Neil Irwin had an interesting Upshot piece pointing out that concerns about budget deficits have receded dramatically in recent years. This is, of course, true, as politicians of both parties have largely given up their concerns about the deficit. Many prominent economists have also moved away from previous positions that held that budget deficits were a major problem.
While the government can clearly run much larger budget deficits, without negative economic consequences, than many economists had previously viewed possible, for some reason the role of the trade deficit in this story is never mentioned. This is really front and center.
As every intro economics student learns, the components of GDP are consumption, investment, government spending, and net exports. If net exports are a large negative, in other words, we are running a large trade deficit, it means that GDP would be much lower, other things equal. If none of the other components rises, then we would have a large gap in demand.
It is this gap in demand that creates the room for larger budget deficits, without triggering inflation. If we envision a world where trade was balanced, instead of the United States running a $630 billion annual trade deficit (3.1 percent of GDP), we would almost certainly be seeing rapidly rising inflation with current budget deficits, unless the Fed offset the impact with high interest rates.
It is remarkable that the role of the trade deficit is almost always left out of this discussion. It is very basic economics.
Neil Irwin had an interesting Upshot piece pointing out that concerns about budget deficits have receded dramatically in recent years. This is, of course, true, as politicians of both parties have largely given up their concerns about the deficit. Many prominent economists have also moved away from previous positions that held that budget deficits were a major problem.
While the government can clearly run much larger budget deficits, without negative economic consequences, than many economists had previously viewed possible, for some reason the role of the trade deficit in this story is never mentioned. This is really front and center.
As every intro economics student learns, the components of GDP are consumption, investment, government spending, and net exports. If net exports are a large negative, in other words, we are running a large trade deficit, it means that GDP would be much lower, other things equal. If none of the other components rises, then we would have a large gap in demand.
It is this gap in demand that creates the room for larger budget deficits, without triggering inflation. If we envision a world where trade was balanced, instead of the United States running a $630 billion annual trade deficit (3.1 percent of GDP), we would almost certainly be seeing rapidly rising inflation with current budget deficits, unless the Fed offset the impact with high interest rates.
It is remarkable that the role of the trade deficit is almost always left out of this discussion. It is very basic economics.
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An article on United States trade policy with China dismissed the idea that the United States should push China to raise the value of its currency. It told readers:
“Mr. Trump’s advisers have also pressed China to refrain from further devaluing its currency to lift its economy as American tariffs bite. A drop in the value of the Chinese currency in the past year has already neutralized much of the economic effect of the 10 percent tariffs that Mr. Trump placed on roughly $200 billion of Chinese exports to the United States, said Eswar Prasad, a professor of international trade at Cornell University.
“Yet requiring China to manage its currency and keep it above a certain level would be a striking shift from the policy of past administrations, which have tried to encourage China to let the value of its currency rise and fall with market forces.
“‘It’s a very odd way to approach this,’ Mr. Prasad said, ‘to tell China, after having told them for all these years, ‘Let your currency be determined by market forces,’ to say, ‘Let your currency be determined by market forces only if it is appreciating.””
This section implies that China is doing nothing now to hold down the value of its currency. However, China holds a huge amount of international reserves, with the sum coming to more than $4 trillion, counting its sovereign wealth fund. Earlier this month, the New York Times ran a piece noting Russia’s extraordinary level of reserves, noting it had more than three times the reserves recommended by the IMF, relative to the size of its economy.
China’s reserves are even larger relative to the size of its economy than Russia’s, so unless the NYT has gone full Trump, China must have more than three times the reserve recommended by the IMF for a country its size.
This matters, because China’s holdings of excess foreign reserves keeps down the value of its currency relative to the dollar and other currencies. This is similar to the story of the Federal Reserve Board’s holding of assets. While the Fed long ago ended its quantitative easing program, which involved buying assets, it continues to hold more than $3 trillion in assets, which most economists agree is a factor keeping down long-term interest rates. In the same vein, even though China is no longer buying up large amounts of dollars and other foreign exchange, its holdings of foreign currencies continue to keep down the value of the Chinese yuan.
All of this should be pretty straightforward, but for some reason, the NYT seems determined to obscure issues here.
An article on United States trade policy with China dismissed the idea that the United States should push China to raise the value of its currency. It told readers:
“Mr. Trump’s advisers have also pressed China to refrain from further devaluing its currency to lift its economy as American tariffs bite. A drop in the value of the Chinese currency in the past year has already neutralized much of the economic effect of the 10 percent tariffs that Mr. Trump placed on roughly $200 billion of Chinese exports to the United States, said Eswar Prasad, a professor of international trade at Cornell University.
“Yet requiring China to manage its currency and keep it above a certain level would be a striking shift from the policy of past administrations, which have tried to encourage China to let the value of its currency rise and fall with market forces.
“‘It’s a very odd way to approach this,’ Mr. Prasad said, ‘to tell China, after having told them for all these years, ‘Let your currency be determined by market forces,’ to say, ‘Let your currency be determined by market forces only if it is appreciating.””
This section implies that China is doing nothing now to hold down the value of its currency. However, China holds a huge amount of international reserves, with the sum coming to more than $4 trillion, counting its sovereign wealth fund. Earlier this month, the New York Times ran a piece noting Russia’s extraordinary level of reserves, noting it had more than three times the reserves recommended by the IMF, relative to the size of its economy.
China’s reserves are even larger relative to the size of its economy than Russia’s, so unless the NYT has gone full Trump, China must have more than three times the reserve recommended by the IMF for a country its size.
This matters, because China’s holdings of excess foreign reserves keeps down the value of its currency relative to the dollar and other currencies. This is similar to the story of the Federal Reserve Board’s holding of assets. While the Fed long ago ended its quantitative easing program, which involved buying assets, it continues to hold more than $3 trillion in assets, which most economists agree is a factor keeping down long-term interest rates. In the same vein, even though China is no longer buying up large amounts of dollars and other foreign exchange, its holdings of foreign currencies continue to keep down the value of the Chinese yuan.
All of this should be pretty straightforward, but for some reason, the NYT seems determined to obscure issues here.
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CBS News had a piece warning its audience about the problems of large government debt. It noted projections of rising US government debt, commenting:
“The only countries with a higher debt load than the US are Portugal, Italy, Greece and Japan. The first three have become synonymous with profligate spending and economic woes post-Great Recession, while Japan’s lost decade of economic stagnation is a mainstay of economic textbooks.”
The first three countries are all in the euro zone. They do not have their own currency, but rather must adhere to rules set by the European Central Bank and the European Commission. Their situation is comparable to that of a state in the United States. No one disputes that it would be a big problem for Utah or California to run up very large debts.
Japan is the country most comparable, but the textbooks CBS refers to seem not to be very reliable. According to the IMF, Japan’s per capita GDP has increased by an average rate of 0.9 percent annually between 1990 and 2018, while this is somewhat less than the 1.5 percent rate in the United States, it is hardly a disaster. In addition, average hours per worker fell 15.8 percent in Japan over this period, compared to a decline of just 2.9 percent in the United States.
In spite of having a debt-to-GDP ratio that is more than twice as large as the United States, the country does not provide evidence to support the warnings CBS gives about large deficits. Its long-term interest rates are near zero, meaning the debt is not crowding out investment. Its interest payments on its debt are roughly 0.5 percent of GDP ($100 billion in the United States), indicating that they are not crowding out other spending priorities. And, its inflation rate is just over 1.0 percent, indicating that profligate spending has not led to a problem with inflation.
CBS News had a piece warning its audience about the problems of large government debt. It noted projections of rising US government debt, commenting:
“The only countries with a higher debt load than the US are Portugal, Italy, Greece and Japan. The first three have become synonymous with profligate spending and economic woes post-Great Recession, while Japan’s lost decade of economic stagnation is a mainstay of economic textbooks.”
The first three countries are all in the euro zone. They do not have their own currency, but rather must adhere to rules set by the European Central Bank and the European Commission. Their situation is comparable to that of a state in the United States. No one disputes that it would be a big problem for Utah or California to run up very large debts.
Japan is the country most comparable, but the textbooks CBS refers to seem not to be very reliable. According to the IMF, Japan’s per capita GDP has increased by an average rate of 0.9 percent annually between 1990 and 2018, while this is somewhat less than the 1.5 percent rate in the United States, it is hardly a disaster. In addition, average hours per worker fell 15.8 percent in Japan over this period, compared to a decline of just 2.9 percent in the United States.
In spite of having a debt-to-GDP ratio that is more than twice as large as the United States, the country does not provide evidence to support the warnings CBS gives about large deficits. Its long-term interest rates are near zero, meaning the debt is not crowding out investment. Its interest payments on its debt are roughly 0.5 percent of GDP ($100 billion in the United States), indicating that they are not crowding out other spending priorities. And, its inflation rate is just over 1.0 percent, indicating that profligate spending has not led to a problem with inflation.
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Of course, he wouldn’t do that. Steven Rattner isn’t concerned about the hundreds of billions (perhaps more than $1 trillion) that the government redistributes upward each year in the form of patent and copyright rents. These rents, which come to close to $400 billion annually for prescription drugs alone, are a direct and intended result of the monopolies that the government gives companies and individuals as a way of paying for innovation and creative work.
But Steven Rattner isn’t concerned about this enormous burden on our children, which makes folks like Bill Gates incredibly rich. Instead, he is worried about the much smaller burden of the interest on the debt, which currently nets out (after deducting money rebated by the Federal Reserve Board) to around $200 billion a year or 1.0 percent of GDP. He also is not concerned about the fact that the income of our children may be $1 trillion a year less, which has the same effect on living standards as paying another $1 trillion a year in higher taxes ($3,000 per person), because of the austerity that people like him demanded in the years following the Great Recession.
For some reason, no matter how much damage these people cause and how little sense their arguments make, we are still supposed to take their views seriously. Any ideas why?
Of course, he wouldn’t do that. Steven Rattner isn’t concerned about the hundreds of billions (perhaps more than $1 trillion) that the government redistributes upward each year in the form of patent and copyright rents. These rents, which come to close to $400 billion annually for prescription drugs alone, are a direct and intended result of the monopolies that the government gives companies and individuals as a way of paying for innovation and creative work.
But Steven Rattner isn’t concerned about this enormous burden on our children, which makes folks like Bill Gates incredibly rich. Instead, he is worried about the much smaller burden of the interest on the debt, which currently nets out (after deducting money rebated by the Federal Reserve Board) to around $200 billion a year or 1.0 percent of GDP. He also is not concerned about the fact that the income of our children may be $1 trillion a year less, which has the same effect on living standards as paying another $1 trillion a year in higher taxes ($3,000 per person), because of the austerity that people like him demanded in the years following the Great Recession.
For some reason, no matter how much damage these people cause and how little sense their arguments make, we are still supposed to take their views seriously. Any ideas why?
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Catherine Rampell noted in her column today the sharp slowing in health care cost growth in the last decade. This is an important point, which has received remarkably little attention. The Medicare projections and the budget projections more generally look far better than would otherwise be the case because of lower than projected health care cost growth. (It is hard to understand why the Obama administration did not try to take more credit for the slower cost growth.)
Anyhow, there is an important point to add to this picture. There has been a similar slowing in most other wealthy countries. According to data from the OECD, between 1990 and 2008, per person spending rose at a 6.7 percent annual rate. It slowed to a 4.8 percent rate in the years from 2008 to 2017. In Spain, spending growth declined from 6.9 percent to 2.2 percent. In the Netherlands the decline was from 5.9 percent to 3.4 percent. And in France the decline was from 5.5 percent to 3.2 percent.
While the slower growth in the United States is good news (it’s actually associated with better health among the elderly population where the slowing was sharpest), it seems that the driving force goes beyond policy changes in the United States. Some of the slowing in European countries was undoubtedly the result of austerity imposed by deficit-obsessed governments. But it is striking that the slowdown occurs in most wealthy countries at roughly the same time. And, this is in spite of an aging population that requires more health care.
Catherine Rampell noted in her column today the sharp slowing in health care cost growth in the last decade. This is an important point, which has received remarkably little attention. The Medicare projections and the budget projections more generally look far better than would otherwise be the case because of lower than projected health care cost growth. (It is hard to understand why the Obama administration did not try to take more credit for the slower cost growth.)
Anyhow, there is an important point to add to this picture. There has been a similar slowing in most other wealthy countries. According to data from the OECD, between 1990 and 2008, per person spending rose at a 6.7 percent annual rate. It slowed to a 4.8 percent rate in the years from 2008 to 2017. In Spain, spending growth declined from 6.9 percent to 2.2 percent. In the Netherlands the decline was from 5.9 percent to 3.4 percent. And in France the decline was from 5.5 percent to 3.2 percent.
While the slower growth in the United States is good news (it’s actually associated with better health among the elderly population where the slowing was sharpest), it seems that the driving force goes beyond policy changes in the United States. Some of the slowing in European countries was undoubtedly the result of austerity imposed by deficit-obsessed governments. But it is striking that the slowdown occurs in most wealthy countries at roughly the same time. And, this is in spite of an aging population that requires more health care.
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