2006-02-13

US Trade Deficit is Good?

Tom: What do you have to say about this analysis by one of the Cafe Hayek econoics professors?
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10 comments:

Tom Philpott said...

The problem with running huge trade and current-account deficits is this: Say China takes its dollars it earns from selling us toys and instead of using them to to buy a factory in Utah or stock in Google or U.S. Treasuries, it buys stock in Nokia, plunks a plant down in Ireland, or buys eurobonds. If that happens enough, the value of the dollar will drop. Many economists, including some right-wingers on Wall Street, fear such a scenario might cause a real run on the dollar, like a 15--20 percent plunge. What would be the consequences? Well, the Fed would have to jack up interest rates to attract more foreign investment (the bond market would jack up rates no matter what the Fed did). That would crimp growth and possibly trigger a recession. Now, why would the Chinese do that--crimp consumption power in its biggest market? Well, one scenario would be oil. If world oil supply conditions continue to be tight, expect increasing competition between the US and China over supplies. Our giant current account deficit gives China a de facto trump card over the US Fed. It could trigger higher rates whether the Fed wants it or not. In an oil struggle, it might just play that card. Even threatening too might be enough to cause a run on the buck.

1:59 PM
Paul Hue said...

Tom: Did you read the article? It seems to me that the free market internationalists (like my heroes at the George Mason U economics dept, Larry Kudlow, and Tommy Sowell) are correct that their view creates interdependancies amongst the nations involves, with each depending on the other to prosper.

Of course, any one company or one industry in any one country can hope for conditions (and manipulate conditions) so that it benefits to everybody else's detriment. For example: Enron. But in a free market, such cheating creates many enemies who are equally powerful.

You and Nadir believe that "the oil companies" conspire to boost petro costs. Let's ignore that for many years petro costs sagged, that unlimitted price-increasing by a cartel will kill the economies purchasing the oil, and the absense of a single entity that we can label "the oil companies." Let's just address this question: Are those evil oil companies really more powerful than the other evil companies that lose when petro prices increase (Walmart, Honda, Airbus, Boeing, Disney, Monsanto, etc.)?

If indeed you and Nadir (and Pat Buchannon?) are correct that petro consumption will inevitably lead to the world running out of fuel for its economic engine (we free marketeers generally fall under the sway of Julian Simon's "Ultimate Resource" thesis), could any side in your China vs. US scenario actually "win"? What sort of China would emerge from having utilized that "option" you described, with the US economy collapsing?

3:21 PM
Tom Philpott said...

So are you guys declaring the end of international financial crises? That has been declared more times than the end of oil. What if China decides European Union assets are more attractive--or has a banking crisis, and can no longer buys loads of US debt? What if Opec decides to accept yen, euros, or yuan, instead of demanding dollars, as it decided to do after some rather tense discussions with Henry Kissinger in 1973? Either scenario could cause a run on the dollar. It wouldn't necessarily cause a collapse, any more than stagflation in the 70s amounted to one. But it could mean tough times.
For the record, the ideas that US oil companies artificially jacked up crude prices and that we're about to run out of oil are contradictory. My understanding is that supplies are genuinely tight, because of an unexpected surge in demand from China and India. Are we running out? I have no idea. Logic tells me we will some day, but not when.

5:43 PM
Paul Hue said...

Tom: To all your "what if...?" quations, I have one for you: What do you propose as an alternative to letting Americans (in the form of individuals acting on their own, or collectively as evil "companies") freely choose what to purchase, and from whom?

9:55 AM
Paul Hue said...

====Tom=================
For the record, the ideas that US oil companies artificially jacked up crude prices and that we're about to run out of oil are contradictory.
========================

I agree. But you have simultaneously advocated both of these positions.

9:56 AM
Paul Hue said...

===========Tom=============
My understanding is that supplies are genuinely tight, because of an unexpected surge in demand from China and India. Are we running out? I have no idea. Logic tells me we will some day, but not when.
==========================

This is the position that I advocated, to explain the increase in prices, in conjunction with hurricanes and lack of US refining capacity. You and Nadir claimed that the evil oil companies, in collusion with their secret partners in the white house as well as your neighborhood petro station owners (and managers?), had conspired to increase prices. Never mind that this violated y'all's insistance that Bush had invaded Iraq to vouchesafe "cheap oil" to keep the blessed US economy humming (while of course increasing the weight of the western robber barron jackboot on the throats of otherwise prosperous thrid world nations).

We "ultimate resource" guys do not claim that the world will never run out of petro. We claim that over time petro prices will fall, and that free markets will resolve energy problems.

10:11 AM
Tom Philpott said...

You won't me find me on record saying that supplies aren't genuinely tight.

6:07 PM
Paul Hue said...

In the face of tight supplies, will you advocate permission for US citizens (organized into "companies") to explore and produce on currently off-limits US lands? Or do you accept such options only for such nations as Saudi Arabia and Nigeria?

10:22 AM
Tom Philpott said...

No, I think the idea of putting significant resources into drilling on public US lands borders on idiocy. I think it's ultimately a losing game. Paul Roberts explains in his excellent End of Oil how the oil market is so oddly constructed, with a huge portion of supply organized into a cartel that doesn't give much info about proven reserves, that a peak could happen without a big market signal (such as gradually rising crude prices.) Meanwhile, most scientists believe, and I see no convincing contrary evidence, that humanity's prodigious burning of fossil fuel over the last century is causing a potentially disastrous raising of global temperatures. Rather than squeeze the last drop out of the earth, here or in Saudi Arabia, I think we should conserve. There's no reason that every jackass riding around in an SUV couldn't be driving a little car that gets 60-70 or more mph. In a real sense, the $5 billion were dropping a month in Iraq is to ensure our access to oil. I can think of more constructive ways to spend that money. Meanwhile, let's build out extensive mass-transport systems, and work toward creating vibrant local and regional production systems, particularly with regard to food. The average item in the supermarket, whether it's a Safeway or a Whole Foods, travelled 1500 miles from farm to retail point. Moreover, it takes 3 calories of energy to create 1 calorie of food in industrial agriculture--35 calories of energy in feedlot beef production. These are much more urgent problems than the effort to squeeze a few months of crude supply out of, say, the Alaska National Wildlife Reserve.

1:30 PM
Paul Hue said...

Tom: You might think you have found "better" options than more drilling on US soil, but who are you or any govt agency to *mandate* such a thing? You and Paul Roberts favor what amounts to a managed economy, rather than an economy that results from the free interactions of free humans. I am certain that such interactions naturally produce the best possible outcomes, including outcomes unimaginable by you, Paul Roberts, or even me. If you and Paul Roberts want me to stop driving an SUV, I want you to convince me... or let the free market penalize me naturally for my stupid mistake.

How did Europe ever survive and overcome the "energy crisis" of over-timbering in the late 1880s? Did far-sighted govt officials restrict timbering and impose alternative energy requirements? Or rather did humans use their freedoms to create alternatives in response to market demands?

In many cases this view leads to actions that you support, such as ending farm subsidies and various special tax breaks.

I am certain that the behaviors that you and I find attractive (such as purchasing local foods with minimum refinement) will have their best chance in the freest market. I am glad for the choices that I do have which are not subject to the approval of you and Paul Roberts, and I am certain that my life would improve if I had yet more.

Tom, I have read many books and articles written by leftists like Paul Roberts. Can you please describe any books that you have read by free marketeers? I remember as a liberal the first time that I read a free marketeer book, Julius Simon's "Ultimate Resource." I read it in a grad school economics course, in order to disprove it in a review. Instead, the book changed my mind.

How wonderful you must feel to have had all your life's learning confirm the conclusions that you reached in high school!

4:01 PM

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