Should the Government try to Stimulate US Exports? Becker

Posner shows, among other things, the basic impossibility of doubling US exports during the next five years. I consider whether such a policy makes sense, even if it could be achieved. My short answer is that it does not.

In economies that have full employment except during recessions, which describes the American economy, increased exports do not create jobs, any more than building football stadiums creates jobs, although many commentators and businessmen continue to lament the jobs lost to China. What increased exports do under full employment conditions is transfer jobs from producing for domestic consumption and domestic investment to producing for export. The share of American GDP devoted to exports has about doubled during the past 50 years without having any noticeable impact on either the employment or unemployment rates. Part of the reason for this little impact is that imports increased even more rapidly than exports did, but the main answer is that some workers and capital shifted from producing for domestic uses to producing for foreign uses.

Many countries want to increase their exports in good part because of the continuing influence of the old mercantilist tradition that countries should try to accumulate more assets, such as gold. In earlier times, increase in gold reserves equaled the difference between the values of exports and imports. In present times, there is considerable envy of China’s accumulation of over $2 trillion worth of reserves because China exports many more goods and services than it imports. The US and other countries that import much more from China than they export to China have been pressuring China to appreciate its currency in order to encourage Chinese consumers and businesses to import more from other countries, and to reduce imports by other countries of Chinese goods.

I have argued earlier (see my post on our old website for Nov. 23, 2009) that China has been accumulating more reserves that the optimal amount that would promote its own interests. Since China has far more than enough reserves to manage even large fluctuations in its trade balance, the Chinese people would have greater real wealth if its government allows the Yuan to appreciation. An appreciation of its currency would reduce China’s exports and raise its imports.

While China has been hurt by its mercantilist policies, I believe that the US and other developed countries have gained rather than lost from China’s policy of undervaluing its currency. China has exchanged goods produced by hard-working labor, and costly raw materials and capital for paper, like US Treasury bills and bonds, that yield low interest rates. The financial assets that China is accumulating is not yielding much more in the way of income than the mercantilist goal of accumulating zero interest bearing gold in exchange for goods produced by labor, materials, and capital.

A common response to the analysis I just gave is that it is too “economic”. It is claimed that from a geo-political view, China has the United States at its mercy due to its large accumulation of US debt. According to this argument, China could threaten to sell these assets, thereby raising interest rates on American debt, and creating chaos in the market for American debt. The truth is just the opposite, for, if anything, the US has China over the barrel. For the US could threaten to inflate away much of the burden of its debt, and thereby greatly reduce the real value of China’s assets. The US could also use the Fed to maintain relatively low interest rates, even though this would likely increase inflation as well.

In fact, while China has very large holdings of US debt, it does not have much leverage on the market for this debt. For one thing, there is little debt of other governments that China would consider good substitutes for its US Treasury bills and bonds. Particularly now, with the major fiscal problems of the PIIGS (Portugal, Ireland, Italy, Greece, and Spain), EU debt does not seem like an attractive alternative. Moreover, China in fact has little monopoly power in the market for US government debt. Despite its vast holdings, China has no more than about 10% of the US debt held by the American public or foreign governments. A 10% share of the market for an asset does not provide much control over interest rates on that asset, especially when the asset is part of a much larger worldwide market for governments, private bonds, and equities. China may be willing to take some losses in order to pressure the US in its military relations to Taiwan, and other geo-political areas of conflict. But its threats in the government bond market have little credibility since China would suffer much more than the US would.

I am not claiming that the American government and American consumers have been saving enough. Since the US’ deficit between imports and exports is the mirror image of its deficit on capital accounts with other countries, fiscal deficits have affected the trade balance. for this reason and others, the huge federal deficits during the past couple of years, and also earlier in this decade, are very worrisome, especially if the American debt/GDP ratio continues to rise rapidly during the next few years. However, the basic problem is not US exports, but it is getting the federal government to cut its spending, and to implement policies that increase the rate of growth of the US economy.

Comments

[Jack]

"In economies that have full employment except during recessions, which describes the American economy, increased exports do not create jobs, any more than building football stadiums creates jobs....

.............. Hmmmmm, I'm wondering (and strongly suspect) that the US economy has fundamentally been changed, and that with the "help" of imports and outsourcing may well never see full employment again unless changes in trade relations are made. Consider that much of "GM's problem" and that of every car mfg and most other mfg's is that of the product lasting longer and being built with far fewer man hours. As for "building football stadiums" and making lattes for each other neither is going to help our soaring trade deficit.......... and the dollar weakens but not enough for our exports to compete in China, India, Africa, while the oil that we use/waste at far higher rates than other economies, continues to increase in dollar terms.

Kinda wish you'd have used a different example, such as projects that result in less use of imported fuels, or that we'd have invested in infrastructure maintenance and upgrades so when, or if, this mess is over we'd have something in our asset column that would pay dividends in improved efficiency.

Then if we regained, or expanded our leadership in biotech, and fossil fuel conservation tech and mfg perhaps we would increase our exports at a higher percentage/year.

One last thought on employment is that of our economy having "matured" in a manner in which many of our jobs are largely featherbedding of some sort that is politically protected, for example our H/C system using 8 or more clerical people to Canada's one,"investment bankers" skimming off billions for either gutting and reselling long established companies, or "packaging loans" at some godawful rate of leverage that would arguably be better off where they were. "Lean and mean" would be part of the prescription for maintaining our std of living, against high odds to the contrary, but what do we do with the former featherbedders?

[altereggo]

"The financial assets that China is accumulating is not yielding much more in the way of income than the mercantilist goal of accumulating zero interest bearing gold in exchange for goods produced by labor, materials, and capital."

Amazing! This was my argument against mercantilism when I was seven years old... not expressed in those precise terms, of course. Nobody seems to realize how much cheap walmart-sold chinese imports have improved quality of life in this country, especially for the poor.

[K.R.Srivarahan]

Doubling exports in five years is possible (as other nations have demonstrated in the past) provided adequate capital and labour are available.Provision of $2 billion may not be adequate for this ambitious target.Regarding labour, it is not necessary to shift them from production for domestic consumption inasmuch as the unemployment rate is now atrociously high and threatens to be so in the light of imminent jobless growth scenario. It is too risky to depend entirely on increase in domestic demand to sustain growth. Casting the net wide is a sane economic and social policy.

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Who agrees with me when I say that flag football is a terrible substitute for tackle football? Or for those of you who prefer flag football to tackle football, why?

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One last thought on employment is that of our economy having "matured" in a manner in which many of our jobs are largely featherbedding of http://www.new-jerseys.com some sort that is politically protected, for example our H/C system using 8 or more clerical people to Canada's one,"investment bankers" skimming off billions for either gutting and reselling long established companies

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I thought China had a lot more than 10% of US treasuries. Anyway, with all the spending and dollar printing going on in the US, it's only a matter of time before the dollar reverts back to the slide it was on. It's only up at the moment due to the Euro problems. Once the dollar tanks, exports will increase but at a very costly price.

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Doubling exports in five years is possible (as other nations have demonstrated in the past) provided adequate capital and labour are available.Provision of $2 billion may not be adequate for this ambitious target.Regarding labour, it is not necessary to shift them from production for domestic consumption inasmuch as the unemployment rate is now atrociously high and threatens to be so in the light of imminent jobless growth scenario. It is too risky to depend entirely on increase in domestic demand to sustain growth. Casting the net wide is a sane economic and social policy.

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The answer is no. Thanks for the post.

[cat]

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With all the dollar printing going on in the US, it's only a matter of time before the dollar reverts back to the slide it was on. It's only up at the moment due to the Euro problems. Once the dollar tanks, exports will increase but at a very costly price.

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China could threaten to sell these assets, thereby raising interest rates on American debt, and creating chaos in the market for American debt. The truth is just the opposite, for, if anything, the US has China over the barrel. For the US could threaten to inflate away much of the burden of its debt, and thereby greatly reduce the real value of China’s assets.

This is a great point and it often overlooked by the gloom and dommers!

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