Robert Samuelson Still Doesn't Get Why the 'Trade Deficit' Is Great News
A little ways back the New York Times published a piece about the globalized nature of the iPhone. While designed in Cupertino, the inputs necessary to create the supercomputers that line a growing number of pockets come from all over the world. Apple is hardly alone.
Boeing’s 787 Dreamliner is manufactured in six different countries, while over 30% of the most American of American cars (the Ford F-150) is foreign made. Notable here is that none of what’s been written so far takes into account the endless global cooperation that goes into the creation of the inputs that lead to smartphones, airplanes and automobiles.
All of the above is a reminder of Robert Mundell’s crucial, but nearly always ignored point about “closed economies.” There’s no such thing. When Mundell makes plain that “the only closed economy is the world economy,” he’s stating an obvious truth that nearly always eludes economic commentators, right and left.
Keynesian thinker Robert Samuelson is one of those for whom Mundell’s essential truth hasn’t quite sunken in. It shows up yet again in a column he wrote about the so-called “trade deficit.” Samuelson is right that this most worthless of accounting abstractions is “good news,” but his closedmindedness to the globalized nature of everything has blinded him to why it is.
Samuelson has largely reduced what isn’t (the “trade deficit”) to a currency phenomenon. Earlier this week he wrote that “A higher-priced dollar is what makes U.S. exports more expensive and U.S. imports cheaper.” As he so confidently asserts about the latter, “Presto, there’s the formula for persistent trade deficits.” Actually, no.
Samuelson ignores the simple truth that money is a veil. Changes in its value can’t alter the real price of anything any more than Kim Jong-un can make himself tall by decreeing the length of the inch shorter. Whether it’s currencies or measures of length like an inch, reality intrudes rather quickly.
No matter what North Korea’s diminutive dictator does to the inch, he’ll never be tall. Just the same, foreign goods will never be rendered cheap via currency devaluation. Samuelson’s error is in forgetting that with anything economic, the impact is always global.
Applied to foreign goods bound for the United States, they, like Apple, Boeing and Ford products, result from global cooperation. This includes inputs produced around the world. So if the policy of foreign countries is devaluation of the currency, no trade advantage is gained. Producers of goods and services aren’t dolts, and because they aren’t they’re not going to hand over tangible goods, services and labor for devalued money as though the devaluation never took place. Money is just a measure, so if you shrink the measure, it’s going to require more of it to purchase what’s needed. Only economists wholly untouched by the most basic real world truths could believe that producers would be so dense as to exchange established value for paper that’s shrinking in value. And it doesn’t stop there.
Samuelson is once again a Keynesian thinker. He believes consumption powers economic growth. In that case he must think Haiti is booming. Figure that consumptive desires there are endless. Everyone wants to buy things with abandon, but everyone is limited in their consumption by how much they produce. Production is of course a function of investment whereby investment powers the creation of more and more goods and services at lower and lower costs. Translated, investment is always and everywhere the driver of cheaper, more competitive goods. To use one of countless examples, the fastest computer in the world today is three times as powerful and four times cheaper than the 2nd fastest computer built three years ago. Feverish investment continues to result in faster, more capable technology, that is also quite a bit cheaper.
What Samuelson imagines is the source of falling prices is logically the biggest barrier to them. He forgets that investors are buying future currency income streams when they put money to work, which means devaluation is a tax on their investment. In short, Samuelson is flamboyantly incorrect in his “Presto” assertion that cheap currency is the driver of falling prices. Not in a globalized economy, and not in any economy really. Money is once again a veil.
Samuelson’s other major error is in presuming that trade doesn’t balance. Of course it does. There are no “deficits” in trade. The individuals who comprise the U.S. economy are only able to “import” insofar as they export. With the mythical U.S. “trade deficit” in mind, the news per Samuelson is good, but not for the simplistic reasons offered up by the Washington Post economist. The good news is that headquartered in the U.S. are the most dynamic and valuable corporations on earth. Demand among global investors for shares in these brilliant companies is endless. There’s your “trade deficit.”
You see, the import of shoes, socks, t-shirts, and televisions by the world’s richest producers (that would be the American people) factors into the so-called trade balance. Basically, Americans import all manner of prosaic goods not in their interest to produce. On the other hand, export from the U.S. of shares in the world’s most valuable companies does not factor into what isn’t: the trade balance. In reality, all trade balances by definition simply because trade takes place among individuals. The “deficit” in trade is merely an effect of substantial foreign investment in the U.S. The great news isn’t a currency story per Samuelson, rather it’s a story of intense demand among investors the world over to put their money to work in the United States. Investment once again powers economic growth, and what isn’t (the “trade deficit”) is a consequence of copious investment stateside.
After that, Samuelson typically offers up trite commentary about how Chinese companies are somehow enhanced by state meddling in what they do, and there the economist is just showing how much the simple (economics) has passed him by. Goodness, state subsidies are the certain path to economic stagnation mainly because they prop up the present at the expense of the future.
The U.S. economy booms, and is a magnet for investment, precisely because government subsidizes the status quo much less here. What Samuelson naively thinks helps Chinese producers is what would suffocate economic progress stateside. It’s the replacement of the existing order that powers prosperity, not its maintenance.
But that’s a digression. Samuelson’s thinking is calcified, and it’s rooted in the false notion that country economies are impregnable islands of economic activity, as opposed to integrated parts of global whole. And so he misdiagnoses, while misunderstanding.