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August 25, 2007

Comments

Bruce Wilder

"a reduction of the U.S. current account deficit necessarily requires a reduction in U.S. expenditures relative to income"

Yes. The arithmetic ought to make this clear.

"a depreciation reduces the adverse impact on incomes because it raises demand for U.S. tradables"

I am not so sure the arithmetic on this is so clear, as to justify your characterization.

A depreciation reduces the price of what we sell; whether that reduces real income depends delicately on rents and elasticities.

I suspect that the editorial writers at the New York Times are making a large implicit leap between savings (thrift) and investment.

It is difficult to correctly analyze what is left unspoken, but I surmise an underlying narrative linking foreign exchange values and return on investment in domestic industry.

(Real) incomes are dependent on productivity, which, in turn, is dependent on accumulated capital stock, which is being depleted or eroded by low savings/investment.

It might be true that a lower exchange value for the dollar would induce import substitution investment or an expansion of export industry investment, but would this investment increase the capital stock or increase productivity? I don't know, but I think the N.Y. Times editorial writers are fumbling toward an analysis that connects savings/investment to the outcome of a decline in dollar foreign exchange value.

On the whole, I think I have to award this one to the N.Y. Times, on points.

ePToverPN

Dani Rodrik wrote: "In fact, a depreciation reduces the adverse impact on incomes because it raises demand for U.S. tradables."

Yes a real depreciation helps raise national income, by moving production into the tradables -- the sector with rising prices and out of non-tradables.

But a lot of Americans derive their income from the non-tradable production sector (e.g. the service sector is the largest employer in the US) but still spend a good deal of their incomes on tradables.

A real depreciation, entails, by definition, a reduction in the price of non-tradables to tradables. There is no doubt at all that this will reduce real incomes and living standards for many if not most of those individual Americans, especially those who do not have skills or mobility to move into the tradable sector.

robertdfeinman

I'm confused. It seems that many writers have implicit moral attitudes which they then try to justify by using economic arguments.

Take saving/investment/spending. Presently everyone is decrying the low rate of savings. I assume they mean savings by the average Joe who keeps increasing his debt load. At the same time corporate earnings have risen so the increased wealth of the nation has gone there instead.

Now what are these firms doing with their earnings? According to some they are not using them for "investing", but are using them for buybacks, raising dividends and takeovers. But these are considered "investments" by the firms themselves.

So if there is an economic argument that this behavior is worse than Joe putting his money in the bank, I've yet to hear it.

To my ear it just sounds like a channeling of Poor Richard's advice.

Having said this I also believe that stock buybacks and takeovers are not a good use of the money, but I can't give an economic argument either.

Dani Rodrik

Bruce Wilder --

Forget productivity and investment, which are long-run processes. What happens to those is anybody's guess. Think short-run adjustment instead.

You agree that reducing the external deficit will require a reduction in domestic expenditures (through a rise in either private or public saving).

Now this reduction in expenditure requires an equilibrium reduction in the price of non-tradables to tradables, or almost equivalently in wages relative to the price of tradables, in order to get the non-tradables market to equilibrate. Why? Because the reduction in expenditures falls in part on non-tradables. (The market for tradables equilibrates through a lower trade deficit.)

So either you wait for wages to adjust, or you do the easier thing and let the currency depreciate. If neither happens, you have excess supply in non-tradables, low capacity utilization, unemployment, and therefore lower income.

This is the standard adjustment mechanism, and that is the story I had in mind.

op

"either you wait for wages to adjust, or you do the easier thing and let the currency depreciate"

brutal class reality
but a balanced trade dollar
is a long run wagery winner
as "we"
regain a measure of industrial production

nothing about our ecnomy couldn't be fixed
by importing "back "
10 million industrial jobs
albeit at lower relative
real hourly rates then
obtained b4 they were exported the first time

Bruce Wilder

I appreciate the clarification. My remark was the consequence of a failure in reading comprehension.

Justin Rietz

Agreed 100%. Overall, I thought the article was confusing - in some cases mixing cause and effect, and making generalizations without drawing out the critical details behind the generalization.

For example:

"Currency markets generally punish heavily indebted nations by pushing down their currency."

They should clarify _why_ this is the case. It could be because investors believe the indebted nation's government will default on loans / bonds. It may be, as is the case in the U.S., that artifically low interest rates increase the amount of debt taken on by consumers and businesses, thus increasing the money supply. Moreover, low interest rates will cause foreign investors to look to other countries where they can get higher interest rates, thus reducing the demand for U.S. dollars.

Per Kurowski

There are other things in the toolbox beside devaluation and salary reductions and that should not be overlooked in the confusion since though they might mean less consumption they do not necessarily have to imply lower standards of living but perhaps more of changes in standards of living.

The following is a letter to the Editor that I wrote and that was published in the Financial Times, April 2, 2005.

A sensible country would raise tax on petrol, so what is US waiting for?

Sir, it is hard to understand the United States of America!

It has a huge fiscal deficit; it has a huge current-account deficit; it is by far the world’s biggest oil consumers both in absolute and in relative terms; now willing to explore for oil and gas in Alaska, it shows itself to be aware of the difficult energy outlook the world faces; it seems aware and resolute about the environmental problems (ignore the Alaska part) as it imposes other expensive environmental regulations, such as recycling—which, as no one likes to do it, requires the hiring of Salvadoreans; it speaks all over the place about having to reduce the vulnerabilities of its oil supplies.

As any other sensible country would, in similar circumstances, increase the taxes on petrol consumption and substantially help to solve all the above-mentioned problems; and as the US has always shown willingness to pull together as a nation, recently even to the extent of going to war on shaky grounds, the big question remains: why is it that the leaders of the US do not even want to talk about a substantial tax on petrol?

corvad

re: "as the US has always shown willingness to pull together as a nation, recently even to the extent of going to war on shaky grounds ..."

except when a big part of the US government, media, and corporatocracy (dems and repugs) imagines itself as the exceptional global subcommunity

is as the place where you don't have to pay taxes (it's considered stealing, somehow). makes us better than everyone else, see. distorts the market and so forth.

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