Saturday, 1 October 2016

You know the world is getting weird when ....

Greg Mankiw starts agreeing with Paul Krugman! But Donald Trump has made even this happen.
Their [two of Trump's economic advisers] analysis of trade deficits, starting on page 18, boils down to the following: We know that GDP=C+I+G+NX. NX is negative (the trade deficit). Therefore, if we somehow renegotiate trade deals and make NX rise to zero, GDP goes up! They calculate this will bring in $1.74 trillion in tax revenue over a decade.

But of course you can't model an economy just using the national income accounts identity. Even a freshman at the end of ec 10 knows that trade deficits go hand in hand with capital inflows. So an end to the trade deficit means an end to the capital inflow, which would affect interest rates, which in turn influence consumption and investment.

I suppose that their calculations might make sense in the simplest Keynesian Cross model, in which investment is exogenously fixed and consumption only depends on income. But that is surely not the right model for analyzing the impact of trade policy over the course of a decade.
Consider just how weird Trumponomics must be when Mankiw and Krugman are in agreement in opposition to it.

Actually the world is getting even weirder since its not just Krugman and Mankiw against Trumponomics, its Krugman, Mankiw and Don Boudreaux!

At Cafe Hayek Boudreaux has an open letter to Peter Navarro, one of Trump's advisers:
Dr. Peter Navarro
University of California – Irvine

Dr. Navarro:

You write in your document “Scoring the Trump Plan” that “[a]ccording to textbook theory, balanced trade among nations should be the long-term norm, and the chronic and massive trade deficits the US has sustained for over a decade simply should not exist.”

This claim is untrue. Nothing at all in economic theory says that it’s abnormal for a country to run trade deficits for over a decade, or even for over a century. Nothing in economic theory implies that years, decades, or even centuries of unbroken annual trade deficits are evidence of ‘unfair’ trade practices by foreigners or of self-destructive economic policies at home.

If investment opportunities available in the United States this year are especially attractive relative to opportunities elsewhere, the U.S. will run a trade deficit this year as global investors use some of their dollars, not to buy American exports but, instead, to invest in America. If next year the U.S. economy again offers especially attractive investment opportunities, America will run a trade deficit again next year. Ditto for two years from now if the relative attractiveness of American investment opportunities continues for that year. For an innovation-filled economy, such as that of the U.S., in a world in which the size of the capital stock can grow, there is no natural limit to the number of attractive investment opportunities that arise each year. Nor is there a natural limit to the number of consecutive years that a country can, or will, continue to remain a disproportionately attractive destination for investment funds.

The fact that you do not understand this elementary point – along with the fact that you utterly fail also to understand that investments in the U.S. made by foreigners are just as likely to create jobs in the U.S. as are investments made in the U.S. by Americans – is proof positive that you need to consult very different economic textbooks.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

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