Tuesday, April 17, 2018

Saving: A Little Brush Fire?

While we have been arguing the last few weeks about tariffs, saving, and trade deficits, the Congressional Budget Office was preparing its Budget and Economic Outlook 2018 to 2028 (www.cbo.gov). It might not seem obvious how the CBO’s work relates to our tariff spat, so I decided to spend a perfectly nice Sunday morning tying the two together. The main idea is that our trade deficits have very little to do with cheating and everything to do with national saving. National saving has a lot to do with government deficits. 

Some of you don’t like the convoluted explanation that insufficient domestic saving (over-consumption) draws in foreign saving, raises the value of the dollar, and creates a (larger) trade deficit. It sounds much too theoretical. And you don’t see how Americans who love their lattes and other luxuries could ever behave like folks in other countries who actually try to balance their budgets.

But that’s all recorded in the past few weeks of blogs. If that hammer wasn’t big enough, I now want to bring the CBO’s latest sledgehammer into the project. Some of you are old enough to remember the world as it was in 2007 before the global recession slapped us around. In those good old days, a cup of coffee cost 20 cents and tasted like tea and most of us drank water from a tap in a thing called a glass. In 2007, the US budget deficit was $161 billion and the net national debt was $5 trillion.

Let’s back up. A government deficit is a one-year measure. In 2007, the government spent about $2.7 trillion, collected revenue of about $2.6 trillion, and sold government bonds to the public totaling $161 billion. Yes, when the government spends more than it collects in tax revenue it must borrow the difference. The $161 billion of 2007 was pretty typical of US government borrowing between 1999 and 2007 though it oscillated from year to year and hit a high of around $400 billion during one of those years.

The government borrows mostly from US savers. Borrowing $200 billion or so per year did not put too much stress on US saving. But imagine what happens when the borrowing rises from $161 billion in 2007 to $1.4 trillion in 2009. You are correct. That’s a 10-fold increase. If households and business firms are trying to borrow from savers at the same time, you can imagine how domestic saving might be insufficient or at least less sufficient to cover the borrowing. In such cases foreigners make up the difference. They bring their savings from countries around the world to the USA.

But wasn’t that $1.4 trillion government deficit a one-time thing? We had a huge and scary recession, and our government did what it was supposed to do to generate more spending in the economy – tax less and spend more. That’s true. And all looked pretty good as government deficits began to get smaller. Then along came two events: the Tax Reform of 2017 and the Bipartisan Budget Act of 2018. Between these two waves of the magic wand, we took the budget deficit from $665 billion in 2017 to $1 trillion in 2020 and $1.5 trillion in 2028.

John Maynard Keynes thought the government should use a deficit in short-term situations with the intent of stimulating output. The fiscal dividend of the rising output would be a surge in tax revenues and a decline in government spending. Viola – a temporary deficit then vanishes into thin air. Keynes would be scratching his head about how nearly a decade after the recession started we are still stoking the fires with larger and larger deficits.

What sorts of things are wrong with this situation besides causing Keynes to roll over in his casket? First, the government is gobbling up our saving in the USA and sucking even more in from abroad. This makes it harder for US firms to borrow, to expand, modernize, and otherwise raise productivity. Economists call this “crowding out” of investment spending. Second, these government deficits that reduce available saving raise the value of the dollar and hurt our trade balance.

Third, these government deficits accumulate. If the US borrows $500 billion one year and another $1 trillion the next, then in those two years it has added $1.5 trillion to the national debt. The US net national debt was about $5 trillion in 2007. By 2017 it tripled to just under $15 trillion. The CBO says it will rise to $29 trillion by 2028. What a ride! In 2007 the net debt was 35% of the national economy. By 2017 it rose to 77%, and by 2028 it will be closing in on 100% of the economy.

Keep in mind that these forecasts extrapolate from current law only. It is possible to imagine this government raising spending (or lowering tax rates) even more during the next 10 years. It is also a sure thing that the US will encounter another recession before 2028. Either of those eventualities will cause the deficits to bleed even more and the national debt to be taller than a giant beanstalk. 

Need I say more? Between households, firms, and our lovely government, we are spending our brains out and the impact is to lower national productivity and competitiveness. We have too little business spending on capital and a corresponding trade deficit. Are we sure we don’t want to tend to this brush fire? Whether it is the government or the consumer, can we not find a way to restore more balance between revenue and spending? I guess we can always start over after the fire ravages our nation. 

Tuesday, April 10, 2018

Cheaters, Saving, and Investment

It is easy and perhaps even fun to describe the US balance of trade as born of cheaters and clearly unfair to US workers. The logic seems simple and intuitive. We are a great nation, and yet we import more goods from other countries than we can export to other countries. If trade was perfectly fair, then, of course, Americans could not lose. After all, we are smart, educated, attractive, competitive, and whatever else you want to add. How could we possibly be so uncompetitive? Surely those other guys are cheating. End of story. Where is my celebratory JD?

Not so fast. Economists have another explanation, and it has to do with how much a country saves and invests. Whammo, the intuition vanishes and the reader is pretty sure that economists are from another planet. In defense, I will point out that intuition has an advantage when people decried the Earth flat. From anyone’s vantage point, the world did not look round. This “saving and investment thing” lacks intuition but that doesn’t make it wrong.

One more point. Some friends have told me that maybe saving and investment do matter to the trade balance – but there is no way to get Americans to consume less and save more. While it might seem like an uphill climb, the data in the table below suggest that the USA is an outlier. When compared to other countries and other regions of the world, we are second-class citizens of saving. Maybe if people understood that this imbalance is truly a problem we might begin to do something about it. If the choice was between a devastating trade war and inducing Americans to save more, might one not entertain policies to raise saving?

To review: If a nation spends more (and saves less) than its ability to produce then it will import the difference. Or put another way, the paucity of saving means that firms and government will have to draw in or borrow foreign money to meet its spending needs. This capital inflow raises the value of the dollar, increases imports of goods, and reduces exports of goods. Viola. A lack of saving leads to trade deficits in goods.
What do the numbers in the table show you?

First, I have 15 countries and regions listed in the table (data taken from an International Monetary Fund report). The highest saving rate among those 15 in 2017 was the 40.5% of GDP for emerging Asia. Just below are Japan and Germany with respective saving rates of 27% and 28%. The lowest in the list is the United Kingdom at 13.4%. At 17.5%, the US was in the third place from the bottom. We clearly do not save very much. I knew that Japan saves more than us by a long shot. But so do 12 of the 15 in the table. The average for all developing countries was 31.7%, and for all advanced countries, 22%.

We do better at investment. The almost 20% investment ratio for the US is bigger than our desire to save.  But in looking down the list, our investment ratio is bigger than only Germany, Italy, UK, and Sub-Saharan Africa. The average for developing countries was 32%; for advanced 21.1%. So we are a laggard when it comes to both saving and investment. Does the low saving retard investment?

What really matters for the trade deficit is how short our saving is relative to investment since that gap is the key to capital inflows as explained above. Half of the regions included have negative saving ratios – meaning that saving is less than investment and those countries will have capital inflows and trade deficits. Our saving deficit of 2.3% of GDP puts us in the middle of those countries with the (negative) deficit sign. So it looks like we are in the bottom third of the whole group when it comes to saving insufficiency as a percent of GDP.

If so many of these countries can have adequate savings, then why can’t we in America? Do we really need all that crap we buy? Are there no policies that might improve incentives for saving? 

Table. Saving and Investment as a Share of GDP, 2017
USA and Selected other Countries and Regions

Saving Investment S-I
United Kingdom 13.4 17 -3.6
Sub-Saharan Africa 15.3 18.7 -3.4
USA 17.5 19.8 -2.3
Italy 19.6 16.9 2.7
Canada 19.9 23.3 -3.4
Advanced nations 22 21.1 0.9
France 22.1 23.1 -1
Spain 22.5 20.6 1.9
Emerging Europe 22.5 24.8 -2.3
Middle East, Africa, etc 25.2 26.8 -1.6
CIS 25.6 24.3 1.3
Japan 27 23.4 3.6
Germany 27.6 19.4 8.2
Emerging and developing nations 31.7 32 -0.3
Emerging Asia 40.5 39.6 0.9

Tuesday, April 3, 2018

10,000 Tariffs

In working on my last post about import villains, I stumbled across an incredible realization. Steel and aluminum are just the tip of the iceberg. Most of us mere mortals have not tried to explore the labyrinth of information called the Harmonized Tariff Schedule (HTS) where we list all the tariffs levied against our trading partners. My reaction to perusing that schedule is a lot like the feeling one gets when they first try to understand all the notes on the neck of a guitar. Yikes, I didn’t realize all those notes were in so many places! Luckily, on a six-string guitar in one octave, there are only 72 places for notes.

The HTS contains 22 sections of goods categories broken into 99 chapters covered on 3,710 pages including over 12,000 import tariffs. Are you kidding me? I didn’t even know there were 12,000 goods.

What’s my point? My point is that a trade novice evaluates or judges the change in the tariff on steel imports without any real understanding of the whole tuna. Imagine such a novice who thinks that we don’t have many tariffs and that a 25% tariff is weirdly high or unusual. In that case you might come to one kind of conclusion about steel and aluminum. I am tired of typing steel and aluminum so let’s just say S&A.

But now, after a fascinating morning with my friend Google, I know there are more than 12,000 goods tariffs. One of them is the 127% levied on Chinese paper clips. Paper clips! I found examples of very high tariffs including those on canvas sneakers, leather and foot ware, synthetic yarns, canned tuna, and a large variety of lovely foods from the EU including cured ham, truffles, oats, and mineral water.

Inasmuch, a less na├»ve person would interpret the newly increased S&A tariffs in a different light. A 10% or even a 25% tariff is neither startling or unusual. That does not mean I am supporting or advocating these new tariffs – it simply means we need a more realistic approach to evaluating them. From the reactions in the press, you would have thought that CNBC had purchased Fox Business News. Not so.

These new tariffs are really like a blip in the ocean. Given all the tariffs we already have on imports, I doubt these new tariffs are going to drastically change those 3,710 pages. But it is interesting that among all those 12,000 goods that somehow S&A avoided a tariff and that past attempts to levy them had been so unsuccessful.

Why do we have so many import tariffs? Is the world so unfair to the US that we had to slap on tariffs to be competitive and save US jobs? Or is this more of the same game of government spoils that is applied so routinely by companies within our borders? The government has a lot of elected officials with lovely salaries and benefits. Perhaps we have so many protections because it pays well?

I am asking more questions than I am answering. But this thing with S&A really opens a much bigger set of questions once we view it in a wider context:
Why have we not had tariffs protecting S&A when we protect so many other industries?
What does any of this have to do with US national security?
How many of these 12,000 existing tariffs improve national security?
How many other goods should have tariffs because of national security?
Do we really need any tariffs to protect national security?
How can we preach the values of competition when we seem so far from the ideal?
While the WTO made initial progress in removing barriers to trade, why is the Doha Round dead after so many years of negotiation?
Have we given up on the idea that reduced trade barriers are good for the global economy?
Where is my JD?