Nonsense, horsefeathers, and idle musings from a decade in South Korea (2002-2012).


23 January, 2012

Trading Ideas

By Aaron
23 January, 2012

Over this long, Lunar New Year weekend, I had the great good fortune to have lunch with Steven Denney. Steve's an ambitious young graduate student over at Yonsei University, the sort of fellow who makes the rest of us look bad with all of his get-up-and-go. As one would expect, he blogs at not one but two sites (here and here) and I seem to recall him mentioning that he had another site - focusing on North Korea - in the offing.

While Steve and I share many interests, our worldviews are a study in contrasts. As an illustration, Steve sent me two recent articles by former U.S. Secretary of Commerce Clyde Prestowitz, both of which - to my mind, at least - are filled with needless hand-wringing about the supposed decline of U.S. manufacturing and the eventual implosion of all that makes America worth a damn. As tough as it is for me to get through a Prestowitz article (for a Secretary of Commerce, he sure seems to have slept through a surprising number of economics courses), I figured I'd offer a few comments here rather than simply starting an email thread with Steve.

In the first article, from December 2011, Prestowitz argues that trade deficits are important and, further, that the United States must take steps to reduce its current account deficit:

The opportunity lies in the size of the $500 billion U.S. trade deficit. Just halving it would create 2.5 million jobs without the need for tax reductions, further deficit spending, or further quantitative easing. Indeed, taxes could even be raised without fear of job loss. President Obama should see this as a Godsend. He can have his cake and eat it as well by increasing jobs and reducing the federal budget deficit.

Prestowitz never explains how he arrives at the "2.5 million jobs" number, nor can I imagine how anyone would prove such a figure, so complex an organism is the global economy. More likely, government efforts to reduce the trade deficit would create some jobs, even as such actions destroyed others, all while punishing consumers and making the U.S. economy less competitive in the long run.

More importantly, though, a current account deficit equals a capital account surplus - that is, more investment is flowing into the United States than is flowing out. To bemoan the trade deficit, therefore, is to also lament the willingness of foreigners to invest in America. Of course, a sizable chunk of this "investment" is in the form of U.S. government debt (as well as corporate debt, real estate, facilities, etc.), which troubles budget deficit hawks like myself, but if you're a person who believes that the U.S. government should be engaged in greater deficit-financed stimulatory spending right now then you should also celebrate the U.S. trade deficit.

For more on trade deficits and (supposed) Chinese currency manipulation, I highly recommend this Econtalk podcast.

The second, and more recent, article finds Prestowitz lobbying for a defined U.S. national economic strategy as a way to counter the mercantilist tendencies of countries like China. Not surprisingly, I ain't climbing aboard Prestowitz's Industrial Policy Express, even if he could prove that China's export-promotion orientation helps the Chinese more than it hurts them. Rather than rehash my views on this matter, however, I'll merely direct readers to this 2010 piece in which I laid out my skepticism of politically-designed industrial policy. Briefly:

...to paraphrase PJ O'Rourke, a successful industrial policy requires that bureaucrats and politicians know more about everything than we do, and requires them to make smarter decisions than we can. And it demands that a state official make those wise and knowledgeable decisions without regard for his political or financial self-interest.

As it happens, the current issue of The Atlantic has a superb article by Adam Davidson which touches on these very issues. It is, in short, the best piece I've read on U.S. manufacturing and employment in recent memory. Indeed, it's one of the magazine pieces I've read on any subject in a long while. It's specific, nuanced, and I can't recommend it highly enough. Rather than offering my comments on it here, however, I'll simply get out of your way and let you get to reading it.