market is better able to allocate resources than public hands is so deeply rooted. All rescues packages come from the principle of top to bottom approach such as “too big to fail”, “too important to fail”. The effectiveness of this philosophy is still not challenged much in public.
Who is going to decide which industry is important to save?
Voters has no clue about it except short term self interest in the industry they are working with.
Politicians have no ideas about it.
Economists can only guess about it based on historic data but have no clue about it either.
Only the market can decide whether the industry is excessive or not.
The simple remedy is to let the market play it out as quick as possible while providing social safety net to the most innocent and disadvantaged people.
I agree with RR that US need to get to the bottom as quick as possible.
Lots of good stuff here. The market should decide which industry survives and which industry goes down. Rather, which firms survive. Must have some firms in the financial sector. But we don’t need all of the ones that currently exist. AIG and Citigroup should have been toast by now. No more funds to them or to any other firm in the financial industry. Those guys should reap what they have sowed.
My desire to see the market determine which firms survives in the U.S. does not extend to the question of whether to buy from China or the U.S. The “market”currently decrees to buy more from China.
China has a need to take care of China. The U.S. has a need to take care of the U.S.
I view the needs to those two countries in terms of their Gross National Product. That is because I believe, along with Adam Smith, that the wealth of a nation is controlled or determined by the quality and quantity of goods and services produced by the domestic economy.
Equal trade requires exports and hence Gross Domestic Product to grow by an equal amount in each country because the amount exported from each country is equal. This is the beauty of trade.
When one country has a trade surplus, that countries GDP must increase by the amount needed to get to equal trade, plus the amount needed to produce the extra product that is exported to create the surplus. Thus, a trade surplus requires the GDP to grow faster than equal trade. Equal trade requires the GDP to grow faster than no trade.
A trade deficit requires the GDP to grow slower than it would with equal trade.
Twofish wants me to deal with this issue on an individual level. Can’t be done. A trade deficit is a characteristic of a nation. Nations have special characteristics and needs. One of those needs, of high priority right now, is to maintain a dynamic and growing economy.
A trade deficit is bad because it inhibits the growth potential of a nation.
bsetser: Plus the process that led to the deficit — very low long-term rates b/c of artificial central bank demand — induced a lot of other distortions in the us economy and financial sector, distortions that in my view contributed to the current crisis.
The use of money rather than barter contributed to the crisis. Yes, cheap money was part of the problem, but it wasn’t the essential cause of the mess.
The problem was not the cheap money, but what was done with the cheap money. You can take cheap money and invest it in things like health, education, infrastructure, new businesses. Look at the dot-com’s, there was a tremendous amount of investment in start-ups most of whom went bust, but the few that survived were able to generate enough wealth to cover the loses and then some.
So had the cheap foreign money been invested in something useful like better universities or health or clean energy, there would have been enough money to pay back the debt and then some. But the basic problem was that the debt was used to buy things (real estate) that didn’t provide any economic return.
That’s the basic problem.
bsetser: Plus the process that led to the deficit — very low long-term rates b/c of artificial central bank demand — induced a lot of other distortions in the us economy and financial sector, distortions that in my view contributed to the current crisis.
I don’t think so, because I don’t think the demand was artificial. If it were then why are we seeing negative interest rates, and why are people now lining up to buy treasuries? The crisis has increased the dollar strength and lowered interest rates, which is the opposite of what you would expect if you use the “balance model.”
The thing problem with the “balance model” is that if it held, you would expect things to move back to equilibrium once the crisis hits, and I suspect that next year, things will move even more in the direction of “distortion.” I strongly suspect that next years trade deficits and budget deficits are going to be far far larger than this years, because the problem is not getting cheap money, the problem is what was done with it.
Ying: Who is going to decide which industry is important to save?
In the United States, it’s Congress and the Cabinet. In China, it will be the State Council and the Politburo.
Ying: Voters has no clue about it except short term self interest in the industry they are working with.
Voters are sometimes far, far more clueful than politicians and academics. In any case, this is why you have a political process. You get everyone in a room representing their interests, and you have lots of screaming, compromises, handshakes, deals before something comes out.
What comes out usually is reasonable for the people that made the deals, which is why it is important that you get yourself in the rooms were the deals are being made.
Ying: Only the market can decide whether the industry is excessive or not.
No. You can have central planning. It doesn’t work very well, but the market is not the only option. It turns out that markets are good for some things, horrible for others, and worshiping the market economics is as bad as worshiping central planning. If it works, use it. If it doesn’t work, fix it. It’s not working.
brad, what do you think of the idea that the us government should (a) borrow as much and as quickly and as cheaply as possible while the treasury bubble continues, and then (b) engineer a devaluation of the dollar (through talk, currency market intervention, protectionist tax/reg measures and/or simply promising to keep borrowing until an exchange rate target is reached)?
“I don’t mean an ambiguous line in a speech that means different things to different people.
I mean big campaign posters that say “VOTE FOR ME AND I’LL TAKE THE US OUT OF WTO” and “RAISE TARIFFS.” The very fact that politicians when they are anti-trade talk in such ambiguous terms should tell you something”.
Twofish is accurate. No politician advocates a real change in U.S. trade posture as effective as my prescription. My interpretation of that reality is different. I think generations of college kids have been brainwashed to believe that free trade is always, everywhere and under all conditions better than an restrictions on imports.
I recognize that politicians do not slavishly follow the advice of economists when it disagrees with their understanding of what their constituents want.
But they are slavishly following the teaching of International Trade Textbook. (I must qualify that statement by admitting that I have studied only one International Trade Textbook, the 1994, third edition of International Economics by Krugman and Obstfeld). But their exposition is so confident and unqualified that I believe they represent what other textbooks said at the time. And it is textbook written in the nineties that formed the world view of people like Robert Ruben and Bill Clinton and George Bush.
ReformerRay: When one country has a trade surplus, that countries GDP must increase by the amount needed to get to equal trade, plus the amount needed to produce the extra product that is exported to create the surplus.
And I’d argue that trade produce so much extra wealth through comparative advantage, that the GDP increases by more than the loss due to the trade imbalance.
So the US can live with a $250 billion/year trade deficit, if that deficit allows the US to generate an extra $1 trillion/year of wealth internally. Whether this is happening is something you can’t see from just the trade numbers. But the mechanics of the market makes it likely that this is happening.
When a US company outsources a plant to China or buys a Chinese product, it’s because they think they can make more money for the US company putting the plant in China than putting the plant in the United States. So it’s likely that having a trade deficit is generating more wealth than you are losing from the deficit itself.
If it wasn’t then you have the question of why are there not more people angry about it. If you have a situation in which $250 billion gets sent to China and no one makes any extra money, then you will have a lot of people in the US losing from the deal. Conversely if trade with China is causing domestic wealth to increase, then this explains why there isn’t more public outcry.
Q ualification – I should say “no politician who has had success” has advocated …..
A man named Davis in upstate New York ran on an anti-trade ticket but he was defeated.
ReformerRay: I think generations of college kids have been brainwashed to believe that free trade is always, everywhere and under all conditions better than an restrictions on imports.
Brainwashing stops working when you end up unemployed. People vote their self-interest, and when self-interest goes against textbooks, then the textbooks get thrown away.
ReformerRay: But they are slavishly following the teaching of International Trade Textbook. (I must qualify that statement by admitting that I have studied only one International Trade Textbook, the 1994, third edition of International Economics by Krugman and Obstfeld). But their exposition is so confident and unqualified that I believe they represent what other textbooks said at the time
And the textbook may be wrong. People do change their mind as new data comes in, and if you show data that indicates that Krugman is just wrong, then its something to talk about.
In finance, anything that is more than six months old is likely to be outdated, maybe hopelessly so.
ReformerRay: And it is textbook written in the nineties that formed the world view of people like Robert Rubin and Bill Clinton and George Bush.
Actually no. People’s world view tend to be formed when they are in their 20’s, so the views of that generation of people were formed in the 1960’s.
@Brad,
On the Fed bonds, I saw the info on Alphaville:
http://ftalphaville.ft.com/blog/2008/12/10/50258/the-feds-very-own-bonds/
Best,
C.
Brad,
I have been predicting that the US trade deficit would increase as a share of US GDP as mercantilist governments increase their trade manipulations throughout the depression.
Although it is still much too early to tell if I will be proven correct, the October statistics support my prediction. With GDP flat and the seasonally-adjusted trade deficit rising, the US trade deficit probably increased in October as a share of GDP.
Howard Richman
http://www.tradeandtaxes.blogspot.com
Twofish:
Agree with RR on textbook. As a recent graduate with Bachelor of Business Administration from a Canadian University, I have to say that all that is taught in economic and business class here are models in perfect market, comparative advantage and the advantages of globalization. In fact, my professor told me that students from Singapore, US, Canada and most of the world learn the same thing about perfect market at school.
The job of students is to pass exams or get high grades so that they can go to graduate school or get a good job.
Yes a few of students questioned theories taught in textbook. They felt bewildered. They don’t like these courses. They turn to study something else like geography, social science, English, philosophy where math models have no roles.
Alas, the economy is led by business elites, not students from Sociology major. Business is about winning the game. I have no stigma against them. It’s up to the government to set the rules.
twofish: People are smart and clever, but in no where intelligent in most cases. Most of them don’t participate in decision making process at all.
Joseph Stiglitz lays out the Blame for the US Economic fiasco
http://www.examiner.com/x-243-Progressive-Politics-Examiner~y2008m12d11-stiglitz
Mr. Stiglitz argues the collapse was a “system failure”, and lists the events chiefly responsible:
1. “Greenspan played a double role. The Fed controls the money spigot, and in the early years of this decade, he turned it on full force. But the Fed is also a regulator. If you appoint an anti-regulator as your enforcer, you know what kind of enforcement you’ll get. A flood of liquidity combined with the failed levees of regulation proved disastrous.”
2. “The tax cuts played a pivotal role in shaping the background conditions of the current crisis. Because they did very little to stimulate the economy, real stimulation was left to the Fed, which took up the task with unprecedented low-interest rates and liquidity. The war in Iraq made matters worse, because it led to soaring oil prices. With America so dependent on oil imports, we had to spend several hundred billion more to purchase oil—money that otherwise would have been spent on American goods. Normally this would have led to an economic slowdown, as it had in the 1970s. But the Fed met the challenge in the most myopic way imaginable. The flood of liquidity made money readily available in mortgage markets, even to those who would normally not be able to borrow.”
3. “Accounting is a sleep-inducing topic for most people, but if you can’t have faith in a company’s numbers, then you can’t have faith in anything about a company at all.”
4. The other problem not addressed involved the looming weaknesses in the economy. The economy had been sustained by excessive borrowing. That game was up. As consumption contracted, exports kept the economy going, but with the dollar strengthening and Europe and the rest of the world declining, it was hard to see how that could continue. Meanwhile, states faced massive drop-offs in revenues—they would have to cut back on expenditures. Without quick action by government, the economy faced a downturn. And even if banks had lent wisely—which they hadn’t—the downturn was sure to mean an increase in bad debts, further weakening the struggling financial sector.”
TWOFISH SAYS : “And I’d argue that trade produce so much extra wealth through comparative advantage, that the GDP increases by more than the loss due to the trade imbalance”.
Comparative advantage is one of the basic concepts of trade. It describes a situation where two countries exchange goods of equal value to their mutual advantage. But it is a special situation. One of the trading partners is more efficient than the other in that it can produce more of both products (in this example, chairs and television sets) per 100 workers. But the more efficient nation does not produce both products. It concentrates instead on producing television sets while the other country produces chairs; As a result of this specialization of labor, the total of television sets and chairs produced by the two nations is greater than it would be if each produced both products. In the example used by Sowell (Basic Economics, 2004), the combined production is 10,000 more television sets than would be produced if both produced both products and 35,000 chairs than would be produced if both produced both products. This extra production (10,000 television sets and 35,000 chairs) requires no increase in the output per worker in producing each product in each country.
Ricardo, who discovered this principle, and Sowell who reproduced it, focus attention on the seemly costless gain – no change in worker output per product. This is the magic of trade.
Notice that the discussion concentrates on production. In my introduction, I concentrated on the exchange. I claim that the equal exchange is the hidden assumption necessary to produce the benefit. If both countries produced the extra product, but left the product to lay in their warehouses, the gains would not exist. Only when the more efficient country is willing to exchange the extra 10,000 television sets for the extra 35,000 chairs do both countries benefit. That seems obvious. It is so obvious it is usually ignored.
However, the exchange cannot be taken for granted. Twofish says the U.S. produces extra wealth by a trade deficit. Comparative advantage demonstrates that. Comparative advantage does no such thing. It shows that trade produces advantage when the exchange is equal. Comparative Advantage says nothing about when trade is not equal.
Brad,
Great stuff as usual. I have a question. Will the deterioration in the NIIP (which should be considerable given that we are, in some sense, effectively levered international equity investors) be reflected in the current account? I ask because while the numbers themselves don’t change the ‘facts on the ground’, to the extent our current account deficit % of GDP starts gaping higher at this precarious moment, it’s probably not going to do much for the perception of our credit worthiness amongst international policy makers and their constituents…
the niip reflects two things — capital flows, which are the inverse (on net) of the current account. i.e. net ext. debt should go up b/c of the current account deficit. and valuation changes on the stock of existing assets (probably a $1 trillion fall in value of us investment abroad v foreign ivnestment in the uS). that is not part of the current account/ capital account (think flow) data in any way.
in any case, the bill fall in the niip won’t hit the screens til next june … and that is far far away
“So the US can live with a $250 billion/year trade deficit, if that deficit allows the US to generate an extra $1 trillion/year of wealth internally.
This is a possible scenario. If the trade deficit consisted solely of components that are used to make valuable products, and all those valuable products are sold in the U.S., then a trade deficit would benefit the U.S.
However, consumer goods are the major components of imports.
In addition, the benefits produced by importing components exist only if the components are cheaper and better than what could be produced domestically. If I could persuade the U.S. to insist on equal trade, U.S. production would necessarily decline until we could produce products equal in quality and price to what is available on the international market. The path to more and better domestic production is through reduction in imports – while preserving international competition via imports from nations that do not insist on a trade surplus with the U.S.
Ying – I like your stuff. Particularly your statement that it is up to the government to set the rules. Ronald Reagan has persuaded a generation of business men that it should not be up to the government to set the rules. And our current financial disaster grew out of what the business men believed.
ReformerRay,
The US trade deficit from Energy oil imports exceeds the trade imbalance from China. Saudi Arabia isn’t responsible for America’s Joe6pack addiction to driving around in gas-guzzler Hummer, Ford Expedition, Chevy Suburban SUVs that directly cause the Energy import deficit. The United States still produces 40% of its oil consumption; if the average mpg for all vehicles was the equilvalent to the Toyota Prius mileage of 45 mpg, the United States wouldn’t have to import a drop of oil from the rest of the world. We always hear from the Detroit Auto executives that it is “impossible” to produce high-mileage vehicles. But Toyota has done it with the hybrid Camry built in Kentucky, and the hybrid Prius soon to be built in Alabama. Let’s see if the Detroit automakers can impose protectionist tariffs around Toyota factories in Kentucky, West Virginia, Indiana, Alabama, California, and Texas.
One little factual addition to Betser’s correct description of the two factors influencing NIIP. (Net International Investment Positions)
The financial flows have been very heavy ever since 2001, never below 400 billion, topping out at 839 billion in 2006. On the basis of this factor alone, NIIP should have become more negative each year since 2001. However, it turns out the influence of price changes and exchange rate changes and other changes were stronger than the growth in financial flows. As a result, the ending position was higher at the end of 2002 than in any other subsequent period(-2.4 trillion).
I am a little suspicious of these adjustments. But I have no evidence that they are wrong.
(-2.4 trillion is calculation based on market value)
DJC – “Let’s see if the Detroit automakers can impose protectionist tariffs around Toyota factories”
I am opposed to pretectionist tariffs that protect any domesic producer of any specific product – including those now existing on sugar. But all these “mistakes” should be replaced by tariffs on ALL products made in China, Japan, Germany, Canada and Mexico.
Toyotas produced in Kentucky would not be subject to the tariff. All component parts shipped into the U.S. from Japan would be subject to the tariff.
Brad,
Thanks for the response. I was under the impression that the current account did contain a net investment return component, but I take it that this is made up only of tangible ‘income’ differentials, and not total return differentials, as per your prior post. That of course makes this component of the current account rather superficial, and calls into question why that data would treated with such reverence by the guys that came up with the “Dark Matter” theory of international trade.
Speaking of which, I would assume now that both this Saul Bellow-esque ‘Dark Matter’ has gone the way of the Do Do, along with the ‘consenting adults’ view of trade/current account deficits? Or are you not yet in the position to claim victory here?
Again, thanks for your running commentary. Those of us who’ve found it feel smarter for it…
DJC – I have avoided the issue of oil imports. When I created my scheme, oil imports were an minor issue. The 5 nations that accounted for 60% of the U.S. trade deficit in 2005 did not include any oil producing countries.
Manufacturing output must be boosted in the U.S. The trade deficit from these 5 countries hinders the growth of domestic manufacturing output.
The keg of worms that is the oil question should be approached in its own terms, with the oil deficit only a part of the problem.
Majorajam responds:
Brad,
Great stuff as usual. I have a question. Will the deterioration in the NIIP (which should be considerable given that we are, in some sense, effectively levered international equity investors) be reflected in the current account?
Causation runs the other direction. The change in the current account influences the NIIP. But as I described in my previous post. the effect of change in capital flows on NIIP is overcome by the stronger influence of adjustments to the value of the total NIIP due to price changes, exchange rate changes and other factors. As a result, the ending position in NIIP at the end of 2007 was 1.7 trillion compared with 2.4 trillion at the end of 2002.
As a consumer,I don’t care if the products I bought was made in the US,or China,Japan, India, EU …as long as the products are in good quality and satisfy my need. I don’t care if my boss is American, Chinese, Japanese, German, Indians, Russian ….as long as they pay decent living wages.
If the Japanese produce better cars than Americans, let them take over GM and Ford in US. US government still have the power to set the rules to guarantee the interest of US workers on US land.
I can’t understand why US couldn’t let auto sector go though they let everything else in manufacturing sectors go.
I should add that 1.7 and 2.4 numbers in a previous post are negative numbers and should have a minus sign infront of them. The flow data are also negative numbers – representing dollars sent overseas to pay for imports in excess of exports.
Ying – as a consumer you should purchase the best product available to you. But government sets the rules. To retain healthy manufacturing sector in U.S., rules must be set to reduce imports down to exports.
As to why all the fuss over auto sector, it is symbol of U.S. manufacturing prowess. Political leaders do not like to have U.S. impotence rubbed in their faces. Ok if thousands small firms fail – public does not complain about death by a thousand cuts.
I recognize the value in depicting export and import data separately, but doing this also conveys the impression that these are separate phenomena. Some portion (we don’t know how big, but probably substantial) of exports are tied to imports in the form of intermediate goods. The ideal chart would be one that had two series, exports net of intermediate goods tied to imports and imports net of these same intermediate exports. (This abstracts from the problem of asynchronicity.)
RR:
I don’t know if auto sector is a healthy manufacturing sector. For me, it pollutes environment and waste human and natural resources. Yes it may create jobs. If all the resources auto sector used can be put into other industries such as alternative energy sector, the long term results would be better.
Manufacturing bus is a good idea, or bicycles even better.
Put it this way ReformerRay, it seems strange to me that a flow variable like the current account doesn’t account for the change in a stock variable like the NIIP, being that it explicitly contains an account, the NII, which expressly exists to reflect differentials in investment performance that ultimately bear on the balance of payments. I mean whatever it is that makes ‘valuation changes’, i.e. capital gains and losses, meaningfully different from investment income is beyond me. I work close enough to the community to know that investors are ultimately pretty indifferent to the make-up of their returns so long as transactions costs are not prohibitive, and furthermore I can’t see how this context changes the situation. One could argue that investment income must be reinvested, while unrealized capital gains do not, however what difference does that make? You’ve got a capital account going- just add the line items.
Relatedly, I’m sitting here thinking to myself why is it that the ostensibly intelligent folks that coined dark matter to account for the persistent advantages in the NII that aren’t accounted for in the NIIP would have invested so much in the former, especially as most of the concern over these things is only a few years old. If you have any ideas there, I’m all ears. In any case, presumably the $1tn or so that Brad calculates as being the deterioration in our NIIP would seem to be something of a rebuke to this thesis, not to mention the consenting adults view of trade deficits. Why would the present value of the US’s eternal and unassailable return premium decline in the midst of ‘flight to safety’ strengthening of our currency and government obligations? I can’t think of any reason that bears scrutiny.
A couple of points guys:
1). The nominal amount of borrowing isn’t necessarily a burden in itself for the borrower. What really imposes budgetary constraints down the line is the cost to service that debt.
Would you rather be $15 trillion in debt but pay no interest or be $200,000 in debt but have to mortgage that debt at a fairly high rate? The net factor income component of the current account might present a more relevant picture.
2). Fiscal spending alone won’t be nearly enough to support China’s migrants. Suggestions have been made in the past that the Chinese government should increase social spending on the health and education system in order to promote employment. This strategy kind of misses the point because it isn’t the educated urbanites who are having the most trouble finding jobs but rather the uneducated masses from the countryside. A quick visit to China would reveal that a lot of the unskilled migrant labor was absorbed by the private sector, where dozens of waitresses staffed tiny restaurants and newly built apartment buildings hired teams of 7 or 8 button-pushioners (did I just invent a word?) to service the elevator rides. I’m not sure how government spending on social welfare can easily make use of their labor.
Brad,
Nic topic and interesting way to present data. But imposible to say anything about trends except that these data may contain only little of the consequences of decisions taken during the past three months, which saw one of the most severe asset liquidation sprees I have ever seen.
To link this back to the Great Moderation discussion, trends that defy explanation (and then appear to be less firm that was though for a while) are no basis for prediction or policymaking. In the Great Moderation we had an increasingly procyclical financial system (with pro-cyclical institutions like regulation and accounting too) which may have not affected that period’s aggregates, but is now playing havoc with everything in the real sector.
It would be interesting to see how decision makers are responding to the current environment (deflation, finance scarcety, fear) . I guess the export package with the largest non-discretionary core will be the least affected (tautologically). And that is not China. So, expect the US, Europe and japan to have a larger share of world trade for a while and East Asia plus OPEC, Brazil etc, less.
Let’s see a year from now.
The whole idea that one country can gain advantage over another country by exchanging something of value (consumer products, oil etc) for another countries bonds denominated in its own fiat currency makes no sense.
On a micro level if anyone out there would like to exchange some useful product for david_in_ct bonds denominated in david_in_ct currency please let me know. I will not be averse to running the largest trade deficit known to man kind.
The whole idea that one country can gain advantage over another country by exchanging something of value (consumer products, oil etc) for another countries bonds denominated in its own fiat currency makes no sense.
It makes sense to me. The country that sent the product had to have productive capacity. Productive capacity controls the wealth of a nation.
The U.S. was the leading nation in the world after WW II because of the ability of our industry to produce valuable goods.
Japan grew from the ashes of WW II to the second largest economy in the world because it expanded its productive capacity. And so it goes.
The bond the productive country got from the unproductive country can be exchanged for machine tools and other equipment to enhance productivity.
The country that issues the bond has to keep increasing its own supply of valuable goods, so as to be able to pay back the bond when the owner requests payment.
The fact that the bonds are in your own currency does not give you the privledge to charge one price for your goods to the bond holder and another price to everyone else in the market.
Peter responds:
I recognize the value in depicting export and import data separately, but doing this also conveys the impression that these are separate phenomena
Imports and exports are separate phenomona. One goes in, the other goes out. Because a considerable portion of imports are components that are used to create domestic products does not make them exports. Most of the domestic poducts created with some import component are sold in the U.S. If the product completed is sold outside, it is an export. The new product created by combining various componenets is not the same as the import that came in.
ReformerRay,
I fail to see how this nation has lost its ‘productive capacity’ when it has the ability to churn out not one, two, or three, but four stealth jets that incorporate the highest levels of technological advancement in both material and electronic science.
I fail to see how ‘productive capacity’ has disappeared when we are on the verge of having hypersonic planes that can consistently fly at mach 8.
I fail to see how we have lost the edge to China or Japan when we have ships that not only can accurately track ICBMs but also strike them down with missiles of their own.
Do not confuse the absence of commercialization with the absence of capacity. This country has the top material and electric scientists and also the most skilled workers (ask somebody who works at Boeing if you disagree with me). The problem is that for political reasons no doubt we have not been able to commercialize and capitalize on this cutting-edge knowledge with the except of a couple of military deals here and there.
For this reason, my hopes in alt energy rest with the needs of USAF to keep its B2s flying rather than with private initiative. Time will tell.
Observer responds:
ReformerRay,
I fail to see how this nation has lost its ‘productive capacity’ when it has the ability to churn out not one, two, or three, but four stealth jets that incorporate the highest levels of technological advancement in both material and electronic science.
The ability of Boeing to sell planes overseas has been one of the places where the U.S. exports more than it imports. The technological prowess in airplanes has been there for years. However, a friend of mine tells me that a large % of the new Boeing plane will consist of components made in Japan.
Every country has one or two or three areas in which they beat the competition. Semiconductors is another example of U.S. prowess.
However, it is the total that counts. The U.S has a very large goods trade deficit because our manufacturing sector has not been able to compete with goods manufactured in Germany and Japan. China is by far the largest source of our trade deficit. They are making things that we should not try to make. A trade deficit of some small size to one country will not kill us but a trade deficit with 5 major manufacturing countries that amounts to something like 400 billion per year means that the U.S. manufacturing sector is taking it on the chin.
In 1980, the U.S. manufacturing sector accounted for 45% of all the corporate profits produced in the U.S. In 2006, that number was down to 19%. This result was produced, in my opinion, by growth in the trade deficit in goods during those 25 years The trade deficit in goods in 1980 was only 11% of U.S. imports. By 2005, it had risen to 47%. Since U.S. exports are largely manufacturing goods, it makes sense to me that the substitution of goods made overseas (exports less than imports) for goods made in the U.S. is the reason that manufacturing now has only 19% of the profits generated by corporations in the U.S.
Observer – Please allow me to make one other point. National prowess was determined, in past years, by the military capacity of the country.
Since we do not want to use the Atom bomb and we have little stomach for bombing any country into oblivion, the military superiority of the U.S. is perhaps a handicap. Military superiority, along with other considerations, must have played some part in the decision to invade Iraq. Turns out defeating the Iraq army was not the end of our problems.
Germany and Japan may not have known it at the time but our insistence that both of them renounce war, which they were happy to do since they were sick of war at the time, may have been a part of the reason they have been able to develop manufacturing capacity which allows them to sell more than they purchase on the international market.
High tech bombs may be important someday but right now they are not helping our struggle to maintain a productive manufacturing sector.
The collapse of the US Dollar is imminent in 2009 – United Nations Report
Here’s a link to the latest World Economic Situation and Prospects pre-release, dated Dec 01 2008, from the United Nations.
http://www.un.org/esa/policy/wess/wesp2009files/wesp2009pr.pdf
I think pages 14-17 would be very useful for your analysis. (Brad has been expecting this for quite some time, including in his Sovereign Power report).
Section title:
“Increased exchange rate volatility and the risk of a dollar collapse”
“… it is expected that the recent strength of the dollar will be temporary and the risk of a hard landing of the dollar in 2009 or beyond remains..”
ReformerRay,
Facts and figures are impartial and I’m certainly not here to debate about their accuracy. However, it is important to judge whether a particular set of facts and figures hold any relevance to the debate over a particular argument. The fact that the manufacturing sector has decreased in relative proportion to other sectors in the makeup of the GDP does not contradict my argument that there is a lot of latent manufacturing capacity that has been held down by geopolitical objectives.
The US currently holds the patents to eight of the top ten fastest supercomputers in existence, and yet not only is industry barred from selling the product to China, it’s also barred from selling many of the key components to allies as well in fear of Chinese espionage. Imagine if you are a skilled worker who could’ve had a well-paying job manufacturing one of these high tech products instead of holding down the sales job at Best Buy. It seems to me that you ought to blame Uncle Sam here and not the Chinese.
Again, do not confuse the absence of commercialization with the absence of capacity.
ReformerRay: Toyotas produced in Kentucky would not be subject to the tariff. All component parts shipped into the U.S. from Japan would be subject to the tariff.
You do realize that US auto plants in Michigan are critically dependent on parts from Canada, don’t you, and that repealing the 1965 US-Canada Auto Parts Pact would destroy what is left of the auto industry.
I’d like to point out the “physiocrats.” In the 19th century there were economists who thought that is was a horrible thing that fewer and fewer people were in agriculture and that all real wealth came from the land. To them it would have been unthinkable that you’d have a prosperous nation with only 2% of the people working in agriculture.
http://en.wikipedia.org/wiki/Physiocrats
The notion of comparative advantage was originally directed at them in the early 19th century. The logic was that without tariffs on agricultural products, England would starve to death, and the idea of comparative advantage was Ricardo’s argument for repealing the Corn Laws. As a result of the Corn Laws, England’s agricultural population plumented and the balance of food went negative as England imported its food. But in the end England got more wealthy.
The idea that manufacturing is the only thing that generates real wealth is the 20th century variant of that idea. Frankly, I think that the US would do fine if it had no more manufacturers than farmers.
Also, it’s not the patents, it’s the people. The US could turn over all of its supercomputing patents and designs over to China, and they would not be able to make as good use of them as the United States. At least not yet. I should point out that banks are some of the biggest users of high performance computing technology, and “programming supercomputers” is the answer to “what is an astrophysics Ph.D. doing on Wall Street?” I think that there is a very strong correlation between bank survival and investments in supercomputers.
What the US should be worried about is not the “trade deficit” but the looming “brain deficit.” I don’t worry that the US is losing manufacturing jobs. I do worry that Chinese companies are coming to the United States picking off people with high skills, and something no one has mentioned is that if you revalue things so that it is harder for the US to buy goods, it makes it much easier for Chinese companies to “buy brains” which is a bad exchange.
Observer: Would you rather be $15 trillion in debt but pay no interest or be $200,000 in debt but have to mortgage that debt at a fairly high rate? The net factor income component of the current account might present a more relevant picture.
There is also liquidity and term issue. One problem that gets people in trouble time and again is they have debts that get called in a crisis. In a crisis, you may find that all your debt suddenly is due. Also interest rate variablity is a big factor.
Twofish:
I should point out that banks are some of the biggest users of high performance computing technology, and “programming supercomputers” is the answer to “what is an astrophysics Ph.D. doing on Wall Street?”
Programming supercomputers won’t make you much money. You have to understand the politics and the bigger games.
Those supercomputers are basically for statistical arbitrage trades; with or without fat tail adjustments the black scholes model is unlikely to yield useful predictions of future derivative prices.
Useful Analysis: Those supercomputers are basically for statistical arbitrage trades; with or without fat tail adjustments the black scholes model is unlikely to yield useful predictions of future derivative prices.
Computers are used for lots of things. Star arb and derivatives pricing are completely different things. You actually don’t need a supercomputer to do derivatives pricing or most stat arb. Microsoft Excel is plenty of horse power.
Where massive compute power comes in really useful is crash testing….
One thing that you can do with massive compute power is to calculate large numbers of scenarios. What does happens if the S&P 500 drops 50% in one day and the price of oil spikes $50 in one day? Or what happens if the S&P rises 50% in one day and the price of oil drops $50.
You take hundreds of thousands of scenarios and run them against the book of your investment bank and hedge fund and ask, if the unthinkable happens, are we still in business? Computers are particularly good at this sort of thing because they just crunch numbers, and they don’t say “this just can’t happen.”
Once you’ve run a massive number of scenarios against your positions, you look at the one’s that cause problems, and then see what you can do so that you are still in business if that scenario happens.
People that did this a few years ago and figured *oh my god, if the S&P 500 drops 50%, the dollar rises, and all these subprimes go bust, we are toast, what can we do?” are still in business. People who didn’t figure this out, aren’t.
This is particularly useful because no one has any clue what will happen in 2009, and analysts have been so wrong that you’d be an idiot to bet your company on what they think will happen. So you go through every possible scenario and ask “are we in business if this happens.”
Sure you’ll miss the real scenario, but if you can show that you’ve gone through ten thousand different scenarios, and in none of them do you go broke in a month, that puts you in a much better position than someone who can’t do that.
Don’t be stupid enough to think that you can predict the future. Use the technology to figure out what you should do given that you can’t.
Twofish: if you can show that you’ve gone through ten thousand different scenarios, and in none of them do you go broke in a month
Actually you can never show that. If you’re part of a close cartel and you’re able to trigger credit crises around the world at will, etc then you’re in business more than a 100 years later. If not you end up bust within 15 years, no matter how smart you are and what technology you have, like most of the top S & P index companies.
At least you can try to understand what’s really happening, like George Soros. You use that knowledge to make speculative profits. Then you’re a bit of a somebody. If keynes hadn’t been a filthy rich speculator nobody would’ve have listened to his pacifist ideas to give up wars and stick to money making.
Brad’s ideas on giving up the dollar hegemony and spend time building and exporting planes won’t get any much traction because he’s just an analyst. The world doesn’t influenced much by analysts. It listens to those who have at least a few billions in their personal books with great animation and follows them around.
And apart from being a filthy rich speculator Keynes was part of the elite India House bureaucracy. The richest and most powerful men in the Birtish Empire were the India House bureaucrats and the officers of the East India Company,
I love what has been put on this blog while I slept. Observer, Useful Analysis and Twofish have some important things to say.
Where shall I begin?
@ Reformer: I’m all eyes.
The US currently holds the patents to eight of the top ten fastest supercomputers in existence, and yet not only is industry barred from selling the product to China, it’s also barred from selling many of the key components to allies as well in fear of Chinese espionage.
The effort to keep advance technology for exclusive use of the U.S. is a common activity for all nations. It is an effort which I support.
Twofish says: “As a result of the Corn Laws, England’s agricultural population plumented and the balance of food went negative as England imported its food. But in the end England got more wealthy.
The idea that manufacturing is the only thing that generates real wealth is the 20th century variant of that idea. Frankly, I think that the US would do fine if it had no more manufacturers than farmers.
Notice that England got more wealthy because it shifted its labor force to an activity which produced more goods per man hour of input – manufacturing.
If Twofish would point the way towards another industry other than manufacturing that would produce more goods per man hour of input than manufacturing AND would provide a product that could be sold on international trade, I would agree that the U.S. should move in that direction before other nations do.
Absent any such magic bullet, I fear we are forced to fight in the only battlefield that exist, that of producing goods that can be sold internationally because they are valuable compared to their price.
December 12th, 2008 at 2:46 am
Twofish is right that brains are the ultimate resource in our competitive world. And I do recognize that Asian – American students top others, as a generality.
Brains gravitate where their utility is recognized and needed. The U.S. must expand its manufacturing base. And brains will be needed to design and built a better mouse trap.
I assume Toyota and Honda spend a higher proportion of their total costs on engineers than on accountants, management executives, lawyers and advertising executives. U.S. companies should follow their lead.
“Don’t be stupid enough to think that you can predict the future. Use the technology to figure out what you should do given that you can’t”.
“Useful Analysis responds:
Twofish: if you can show that you’ve gone through ten thousand different scenarios, and in none of them do you go broke in a month
Actually you can never show that”.
Two very intelligent guys, both point to the impossibility of predicting the future.
On the other side of the coin, the past gives hints of possible futures. Too bad the U.S. has been unwilling to recognize that the U.S. trade deficit will continue so long as the U.S. is rich and opens its door to imports. That is a prediction about the future that I will make with confidence.
“Brad’s ideas on giving up the dollar hegemony and spend time building and exporting planes won’t get any much traction because he’s just an analyst. The world doesn’t influenced much by analysts”.
To the contrary, I subscribe to the Keynes comment that I cannot quote exactly, which is a shame because the phrasing is exquisite, to the effect that “practical men are in thrall to some long dead economists”.
Practical men are rightly skeptical of the advice they receive from current economists because it is all over the map. However, the advice of Adam Smith lives on. All his competitors are forgotten. What is remembered is his discovery of the magic of a market and the magic of trade.
I salute his genius. But I insist that he advocated free trade rather than equal trade because he wanted to retain the ability of the most effective producer of goods (England)to be able to grow their economy as fast as technology and trade would permit.
Addendum: Smith had another motive. He wanted to prevent politically powerful English industrialists from being able to use their political power to get England to erect barriers against imports of the goods they were producing. Elevating free trade to an ideology finally killed off the power of the textile industry, the steel industry, in the U.S. to get the Congress to restrict imports of their products. Free trade ideology preformed an important service there. But free trade ideology also inhibited consideration of any other way to reduce the U.S. trade deficit. Because it stands in the way of intelligent restrictions on imports, it must be killed.
TWofish and Useful analysis have valuable things to say about debt, interest and supercomputers. I cannot add to their discussion.
The U.S. has always admired rich men. But do you take the advice of Warren Buffett or Robert Rubin?
The advice Buffett provided in his Nov. 2003 magazine article in FORTUNE magazine was to take unilateral action to reduce the trade deficit. Rubin would want to bolster international trade, assuming the trade deficit can be tolerated.
More generally we admire success in any field. An economists who becomes a Nobel Laureate is suddenly more nearly right. Trouble is, we have several of them and they disagree with each other.
No help for it. If we are to find a better way, debate and discussion seems to be the only good road.
I would agree that it’s hard to predict the future. But history repeats itself, by and large. The difficulty is in identifying the relevant historical patterns and forces that are repeating themselves.
In the past import tariffs were exclusively for the benefit of rich industrialists in the US. Now it’s being proposed that doing away with trade will benefit
a) A large number of common people
b) Sovereign Power (Brad’s report)
I would agree with Twofish on his overall assessment that the crisis has little or nothing with international trade. Also that there are few clearly idetifiable benefits of doing away with imports and balancing the trade.
@ Reformer
Is it possible to state very clearly how people will benefit exactly from doing away with Chinese imports, for instance. And how exactly does that relate to the current crisis?
It shows you exactly how mad someone can get: why didn’t the guy just disappear somewhere?
http://online.wsj.com/documents/madoffcomplaint.pdf
you have to really admire this guy’s honesty and courage in turning himself in. hope he gets to be a much better business man someday.
Observer:
Appropos your gloating over the fantastic miltary equipment:
Here’re comments from Winslow Wheeler on the loss of prodcutivity in our military:
( Winslow T. Wheeler worked on national security issues for 31 years for members of the U.S. Senate and for the U.S. General Accounting Office (GAO). In the Senate, Wheeler worked for Jacob K. Javits, R-N.Y., Nancy L. Kassebaum, R-Kan., David Pryor, D-Ark., and Pete V. Domenici, R-N.M. He was the first, and according to Senate records the last, Senate staffer to work simultaneously on the personal staffs of a Republican and a Democrat (Sens. Pryor and Kassebaum).
Coinciding with the arrival of Obama and his deputies in Washington, the Center for Defense Information is releasing America’s Defense Meltdown — Pentagon Reform for President Obama and the New Congress, a primer on what is wrong with our defense system written by men with long and honorable experience in the bowels of the military services and Pentagon bureaucracy. The book’s editor, Winslow Wheeler is familiar to readers of this site for his acrid and knowledgeable commentaries on the defense establishment. CounterPuncher Andrew Cockburn interviews him about the book and its message.
AC: You say in your preface that “the vast majority, perhaps even all, of Congress, the general officer corps of the armed forces, top management of American defense manufacturers, prominent members of Washington’s think tank community and nationally recognized ‘defense journalists’ will hate this book.” Why is that?
WW: The conventional wisdom amongst the elite in Washington is that they have done a pretty good job of taking care of our national defense, that things may be a little expensive but we have the best armed forces in the world, perhaps even in history, and we do the best for our troops by giving them the world’s most sophisticated equipment which is, of course, the most effective. We have, so the elite asserts, demonstrated our ability by knocking off Saddam Hussein’s forces twice and are in general a model to the rest of the world on how to build equipment and provide for forces.
That’s all crap. None of it is true. None of it stands up to scrutiny. Let’s tick through it.
First of all, we now have the largest defense budget in inflation-adjusted dollars since the end of World War Two. That has bought the smallest military establishment we have had since the end of World War Two. We now have fewer navy combat ships and submarines, fewer combat aircraft and fewer army fighting units than we have had at any point since the end of World War Two. Our major items of equipment are on average older than at any time during this period. Key elements of our fighting forces are badly trained. In other words we’re getting less for more. People point to the two wars against Saddam Hussein. His armed forces were pitifully incompetent and even against them in both the 1991 and 2003 gulf wars we demonstrated serious deficiencies while overestimating how good we were.
{FM Note: see the CBO study above for supporting evidence}
AC: But is the U.S. likely to be facing anyone better in the near future?
WW: Apparently we are right now. …
AC: What brought the U.S. to this sorry state of affairs?
WW: The fundamental reason, I believe, is that we are not interested in what works best in combat. Instead, our defense structure in Washington is interested in other things. In Congress they’re interested in jobs and campaign contributions. In the Pentagon they’re interested in various political and bureaucratic agendas. They’re not paying attention to the lessons of combat history. A bloated, declining military structure is the result. …
AC: Given the sort of people he’s selecting for defense position, it looks as though Obama is not necessarily going to follow the course of action you urge in your book. What is your opinion of the Obama defense team as currently formulated?
WW: He campaigned on “Change We Can Believe in” and his transition almost immediately switched to “Continuity We Can Believe In.” The people so far selected, especially Robert Gates, have a track record, and that track record is basically to keep things the way they are. Gates will do what he’s told on issues like Iraq and Afghanistan. He’s already made it clear that as far as managing the Pentagon is concerned he thinks he’s been doing a competent job. But during his tenure things have only gotten worse. The budget’s going up faster than ever before in recent history; the size of our forces is going south; the equipment continues to get older. We have a new report from the Congressional Budget Office that tracks the size of our weapons inventory and its age. This study shows that if everything goes perfectly according to Gates’ plans as revealed in his Pentagon budget, our forces will continue to shrink and the equipment will continue to get older. …
AC: Realistically, do you think there’s any possibility that you could meaningful reform in the Pentagon?
WW: I’m not at all optimistic. The second tier of appointments that they’re talking about in the press for the Obama team are mostly holdovers from the Clinton era, when things were almost as bad as they were during the Bush era. Most of the major hardware programs that are now coming a cropper as major cost and performance disasters were conceived during the Clinton era. …
AC: What about Obama’s National Security Adviser, General Jim Jones? He looks like a fine upstanding Marine.
WW: He is a man of great stature, physically and figuratively, in Washington. He is a Washington ‘heavy’ but if you look at his record, nothing much ever happened. Things went south in Afghanistan pretty rapidly when he was supreme commander of all Nato forces in Afghanistan. When he was Commandant of the Marine Corps, a lot of the marines’ overpriced underperforming hardware programs, such as the V-22 [vertical takeoff troop transport plane] and the Expeditionary Fighting Vehicle were endorsed and continued happily along. He seems to have been mostly a placeholder when he had these very senior and important positions.
The crisis in the US is being addressed through 1) quantitative easing – monetary expansion while maintaining the target interest rate.
2) fiscal stimulus – mainly a large government spending infrastructure and other public works programs.
Trade deficit hasn’t been recognized as an immediate problem anywhere, though it could be a longer term priority.
Any thoughts on the effectiveness of 1) and 2) above?
Impediments: German finance ministry is unwilling to participate in stimulus spending, I wonder if that impedes us. Does our stimulus spending leak out to European imports?
Useful Analysis,
The facts and arguments that you have presented do not contradict with my argument. Winslow Wheeler made the argument that the military budget has not been properly allocated to produce the right kinds of systems or sub-systems that best meet the rigors of today’s battlefield. Nowhere did he say that we lacked the knowledge required in material and electric science to produce the best systems in the world.
It is highly counter-intuitive to say that foreigners are undermining our advantage in the cutting-edge fields when they are in fact funding our research and higher education. It is equally counter-intutitive to blame the foreigners for the lack of commercialization of our cutting-edge knowledge when we are the ones who forbid such activities.
ReformerRay is making the comments section unreadable. Eight comments from any one person without interruption, no matter what the content, is too much.
Please stay concise, Ray, and stop overwhelming everyone.
Reformer
Is it possible to state very clearly how people will benefit exactly from doing away with Chinese imports, for instance. And how exactly does that relate to the current crisis?
First, I don’t know how it would relate to the current crisis. I haven’t thought about that.
second, I do not propose to eliminate all goods imports. I would hope to reduce goods imports by 50% in 3 years.
The benefits to residents of the U.S. will come in the additional employment and profits created by the additional domestic output required to make up for absent imports.
Also, 410 billion dollars will be retained inside the U.S.
We can estimate the probably size of the benefits to employment and profits but that would take a bit more work.
Addemdum: The reduction of 410 billion dollars of impors (using 2007 figures) would be 21% of all U.S. goods imports in 2007. The reduction of the trade surplus China has with the U.S. should be more than 21% because the intent is to get all the reduction from the 5 nations that haave the largest trade surplus with the U.S.
Ian Hurst responds:
ReformerRay is making the comments section unreadable. Eight comments from any one person without interruption, no matter what the content, is too much.
Please stay concise, Ray, and stop overwhelming everyone
Good advice. I would like to comply. My problem is I get excited by the prospect of having my ideas critiqued. I have been working alone, without feedback, for years. I do so much appreciate the comments of Twofish and others.
Please, please, ignore my prolixus if possible. I really do want to know what is wrong with my ideas. Alas, I will not find out if no one reads them.
I have had my say. No more interruptions from me UNLESS SOMEONE LIKE TWOFISH PRESENTS ME WITH AN GOOD CHALLENGE.
ReformerRay: Please, please, ignore my prolixus if possible. I really do want to know what is wrong with my ideas. Alas, I will not find out if no one reads them.
Blogs are free. Start your own and get feedback there. I don’t speak for Brad, but it’s my opinion that the comments section on *his* blog is for feedback on *his* ideas – and that’s why *I’m* here.
Ian Hurst:
You are right.
Reformer Ray,
May I draw your attention to the Welcome Relief and Good Intentions Act of 2009?
Upon further review –
1. I am guilty as charged to taking up too much space on this post.
2. My topic, the need to reduce the U.S. trade deficit and a way to do so, grows logically out of Brad’s discussion.
3. No need to repeat myself on any additional posts of Brad’s.
4. I will speak up on other posts that introduce my topic.
5. I appreciate the opportunity provided by Brad and others, especially Twofish.
[...] What happens to the United States non-oil trade deficit? It was improving quite rapidly for most of the past two years, though a rising oil import bill [...]