Thursday, December 8, 2016

What trade deficits really mean

Harvard's Greg Mankiw explains in this NYT Upshot column what happens when a country runs a trade deficit.  When imports are greater than exports, this results in lower GDP.   But is this something we should really be concerned about?

Mankiw points out that the trade deficit is accompanied by a foreign investment surplus.  When businesses overseas sell more to us than we sell to them, they have to do something with the funds they accumulate.  In practice that means they either end up buying US assets or make physical investments in the US, e.g., Siemens opening facilities here.  And guess what?  The investment foreign companies make in the US is considerably larger than the investments US firms make overseas.  In other words, there are many more cases like Siemens than like Carrier.  

Viewed differently, US consumers are able to have a higher standard of living by being able to import goods from overseas.  Investors overseas are able to invest in a relatively "vibrant and safe" economy.  So why would you want to mess with this?

Wednesday, December 7, 2016

Deadweight loss during the holidays

Great video on the economics of giving by Marginal Revolutions's Tyler Cowan and Alex Taborrok.

Pop quiz: Suppose you have $20 in your budget for a gift to Aunt Mabel.  How do you make sure that Mabel gets at least $20 worth of enjoyment?  Easy answer: give her $20 in cash or Amazon gift card.

But do we really want to spend the holidays trading $20 bills with each other?  The video brings up other motives for gift giving, but I am not sure making charitable contributions in Mabel's name is the answer.  She might rather have the $20.

Friday, December 2, 2016

Saving jobs at what cost

I have been searching for the words to express how exasperated I am with United Technologies' decision to keep 700 or so jobs in its Carrier plant in Indianapolis.  Kudos to Larry Summers, today in WP, who totally nails it.  In a market system based on stable regulations and enforced laws, everyone plays under the same rules.  Who you are does not matter.  In a system based on ad hoc deals, all bets are off and companies will redouble their efforts to make friends in high places in government.  

Money quote:
Most companies will prefer the good to the bad will of the U.S. president and his leadership team. Should that reality be levered to get them to locate where the president wants, to make contributions to the president’s reelection campaign, to hire people the president wants to see hired, to do the kinds of research the president wants carried out, or to lend money to those that the president wants to see assisted?
Some of the worst abuses of power are not those that leaders inflict on their people. They are the acts that the people demand from their leaders. I fear in a way that is more fundamental than a bad tax policy or tariff we have started down the road of changing the operating assumptions of our capitalism. I hope I am wrong, but I expect that as a consequence we are going to be not only poorer but less free.