China Trade Deficit

James Fallows has a very good article on our trade deficit with China in the Atlantic monthly that I’ve been recommending for a week now. If there’s an issue that suggests to me that I need to reconsider my political outlook, it’s sitting in the middle of the second page, where he relates that America’s annual savings rate has hovered near zero percent, often below zero.

I also suspect that the low national savings rates interact with the issue of budget deficits. I’m can’t get myself into the mindset where deficits are a huge evil, but when the government is hemorrhaging money, and the American people aren’t the ones lending it, that strikes me as worrisome.

Politically, this is obnoxious since in spite of all the rhetoric that’s been going on in the past few years, the Republicans are still more fiscally responsible. While the things the democrats want to spend money on (healthcare, etc) strike me as better than the Republicans’ priorities (endless war, irresponsible tax cuts, etc), that doesn’t change the fact that budget deficits would probably be larger under any of the three primary Democrats.

On this note, I found an old post by Megan McArdle on fiscal responsibility. I particularly like her explanation of how budget policy is not the sort of thing you should ever yell about, no matter how much you care.

Of course, I only made it through intro econ and a semester of macro, so veritas cum grano salis. In particular, I don’t know how to weight fiscal responsibility against the possibility that we’re headed into a recession–that’s not generally the time to worry about a budget deficit.

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3 responses to “China Trade Deficit

  1. I’m curious how the point about American savings would lead you to a different political outlook.

    A couple points of disagreement:

    Are you unconvinced that deficits (i.e., lower savings) lead to higher interest rates, which lead to less investment, which leads to slower growth? The theory has its deniers (eg, http://en.wikipedia.org/wiki/Ricardian_equivalence), but it seems convincing to me. I believe that in recent history, countries that balanced their budgets have enjoyed the fastest growth, cet par. Compare Spain, Australia, Ireland, and Canada to the Euro area (obviously there’s a lot to control for, but still). Also compare early/mid 90’s massive deficit Canada to late 90’s/early 2000’s balanced budget Canada. I think a similar point can be made about B. Clinton.

    If you look at how this argument has played out in at least some real life cases, it’s clear why it’s a very important political issue. In Canada, proponents of balancing the books argued that it was necessary in order to restore high economic growth. Opponents argued that it would worsen social programs and hurt the poor. They also argued that the growth argument was masking plans to permanently scale down public programs and the welfare state. History has proved the last claim wrong.

    You may be right that during a recession is not the best time to try to balance the books, though.

    I’m also dubious of the claim that Republicans are more fiscally responsible. I admit I don’t know the current candidates’ plans in enough detail to comment on them. But I wouldn’t have thought that would really be conclusive to say anything about the parties generally. I recently tried to find a graph of the real budget deficit over time to see what various presidents did with it. I couldn’t find one. But just off the top of my head, Clinton was certainly more fiscally responsible than the Republican presidents who came before and after him. I think the mainstream of the Republican party, since around the time of Reagan, actually like budget deficits, as it’s part of their “starve the beast” strategy (though this may not apply to Bush). The deficits caused by tax cuts will eventually cause reduce government’s role in the things they don’t want it to play a role in. Another theory proven very wrong by history. In any case, if there is a difference, I wonder whether it’s significant.

    Sorry if this is too long for a comment.

  2. There’s a lot here to respond to.

    I think the issue about which party would do what centers around the health care plans of the Democrats. They’re incredibly expensive. The counter-point is that they’re probably a very good place to spend money. But I don’t think the underlying point that the current camp of Democrats would probably expand deficits relative to their republican counterparts (I think this is obviously true in the case of McCain). The wild-card is whether they might reduce our expenditures on military adventures. Here’s to hoping!

    I’m of the camp that thinks the Clinton years were more a product of underlying economic forces that favored fast growth, low interest rates, etc, rather than anything he did. Note the fact that it was the heyday of the “the fed is brilliant!” story (and this story matters because of investor confidence, etc).

    Lastly, I did I say I can’t get myself to think the deficits are a “huge evil.” I suspect we should aim to reduce the debt as a percentage of GDP–this means running either a smallish deficit or (better) a smallish surplus. Here’s a nice graph. The Reagan and Bush years were bad, but I don’t know that we need anything like a decline at the level of the Clinton years.

    Lastly, I should say that it’s not like I spend a ton of time thinking about economics. Just yesterday’s conversation suggests that you know more than I do. So veritas cum granulo salis!

  3. I’ve forgotten most of my economics other than the slogans. So that Latin phrase for me too.

    I don’t know, I wonder if what you were saying about the experience issue being like a Rorschach test applies to fiscal responsibility. Granted, the Dems’ health care plans will be expensive. But, I think, we can expect lower tax cuts from them and, as you pointed out, less military spending. Historically, as the graph shows, it certainly isn’t the case that the GOP is more fiscally responsible. And at present, neither the White House nor Republicans in Congress are substantially different than Democrats on this issue, are they? (Indeed, though I don’t have the time to check it out, I would expect that Democrats were less likely to vote for the two main causes of the current fiscal mess, viz. the tax cuts and the war.)

    It’s certainly true that deficits per se are no evil at all. I think everyone could agree to that. As I see it, the important difference is between a short-term deficit due either to a short-term rise in costs or a short term reduction in spending for some clearly defined purpose, vs. deficits caused by long term spending projects without any long term funding strategy. i think this is what Yglesias is saying in the article you linked. Many Republicans (Reagan was explicit about it) favor eliminating long-term funding through tax cuts without eliminating long term spending projects.

    As for Clinton, of course there had to be other forces favoring growth. But things he did having a positive impact and other things doing so as well are not mutually exclusive. It’s something I haven’t spent a lot of time thinking about either, but I do think the theory linking deficits to interest rates and growth is sufficiently well confirmed; perhaps Clinton isn’t the best piece of evidence. I’m not sure. I would be amazed, though, if sound fiscal policy failed to have any positive impact.

    You might be interested in looking at the Canadian case and I’m not just saying this because I’m biased. There, the issue of spending on social programs vs. fixing the deficit and cutting debt emerged very clearly, since social programs=government spending there. At the time it was going on (I was a teen ager) I thought it was starve the beast (though I didn’t know the phrase). But in retrospect, I think it’s worked for the country. It may have helped that the same party, the Liberals, who were very disciplined and competent economic policy-makers, was in power for several consecutive terms to oversee the budget balancing. Anyway, there’s a lot of stuff out there on the effects of the balanced budget on growth and tax revenue. In Canada, the growth did generate increased tax revenue and budget surpluses starting in the late 90’s, and the government, for a while, split this between social programs and tax cuts. I haven’t kept up with this stuff, though, for probably about five years.