Rob Atkinson was nice enough to respond to my post on manufacturing and trade balances. I have thoughts on a lot of the points he made, but to keep the debate as simple and clear as possible, I'm going to try to focus on a few key issues, rather than respond to every point where I disagree.
Rob states that:
The dominant view in Washington, especially among conventional neo-classical economists, is that trade deficits don’t matter and they are caused by lack of national savings. This is a reassuring view to free-market believers because it means that the government doesn’t have to pick winners: in this case export-based manufacturing. If the trade deficit is not a problem, then there is no need for an industrial policy.
Perhaps this is not that important, but I'm not sure what the "dominant view" is here. I'm going to focus on the view "in Washington," rather than the views of neo-classical economists. It would be nice to have a survey of what influential people in Washington think, but we don't have that. From what I can tell based on what I hear from the powerful people in Washington (e.g. members of Congress), the majority view in Washington is that:
- Trade deficits do matter and they cause job losses; and
- The U.S. trade deficit is caused by the U.S. being taking advantage of by its trading partners in various ways (Japan used to be the main culprit, while today it's China, but there are plenty of others as well).
But clearly there are a range of views out there.
With regard to trade deficits being caused by lack of national savings, I want to mention that when you look at what neo-classical economists are saying, the explanation is more nuanced than that. I don't know if Gary Hufbauer sees himself as falling into this category, but as I noted in my original post, he offered the following explanation of U.S. trade deficits:
The size of the trade deficit is primarily determined by four macroeconomic forces:
- The difference between US household and business savings on the one hand and spending by US residential construction and business investment on the other hand;
- The combined deficit of federal, state, and local governments;
- The level of economic activity in the rest of the world, particularly in countries that are close trading partners of the United States;
- The trade-weighted exchange rate of the US dollar.
So while national savings levels are a key factor, there are other important ones as well.
Finally on this point, let me also just mention that I wouldn't say "[i]f the trade deficit is not a problem, then there is no need for an industrial policy." While I am a skeptic of industrial policy, one of my main points here is that issues related to U.S. manufacturing and industrial policy should be debated on their own merits, totally separate from the trade balance. Whether the U.S. should shift its economic focus from services, agriculture, natural resources extraction etc. to manufacturing is an important debate, but the trade deficit is not a major consideration here.
Transitioning from the role of savings over to causation/correlation between savings and the trade deficit, Rob says this:
Simon reflects the conventional wisdom when he says trade deficit is determined by U.S. savings. But this is only correlation, not causation. If the U.S. didn’t run trade deficits there would be less spending and more savings.
Again, savings is not the only issue here, but it is one issue. And what I would say is that there is causation here. If Americans spent less and saved more, the trade deficit would fall. And that's true regardless of whether you think spending less and saving more is a good idea or a good policy. I sense that there is a whole debate out there about how much the U.S. should spend, or how much Germany should spend. When it comes to personal spending habits, I don't have strong feelings about this. I think people should spend what they feel it is appropriate to spend, and cultural differences here are fine. My question for Rob (and anyone else who wants to answer it) is the following: If two countries have a different spending/savings breakdown, doesn't that inherently contribute to a trade imbalance, at least if exchange rates are set in a way that doesn't allow for a correction? There are other factors to take into account, of course, but it seems to me that different spending/savings levels must be a factor here.
Lastly, let me turn to the issue of exchange rates. Rob says:
So what I want is the United States running an overall trade balance, with a surplus in advanced technology goods and services, with a strong dollar.
"Strong" and "weak" dollar can obscure the issue a bit, but it sounds like Rob is suggesting he wants a dollar valued above the market rate. If it's not "strong" in this sense, I'm not sure what "strong" would mean, and he can correct me if I've misunderstood. But I would think that a "strong" dollar in this sense would make imports cheaper and exports more expensive, which would exacerbate the trade deficit. What I would want to see with exchange rates, by contrast, is a dollar that reflects as closely as possible market rates.
