Tuesday, January 17, 2017

Truth, Lies, and Misrepresentations

We are learning a lot lately about how people purposely lie and mislead on social media. Especially sad is how people fabricate news stories to the delight of friends who they know will spread the lies multiple times. The term urban legend has been around a long time. I understand it to mean a fictional account that has been circulated enough so that many people believe it to be true.

It worries people that soon we won’t know the difference between fact and fiction. Information will exist but its validity will be suspect. Whether it is evidence about global warming or about the color of the skin of a murderer, most of us will just shake our heads and wonder if the latest story has any truth to it. Information will (already has) become entertainment and persuasion.

We have been dealing with fact and fancy for a long time. In physics, we learn that the very fact of observing a phenomenon can bend its result. Does a tree that falls in the woods make a sound if we are not there to hear it? These ideas titillate the mind. Complicated phenomena (like poverty, economic growth) must be observed and interpreted, and there is room for two different observers to come away with two very different observations and conclusions.

Thus it is reasonable to think of truth as being subjective. And therefore it is possible that you might think one person is lying despite his or her very ardent attempts to be truthful. But when it comes to most things, this element of subjectivity is pretty minor. Many things are very clear. What goes up usually comes down. One final JD has predictable effects. A person high on crack may commit horrible crimes. Too much pollution makes for illness and discomfort. It it other more complicated phenomena that cause the consternation about truth or fiction.

I want to split a hair about these complicated issues. Yes, there is more than one interpretation. There is more than one intelligent view of the truth. But that does not give one license to intentionally lie and mislead. I am often critical of economists who intentionally distort issues by leaving out critical facts that they know to be true. They probably do not admit to their families that they tell whoppers, but surely they appreciate the back slaps, promotions, and high-paid speech opportunities that come with wowing their followers.

Sadly, misrepresentations are hitting new levels. Let me list below some of the ones that have been spouted in the last week by very prominent people.

Federal Reserve interest rate increases will lead to the next recession.
Any attempt to reform Obamacare will be tantamount to pushing grandma over the cliff.
Because Boomers are retiring, it is impossible to have strong employment growth in the US.
Consumer finance deregulation will lead to predatory lending and hurt loan customers.
Tax rate reductions that are part of tax reform will worsen poverty.
Deregulation of the financial sector will lead to excessive leveraging and lead to another financial disaster.
Any attempt to regulate abortions will cause irreparable harm to women’s health.
Infrastructure proposals with strong private sector participation/ownership will lead to rampant corruption.

No, I am not going to take each of these and bore you with a complete analysis. But be honest. The people who are now saying these things (and more) are misrepresenting truth. The people who say these things get wealth, power, and popularity by misleading you or providing ideological fodder for your predilections.

Could any of the above statements be true? Of course they could. But they might also never happen because they are each based on excluding things we know to be true. We know that regulations introduced in the last eight years were not all perfect. We know they have had severe unintended effects. We know that today we have major economic and social policy challenges. 

Policies and regulations can easily be represented by a meter or a dial. In some years the needle moves to the left. In other years it moves back to the right. Arguing about these shifts and changes is normal. Screaming bloody murder when the next team gets power is normal too. But making up stories is not and should not be tolerated. 

Let’s decide a position for the needle in the coming years based on honest and open discussion of the fullest possible set of facts. It might not amount to absolute truth but it will get us a lot further than a bunch of sad distortions. 

Tuesday, January 10, 2017

Show Me the Money

It is January 10, and you are finally getting over the unintended effects of your New Year’s Eve celebration. You also read my last two blog posts and are ready to drop your subscription.

So I thought I would begin 2017 by really spouting off. Hopefully, this spout will antagonize many of you – at least those of you who cling to the old politics.
I title this one “Show Me the Money” because that’s what people in Missouri say. 

When you say this phrase, it means you want some evidence that something is valuable and that it is worth paying for. Robbers sometimes say the same thing but I am not dealing with those robbers today.

"Show Me the Money" is what I hope we collectively say to our politicians this year. Let’s face it: the Blue team is out of office now and they are not happy that the Red team is going to try to undo everything now Blue or Blue-er. We can be sure that even though the Republicans have majorities in Congress, they will be tested over and over. Supreme Court justices, energy policy, health care, tax policy, you name it – the screaming will be loud and colorful.

That’s where “Show Me the Money” comes in. Wouldn’t it be refreshing if instead of name-calling our fully paid and pensioned representatives of the people decided to have real discussions and debates about policy effectiveness? Maybe they could throw out a theory or two? Maybe they could argue over some real data? Maybe they could look at goals relative to results of their policies?

I am a macroeconomist, and therefore I would like to stick to what I know. I have opinions about lots of policies but one important one concerns income inequality. It turns out that despite me being the best professor ever on the planet, there were other professors teaching silly things like finance and nuclear physics who made more money than me. And similarly, I made more money than most high school teachers and a few plumbers.

So it is pretty clear just looking at my boring life that incomes are not equal. But if we look even farther, most of us who have any heart at all realize that there is a very wide gulf between the rich and the poor in America.

That bothers a lot of people. Many people believe that this gulf should be made smaller. Some want it to vanish altogether but probably most people just want it smaller. So it might seem reasonable that we have a debate about what to do to accomplish that. But try as I might, I don’t see anyone in Washington DC approaching this topic from a rational vantage point. Often the level of the argument does not exceed the intuitive but thoughtless idea that if we just take a dollar from a rich person and give that dollar to a poor person, then the problem would be solved.

In my perfect world, we might make some headway by doing the following. First, define the problem warts and all. Second, think about policies that might effectively improve the situation. Third, identify unintended consequences of the policy and deal with those too.

In the case of income distribution, problem identification is critical. Those who seem to worry the loudest about income distribution have in mind a comparison between the very rich and the very poor. But let's suppose, for example, the numbers tell us that much of the income gap is between the upper 1% and the upper 5%. We might not classify that as a big problem. Instead, maybe the income gap mostly impacts those who make $20k per year versus those who make $30k. Maybe you see that as a big enough problem. But clearly the remedy for that specific challenge is different than the usual perception about the richest and poorest. Maybe when we get done measuring, we find that there is no big distribution problem. Perhaps, instead, the problem is that economic growth lifted most boats but didn’t lift them enough. That’s not a problem of the distribution of income. That is a problem of not enough income for those at the bottom. But we won't know what the problem is until we stop lobbing F-bombs and start looking seriously at some data.

Once we have isolated a real distribution of income problem, then we need to find a matching solution. To do that, we might need to examine other country’s experiences with similar problems. And that is made tricky because, unlike white mice, countries can be very dissimilar. So doing thought experiments on policy among various countries is not as easy as picking out the best singing voice in Europe. For example, I took a quick look at the rankings of country income distributions done by the United Nations and the US Central Intelligence Agency (https://en.wikipedia.org/wiki/List_of_countries_by_income_equality ).  

Here are some of the countries with much more equal income distributions than the USA: Ukraine, Norway, Kyrgyzstan, Afghanistan, Denmark, Iraq, Sudan, India – can I stop now? Clearly the US does not want to follow the economic policies of all these countries.

How can we make permanent improvements in income equality across the citizens of the USA? Since we have never explicitly considered income distribution to be among our country's policy goals, we don’t have a lot of experience answering this question. It would nice if we trusted our elected representatives to do this in the same way that Eli Lilly scientists and executives try to solve Alzheimer’s disease.

Finally, there is the issue of unintended consequences. In our zeal to solve social and economic problems, we often forget that things don’t always work out as planned. I am sure that Lyndon B. Johnson would be quite shocked to learn that his great war on poverty created many more poor people than existed in the 1960s. An earnest examination of poverty programs or any other programs designed to improve income distribution should commence. What has worked? What hasn’t worked. Come on dudes – be honest!

What is the real problem today and in the future? What policies have been used to eradicate or mitigate these problems? How can we learn from the past about approaches that work? What are the risks arising from these policies? How can we parcel out the citizen’s money in ways that we would all be proud of? Under Trump, we don’t know what to expect. Maybe he and his new advisers can forget partisan bickering and approach our problems like real scientists and executives? Or maybe I need another JD? 

Monday, January 2, 2017

Happy New Year: macronotesmba.com and other Blog Facts Updates

New for 2017 --  http://macronotesmba.com/

My followers include people with and without much education or experience with macroeconomics. I have heard from many of you that you like to read parts of my postings but often you get lost in the vocabulary and the details. 

So I decided to adapt a reader I use in courses for blog purposes. It is called MacroNotesMBA and can be found at the above address. 

Once you find the location you will see four main blocks: Home, About, Blog, and Contact. Below all that are the main topics for international macro. Place your cursor over any of those topics and you will see a number of sub-topics. Cool! 

If you find it useful please use it for background to the blog. Feel free to share it. 

MacroNotes was developed for my past MBA courses -- it attempts to be a very practical and useful guide to the main topics of international macroeconomics. 

Other Stuff

Because I have been traveling and partying excessively (code words for an extra JD or two), I didn’t have enough grey matter or energy to begin the year with a power-packed analysis of the President-elect’s policies or potty habits.
But I did decide to share some blog facts with you.

·       I mounted this pony in 2010 and since then, I have more or less posted each week for a total 390 posts. As a result the A and the S on my keyboard are worn off.
·       I am especially pleased that nearly all posts have comments from colleagues and friends. They are often the best part of the blog.
·       I am told you must have a Gmail account to post comments but I have been told more than one thing about that. Sometimes people send me their comments and I post them. Blogspot help is absolutely no help for anything. They seem to ignore all my requests.
·       If you look on the right-hand-side of the blog homepage, you will see two different listings of all the posts – one by date and one by topic (Label). Click on a label and you will see all the posts about that topic. Look for the label Kardashian under K.
·       I have posted 22 times on Economic Growth, for example, and only one time on Bernie Sanders.
·       Blogspot shows me some facts about the readers. Each week I send an email to approximately 500 old friends, neighbors, and creditors. I also post on Facebook, Linked-In, and Twitter.
·       Until about three months ago, readership had grown from about 1,000 page views to about 2,000 per month. But strangely, in the last few months I am getting more like 8,000 page views per month. I don’t know how or why – but for the last three months the numbers have gotten high and stayed there.
·       I am shown information about page views by country. In the last month, the great majority of page views were from the USA (8,000). Behind the USA was Russia (1,100), Germany (50), France (40), followed by China, Ukraine, Canada, South Korea and India. Since the blog began it has had about 130,000 page views.
·       I have thought about getting a sponsor and making money from the blog but I also thought about being a pole dancer in Budapest.




Tuesday, December 27, 2016

Predictions for 2017

Hello friends,

You need a break. You have been entertaining friends and family and you need an excuse -- any excuse -- to sneak into your office or garage and pretend to be doing something important. So here it is -- Davidson's annual predictions for the new year. What better excuse than that?

I have never lived through a time when forecasting was more useless. But that doesn't mean that you have to remain dormant until the next epoch of predictable boredom. I hear people making predictions all the time. I heard one women in Target the other day telling her son that if he didn't eat the pepperoni on his pizza,  his wiener would fall off.

Anyway, I thought it my personal duty to share my thoughts about 2017 with you:
  • The government will make driving while texting legal and will start a new promotion called Texting, Weed, and Driving. Nancy Pelosi was quoted in the Bloomington Herald Times as saying that if drivers are going to be distracted then they should be REALLY distracted. Hu Ha. 
  • National Debt will be renamed National Advantage and economists will write hundreds of articles about why Advantage will make America great again. 
  • Global change activists will demand that President Trump expand the wall to the west around California and then up to Seattle. An eastern expansion would include Florida up to Maine. Of course, Mexico will be asked to pay for it. They will pay with Tequila.
  • The Stones will make a new album devoted to all their fans from the 1960s. The lead song will be I've Got Those Swollen Prostate Blues. 
  • Bloomington's Mayor will rename Christmas. It will now be called Freeze Your ASS Off Day. 
  • Amazon's request to merge with AT&T, Google, and Uber will be allowed. Once the merger is consummated, the new company will be larger than the US government and will replace it. All Congressional representatives will be sent home and given pensions that will expire when hell freezes over. 
  • China will "merge" with all the countries of the Pacific Rim. After attempting to integrate California and Washington, they will balk and say something like, "We like their music but they are way too wacked out for us." The US will be stuck with both coasts. 
  • All the countries of the European Union except for Germany will leave the EU and join something called the BrEntrance.
  • To stave off future security issues and tackle European financial instability, Greece will be sold to Russia and the resulting country will be named Grussia. The GDP of Grussia will soon fall lower than Haiti's.  
  • Donald Trump will get a new hair style -- he will shave his head and sell his locks to the highest bidder.  

Tuesday, December 20, 2016

Lesson 1. International Trade Ignorance

Those of you who can count will recognize that my last lesson was Lesson 16 and therefore you were expecting Lesson 17 this time. Unfortunately I checked the records and I never had a Lesson 1. I started with 2. Sheesh. So I am naming today’s main plate Lesson 1.

This lesson is about international trade. International trade is a lot like pho, the Vietnamese soup. A lot of people really like it but almost no one knows how to prepare it. Otherwise Campbell’s would have canned it already. We're similarly ignorant about international trade. When my fifth grade teacher called me ignorant, I was very hurt. But later I realized it did not mean I was terminally stupid – only that I didn’t know very much. I was willing to go with that.

I fear that our President-Elect is a bit ignorant about international trade. I also fear that he will read this post and ask me to be Secretary of Doggie Bags, but the truth is that most of us are ignorant about international trade. So no insult is intended.

One of my professors once talked about international trade in terms of the tail that wagged the dog. Unless you have a really small dog with an unusually large tail, you expect the dog to wag its tail. So saying international trade is like the the tail wagging the dog ought to have your ears perked and your tail wagging.

What my professor meant is that there used to be a day when trade pretty much meant one thing – countries selling goods to each other. "Goods" implies a tangible, e.g. a manufactured product or an agricultural product. You can imagine a time when much of world trade was coal or corn or clothing or cars. Countries loved to export goods because it expanded their ability to sell. The more they sold, the more incomes and employment grew.

So exporting goods was really cool. It was the big dog. You were the coolest kid on the continent if you could export your goods to other countries. That’s what many people think is what international trade is all about. Exports of goods! In 2015, the US exported $1.5 trillion of goods. Go team.

The interesting thing about an export of goods is that a bunch of foreign currency comes into world markets to pay for your goods. What do we do with all those foreign currencies? They are pretty but papering your walls with it can only go so far. Then some bright bulb thought, "Hey, with all this foreign money, maybe I could buy things from other countries!" So export countries would use the foreign currency to buy goods from other countries. Imports go hand in hand with exports. And more important, imported goods can really help your country – especially if you import things that help you to be happier and more productive.

So exports of goods imply imports. While exports have an important role for national goals, imports of goods are also part of that equation. If a country imported only Twinkies, then maybe you might want to rethink the value of the imports. But countries often import vital things they can’t get at home.

Nowadays most of the world has discovered services. Services are intangibles which essentially disappear once they are consumed. A float down the Rhine might cost you $20k but on your way home all you have left are some nice memories and the JD bottle you stole from your room fridge. Travel, tourism, entertainment, communications, utilities, healthcare, etc. are services. In the US today, about 70% of what we spend goes for services. So whatever I wrote above about goods adheres equally to services. Services exports augment a nation’s output and employment; services imports fill in what we don’t or shouldn’t make ourselves. In 2015, US services exports were $743 billion.

When people subtract national imports from exports, they are doing a legitimate operation. For example, if exports are less than imports of goods and services, we call that negative number a trade deficit. That causes frowns. We don’t like deficits. But in reality the negative number is telling you only one thing directly – currency going out exceeded currency coming in. What this negative number tells you – for example, a deficit of goods and services of $500 billion in 2015 – is that $500 billion did not return to the US via imports of goods and services. So what? It does NOT tell you that the US is in a half-billion dollar hole. In fact, what we know is that the nation got benefits from the exports AND it got benefits from the imports. Adding them together, we got about $5 trillion of benefits to the country in 2015.

I see you are tiring. Give me 10 burpees. The best part is coming.

What we have left out of all this is a huge part of trade call financial stuff. Okay, there is a more technical term but for now remember that the trade deficit left $500 billion of dollars around the world that people did not want to use for US goods and services. 

Notwithstanding wallpaper, foreigners who hold all those dollars can use that money and more if they want to buy financial stuff in the USA. They can open up an account  at the IU Credit Union. They can buy corporate or government bonds. They can buy shares of Apple or shares of an index fund. They can also acquire or merge with Apple or the Crosstown Barber Shop.

Wow. And they are not limited by that $500 billion left over from the trade deficit. They can invest all they want. And I don’t have to convince you that when foreigners buy US assets, it is a good thing. It is good because US firms find it easier and less costly to raise capital for investment. It is good because it lowers US interest rates. It is good because it can infuse the latest technology and innovations into American companies.

In 2015, foreigners increased their ownership of US companies (what we call foreign direct investment or FDI) by around $350 billion dollars. That’s not how much they owned – that’s how much they INCREASED their ownership in that one year. They increased FDI by around the same amount in 2014. In those two years, foreigners increased their ownership of portfolios in America by about $736 billion. Money is gushing into the USA. Between this portfolio investment and the FDI, we are talking about an increase of dollars buying US assets of more than $1.4 trillion.

Here’s the point: Trade includes cross border transactions of goods, services, foreign direct investment, portfolio investment, and more. Anyone who focuses on one of these to the exclusion of the rest is not telling you the full story. International trade is great for the USA. Yes, we have a trade deficit. But we also have a pile of very valuable imports of goods and services flowing in and a waterfall of the world’s savings wanting to invest here. Anyone who suggests that we should jeopardize the latter so as to remediate the trade deficit in goods is not understanding the meaning of international trade.  

Tuesday, December 13, 2016

Manufacturing Employment by the Numbers

The populist shift in the world these days seems to be driven in large part by employment. In the USA, the lament seems focused on manufacturing employment (ME). So I decided to take a little trip down memory lane to see what has happened to US ME, especially within the context of a little history, globalization,  and NAFTA. As you might guess my conclusion is that the data does not support the idea that trade, unfair or fair, is mostly responsible for robbing the US of its manufacturing prowess and employment.

Has US manufacturing employment declined? Yes. See the table below. In 1948 ME was about 14.3 million workers and represented almost 25% of the US workforce. But that was a long time ago and I hadn't even heard of JD then. ME grew after that and peaked in 1979 at 19.4 million workers. But already – before globalization – ME had fallen to less than 20% of the US employment in 1979. Point – a downward trend had begun without globalization or Nafta. Between 1948 and 1979 ME fell from one-quarter to one-fifth of US total civilian employment.

Even 1979 was a long time ago. At that point I was mixing JD with Coke and grooving to disco music. Between 1979 and 1994 the number of MEs fell from 19.4 million workers to 17 million. By 1994 ME was down to 13.8% of total employment. So before Nafta or before the fall of the Soviet Union (1991) could impact trade very much, ME was down to less than 14% of all US jobs. Note the fall from 25% to 20% to 14% from 1948 to 1979 to 1994.

It took another 12 years to push ME down even farther. By 2006 and just before the world economic crisis, US ME has fallen to 14.2 million workers and accounted for just under 10% of all employment. So in those 12 years ME fell by another 2.8 million workers and by another 4% of the total employment.  This was the time period in which NAFTA, the opening of China (in the 1990s), and other major global forces were in full bloom.

But it would be exaggerating the truth to say that globalization was responsible for all of the ME declines between 1994 and 2006. For example, whatever was causing firms to replace workers with machines before 1994 was surely still operating after 1994. And another important cause of falling ME was recessions. After the recession in the early 2000s, ME fell from more than 16 million to about 14 million workers. After the 2008 recession ME fell from about 14 million to about about 11.5 million. We expect many of those jobs to come back if and when the economy regains its former strength. But for now recession aftermath continues to impede ME.

In 2015 ME was down to a humble 8.3% of total US employment. That’s a steep fall from the 25% it garnered in 1948. During those years many factors were impacting ME in the USA.  Equipment, robots, and other capital improvements have displaced labor continuously. Globalization has caused some US producers to move offshore and has allowed other countries to compete for US consumers, thus displacing workers. Recessions always caused temporary declines and they continue to do so.

ME employment fell from its peak of 19.4 million workers in 1979 to about 12 million recently.  It is not easy to decompose that decline and to know exactly how much of it was caused by globalization.  Conversely it is not easy to say by how much globalization increased ME in the USA. Surely as foreign firms have geared up to compete internationally US business productivity has benefited by importing new capital, parts, and assemblies—making US firms more competitive and allowing them to expand output and employment in the USA.

Don’t be easily persuaded to think that globalization and free trade agreements have decimated US ME. Note that ME in 1948 was not the major US employer. Even back then ME accounted for only 25% of jobs. It is true that ME declined to 12 million jobs today. But the numbers say that globalization is only one of  many things causing US ME to decline. It is foolish to think that extreme nationalistic and protectionist policies will do anything to stop or restore these changes in US economic structure.

Table. Manufacturing Employment (ME)
Selected Years since 1948

Year    Millions  % of Total Employment
1948      14.3               24.5
1979      19.4               19.7
1994      17.0               13.8
2006      14.2                 9.8
2015      12.3                 8.3



Tuesday, December 6, 2016

Strong Dollar. Who are We Going to Blame Now?

President-elect Trump rode into Washington on a horse named Unfair Competition. One part of the story is how other governments manage their currencies so as to gain a competitive advantage against the US. And while I agree that countries sometimes do that, such currency manipulations are not among the dominant forces now. If anything we in the US are the one’s causing our manufacturers to lose competitive advantage.

Why worry? Or was that What me Worry? Regardless, in the last month (between November 4 and December 2) the dollar went soaring. It rose in that short time by more than 10% against the Japanese yen and 8% relative to the Mexican peso. It rose by about 5% against the euro and the Brazilian real and by lesser amounts against the Korean won and the Chinese renminbi. It held steady against the Canadian dollar. When the dollar rises by such large amounts US exports are less competitive in global markets. So we fret. This puts US exporting companies at a disadvantage. Clearly the bad guys must have done this to us!

But alas, I don’t think that is true. Most experts are saying that we did it to ourselves. Experts are saying that the Trump bump is making people more optimistic about the US economy. This optimism makes US assets like bonds and stocks much more appealing to investors. It also emboldens Ms Yellen and her band of Federalies to raise interest rates. Thus we are receiving a tsunami of attention from global investors who must first buy dollars so they can buy our very attractive assets. This revived love of dollars means a higher value for the dollar.

This is not a trick played on us by evil China or Mexico. The negative impacts on US exporters are because investors have concluded that Trump will be good for the US economy – at least for a while. Even before this latest wave of foreign investment, the world marveled at how the US recovered after the global recession while other countries continued to struggle. This has been lifting the dollar for some time and has made life difficult for US exporting companies. During the last two years the dollar rose by 13% against the renminbi. It also rose by 8% against the yen and by almost 30% against the euro. 

This doesn’t look like unfair currency manipulation to me. It has more to do with US policy and economic performance. It is market forces working in a global economy.
So maybe we should dispense with the unfair competition talk and ask ourselves what we really want. If the "experts" are correct, then it appears that the best way to help US exporters is to do something to make the US weaker and grow more slowly. But that is tantamount to throwing the baby out with the bath water.

Instead, if we really want to help our exporters, we ought to have policies that do not weaken our trading partners. When they get stronger they will buy more – and some of that extra spending will be directed toward US goods and services. Slapping tariffs on goods we import from key trading partners will do nothing but weaken them, make the dollar stronger, and smack our exporters. Are you sure that’s what we want to do?

One last point. The last time I looked it took two to tango. It also takes at least two to do JD shots but that’s a different story. Trade is more than an export story. While the optics are vivid with respect to exporters and their workers – countries gain with strong imports and with strong inbound and outbound investment. Keep in mind that when the dollar appreciates and negatively impacts exports – that same rise in the value of the dollar improves the situation for importers and makes foreigners more interested in investing in the US. Keeping in mind that many US imports are business goods that add to US productivity, a high and rising dollar is sometimes on net, a great boon to American business. The optics of the latter are less clear than the export story but nevertheless are important.

Summary: We should be alert to real rather than imagined unfair competition. Let's stop tilting at windmills. Competitive advantage of a country is determined by more than export sales. Policy should focus on the many avenues in which trade enhances American well-being. 

Tuesday, November 29, 2016

Peas, Stuffed Cabbage Balls, and the No-Camp Camp of Economic Policy

As a recent member of the Septuagenarian Club I am working hard on balance. Old people fall down a lot even when they have not partaken of JD tasting rituals. So working on balance is important if one values his hips, shoulders, and other decaying body parts. Getting depressed yet? Getting old ain’t no picnic you know.

But this piece is not about aging or falling down. It is about restoring balance in economic policy in this country. While it sounds obvious that balance might be an appropriate goal, this conclusion is not shared by everyone and the move towards balance is not easily attained. Stand on one leg and close your eyes and you will see what I mean.

American is very unbalanced. We have our camps. The blue camp likes more government intervention. The blue camp prefers to increase spending and worry later about the debts. The blue camp wants to regulate banks, shadow banks, and various companies. The red camp says they worry about government deficits but often favor tax cuts that create them anyway. The Red camp favors deregulation and generally a smaller intervention by government. And now there is forming a Trump camp. The Trump camp is not so much a camp as it is family of camps with no identifying color.

I kind of like the no-camp camp. The no-camp camp is a little closer to what I might call balance. The no-camp camp can favor more government spending and at the same time propose tax cuts. It believes that somehow lower tax rates and higher spending will not cause the deficit to increase. It also says it wants to reduce many recently imposed government regulations.

How could I like this no-camp camp? If balance enrages extremes then it immediately has strong minuses. Notice that balance means that the blues will scream about a proposed diminishing role of government while the reds yell that the government is still too big. This no-camp camp will quickly enlist enemies from all the traditional camps. This will not be easy to overcome.

Overcoming the negatives shouted by the traditional camps means focusing on the positives gained by each camp from the no-camp camp. More spending on infrastructure is widely viewed to be beneficial on many fronts since it generates income to the working class while it improves productivity. Red and blue will like that one. Tax cuts for the middle class can restore losses in earning power to that group. Blues will like that. Tax cuts for the wealthy should be good for national investment spending and declines in corporate income taxes and should boost the competitiveness of US companies and American cities. Can you hear the reds cheering?

More contentious is how government deregulation can promote jobs and growth in energy and healthcare. But the clear point is that a slowdown of regulation in these areas could produce jobs and income growth. One does not have to be a climate skeptic or a hater of the poor to believe that a temporary hiatus of regulation in those areas might produce important beneficial growth effects. Get the economy humming again and then return to more vigorous ways to remedy global warming and coverage of health care.

What I am suggesting here is that a no-camp camp set of policies provides balance as it contains features that both annoy and amuse everyone. It’s like my mom used to say to me – Larry, eat your peas and then you can have another stuffed cabbage ball. In the distant past the two political parties would compromise on economic policies. Give a little get a little was the slogan. More recently with strong influence by ideological extremes we quit doing that. You can eat the peas or the stuffed cabbage balls. Not both. And the nation has suffered from this standoff.

Many of us don’t like Trump for one reason or another. What I am suggesting is that since Trump has no real connection to either party or ideology, he might be the perfect person to get us back to some much needed balance in policy. I guess we will see in the near future. He has to come through with policies that make some sense. As voters, we need to be ready to eat our peas. Hopefully the meatballs will make it worth our while. 

Tuesday, November 22, 2016

Trickle-Up Economics and Labor Infrastructure

When both parties agree then you know something is wrong. Infrastructure spending (IS) has gained a lot of bipartisan support lately. There is a lot of pressure on Trump and Congress to put together a really big package on infrastructure. What does that mean and is that the best we can do with our money?

The usual support for more IS focuses on simple theories. Paramount is that IS is part of the production and delivery process of goods and services. An improvement in infrastructure will accordingly increase our lagging national productivity. When workers are more productive the nation becomes more competitive.  A second logic is that building more infrastructure takes workers and therefore employment will increase. Third, when those workers have more income they will buy more goods and services thus providing more business and employment for other firms and workers. Can you hear the horns blowing? Who could be against more IS?

The reason people can be against more IS is that the above is simple theory. Put all this into the context of 2017. For any of the above magic to transpire we have to have viable projects and we have to have them pretty fast. Unlike a tax cut which immediately gives a tax payer more money to spend, an infrastructure project has to be planned, approved, contracted, environmental regulations checked, and so on. Shovel ready projects are a joke. This spending could drag on long after my ashes are spread in Biscayne Bay.

And then there is the issue of where this infrastructure might be built. Since Harry Reid is a has-been it probably won’t be done in Nevada. Politicians will be in seventh heaven fighting for the next bridge, road, or waterway. What a glorious boondoggle!

And then even if some projects get started, what about the spending multiplier theory? The employment-spending-more employment-more spending theory assumes everything else is the same. In 2017 our nation is deep in debt. Our firms are not expanding. Perhaps construction workers will pocket some money, pay off some bills, and the story ends there.

And finally – tada – what about cause and effect? Is our slow growth these days really caused by potholes? I don’t think so. But one major thing many of us agree is that growth is very much impacted by slow labor supply growth, a mismatch of skills, and generally a poorly-functioning labor market. So why not focus on that? If that is the real problem then more IS is really what liberals usually call trickle down. Why wait years if not decades for an uncertain trickle? No prostate jokes please!

Instead we can use some or all of that IS money to improve our work situation. We could seriously fund training, retraining, and relocation. Rather than spiffy highways we could create the world’s employment champion. Wouldn't it be cool if global companies starting moving to America because we have the world's most outstanding employees for the 21st century?

We know that transition is a constant. If we know that renewables will take a larger share of national and world production, why not have the world’s best labor for that? If we know that the GIG economy is employing more and more millennials, then why not shout to the world that the best labor for that is right here in the USA? If Internet security is going to be a global challenge for the foreseeable future why don’t we have the best minds trained here? Healthcare? Entertainment? Whisky? (You didn't think I was going to leave out JD did you?)

If labor is the problem in this country then it ought to be solution. We need to stop wringing our hands and most of all – we need to stop thinking that the best we can do is use company subsidies to improve the labor market. Companies may or may not decide to spend a subsidy on labor.

And of course notice what there is no trickle down if we focus directly on the labor market. Helping people do better in the labor market has immediate impacts on their employability. It makes them more productive, competitive, and valuable. Perhaps we could call this trickle up economics since the benefits start with the workers and then radiate outward to more successful and competitive companies.

Finally when I say labor I don’t mean labor unions. A sincere focus on training, retraining, and relocation means we are strengthening workers for what they want – better pay, improved mobility, and more sustainable jobs and careers. Labor unions can get on board but this idea is not about enriching union bosses. Remember when we decided as a nation to put a man on the moon. We had a clear focus and we made it happen. America can be the training ground for a revolutionary new center of employment readiness. I'd rather see us spend a lot of money in that way than on infrastructure boondoggles. 

Tuesday, November 15, 2016

Elections, Friends, and Families

I am bleary-eyed from reading so many articles about the aftermath of last week’s elections. My quick takeaway is that many sturdy trees have given up their lives. And yet, as is always true about the future, everything we say today is speculation. 

Uncertainty always exists but in this case today uncertainty is on steroids. I am supposed to give a speech about the economy on Thursday. What could I possibly say that wouldn’t be completely wrong in two weeks? Bartender, one JD on the rocks for my friend Lauren please. 

Then I got a text from a very good friend who I won’t name to protect his reputation. This dear friend noted to me how so many of his friends were having fights with their colleagues and families. It reminded me of when I was a young guy during the Vietnam War days. Families were splitting apart. The nation was coming apart. Then my dear friend said that he was so happy that despite our political differences we could continue to be civil and friendly to each other.

Of course, that was like a love arrow piercing my heart. How nice that someone who disagrees with much of what I write could extend a kindness at a time when many of his other friends and colleagues were no less than Vlad the Impaler driving stakes through the hearts of their friends!

So it made me think. How many political conversations held before election day went nowhere because one or both of the participants began with an insult. I am not accusing the left or the right because the same behavior was observed for both. The tenor of the situation was an accusation that the person at the other end of the conversation was either evil or stupid for saying even one good thing about a particular politician. How can two people have a conversation if at least one of those persons starts off by saying the other one is either stupid, immoral, or a bootlicker? How?

Is the hair standing up on the back of your neck? Of course – Trump is the devil. He hates blacks, Hispanics, foreigners, gays, and so on. Of course – Hillary is corrupt and a liar to boot. How could a human being from plant Earth say even one good thing about either of these people?

Good question Larry! But the truth is that if you think that way you have been duped by politicians. There is more than one side to these two politicians. I know they are lousy – both of them. But you people who bought into these extreme caricatures of Trump and Clinton got duped. Nothing is that simple.

Am I saying you have to do back flips for Trump? Not at all. You can fight him tooth and nail on every policy he advocates. What I am saying is that it is not worth demeaning your friends and your friendships over politics. Think about the proportionality. Every morning you wake up and you kiss the dog and pet your wife. You go to work and interact closely with colleagues. You have beers with your buddies. That's your real life. Then you turn on your favorite channel and watch the so-called news. Or you read the newspaper or check your favorite website. And then your blood pressure rises and you start cursing like a sailor.

It is true that a new President will impact the lives of many people – maybe even you. But it is also true that the impact on society is a lot less on you than what happens when you ruin your relationship with your mother or your best friend or your boss. And for what?

“For what?” is the real question. Recall Mr Obama passing Obamacare without a single Republican vote. Recall him making numerous regulatory changes without help from Congress. I was opposed to many of those things. But I didn’t jeopardize my friendships by calling friends and family idiots. After all, they have been in my family or been friends for a long time. We have disagreed many times. But I never dismissed them with the easy phrase like “you must be an idiot to support Obama.”

Now the shoe is on the other foot. Actually I am not sure what foot the shoe is on because Trump does not fit into any easy category. But surely as soon as he gets rolling you are going to hate some of the changes he pushes. Maybe you will be surprised and like some of it. Maybe you won't. When you don’t agree you can oppose them with vigor but at least have the decency to respect those who don’t agree with you. The world is a complicated place. Your friends and family have a right to their own opinions. Try to change their minds if you want. But don’t dismiss them simply because they disagree with you. You can always replace your old friends with new ones who will always agree with you. But that sounds pretty boring and sad to me. 


Tuesday, November 8, 2016

The Gravity of Globalization

Much is being written lately about globalization. Free traders love to see more cross border activity. Non-Free traders wish international trade would be less prevalent. Belgian Walloons tried to stop a free trade agreement between Europe and Canada. I was once in Seoul when a monk set himself on fire and died to protest the coming FTA between S. Korea and the USA. Free trade and globalization have become a central focus in the current US presidential campaign.

Much of the debate has to do with politics and ideological warfare applied to trade. But it helps to know that there are basic economic forces to explain both the rise and the fall of globalization. These basic economic forces have been described by using something called a gravity model. Gravity is the force that attracts a body toward the center of the earth or toward any other physical body having mass. As Charlie would say – gravity is the thing that keeps us from falling off the earth. It is also the thing that causes bird poop to come down on unsuspecting heads. The pull of gravity between two bodies is proportional to the masses of the bodies and inversely proportional to the distance between them. Two large bodies close by have a lot of gravitational pull. Two distant small bodies would have little pull.

Economists have applied gravity models to economic issues. St. Paul and Minneapolis are two cities in Minnesota. Bloomington Indiana and Palo Alto California are also two cities. A gravity model predicts that there would be more trade between the larger close cities St. Paul and Minneapolis than between the smaller distant cities Bloomington and Palo Alto. To apply this basic theory to globalization we need to better define the terms mass and distance as they relate to trade.

Mass refers to economic size but it should be the relevant economic size. For example, if two distant small cities were very specialized art centers – then you might expect a lot of trade in art objects between those two cities. Or if two large close cities had a mountain in between them, then that object might impede trade between the two. Dig a tunnel or build a road through the mountains and the situation changes. Much more trade would be expected.

These ideas are easily applied to globalization. While the physical distance between countries and cities did not change in the 1990s, the distance measured in economic terms did. For one thing technology great reduced the costs of communication and transportation in the last 25 years. For another, the fall of the Soviet Union and the demise of many dictatorships in Latin America allowed people in dozens of countries the legal right to trade. Technology and political change were tantamount to pulling nations much "closer" together or removing a mountain. As they came closer they discovered the benefits of trade.

Harvesting low hanging fruit is easy. But once the easy to reach apples are gone, you need a ladder to get the higher ones. The picking process gets more challenging and more costly the farther up you go. The same happened with globalization. It was easy to get rid of thousands of tariffs. Those tariffs hindered growth in most countries so the politics of tariff removal were easier. When world economic growth picked up and countries dropped many trade restrictions, it seemed like most people in most countries benefited. Today it is harder to see how technology or politics would change again so dramatically so as to make international trade even more seductive. It was hard to see the things that might change in the future that would make serious dents in the costs of distance.

And then it got harder to agree on liberalization. The tariffs that were left (on the higher branches) were the ones that offered protection to a country’s farmers or steel makers. But tariff protection was not enough to satisfy some free traders. If barriers to goods could be beneficial, then why not remove obstacles to trade in services (like airlines, banking, healthcare, and so on)? If restrictions on cross-border investing and mergers and acquisitions seemed unfair, why not remove those barriers too?  If laws did not protect ones ownership of intellectual or other property then why not make it harder for foreigners to easily pirate your patents and copyrights?

Once the low hanging fruit was gone, the remaining trade barriers were much harder to remove. With no earth-shaking transportation/communications inventions expected it is harder to convince voters of the needs for freer trade. This is why the so-called Doha Round of the World Trade Organization remains unsigned though negotiations started in November 2001. The average person says something like – yes, we want the benefits of trade but we do not want to be exactly like other countries. We don’t want a one world government. We don't want our our national champions weakened. 

Inasmuch the advancement of free trade and free trade agreements has become even more political and ideological. As we move to closer economic integration, the benefits of the potential trade are fuzzier and the costs of trade in terms of reduced national independence and stability seem scarier.

Further global trade integration is not impossible. It is just tougher. It is made even more difficult in an epoch of slow world growth. In a slow growth world economic mass is not increasing and it is harder to believe that trade will raise all boats. But it is easy to see the risks to any nation that lowers its barriers. In a world where growth is strong, there is less to lose. Growth means people are doing better, worry less, and are more willing to try something that makes them even better. Without much stronger economic growth I find it very hard to envision a world in which globalization advances. 

Tuesday, November 1, 2016

Alan Blinder and Those Hateful Republicans

Every week I wonder where and when the inspiration will hit for my next spout. I had finished my morning bowl of Rice Krispies and JD and was well into my favorite newspaper, the WSJ, when the inspiration came. As often happens I can’t stop myself from reading columns written by Alan Blinder, economics professor at Princeton. I especially love the pictures but this time he supplied the words that make writing this blog so much fun. The title of the article (WSJ, page A15, October 25, 2016) is “It’s Not the Economy Stupid. It’s the Political Gridlock.”

The main point of the article is that if voters and other people are not happy in the USA it is because of politics. The economy is just spiffy. It is the politicians that make us feel unhappy about our lives. And guess which ones are persona non grata? You got it. Those pesky Republicans did it.  I felt at first relieved that if I wanted to accuse someone for my irritable bowel I now know exactly who to blame. But then after thinking about it for about 10 seconds I realized that Professor Blinder was either kidding us or he was just plain wrong. Or maybe he was hoping that his column would sway voters to the Democrat party. You will have to ask him which explanation is correct for wasting our time on his article on October 25th.

Blinder begins by quoting some well-known polls that show that people think the US is on the wrong track. Then he launched into the most one-sided discussion since Paul Winchell spoke to Jerry Mahoney about birth control. Blinder quoted all the economic indicators we are already familiar with. For example, who doesn’t already know that the unemployment rate is around 5%? Or that the stock market is much higher than its trough  in 2009? Of course, anything that might puncture his carefully constructed happy balloon was somehow ignored. Are people unhappy with zero interest rates? I think so. How do the recent stock market highs compare to highs before 2009? Not so great. The absolutely worse business capital spending and productivity increases that one can remember are not cause for indigestion? Export sales make us itchy. Even those at his former employer, the Fed, are lamenting the plight of souls who are still struggling despite a 5% unemployment rate. Most people just shrug when an economist explains that the economy has not grown so slowly for so long since the Great Depression. And even Fuzzy was not alive in the Great Depression.

To discount the economy as a major source of the country’s poor mental attitude is just plain wrong. But like most liberals these days Blinder doesn’t much care about the truth because he is all about politics and about making sure that liberal candidates get elected. Which gets me to the second part of his story. Blinder believes that our dissatisfaction with the USA today is not due to the economy but rather is due to “The fact that Republicans have blocked almost everything and proposed very little.” That’s it in a nutshell. Case closed. 

Lucky for George Bush, Alan Blinder is not blaming everything on him. Now it is all Republicans who make our people so unhappy. Spread the blame baby. Blinder cites Obamacare as evidence of Republican resistance. But Obama, with a huge majority rammed the largest change in social policy in decades down our collective pie-holes without one Republican to support it. Wow – who is the cause of political dysfunction there?  And please note the headlines reporting huge increases in Obamacare premiums. The Democrats created this monster – and now our negativity is the fault of Republicans?

And how can Blinder talk about blocking by Republicans? If the Republicans had a NFL team they’d be penalized for missing too many blocks – not too few. Listen to Obama make speeches today about all he has accomplished during his eight years. Listening to him you would think he was Abe Lincoln, Teddy Roosevelt, and General George Patton combined. He got Dodd-Frank. He got energy regulation. He stopped a pipeline. He stopped a recession. He contained ISIS. And there were examples of bipartisan support for a Doc Fix, a Highway Bill, a budget deal and so on.

No, Obama and the Democrats did not get everything they wanted. Yes, they met a determined opposition at every turn. But come on folks. Every President without a clear Congressional majority has had to fight tooth and nail. And that is as it should be since the absence of a majority government says that the country lacks agreement on key issues.

In summary, Blinder is very wrong to de-emphasize the role of a slow economy and to exaggerate the negative consequences of Republican resistance to a Democratic president. An honest appraisal would admit two things – it is the economy and it is a dysfunctional Federal Government that make us unhappy. Unfortunately extremes in both parties make the rest of us pay for their harmful antics. 

Tuesday, October 25, 2016

Fed Gone Wacky?

Bloomberg.com had an article last week with a photo of a smiling Janet Yellen which said that the Fed was elated that the inflation rate was rising in the US. On the same day was an article “The Fed Embraces a More Diverse Future” that had several quotes from Fed officials decrying disparate effects of unemployment on minorities. Minneapolis Fed President Neel Kashkari promised to “spend a day in the life of a struggling black family in order to better understand that experience.” The article concluded  

“While the Fed may have no direct ability to do anything about this relationship, it may be less willing to call an overall unemployment rate of 4.5 to 5 percent full employment if it coincides with a black unemployment rate of 8.5 to 9 percent.

I wanted to know more about the explicit goals of the Fed. I found the below words at a Federal Reserve website https://www.federalreserve.gov/faqs/money_12848.htm
The Congress established the statutory objectives for monetary policy--maximum employment, stable prices, and moderate long-term interest rates--in the Federal Reserve Act. In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate.

Wow. Double Wow. The Fed’s explicit job is to control inflation and employment. Yet today’s Fed officials are happy to see more inflation and are not content when they reach their goal of full employment.

Interesting is how cavalier the Fed is departing from its statutory mission. I can see it now. Hey coach I think I would be more popular if I played guard on our football team. But son, you are a quarterback. Come on coach, the linemen are cool guys and I always wanted to hang with the cool guys.

The Fed has no mission and has no ability to affect the composition of unemployment. If they drive the unemployment rate below the usual definition of full employment – they can provide some jobs for those at the lower end of the labor pool. But history shows that such jobs do not last very long. Driving unemployment so low will cause the economy to run fast enough to absorb more workers. But like any engine that runs faster than normal for a while – it will generate frictions that eventually bring it back to normal – if not requiring a new engine! History suggests also that the aftermath of such reckless driving is often the dreaded scourge stagflation wherein both inflation and unemployment rise together. At some point the Fed then has to tighten and cause a recession and even more unemployment. Thus gains are not only temporary but they end up worsening the entire economy.

As for the seemingly perverse joy over a September rise in the inflation rate, this just underscores my point. Yellen has recently been quoted as saying it would be okay for the economy to run hot for a while. I like my coffee hot but she is delusional if she thinks a hot economy is a good thing. Higher inflation and a hot economy won't accomplish anything except to raise and then dash the expectations and lives of those least able to deal with such changes. 

Unfortunately our current Fed has fallen for the liberal line that one should focus on the short-run. Despite relying on nothing more than dreams and drugs, our Fed wants to make people feel happy that it is doing something. But like many do-gooders, the Fed has neither the tools nor the mission. Just because Congress is broken it does not mean the Fed can pull a rabbit out of a hat. Unequal incomes may be a problem but like the QB who wants to be an offensive lineman, the Fed is neither qualified nor licensed to solve this problem. Mrs Yellen -- please just stick to your job description.  

Tuesday, October 18, 2016

Lesson 16: International Investment

Those of you with post-kindergarten training may or may not know that governments keep international trade statistics. Even some of our current presidential candidates know that.  These statistics are found in something called the Balance of Payments Accounts and are found at bea.gov . 

While there are two equally groovy parts to the BOP figures most politicians only know about one part of it, the Current Account. The Current Account is on the top and we wouldn’t expect those people to actually read all the way down to the bottom, right? They are busy people. Also the history of the world and the solar system has emphasized the Current Account so it would be unfair to criticize our politicians for only knowing about the Current Account.

This Current Account is where we publish statistics that have to do with exports and imports of goods and services. We sell Chevys to China and they sell rice and replicas of the Great Wall to us. It’s a cool deal. Some of our political leaders have noticed that our dear country almost always has a deficit in our Current Account. And that burns them. After all – the word “deficit” is not a nice word. If your teacher said you had deficits in your behavior, you would feel injured and probably never get a PhD in science or classical studies. This deficit in Current Account means that we are buying more stuff from other countries than they are buying from us. This is especially true of China and since we have a very long list of other issues with China, our politicians complain and sometimes cry that this deficit with China is worse than Dengue Fever and needs to be stopped.

I have written thousands of posts (I exaggerate all the time) which explain why Current Account deficits are not necessarily bad things and I don’t won’t to repeat all that minutia here. I see the Tuna is already starting to nod off.

This post is about the other part of the BOP Accounts – the part at the bottom that most people ignore. It is the part that our politicians don’t have a clue about. So you should feel very special that I am doing this for you today and send either money or JD to thank me.

The second part of the BOP account is called the Financial and Capital Account (F&C Account). What a name! Can you imagine being in the first grade and having a name like that? No wonder no one looks at this account. But this account is the coolest kid on the block and has a lot to tell us.

The F&C Account records all the financial trades between countries. We don’t usually call these import and exports – instead we talk about outflows and inflows. If China invests in America we call that an investment inflow. We like it when foreigners open up US bank accounts and when they buy our bonds, stocks, and companies. All of those financial inflows are recorded in our F&C Account. At the same time, we also like it when US citizens invest abroad. We usually call that diversification. You don’t want all your eggs in one basket and you don’t want all your investments in US bonds, stocks, etc.

When foreigners invest in America we call that an inflow. When US citizens invest abroad we call that a financial outflow. Globalization means that citizens around the world have become increasingly interested in investments both at home and abroad. 

So as a public service and hopefully for money and booze I will acquaint you with some of the financial flow numbers. Below I will refer to some numbers from a close cousin of the F&C Account called the International Investment Account or IIA (the F&C Account focuses on the one period flows between countries while the IIA reports the resulting total ownership positions). 

As it turns out, there are some looming risks associated with the IIA account that we should be worrying about. Unfortunately our leaders are playing with their bellybuttons and/or are unaware of these trends.

I went to the bea.gov web site and downloaded a spreadsheet of IIA information from 2000 to 2015. Here is some of the information from that download:


                                         2000   2007   2015
US Ownership of F. Assets   7.6    20.7    23.3   
F. Ownership of US Assets   9.2    22.0    30.6
Data is trillions of US dollars
F. stands for Foreign

This little table tells you the following:

·       Globalization of financial markets was very evident in the new century with foreign ownership more than tripling from 2000 to 2015.

·       Most of that increase came between 2000 and 2007.

·       Then the activity slowed – especially with respect to US ownership of foreign assets. After growing by $13.1 trillion in the first period, it grew by $2.6 trillion between 2007 and 2015.

·       Foreign ownership of US assets slowed as well but it still increased by almost $9 trillion between 2007 and 2015.

·       If we focus on the 2007 to 2015 time period we see a much wider gulf – foreigners owned $7.3 trillion more of us than we owned of them. Nearly all of that gap can be explained by what is called portfolio investment (in bonds and stocks). That gap was $1.6 trillion in 2000; $1.3 trillion in 2007; and then $7.3 trillion in 2015.

What’s going on? Why are foreigners so interested in our financial markets?

First, since the financial crisis, the US has done better economically than other countries. A relatively stronger economic profile means more confidence in our financial products. Think Greece, China, and Venezuela.  

Second, think US government deficits and debt that have supplied a lot of investment opportunities to both residents and foreigners. Foreigners gobbled up our huge pile of new government bonds!

Third, while foreign companies did increase their acquiring and merging with in US companies, most of the gap mentioned above came from investments in private bonds, government bonds, and equities.

Fourth, notice that despite the gap, US citizens have shown a strong and growing appetite for foreign bonds and stocks. Despite a financial crisis foreigners continued to buy US assets and Americans continued to buy foreign assets.

What do we make of all this? When the gap is favoring US assets, this implies two important things. First, people need dollars to buy US assets so this has strengthened the dollar. Second, when foreigners buy our assets this pushes our asset prices up and interest rates down. With the huge increases in national debt and the needs of firms to finance their investment projects, this asset demand from foreigners prevented our interest rates from rising/stocks falling and thus helped to keep the US economy growing.  

And this is what concerns me. What happens when things turnaround? What happens when other major countries strengthen and their assets look more desirable to global investors? What happens when our government increases its debt even more as foreigners desert US financial markets? Financial globalization made the US wealthier when the rest of the world was weak and uncertain. Financial globalization will have the opposite impact if the US grows weaker relative to Europe, Japan, China, and other countries. Our politicians have complained loudly about the Current Account Deficit. Just wait to see what happens when buckets of money leave the US to be invested elsewhere. Then we will be clamoring about deficits -- deficits in the F&C Account!