August 16, 2003

"Exorbitant Privilege," or, How Worrisome Is the U.S. Trade Deficit?

Back in the 1960s Charles de Gaulle would complain about the "exorbitant privilege" that accrued to the United States by virtue of its role as the key currency in the post-World War II Bretton Woods international monetary system. Other countries had to worry about their balances of payments: they had to constrain demand or go through the distress of a devaluation in order to balance their trade. But the United States did not: it could simply print extra dollars to cover whatever excess of desired imports over desired exports happened to exist.

The Bretton Woods system is long gone. But the United States continues to reap "exorbitant privileges" from its role as key currency in the international monetary system. Today, however, they are different of exorbitant privileges.

Look at the figure below, showing America's net exports: measured net exports have been negative--often substantially negative--for nearly three decades. Some of these large trade deficits are the result of domestic economic mismanagement (the very large trade deficits of the mid to late 1980s were, in large part, consequences of the disastrously-botched fiscal policy that was the Reagan deficit). Some of these large trade deficits are the result of foreign economic mismanagement (the very, very large trade deficits of the late 1990s and early 2000s are in large part the result of insufficient demand and high unemployment in many of our major trading partners). Some of these large trade deficits are simply not there: the result of errors and omissions in the data that fail to capture a substantial amount of U.S. service and other exports (how much? Ah, now that is an interesting question).

But there is a portion of the persistent U.S. trade deficit that is not due to domestic macroeconomic mismanagement, not due to foreign macroeconomic mismanagement, and not the result of errors and omissions in the data, but instead reflects three exorbitant privileges that the U.S. has as a result of its key role in the world economy.

The first exorbitant privilege is that foreign central banks prefer to hold their reserves in dollar-denominated assets--and as the world economy expands, they want to hold more and more of such dollar-denominated assets. That finances a component of the trade deficit: after all, if they want to buy dollar-denominated assets, they first need to acquire dollars by convincing us to buy imports. (Moreover, this preference for dollar-denominated assets means that dollar real interest rates are a bit lower and the foreign exchange value of the dollar a bit higher than would be otherwise.)

The second exorbitant privilege is that rich people in many foreign countries think that dollar-denominated assets--large sums of money in the Vanguard funds or somewhere in Citigroup--are an important part of their political risk insurance portfolio. Suppose something bad happens in domestic politics, and you need to make a run for it in the Learjet (or, worse, have to paddle away in a small rubber boat and hope that the smugglers you have hired to guard you aren't close readers of The Strategy of Conflict). Large amounts of $$$$ stabled in financial assets inside the jurisdiction of the U.S. government make post-exile life a lot more pleasant. Thus there is an extra part of the trade deficit which is really a service export: the U.S. selling political risk insurance to the rich in foreign lands.

The third exorbitant privilege is that even if the rich abroad are confident about the political stability and economic prospects of your native land, the United States is still a very, very nice place to live in many, many ways. Lots of people living elsewhere know this, and think that even if they don't want to live in America, the odds are very good that some at least of their children or grandchildren will. How do you give your descendants the option of living in America--of becoming Americans? Investing a good chunk of your family wealth in America--and spending time there--is a good way to raise the odds that whichever of your descendants wish to become Americans will be able to slip through whatever immigration barriers will be raised in ten, twenty-five, or fifty years.

So there you have it. Some of America's trade deficit is not really there--the result of errors and omissions in the data, a "statistical discrepancy." Some of America's trade deficit is there, but is not "unsustainable": the portion of America's trade deficit that is the result of its three "exorbitant privileges" can continue until the age of the world changes: American can keep selling international reserve and liquidity services, political risk insurance services, and future immigration options to the central banks and rich of the rest of the world for a long time to come.

Only that portion of the trade deficit that is neither (a) a statistical discrepancy, (b) the result of "exorbitant privilege", nor (c) clearly a short-run and transitory cyclical phenomenon is cause for concern. How large is that worrisome component of the trade deficit? I don't know. It bothers me that I don't know--because I am supposed to.

Posted by DeLong at August 16, 2003 10:49 AM | TrackBack

Comments

Superb comments.

Still if we are headed to zero combined public and private saving as the deficit expands, but we have a steady inflow of foreign saving, is there any reason to expect investment will slow? Did investment slow during the 1980's as the domestic deficit increased? If not, then why did productivity growth slow? Perhaps the deficit is less of a problem if easily financed from abroad. I wonder???

Posted by: anne F&B on August 16, 2003 01:08 PM

doesn't the Euro affect the three privileges?
Considering it offers similar privileges, and assuming different profits from investments in Euro and Dollar
there might be a point were the Euro becomes more desireable. Not likely at the moment AFAICT, but that might change on a rather short time scale (10 years) in my layman opinion.

Posted by: markus on August 16, 2003 01:22 PM

Why should it change? There are pleasing places to live through Europe and attractive opportunites for investment, but friends from abroad always claim they find more attractive investments as well as pleasing places to live in America. Why should America lose the investment edge or become less attractive to live in?

Posted by: dahl on August 16, 2003 02:17 PM

Productivity growth was slow in the 1980s, and the deficits probably helped slow it down, but productivity growth was pretty crappy everywhere at the time, I think, no matter how much investment was going on.

This reminds me of a question I've had for a while. If the deficits of the 1980s had been eliminated by raising taxes alone, would the benefits of lower interest rates have outweighed the depressant effects of those higher taxes? If so, how much?

Posted by: Patrick S. Winslow on August 16, 2003 03:20 PM

@dahl: as a layman (actually an ignorant fool when it comes to economics) I have no idea what influences those decisions, but I can think of a switch in oil prieces from dollar to euro (after some crisis or other in the ME). Or it might come to pass that there is simply more money to be made in Europe (unlikely though). Finally, French food should not be mis-underestimated. ;)
Seriously, I have no idea what could bring about such change, but provided there is a real possibility the trade deficit might suddenly become a lot more real than Brad's analysis suggests.

Posted by: markus on August 16, 2003 04:29 PM

A stimulating set of comments, especially the reference to the political motivations of various foreign investors in the US economy. Some responses:

[1] Statistical Discrepancy.

Seems accurate, but you don't pin the causes down (admittedly speculative for any of us). a) Lots of exported services --- not least in information and communications industries --- are probably not reported to the Commerce Department. Think of a law firm in New York doing business by the Internet with a Canadian client. b) Lots of intra-firm trade across borders from one branch of a multinational with a US base to another branch that is never reported to the Commerce Dept. c) And lots of accounting manipulations, not least transfer-pricing that allows multinationals --- not just US but foreign --- to reduce their overall tax burdens.

[2] Exhorbitant Privileges

The political motivation is nicely brought out by your categories, but the term "exhorbitant privileges" seems excessive and tendentious and ignores just old-fashioned economic exchange. Consider

a) Central Banks rolling up dollar assets. Yes, but the counterpart is that they --- or at least their governments when they're private --- also want and seek to promote export-led growth, especially into the US economy. The new euro bank might have been an exception from 1999 on, concerned to make the new euro system work, but we do know that Berlin, Paris, and Rome among other government in the EU didn't mind at all a falling euro from $1.18 to 0.86 between 1999 and early 2002 . . . since which time, of course, the euro has risen to around $1.14.

b) Privilege Two -- rich people and businesses investing here --- seems overdone in the case of stable countries like Japan or the EU region or maybe even for lots of rich Indians. No doubt the political motive is greater for rich Arabs and Latin Americans and Asians not in Japan or India. But even they, surely, like the enormous offerings --- range, depth of bond and stock markets, dynamism of the US economy's long-term growth prospects, certainty of no capital controls etc --- that amount to a major economic motive too.

c) There is a huge imbalance in the global system, with the EU, Japan, and China waiting for an economic revival here. This is discussed in an article at my site on the Chinese economy: a short-term problem for the US (using an undervalued Yuan, back by huge dollar buyings daily for months now, to push such a surging export-drive in certain US industries --- a $100 billion plus deficit at an annual rate), but a long-term promise.

See http:www.thebuggyprofessor.org Article on China, August 2nd.

-- Michael Gordon

Posted by: michael gordon on August 16, 2003 04:58 PM

Brad: There's still a mystery here, and one _you_ pointed out a couple of weeks ago. It makes sense, for the reasons you outlined above, that people would want to put their money in Citigroup, say. But why doesn't Citigroup in turn invest all of that money outside the US, where returns are higher?

Posted by: Walt Pohl on August 16, 2003 05:57 PM

Very interesting, especially the bit on why rich foreigners keep US assets. But Prof deLong misses one reason that the US will long remain the ultimate bolthole for the rich and/or their children.

There are plenty of more pleasant countries to be poor in (my own - Australia - with its low crime, cheap food, good climates and an egalitarian ethos, for a start), there are even some countries that are as pleasant to be middle-class in (especially in Europe), but there are none that cherishes its rich the way the US does. Low taxes on the wealthy, money buys respectability, cheap servants, and sufficient social segregation to avoid crime - all make it a great bolthole.

Posted by: derrida derider on August 16, 2003 08:09 PM

Saddah Hussein put the final nail in his coffin in 2000 when he insisted on being paid euros for oil. People thought he was nuts then, but his bet on the Euro would have worked if our president hadn't decided to precision bomb him.

Venezuela is also asking for euros. But making venezuela part of an axis of evil is going to be a tough sell. But I am sure the neocons are working this.

Posted by: David on August 16, 2003 08:29 PM

http://www.techcentralstation.com/1051/techwrapper.jsp?PID=1051-250&CID=1051-061903C
Bubbleheads By Arnold Kling

Even though the dollar is overvalued, it is impossible for the United States to suffer a currency crisis of the sort experienced by Asian countries in the late 1990's or Latin American countries seemingly once a decade. The reason is that the United States has the luxury of having its debts denominated in its own currency.

When another country -- say, Argentina -- builds up a large foreign debt, that debt is denominated in dollars. Therefore, when the crunch comes and Argentina's peso declines in value, the cost of the debt increases. Argentina's borrowers, who can no longer afford to pay in dollars when their earnings come in pesos, are screwed.

On the other hand, when the United States suffers a currency decline, it does not affect the domestic value of our debt. We can still afford to pay in dollars. Foreign lenders, who find that they have lost purchasing power when they convert our payments to local currency, are screwed.

The beauty of having dollar-denominated debts in a world of currency fluctuations is that the United States is fairly insulated. If the foreign currency crashes, foreign borrowers take the hit. If the dollar crashes, foreign lenders take the hit. Foreigners are screwed either way.

Why do foreign investors invest so heavily in dollar-denominated assets and bear the risk of a decline in the dollar? Personally, I think it is because they are stupid...


http://csf.colorado.edu/forums/pkt/2003III/msg00169.html
Stiglitz on Global Financial Reform

Something is wrong with the global financial system. One might think the system would shift money from rich countries, where capital is in abundance, to those where it is scarce, while transferring risk from poor countries to rich ones, which are most able to bear it. A well-functioning global financial system would provide money to countries in their times of need, thereby contributing to global economic stability. Through an orderly bankruptcy procedure, a well-functioning global financial system would grant a fresh start to those who cannot meet their debt obligations, giving creditors an incentive to pursue good lending practices, while ensuring that borrowers able to repay loans do so.

The current global financial system does none of these things...


http://quote.bloomberg.com/apps/news?pid=10000039&sid=ajiC4QpfjGg8
An Asian Bond Market? Don't Hold Your Breath: William Pesek Jr.

Deepening the bond markets in individual countries and linking them together would lower borrowing costs and offer more creative financing options to companies that now borrow from banks. Selling more debt in local currencies could shield Asia from problems across the globe.

``It will benefit economies in Asia, whether you are an investor economy or a debtor economy,'' Philippine Finance Secretary Jose Camacho said in an interview.

Yet there are two problems with Asia's bond market plan: timidity and the initiative's priorities.

More than six years after the start of the Asia crisis, governments here are only now rolling up their sleeves to build liquid fixed-income markets. Officials have worked to deepen government debt markets, but not enough energy has gone into ones for corporate, asset- and mortgage-backed securities...

So far, Asian finance ministers have agreed only to buy bonds from each other that are denominated in dollars. That will encourage more dollar-bond issuance, defeating the whole purpose of an Asian debt market.

Posted by: dirk on August 16, 2003 08:54 PM

http://www.techcentralstation.com/1051/techwrapper.jsp?PID=1051-250&CID=1051-061903C
Bubbleheads By Arnold Kling

Even though the dollar is overvalued, it is impossible for the United States to suffer a currency crisis of the sort experienced by Asian countries in the late 1990's or Latin American countries seemingly once a decade. The reason is that the United States has the luxury of having its debts denominated in its own currency.

When another country -- say, Argentina -- builds up a large foreign debt, that debt is denominated in dollars. Therefore, when the crunch comes and Argentina's peso declines in value, the cost of the debt increases. Argentina's borrowers, who can no longer afford to pay in dollars when their earnings come in pesos, are screwed.

On the other hand, when the United States suffers a currency decline, it does not affect the domestic value of our debt. We can still afford to pay in dollars. Foreign lenders, who find that they have lost purchasing power when they convert our payments to local currency, are screwed.

The beauty of having dollar-denominated debts in a world of currency fluctuations is that the United States is fairly insulated. If the foreign currency crashes, foreign borrowers take the hit. If the dollar crashes, foreign lenders take the hit. Foreigners are screwed either way.

Why do foreign investors invest so heavily in dollar-denominated assets and bear the risk of a decline in the dollar? Personally, I think it is because they are stupid...


http://csf.colorado.edu/forums/pkt/2003III/msg00169.html
Stiglitz on Global Financial Reform

Something is wrong with the global financial system. One might think the system would shift money from rich countries, where capital is in abundance, to those where it is scarce, while transferring risk from poor countries to rich ones, which are most able to bear it. A well-functioning global financial system would provide money to countries in their times of need, thereby contributing to global economic stability. Through an orderly bankruptcy procedure, a well-functioning global financial system would grant a fresh start to those who cannot meet their debt obligations, giving creditors an incentive to pursue good lending practices, while ensuring that borrowers able to repay loans do so.

The current global financial system does none of these things...


http://quote.bloomberg.com/apps/news?pid=10000039&sid=ajiC4QpfjGg8
An Asian Bond Market? Don't Hold Your Breath: William Pesek Jr.

Deepening the bond markets in individual countries and linking them together would lower borrowing costs and offer more creative financing options to companies that now borrow from banks. Selling more debt in local currencies could shield Asia from problems across the globe.

``It will benefit economies in Asia, whether you are an investor economy or a debtor economy,'' Philippine Finance Secretary Jose Camacho said in an interview.

Yet there are two problems with Asia's bond market plan: timidity and the initiative's priorities.

More than six years after the start of the Asia crisis, governments here are only now rolling up their sleeves to build liquid fixed-income markets. Officials have worked to deepen government debt markets, but not enough energy has gone into ones for corporate, asset- and mortgage-backed securities...

So far, Asian finance ministers have agreed only to buy bonds from each other that are denominated in dollars. That will encourage more dollar-bond issuance, defeating the whole purpose of an Asian debt market.

Posted by: dirk on August 16, 2003 08:59 PM

My concern with the trade defict is more straightforward. I see a large number of decent paying jobs going overseas, at the same time that American consumers are going deeper into debt to purchase imported items. It seems that at some point in the future, or maybe even now, increasing demand will do very little to increase employment here. All the stimulus just "leaks" overseas. At that point neither fiscal nor monetary policy will be able to generate empoyment. What then?

Anecdote: The wife of a friend is worrying what career she should encourage her son to pursue, something that won't be sent overseas in a few years. That's the first time I've heard that one, but it now seems like a rational concern. Certainly don't go into IT, Gartner is forecasting 1M + jobs there to migrate in the next 18months...

-Marku

Posted by: Marku My Dog on August 16, 2003 09:05 PM

Marku My Dog writes:
> Anecdote: The wife of a friend is worrying what career
> she should encourage her son to pursue, something that
> won't be sent overseas in a few years. That's the first
> time I've heard that one, but it now seems like a rational
> concern. Certainly don't go into IT, Gartner is
> forecasting 1M + jobs there to migrate in the next
> 18months...

I actually find this stunningly irrational. Year after year, you hear about college students chasing after what is this year's "hot major". The only guaranteed outcome of this strategy, though, is that there are a *lot* of people out there unhappy with what they they are majoring in and where it has led them. The second surest outcome is that the forecasts will be fairly useless. Not even 5 years ago, everybody "knew" you had to be in high tech and have a high-tech major (or, better, blow off college and have the job already). Similar enthusiasms have arisen for MBAs, engineers, and even PhD academics (baby boom retirements were going to give us all the best jobs...unless hiring an adjunct turned out to be cheaper, of course).

I advise college students to choose a major that they like, and that suits them. Doing anything else is just asking for trouble.

Posted by: Jonathan King on August 16, 2003 09:26 PM

The decline in value of the dollar has been against the Euro, Canadian and Australian dollars, and Brazilian real. The dollar has been stable against almost all other significant currencies, and the decline against the Euro has been mild relative to the years of appreciation.

America offers prime investment opportunites and a prime place to store wealth. Attracting foreign capital should be a lesser problem, especially since interest rates are likely to rise as the deficit becomes more problematic. The more important problem will be that Americans will own less of our own income generating assets if private saving levels continue to be anemic.

The structural federal deficit we have created with the regressive changes in tax structure will make the anemic private saving level more of a severe problem. From a terrific budget situation in 2000, the Administration has assured a fierce problem in years to come.

Posted by: anne on August 17, 2003 07:05 AM

http://www.nytimes.com/2003/08/17/business/yourmoney/17VIEW.html

Factories Move Abroad, as Does U.S. Power
By LOUIS UCHITELLE

MANUFACTURING is slowly disappearing in the United States. That does not mean we should rush to preserve the remaining factories as historic landmarks. America will still be a manufacturing power in our grandchildren's lifetime, but that status is gradually eroding.

Why does this matter? Well, the essence of a great world power is its edge in producing not services but manufactured products that other people want — Boeing's airliners, for example, Intel's semiconductors and Caterpillar's earth-moving equipment. To the extent this output passes to foreign manufacturers, or even to Americans operating abroad, we lose the means to buy what we, in turn, want from others.

More than half of the manufactured goods that Americans buy are made abroad, up from 31 percent in 1987. If we continue on our path of ceasing to make merchandise that others want to buy from us, the danger is that these imports will be unaffordable for our descendants.

For that to happen, "you have to assume that manufacturing will continue to disappear," said David Heuther, chief economist at the National Association of Manufacturers. He does not make that assumption himself. He contends that America's high-tech advantage and its ingenuity will sustain the nation's manufacturing base.

Maybe. Right now, however, the exodus continues, at a stepped-up pace, government data show....

Posted by: anne on August 17, 2003 07:51 AM

This is a most important article:

NYTimes

"The proportion of the work force employed in manufacturing has fallen to 11 percent from 30 percent in the mid-1960's. Two of the 19 percentage points disappeared in just the last 28 months. On another level, manufacturing's share of real gross domestic product — representing all the goods and services produced in the United States — has edged down, even including in the count the output of foreign manufacturers operating here. The share of real G.D.P. has dropped to between 16 and 17 percent, from 18 to 19 percent in the 1950's.

Given manufacturing's importance in maintaining our status as a world power, the downward trends are alarming. The public, nevertheless, focuses only occasionally on the dismantling. It does so when lots of people are suddenly hurt, as they were in the early 1980's, when an onslaught of high-quality foreign imports coincided with a severe recession. The combination forced plant closings and layoffs on a scale not experienced since the Depression...."

Posted by: anne on August 17, 2003 07:56 AM

Then how do we answer the problem of American wealth loss as the balance of payments deteriorates? Stephen Roach and analysts at Brookings are worried at just this point.

Posted by: jd on August 17, 2003 08:34 AM


[1] Loss of mfg. jobs

This fear has been around for decades now, voiced loudly in some quarters, as though it betokens catastrophe for the US economy. Far from that being the case, our economy has created about 50 million new jobs, on a net basis, since the post-WWII turning point. And especially in the 1990s, most of the jobs were created were in new service industries with average or higher-than-average wages. See the Clinton Council of Economic Advisers' White Paper on this, published in early 2000: "20 Million Jobs: January 1993 - November 1999.

[2] One fear with more substance to it that was voiced in the 1970s, 1980s, and early 1990s had to do with the growth of labor productivity: would a largely service-oriented economy be able to foster growth in productivity as fast as one based more on mfg? (In fact, even in the fast-growth period of productivity advances in the 1950s and 1960s, mfg. accounted for less than 40% of the labor force, and was steadily declining then too.) As we now know since 1995, this fear too has proved wrong. Productivity advances have doubled at an annual clip, and we now know with greater certainty they weren't just a blip on the long-term growth of productivity caused by excessive investment in information-and-communication technologies.

If anything, it's the EU economies on the Continent that -- with a much higher percentage of the labor force in mfg. than we have (in Germany, well over double our 12%) --- that now find themselves stuck with pokey growth in productivity and excessive wage costs in mfg. compared to other rapidly industrializing countries in Pacific Asia and Brazil and Mexico.

Japan, too, is stuck with more mfg. jobs than its firms are competitive in, internationally viewed.

[3] A third fear connected with the declining mfg. sector in the US economy has to do with the problems of low-wage labor since the mid-1970s. Between 1975 and 1995, the bottom 20% were clearly losing out in terms of wages: overall, they suffered about a 15-20% decline in real wages --- a big problem. Some of that had, almost certainly, something to do with the loss of about 5 million mfg. jobs in the smoke-stack industries and autos in the Mid-West (which underwent, all the same, a remarkable decade-long transformation into a high-tech region), though how much isn't something that has been established.

What now appears to be the case, given the rapid increase in low-income wages between 1996 and 2000 --- they actually rose faster than the wages of the top 20% --- is that this fear, while not entirely misplaced in those days, was wrong. The key change after 1995 was the big reduction in unemployment, first below 5.0% (with most economists howling that this was lower than the natural rate of unemployment, inflation sure to surge soon in the wake), then below 4.5% and toward 4.0%.

Labor in low-skilled and mid-skilled jobs was so scarce that businesses in the Mid-West were going into prisons and securing the release of non-violent offenders whom they then trained to take jobs in those business firms. The result? A huge jump in low-income wages. In parts of California, starting wages were double the minimum wage in parts of the Bay area and Los Angeles.

[4] That doesn't mean some concerns being voiced about lost jobs in mfg more recently --- around 2 million or so since the start of 2001 --- aren't justified, given the strange performance of the job market since the technical end of the recession in the fall of 2001. In particular, the huge inflow of Chinese exports --- pushed by an undervalued Yuan that the Chinese government maintains by selling large quantities of Yuan daily for dollars and dollar-denominated financial assets (up to $300 million daily for months now) --- doesn't create a short-term problem, above all in the few industries like textiles and wood-products where those exports from China are concentrated.

(Our trade deficit with China is running well over $100 billion annually, far higher than even our deficit with Japan's . . . which, in any case, despite the Japanese government's efforts to keep the Yen from appreciating, has fallen from about $60 billion in 2001 and 2002 toward a annualized level of about $40 billion this year. And the rise of the Yen, about 7-8% against the $, has eroded the profits of lots of big Japanese firms, many of them, in consequence --- especially in autos --- accelerating the relocation of production to this country.)

What's to be done with the Chinese-created problem without outright long-term protection? I've grappled with this in a lengthy analysis published on this site: http://wwww.thebuggyprofessor.org See the article there for August 2nd on China, "A Short-Term Problem, A Long-Term Promise for the US economy." (It's the first of two-parts. The long-term side --- generally favorable to the US economy's trade and investment relationship with China --- will be set out soon. As a political scientist, I add, I'm especially interested in the implications of growing Chinese GDP and wealth for the Pacific-regional and global distribution of power.)

[5] On a trade-weighted basis, the dollar has fallen about 7-8%. As someone noted here, the fall has been against the euro mainly, the Canadian dollar, the Brazilian currency, and the Yen. It has risen against the Mexican peso and not budged against the rest of Asian currencies.

Fortunately, the last published statistics about the US trade balance is that it fell dramatically in the early summer. Exports were up sharply, imports down even more. That was to be expected, what with the lengthy period in which a dollar depreciation against certain key countries takes before relative price changes show up.

Even then, the length has been spun out and the effects lower because the EU economies and Japan's are so stagnant. In such circumstances, as DeLong notes, a rapidly growing economy here --- probably at a 3.0% annualized rate in the spring, far higher more likely since the end of June --- is bound to suck in more imports than otherwise, while finding it harder to locate customers in those slow growing countries for US exports.

That creates a major problem of imbalance in the global economy, which is hard to justify in 2003 . . . decades after the EU and Japan became wealthy countries with huge internal markets. Even China --- with a population of 1.3 billion --- is far too dependent on export-oriented growth (produced mainly from coastal mfg. centers, with a colossal influx of multinational investment from abroad).

Again, this is discussed at the buggy site in two other very recent articles besides the one on China:

“The Job Market and Unemployment in the US and the EU”
http://www.thebuggyprofessor.org/archives/00000101.php

“Foreign Competition and Industrial Competitiveness,”
http://www.thebuggyprofessor.org/archives/00000101.php

[6] US, Violent Crime, Other Havens

Derider, the Australian visitor here, notes something about crime --- violent and otherwise --- that is, I fear, a misconception: the US is a particularly crime-ridden country, again violent or otherwise.

In fact, as UN surveys of crime-victims undertaken every 4-5 years since 1989 by a Dutch university team show, the US is in the bottom third of industrial countries in both the incidence of crime, violent and non-violent, and trends. Australia, it will surprise Derider no doubt, tops the list of violent crimes per capita, and you are 6 times more likely to be mugged in London these days than in New York. The US population, moreover, shows the most confidence in our police, and simultaneously is found to show the least fear about going out into public spaces.

These stats --- which parallel those gathered by the US government in crime-victim surveys --- are also supported by a different data base that we and other governments use: crimes reported to the police and investigated. Interpol gathers these and publishes comparative studies too.

If you’re interested, you can find my comments on these --- plus links to other articles that deal with them, by me and others --- at another web-site where I posted on Friday:

“US vs. EU Crime”

http://www.samizdata.net/blog/archives/004236.html#004236

It’s a high-quality site and so is the commentary left by visitors. You’ll find the comments I left using the Dutch survey --- its links too, and links to other articles of mine on this --- if you scroll down the lengthy comments to my name or the buggy professor.

http://www.samizdata.net/blog/archives/004236.html#004236


---- Michael Gordon
----- http://www.thebuggyprofessor.org


Posted by: michael gordon on August 17, 2003 09:26 AM

[1] My first set of comments above [1] has an omission that can lead to a wrong impression:

" . . . our economy has created about 50 million new jobs, on a net basis, since the post-WWII turning point. . ."

Add after the post-WWII turning point, the year "1975". That's a turning point because the unusual rapid growth of GDP in West Europe, the US, and Japan between the end of the 1940s and then was brought to a jolting stop by the first oil-price hike and the resulting dislocations caused to industrial economies (and not just them alone).

Essentially, GDP growth in West Europe and Japan fell between 50 - 67%, and has never been improved on since except for Ireland and Britain and Spain, Portugal, and Greece. In the US, the slower grower between 1945 and 1975 --- fully to be expected in terms of convergence theory catch-up growth, with follower countries once launched on a path of sustained growth almost always growing faster than the lead-country --- GDP growth fell off far less: roughly by a third. What did fall by half or more was the growth in labor productivity.


[2] In the 1990s, the US economy recovered. In fact, it had been growing faster in GDP than the EU average in the 1980s, but it was only in the 1990s that our GDP advance and especially the renewed vigor in labor productivity growth made themselves felt. (Of the major industrial countries, only Britain has also improved noticeably its GDP and productivity growth since the 1975 turning point. Ireland, 4 million people (Britain has 57 million), has surged in economic performance and become the richest country in the EU!)

[3] As a result, by 2001, the EU average in per capita income compared to the US had fallen from around 85% at the start of the 1990s to around 68% according to EU stats, and the level of labor productivity had fallen back to 79%. (I posted on this recently at this site, with some comments too about a different study by Robert Gordon on this topic. For an expanded and updated version, see the buggy prof article, "Some Curious Problems with Cross-Country Comparisons of Labor Productivity: The EU and the US"

http://www.thebuggyprofessor.org/archives/00000105.php

[4] Of the other industrializing countries, only Pacific Asia maintain high growth rates of GDP after 1975. Even then, by the early 1990s --- a few years before the 1997 financial meltdown --- growth was slowing in both North and SE Asia, and noticeably so. The exception, slightly, was China in the post-Mao era, though there have always been problems with making sense of Chinese official national income stats, and the use of deflators for inflation.

Since 1997, the sustained high growth of the Chinese economy --- though officially a couple of percentage points lower in GDP growth --- seems doubly suspect . . . to the point that even the former Prime Minister, Zhu Rongji, publicly complained that the stats were bogus, a fabrication of local Chinese officials in the regions around the country, plus CP members, wanting to look good in Beijing.

For a discussion of the Chinese stats and their dubious quality, based on an excellent study by Thomas Rawski of Pitt, see the buggy article for August 2nd:

http://www.thebuggyprofessor.org/archives/00000102.php

--- Michael Gordon
http://www.thebuggyprofessor.org

Posted by: michael gordon on August 17, 2003 09:58 AM

Professor McKinnon (Stanford) has written a nice article on the seignorage privilege of the USA It can be found here:

http://www-econ.stanford.edu/faculty/workp/swp0101 3.pdf

He concludes that this privilege can only disappear by high inflation in the United States, which would make foreigners unwilling to hold dollars. In my opinion, this is going to happen sooner or later. Although the official measurement of price inflation in the US, the CPI, has been relatively low, one should not forget that the Fed has liquidified the monetary system like crazy since the mid 1990s, which has caused and is causing asset price (an API might be useful ..) bubbles in equities, bonds and real estate. Such bubbles, encouraged by the "US productivity miracle" talk, can, of course, not last. An eventual drop in asset prices will lead to high real debts and the easy escape route from this all will be high inflation path. The Federal Reserve have already outlined such scenarios, as they (Bernanke et al.) have proposed buying long-term treasuries and effectively monetizing the debt. IMO, Federal Reserve monetary policy making has been disastrous since the mid 1990s and I do not understand why the Federal Reserve Bank and its chairman Alan Greenspan, aka the "serial bubble blower" (Stephen Roach), are held in such high regard by so many economists. They have praised him for beating inflation, but these economists have, I think, focused too narrowly on the CPI. The Fed's policy of using two objectives (growth and inflation) has also been harmful as it has tried to keep up economic growth rates by pumping unnecessary liquidity into the monetary system. These two objectives are very hard to reconcile with eachother and I'm happy that the Bundesbank and its successor, the ECB, have primarily focused on one objective.

Posted by: Nescio on August 17, 2003 10:03 AM

The criticism I have of Alan Greenspan centers on the sad "fear" of the surplus ann support of Administration tax cuts. This was a prime mistake. American monetary policy however has been superb, and the Euro Bank should copy us.

Federal Reserve policy has been superb for 20 years! Fiscal policy was superb during the Presidency of Bill Clinton.

Posted by: jd on August 17, 2003 10:53 AM

Wouldn't it be much more parsimonious to say that investment flows to the US is simply driven by the super-linear (risk adjusted) returns to capital (in a broad sense, human, social, business...)?

Isn't super-linear returns actually the only way to explain the marked heterogenity in the distribution of capital: dense cities - vast rural areas, Bill Gates - ordinary people like me, 1st world - 3rd world etc?

Posted by: Mats on August 17, 2003 12:37 PM

Nescio,

Although the law states the objective of the Fed is to balance inflation with growth, members have stated that the primary target is inflation. Growth is only a related target in that any central bank which targets inflation is intersted in knowing the rate of growth which keeps inflation steady.

Also the inflation target of the ECB is 1.9999999999 (below but close to 2) which they have stated was recently exceeded, while the Fed is probably going for more like 2-3% (they don't want to say exactly) and believes the bottom limit is being breached.

While high asset prices could eventually lead to rising CPI inflation at some point in the future, what makes you believe the Fed will not switch course and head it off before it exceeds their limit? I don't see the point in fighting future inflation that might not show up for a decade. All that will do is cause further disinflation in the present.

Posted by: snsterling on August 17, 2003 10:27 PM

Once the statistical discrepancy is allowed for, how much of the US current account balance is accounted for by the fact that so many foreign governments--Japan, Europe, Africa, Latin America--insist on killing or at least severely constraining domestic investment opportunities, with regulations, tax policies, and cultures of risk aversion? I bet much more than half, and maybe all of it--allowing for where we are in the business cycle at any given time.

The only thing that would concern me would be a dependence on foreigners to chronically fund the federal deficit. Our reservations should be about long-term fiscal policy.

Posted by: JiminVirginia on August 18, 2003 05:44 AM

Question for those who have a handle on the reserves issue. Some posters have pointed to the possibility of oil sales being denominated in euros (not necessarily likely on a large scale, but you never know) as having the potential to undermine the US capital account. Oil payments seem to me just an intermediate step. It still comes down to reserve holdings. If oil payments are denominated in euros, but reserve portfolios of oil exporters not changed, then they end up selling the euros for dollars to the point that the reserve porfolio contains the desired level of dollars, euros, yen, etc. After an initial shift in short-term accounts, is there any impact from denominating some oil exporters' oil sales in euros, absent a change in reserve preferences?

On the point of Brad's first exorbitant privilege, M Gordon seems to have a point. This is not a portfolio decision, at its root. It is a trade decision, illegal under WTO rules and making lots of US interest pretty testy right now. It is a "privelege" only in the sense that we are willing to pay for higher levels of domestic investment now by paying returns on those investments to non-US residents (unless, of course, all those investors move to the US - pleasant and rich).

Posted by: K Harris on August 18, 2003 07:04 AM

K Harris,

Could you expand on "illegal under WTO rules"? Under the WTO are trades to take place under a specific defined monetary unit?

Posted by: James on August 18, 2003 12:08 PM

Re US global trade deficit? Simply drive by any US port facility and count the stacked containers and
parked foreign automobiles. Acres & acres of them.
"Experts" say no worries, after 25% devaluation of the $, US manufacturing and exports will rebound. ;)

Re what to tell your son? I tell mine to "major" in shop class and International Baccalaurette in high
school, while he can live at home. Then take any college major he can afford to complete as his R&R.
The only 'safe' careers are finance, and government.

Posted by: Marcus on August 18, 2003 01:20 PM

Brad, what effect is a period of deflation going to have on the real balance of trade? Seems to me it would increase it. Follow it up with a period of dramatic inflation and I think the world is going to have much less use for dollars.

Third world, here we come...

Posted by: Randolph Fritz on August 18, 2003 01:22 PM

Anne, I'm not sure that manufacturing jobs are the story any more. They became critical in a time when manufacturing required (1) easy access to a source of energy, like a river, (2) easy access to a transportation network (canals), (3) a large capital-intensive manufacturing plant, and (4) a large concentrated workforce to operate the plants.

Time went by, and (1) energy became increasingly easy to move, first as oil and then as electricity, (2) transportation networks became first regulated and then state-sponsored public services. So built infrastructure replaced geographic. Now we have information technology and (3) manufacturing is becoming increasingly small and generalized; what 19th-century technology did for energy and transportation, making it decentralized and general-purpose, 20th-century technology is bidding to do for capital. And with plants smaller, and more general in their capabilities (at the extreme, advances in material science might do away entirely with the need—that is a goal of nanotechnology), what is the need for (4) a large concentrated workforce? Manufacturing would, I expect, become increasingly local, and I am at a loss to predict the form of an economy so transformed.

For the moment, the old engine of industrialization is working away in the third world. But the end, I think, is in sight. And what comes after?

Posted by: Randolph Fritz on August 18, 2003 01:33 PM

Just goes to show you....

>"...How large is that worrisome component of the trade deficit? I don't know. It bothers me that I don't know--because I am supposed to."

...It's NOT the stuff you don't know. It's all the stuff you DO know (but refuse to take into account) that eventually gets you.

This'll only take a minute....

>"...So there you have it. Some of America's trade deficit is not really there--the result of errors and omissions in the data, a "statistical discrepancy."

(Unquantified, speculative "statistical discrepancies" 'cut' BOTH ways, by definition. Don't they? Let's call THAT dodge a wash, shall we?)

>"...Some of America's trade deficit is there, but is not "unsustainable": the portion of America's trade deficit that is the result of its three "exorbitant privileges" can continue until the age of the world changes..."

Leaving aside the gunk about "the age of the world", taking those 'privileges' in reverse order, let's dispense with...


>"...The third exorbitant privilege is that even if the rich abroad are confident about the political stability and economic prospects of your native land, the United States is still a very, very nice place to live in many, many ways..."

...first.

Nasty:

"Ronald Reagan and the Commitment of the Mentally Ill: Capital, Interest Groups, and the Eclipse of Social Policy: Alexandar R Thomas http://www.sociology.org/content/vol003.004/thomas.html "

"Corporations have chokehold on U.S. media"; Bernie Sanders http://www.dfw.com/mld/startelegram/news/editorial/3534788.htm

"The American Prosperity Myth"; Will Hutton http://www.thenation.com/doc.mhtml?i=20030901&s=hutton

"Power Outage Traced To Dim Bulb In White House"; Greg Palast http://www.commondreams.org/views03/0815-07.htm


THEN we come to....

>"...The second exorbitant privilege is that rich people in many foreign countries think that dollar-denominated assets--large sums of money in the Vanguard funds or somewhere in Citigroup--are an important part of their political risk insurance portfolio. Suppose something bad happens in domestic politics, and you need to make a run for it..."

Brutish:

"BUSH'S DEEP REASONS FOR WAR ON IRAQ: OIL, PETRODOLLARS, AND THE OPEC EURO QUESTION"; http://ist-socrates.berkeley.edu/~pdscott/iraq.html

"Media, Oil, and Politics: Anatomy of the Venezuelan Coup"; http://www.media-alliance.org/mediafile/21-3/venezuela.html

"Argentina Didn't Fall on Its Own: Wall Street Pushed Debt Till the Last"; Paul Blustein http://www.washingtonpost.com/wp-dyn/articles/A15438-2003Aug2.html

"Judge Rules Unocal Can Be Tried in US for Alleged Myanmar Rights Abuses"; http://www.commondreams.org/headlines03/0801-04.htm


And last, but by no means least, we have...

>"...The first exorbitant privilege is that foreign central banks prefer to hold their reserves in dollar-denominated assets..."

Short:

"China to retaliate for yuan criticism?"; (Reuters) http://money.cnn.com/2003/08/08/news/international/china.reut/

"Notes on the U.S. Trade and Balance of Payments Deficits"; Wynne Godley http://www.levy.org/docs/stratan/stratan.html

"Main Causes of the Great Depression"; Paul Alexander Gusmorino 3rd http://www.gusmorino.com/pag3/greatdepression/index.html


Whether they know it or not, "the bottom line" is: "Nasty, brutish and short" MIGHT add up to 'the good life' for a FEW well heeled' gangsters...

"A Tax Cut Plan Rooted in the Bush Pedigree"; Kevin Phillips (originally in Los Angeles Times January 12, 2003) http://homepages.wmich.edu/~jswanson/03s/100/articles/feb4art1.htm


...but the 'average American' (in posession of the facts) would probably beg to differ. THIS one certainly does. And anyway, the world's "consumers of last resort" are just about "tapped out"...

"Watch Out Below"; Jodie T. Allen http://www.usnewsclassroom.com/issue/030526/biztech/26deflation.htm


Consumer Credit Outstanding
(Millions of dollars; Seasonally adjusted)


Date Total Revolving Nonrevolving
Jan 43 6577.83 n.a. 6577.83
Jan 63 68656.46 n.a. 68656.46
Jan 83 385611.67 66726.23 318885.43
Jan 03 1741123.64 714885.21 1026238.43

http://www.federalreserve.gov/Releases/g19/hist/cc_hist_sa.html

"Why Deficits Matter"; http://www.washingtonpost.com/ac2/wp-dyn/A17296-2003Jul19?language=printer


Posted by: Mike on August 18, 2003 05:10 PM

Raj Gupta said in a Barron's interview in February that "The U.S. needs almost the world's entire savings to finance the deficit".

I've seen economists refer to the "debt to GDP" ratio, but they never to refer to the "debt to size-of-market-for-debt" ratio.

Ask a bond trader which is more important.

Posted by: W Stephens on August 25, 2003 07:20 PM

Raj Gupta said in a Barron's interview in February that "The U.S. needs almost the world's entire savings to finance the deficit".

I've seen economists refer to the "debt to GDP" ratio, but they never refer to the "debt to size-of-market-for-debt" ratio.

Ask a bond trader which is more important.

Posted by: W Stephens on August 25, 2003 07:25 PM
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