Warren Mosler links to a post by Stephen Gordon that reiterates the MMT position on terms of trade.
...trade policy would be much more sensible if our governments stopped confusing what the costs and benefits of international trade really are.The Globe and Mail (Canada)
Imports are a benefit, exports are a cost. Is it clear now?
Stephen Gordon | Professor of Economics at Laval University, Quebec City, and a fellow of the Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE)
28 comments:
Objection, assumes facts not in evidence. This assumes we're at full employment with any net imports freeing up labor for other necessary jobs. That's not the world we live in, net imports only serve to increase aggregate supply at a time when we already have a trillion output gap.
What's especially aggravating is that deficit hawks make precisely the oppose assumption-- they assume balanced trade in their full employment models, neglecting the 3% to 5% of GDP demand leakage we've been dealing with year in, year out for two decades (last time US ran current accounts surplus was 1992).
Erm wasnt it Phil P who linked it on FB?
Thanks, beowulf, for pointing out the obvious.
As I posted in the comments on Warren's site, the MMT trade policy also does not distinguish between scarce natural resources and knowledge based products.
When a software company sells their software to someone in a foreign country, is that a loss of real resources ? No. In fact, the more knowledge workers produce, the more knowledge they GAIN.
On the other hand, if knowledge workers are laid off due to slow sales, they LOSE knowledge.
The other issue with free trade is the loss of regulatory sovereignty. If we want to regulate, for example, that workers be paid a living wage and have safe work conditions, free trade allows corporations to escape those regulations by moving offshore.
beowulf Objection, assumes facts not in evidence. This assumes we're at full employment with any net imports freeing up labor for other necessary jobs. That's not the world we live in, net imports only serve to increase aggregate supply at a time when we already have a trillion output gap.
This is Marshall Auerback's objection, too. Warren would say that imports are still benefits in real terms of trade.
But in a cost-benefit analysis, the imports have a cost in terms of demand leakage, the real cost of which is higher unemployment.
Is this real (non-financial) cost "worth" the real benefit?
Naturally we can't just assume full employment any more than we can assume balanced trade. Either option requires a major policy shift away from the status quo.
What I'm having trouble following is the argument against the full employment option where we take all the net imports the world is willing to sell us and offset the demand leakage with fiscal accommodation.
For some reason there seems to be a different set of operating assumptions about domestic dollar savings desires vs foreign dollar savings desires.
On the one hand we can safely accommodate the leakage from domestic net dollar savings desires at full employment without creating a nation of zombies whose only activity is to stuff money in mattresses.
On the other hand, if we open our fiscal stance to accommodate foreign net dollar savings desires at full employment it leads inexorably to a nightmare of Kaldorian bread & circuses decadence.
Why is one leakage assumed to be stable when accommodated while the other leakage assumed to trend towards infinity?
Ha ha!
What is this post - a promotion of selling snake oil to poor nations?
But it's New, Improved Snake Oil with Smashing Orange Bits!!!
I don't think these folks get out shopping too often. We import almost most all tradables that we consume already! I'm not sure we could ever consume enough to satisfy the surplus nations desire to produce. The thousands of bankrupt factories in China and Vietnam certainly suffered from the economic downturn but I think there was an element of over capacity at play as well.
Unless the government were to start paying every person in the USA a monthly stipend of a couple hundred dollars or more, I don't see how we could ever consume all the goods that China, Brazil, Vietnam, Japan, Netherlands, Mexico, Korea, Canada, Germany and all the dozens of other countries who want to sell more to us than they buy. Come to think of it, there are probably more countries now that want to begger-thy-neighbor than there are neighbors. If it isn't realistic politically or as a practical matter of limits on consumption to run deficits large enough, we should draft trade agreements that have rules on what is acceptable not only on the real good trade side but also what is acceptable on the financial asset side. I'm not sure our fiscal authorities in Washington ever dreamed that foreigners would drain trillions of dollars in a little over a decade. To make matters worse is that they don't understand what hit them, they see those capital flows and balances as evidence that we have lived beyond our means.
I'm not sure we could ever consume enough to satisfy the surplus nations desire to produce.
The goal is full employment, not full consumption of the world's output.
Back around 1999-2001 when we had sufficient aggregate demand for unemployment to be in the neighborhood of 4%, the demand leakage from net imports was still in that same 3-5% of GDP it's been in for the last twenty years.
So why is it assumed now that if we had a fiscal injection today sufficient to get unemployment back down to that level that the rate of leakage from net imports would explode?
Or further, after reaching the limits of pump priming, why a JG bolted on to the end of that to mop up the last couple points of residual involuntary unemployment would have similar expansionary effect on the rate of leakage.
Without some kind of narrative or argument for why the rate of leakage will go up, it's hard to see what the downside of accommodation is.
gee,
http://www.data360.org/dsg.aspx?Data_Set_Group_Id=270
It doesnt look like the data is a consistent 3-5% gdp, this is a recent trend.
Based on this data, looks like the only thing that shuts it off is a recession.
If we never had a recession, looks like this % would explode and never recede...
I sort of agree with Ramanan on this...
but also, this doesnt mean we couldnt still use fiscal to maintain full employment...
What is the crux of this is what is the operative phenom that makes these external agents so zealous to acquire and save the premiere western financial assets?
What is driving this zealousness?
This we should be seeking to understand...
rsp,
What is the crux of this is what is the operative phenom that makes these external agents so zealous to acquire and save the premiere western financial assets?
They've learned from bitter experience that if they don't the West will screw them. Since the Asian currency crisis of 1997. They don't "love" USD. They just don't want to get beat up again.
Also involves are the US powers that be that are using imports to both control inflation and US wages, while they penetrate growing markets at the same time. They are fine with the outsized trade deficits. Look at corp profits.
"They are fine with the outsized trade deficits. Look at corp profits."
I find it hard to argue with you about this point Tom, Immelt has been driven to the point where he is unapologetically speaking with admiration of "Communism" lately..
But....
"They don't "love" USD. They just don't want to get beat up again."
They could just proceed to have nothing to do with us Tom... no one is twisting their arm...
This is an interesting story where some slaves over in China put a "message in a bottle":
Background:
http://www.renewamerica.com/columns/swank/071223
Message in Halloween decorations:
"If you occasionally buy this product, please kindly resend this letter to the World Human Right Organization. Thousands people here who are under the persicution of the Chinese Communist Party Government will thank and remember you forever."
The graveyard kit, the letter read, was made in unit 8, department 2 of the Masanjia Labor Camp in Shenyang, China.
Chinese characters broke up choppy English sentences.
"People who work here have to work 15 hours a day without Saturday, Sunday break and any holidays. Otherwise, they will suffer torturement, beat and rude remark. Nearly no payment (10 yuan/1 month)."
Ten yuan is equivalent to $1.61.
"People who work here, suffer punishment 1-3 years averagely, but without Court Sentence (unlaw punishment). Many of them are Falun Gong practitioners, who are totally innocent people only because they have different believe to CCPG. They often suffer more punishment than others."
"If you occasionally buy this product, please kindly resend this letter to the World Human Right Organization. Thousands people here who are under the persicution of the Chinese Communist Party Government will thank and remember you forever."
The graveyard kit, the letter read, was made in unit 8, department 2 of the Masanjia Labor Camp in Shenyang, China.
Chinese characters broke up choppy English sentences.
http://www.oregonlive.com/happy-valley/index.ssf/2012/12/halloween_decorations_carry_ha.html
No one in the west is making them do this... they are doing this on their own, in zealous pursuit of western financial assets... it's sick and demented... we should not allow them to do this...
rsp,
"we take all the net imports the world is willing to sell us and offset the demand leakage with fiscal accommodation."
The basic idea behind trade isn't to allow one country to toil while another produces electronic entries in a spreadsheet.
The current situation is a race to the bottom. Take the calculations to the limits in your head or on a spreadsheet for a few decades and work out the end game consequences using an unrealistic "if the current trend continues" set of assumptions.
All countries are in this boat together and need one another to do their parts in financial and real terms.
In the short term we can have a free ride in real terms while dollar accumulation lasts but in the medium to long term the world needs everyone to produce, reasonable standards of living for everyone (to avoid violence inequality and whatnot) and every country needs to run deficits to offset their own private savings, they need to have growing or at least stable populations, basic environment standards and other real agreements that minimize the propensity to game the international trade system in a way that has caused it to become less efficient than if it did not exist.
The basic idea behind trade isn't to allow one country to toil while another produces electronic entries in a spreadsheet.
I agree. The wise policy choice on the other end of the trade is to cultivate domestic demand and move away from export-dependence. If the flow of net imports dries up because other countries are gearing their own economies towards domestic prosperity I'll be the first one to stand up and cheer.
I just don't see where it's something we can do for them, they have to do it for themselves.
so Matt, you think the only reason foreigners want to accumulate dollar financial assets is because they are "sick and demented"?
That doesn't sound like the basis of a very plausible economic theory to me...
Ryan Harris,
I agree. The question is whether the transition to that more balanced situation will involve massive disruption or not.
"they have to do it for themselves"
It might require intelligent international cooperation, something the post-Keynesians have been saying for a long time.
Wray, Mosler et al, don't seem to think that's necessary, and that's basically the major disagreement between them and most post-Keynesians.
Tom,
the Lavoie introduction to Post Keynesian economics is no longer online, so that link doesn't work anymore.
It looks like it was just a temporary glitch in the matrix.
Y,
I don't believe in 'rational expectations'... They are not rational if they would treat their fellow countrymen this way in order to gain USD balances thru export markets... They are caught up in 'usd-love' and it is irrational...
What is a 'plausible economic theory' anyway? When all economists currently believe we are 'borrowing from the Chinese'?
True explanations will not be found within 'economics' IMO.... Rsp
The question is whether the transition to that more balanced situation will involve massive disruption or not.
"Globalization." How it goes depends on the model used. The neoliberal model is designed to produce a political (power-based) desired effect under the guise of an economic program. The PKE alternative is, as Ramanan puts it, "concerted action" to produce an economically efficient and effective international process.
MMT economists seems to think that the reality is that countries will act in what they perceive as their best interests. Under neoliberalism, based on neoclassical economics, what's good for America is what's good for the elite. Under a Keynesian approach in which full employment is the guiding value, what's good for America would be good for Americans. If all countries implemented a Keynesian approach, then there would be a concerted approach that would result in exchange rates balancing trade through price.
As I see, it in the final analysis from many perspectives converging — social, political, and economic, it's a matter of getting neoliberal elites out of the driver's seat of globalization. Neoliberalism has been commandeered by transnational corps and finance capital to serve its interests. Many Austrian economists as well as Keynesians operating within the neoclassical synthesis are on board with neoclassical economists in supporting the neoliberal ideology and promoting the agenda, too.
"Politically independent" central banks and international institutions like the IMF and World Bank (controlled by the West) are indicative the anti-democratic and even anti-free market approach, since this is basically the imposition of a command system controlled by unaccountable technocrats.
Until then, no other approach will be viable due to vested interests resisting change and imposing the status quo. So let's join together in opposing a common opponent that leading the world over the edge into a dark future controlled by an invincible elite that controls all major institutions of society, which is the aim, the plan, and the track we are on. In my view, anyone who thinks that this is happening accidentally or is just a phase is being naive.
y the Lavoie introduction to Post Keynesian economics is no longer online, so that link doesn't work anymore.
Thanks, I flushed the link.
Tom, I agree with what your saying, but I think I also agree with the post-Keynesian view that the balance of payments represents a real limit to the autonomous expansion of demand.
I'm not sure countries other than the US could reap the benefits of CADs so easily.. I might be wrong.
I'm not sure countries other than the US could reap the benefits of CADs so easily.. I might be wrong.
If it were a priority to get the entire world up to speed quickly it could be done. The problem is not nominal or financial but actual, and the problems are ignorance and self-interest. There is no lack of demand and there is no lack of supply that cannot be addressed witha commitment to innovation. One of the big problems that humanity is facing it the commitment of resources to military use. MMT needs to be integrated with ecological economics and energy economics, for example, and a plan laid out for getting there. The problem is that the issues are being framed in terms of the prevailing neoliberal paradigm, and as a result can go nowhere due to the design, which based on elite power.
So what exactly is the issue here?
Dan, I think that more that a few people think that the assertion, "Imports are benefits in real terms of trade," is sort of meaningless out of context and in some contexts seems counterintuitive. There is also a level of discomfort with the general perception of the MMT position on trade as relying on the exchange rates alone.
Art Shipman cites a relevant quote from Adam Smith here.
From The Wealth of Nations, Book 4, Chapter 1:
A rich country, in the same manner as a rich man, is supposed to be a country abounding in money; and to heap up gold and silver in any country is supposed to be the readiest way to enrich it. For some time after the discovery of America, the first inquiry of the Spaniards, when they arrived upon any unknown coast, used to be, if there was any gold or silver to be found in the neighbourhood? By the information which they received, they judged whether it was worth while to make a settlement there, or if the country was worth the conquering.
Plano Carpino, a monk sent ambassador from the king of France to one of the sons of the famous Gengis Khan, says, that the Tartars used frequently to ask him, if there was plenty of sheep and oxen in the kingdom of France? Their inquiry had the same object with that of the Spaniards. They wanted to know if the country was rich enough to be worth the conquering.
Among the Tartars, as among all other nations of shepherds, who are generally ignorant of the use of money, cattle are the instruments of commerce and the measures of value. Wealth, therefore, according to them, consisted in cattle, as, according to the Spaniards, it consisted in gold and silver. Of the two, the Tartar notion, perhaps, was the nearest to the truth.
So what do people think about this picture:
1. In a world of barter, it would be obvious that exports are a cost and imports are a benefit. Exports are something of value, the product of both valuable resources and valuable labor that are expended in the production process, that you give away in order to get the imports. In such a system trade is automatically balanced. The price ratios between goods are the same as the exchange ratios, so there is no way in which there could be a trade surplus or trade deficit.
2. In a trading system in which all of the traders use a single exogenously produced medium of exchange, then the same kind of analysis seems to hold more or less, assuming the prices/exchange rations are coherent. An export is an exchange in which you receive some amount of the medium of exchange equal in value to the good you exchanged for it. An import is an exchange in which you receive some good equal in value to the quantity of the medium of exchange you exchanged for it. If more goods and services are exported than are imported, more of the medium of exchange is imported than exported. Describing this situation as a “deficit” of some kind seems strange, since the medium of exchange has real, significant exchange value for the parties to the exchange.
The analysis of this case doesn’t seem significantly different if there are multiple media of exchange that are themselves exchanged.
3. In an idealized trading system in which at least one of the traders is the cost-free producer of the medium of exchange, that producer doesn't need to acquire the medium of exchange via exports in order to purchase imports. However, the producer does need to be prepared to surrender exports in exchange for the medium in order to give value to that medium, so that other will be willing to accept it in the first place in exchange for desired imports.
4. However, this idealized system doesn't really apply to us very well, since importers and exporters are for the most part not countries, but firms that happen to be located in countries, all of which are users of the currency, not its producers. A firm needs to sell something to acquire liquid financial assets. It incurs a cost by shipping a good or providing a service, but it acquires a benefit by receiving some of the medium of exchange.
5. The categories of “import” and “export” are somewhat artificial. There is a government sector for each government that produces its own currency, and a universe of economic agents outside that government sector who use the currency as a medium of exchange – the currency zone for the currency. There happen to be various national borders lying across the currency zone.
We’re talking about a world of mostly voluntary exchanges. Since these exchanges are voluntary, presumably both parties to each of the exchanges think that they benefited from the exchange.
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