Home > Uncategorized > Trade, Trump, and the economy: What does Greg Mankiw’s textbook say?

Trade, Trump, and the economy: What does Greg Mankiw’s textbook say?

from Dean Baker

Harvard professor, textbook author, and occasionally New York Times columnist Greg Mankiw told readers today that Donald Trump’s economic team is wrong to worry about the trade deficit.

“The most important lesson about trade deficits is that they have a flip side. When the United States buys goods and services from other nations, the money Americans send abroad generally comes back in one way or another. One possibility is that foreigners use it to buy things we produce, and we have balanced trade. The other possibility, which is relevant when we have trade deficits, is that foreigners spend on capital assets in the United States, such as stocks, bonds and direct investments in plants, equipment and real estate.” …..

“in reality, trade deficits are not a threat to robust growth and full employment. The United States had a large trade deficit in 2009, when the unemployment rate reached 10 percent, but it had an even larger trade deficit in 2006, when the unemployment rate fell to 4.4 percent.

“Rather than reflecting the failure of American economic policy, the trade deficit may be better viewed as a sign of success. The relative vibrancy and safety of the American economy is why so many investors around the world want to move their assets here.”

There are three points worth making here. First, purchases of financial assets, like stock and bonds, do not necessarily translate into greater output and employment. Mankiw may have missed it, but we had a long stretch of very high unemployment following the collapse of the housing bubble in 2008. The Fed purchased plenty of financial assets in this period, it had some effect on boosting output and employment, but did come close to getting the economy back to full employment. (The assets don’t care whether the Fed or foreigners purchase them, it has the same effect on output and employment.)

Second, much of the purchases of U.S. were not because of the “vibrancy and safety” of the U.S. economy. Following the East Asian financial crisis in 1997 many developing countries felt that they had to accumulate massive amounts of reserves to avoid ever facing the same situation as the countries of the region faced in 1997. (In other words, they didn’t want to have a U.S.-directed I.M.F. bailout.)

This meant buying up massive amounts of dollars. That held down the value of their currencies, which in turn allowed these countries to run large trade surpluses. That reversed the textbook pattern where capital is supposed to flow from rich countries where it is plentiful to poor countries where it is scare. In the years since 1997, poor countries have been massive exporters of capital to rich countries.

The third point is that this trade deficit has created a large gap in demand, pretty much as Trump’s economics team claims. In the late 1990s we filled this gap in demand with the demand generated by the stock bubble. When that bubble burst in 2000-2001, the ensuing recession gave us the longest period without job growth since the Great Depression.

  1. Alan
    December 4, 2016 at 1:57 pm

    I find it hard to take anything Mankiw writes seriously. Read what his textbook has to say on Adam Smith and the Smith’s supposed “Invisible Hand of the Market”. Given what he writes, he either hasn’t read Wealth of Nations, is illiterate, or he’s purposefully misrepresenting Smith.

  2. December 4, 2016 at 2:57 pm

    What Mankiv neglects when considering trade deficit is the peculiar role of US: it prints the US$, the nowadays “gold standard”, and it can print any amount of US$s.
    Things are completely different for any different country, who has to buy dollars in order to import, and whose currency in bought normally only in order to buy its export.
    The history of the Euroarea crisis do is the history of internal trade deficits (PIGS) and surpluses (mainly Germany and Holland).
    Things will change, when the the US currency will loose is primacy in international trade.
    Parochialism isn’t only an European problem, as we can see – also an US “pundits” problem.

  3. December 4, 2016 at 5:02 pm

    One way or another, having a trade surplus means giving free stuff to foreign consumers, and having a trade deficit means consuming stuff from foreign producers that you don’t intend to pay for. When all sides have this understanding, all is good. When one side expects books to balance and debts to be paid, things go poorly.

    For example, Chine for years has been maintaining a trade surplus with the US and buying US bonds, not because it needs the 1% return of Treasury bonds but because it knows it’s smart to give US consumers free stuff. China gives the US free money to buy Chinese goods because that drives the Chinese industrial economy in a way that’s good for China, and that growth would otherwise be impossible. Yes China has bonds. It’s irrelevant. It practically gave its money to the US.

    Conversely in Europe, Greece and other countries bought German goods which they thought were free. They thought the EU was going to subsidise that consumption by monetary magic or fiscal transfers, so that we have convergence and growth and good stuff. The Germans didn’t seem to mind giving people free cars for several years, because that way they had a strong economy. Like the Chinese. Then all of a sudden in 2011 Germany went, “Oh no, you don’t understand, of course we want to be paid for all those free cars”. And all hell broke loose.

    Economies sometimes have surpluses. Surpluses are about having strong, robust economies with full employment while giving people (whether it be foreigners or compatriots) free stuff. Surpluses are good, and so is giving people free stuff. Get used to it.

  4. December 4, 2016 at 6:17 pm

    Pavlos Papageorgiou: One way or another, having a trade surplus means giving free stuff to foreign consumers, and having a trade deficit means consuming stuff from foreign producers that you don’t intend to pay for.

    Quite wrong. One is selling on credit, the other is buying on credit. The intent and practice is to get paid or to pay eventually – or people and nations would not do this.

    • December 4, 2016 at 11:02 pm

      No they’re not. Nations are not households and trade deficit is not a credit card. Households make a preference tradeoff to forego consumption now (save) and consume more later, or the opposite. Nations don’t. There’s no timetable for “paying back” national debt, be that to the public or other states. There’s no tradeoff of consumption preferences, or as much as there is it’s an investment calculation not a psychological or moral choice. Nations generally are in no position to “pay back” their debts if called, not even Germany.

      Nations do invest in other nations, sometimes their customers, but that’s not “buying on credit”. China isn’t the US’s credit card company, not has Germany been giving Greece auto loans. When these rich producers invest in the economies that also happen to be their customers, that can only be a political choice (a subsidy, expecting not to be paid) or an investment decided on its own merits. If China thinks Treasuries are a good investment, or core EU banks wanted to hold peripheral bonds, these can only be assessed as investment choices (clue: the latter sucked).

      There’s simply no room in international trade to buy stuff on trade, outside of very specific cases of war or reconstruction bonds. Steady-state trade surpluses, or deficits, are free.

      • December 6, 2016 at 5:27 am

        My statements are true by definition, consistent with accounting and English usage. Yours are not. In particular, the idea that trade deficits are “free”, that deficit countries, like the USA for now, don’t or don’t intend to pay for what they get is very wrong.

        That there is no timetable to paying off a National Debt does not make it not a debt. Nations are almost always in a position to pay back their debts, and constantly do so, otherwise nobody would use their credit/debt = base money. Large firms can sometimes issue debt in increasing amounts for decades, never “paying off” in toto, just as countries do. This doesn’t make their debts not debts, or bad debts, or debts fraudulently incurred with no expectation of redemption. It is precisely the firms with (naturally) good repayment records which can do this – utilities being a traditional example.

        Nations are not households and trade deficit is not a credit card. The same accounting terms and concepts apply to both. I did not say “credit card”, but that is far better than “free” which is a gross, almost absurd error.

        I was using the word credit in its standard English meaning. For example, when a government pays a government worker or a business for some product with its money, the individual or firm is thereby extending credit to the government. That is what money is – credit/debt. (I’m using an MMT example, if you’re familiar with that.)

        Nations do invest in other nations, sometimes their customers, but that’s not “buying on credit”.
        If we are talking on a national scale, as you seem to, China trade surplus vs. USA trade deficit, it certainly is. On the other hand “Free” is just plain crazy. “Free” goes with “gift”. “Invest”, “buy” whatever goes with credit & debt, with money.

        If China accumulates US money=US bonds, it is by that act extending credit to the USA, not giving a gift. It expects to be paid back, and is constantly being paid back. This happens when China buys something from the USA with this cash. The US has an excellent record in paying back, in having a stable value of the dollar, which is why people and nations have been accumulating dollars for centuries, because they rightly expect to be paid back, however understood.

        Steady-state trade surpluses, or deficits, are free. What is “steady-state” here? In any case, that’s like saying a government or a private sector is getting something for free when a “money supply” or National Debt is constant for a few years. No.

        The government gets whatever the private sector did for it. If the government is levying a head tax, Mr. Private Sector gets to keep its head. Win-win. Each activity pays for the other. Neither is “free.” The fact that a sum of these many activities may be constant or zero doesn’t make each individual activity or the sum free, which may be the error you are making throughout.

        The repayment is constant and incessant, which is why trade surpluses or deficits and National Debts can reach very large sums- but usually very roughly proportional to the economic size of the country, which determines its “payback” ability.

      • December 6, 2016 at 11:41 am

        “The fact that a sum of these many activities may be constant or zero” is a very unlikely possibility, not a fact, and Pavlos’s issue is not with even near balance but with constant deficits. In the US these are to some extent balanced by its banks printing and selling petro-dollars, i.e. manipulating the value of its money between its buying and selling. However, with its continuing deficit the danger now is that China will use its spare dollars to buy from the US not commodities but what Polanyi called the “fictitious commodities” of labour, land and money, i.e. US firms and land and the banks it is in a position to bankrupt. And for that you must ultimately blame not the American people but a few international bankers on the make, who have bought the US government and its military enforcers with paper money which they have “printed” themselves, and continue to take back as tribute. It is no good a non-conformist US government changing the staff in the bank or even nationalising the money-making: we need to have a sane “shovel-ready” alternative system to hand before government regulation can provide anything but sticking plasters; and the alternative must not only provide free credit as needed to all rather than just to bankers, it must also arrange for real payback via the world’s work “renewing the face of the earth” being done much better than it is now.

        I love that new phrase that is being used: “shovel ready”! My argument, of course, is that the nearest we have to that is an honest credit card type system, with interest reinterpreted as fines for late payment limiting further credit, with bankruptcies being restricted to those who don’t do their work so even the international balance of his trading is the trader’s, not the nation’s responsibility. But Calgacus, have you managed to read and digest Polanyi’s “The Great Transformation”? If not, it may help you understand the problem with the system, as it has me even after forty years of going over the same ground with a more narrowly British perspective.

  5. Paul Davidson
    December 4, 2016 at 6:21 pm

    What Mankiew did not notice is that after the Federal Reserve and the Social Security Administration, China is the third largest holder of US government bonds — bought with their export surplus income.
    Had they spent this export surplus income on US domestically produced goods and services instead, the US economy would have had 8 years of the “Geat Prosperity” under the Obama Administration.

    What Mankiw likes about the Chinese buying Government bonds instead of us goods and services is that it created enough job outsourcing and lose of income by the middle class to make the election of a Republican president possible.

    Look for Mankiw to be offered a job in the Trump administration..

  6. December 4, 2016 at 8:32 pm

    GREG MANKIW got it right and that may be why TRUMP did on May 9th.
    Excerpt from:
    ” OMG, OMG, OMG, Historic opportunity!
    Washington,Jefferson,Lincoln and TRUMP? On the same page.” by Justaluckyfool

    Donald Trump: “The U.S. Gov’t Doesn’t Default Because It Can Print More Money”
    Posted on May 9, 2016
    “Bonnie Kristian over at Rare writes,’Bonnie Kristian over at Rare writes, Seriously, this proposal is so economically ignorant it is difficult to know how to respond. It’s the sort of thing you’d see if any half-decent economist got a guest writing gig at The Onion. If there were no video evidence, I’d be convinced it was satire.
    All that new money would not magically create new wealth. It would simply dilute the purchasing power of the money that already exists—”
    Seriously, Bonnie Kristian are you ..”economically ignorant”
    believing that this money spent is not in existence ? Then why even pay off debt ?
    ***** If the nation has ZERO plus dollars in its account as owned funds, how does it ‘spend’ even one dollar-except by stealing it or creating a copy of it “out of thin air”.What is so hard to realize that “It is impossible to create wealth “out of thin air” . What they are really doing is “making a copy of someone elses “real Wealth” and giving that copy made “out of thin air” to someone else thereby “creating two owners for the exact same thing”. If a Nation could, in fact, violate these rules of physics, why would we not be fat and prosperous, sitting on our backsides “printing wealth” for our selves and our children! *****The people receiving the USTBBs are GIVING UP THEIR RIGHTS TO REAL WEALTH THEY OWN and are willing to exchange this new ‘paper’ and have it held in safe hands until needed. (US TREASURY BEARER BONDS @ 0%).
    ****** BTW you should read the U.S. Constitution: When a Monetary Sovereignty spends more money than that which it has taken out of its own currency circulation: it must “borrow” (as per US Constitution). This creates the debt of the entire sovereignty,that debt being in that currency.When a Monetary Sovereignty has a debt in its own currency that debt is a deposit in its Central Bank. The owner of the Debt Deposit may withdraw upon demand; however the owner then loses the protections and safety of the credit of the sovereignty.
    Why is there a problem?
    SO where did we go wrong ?
    “Its the INTEREST, stupid.”
    A deficit that grows exponentially MUST over time destroy the quality and quantity of the currency.Period. One can not ignore this mathematical fact this fatal flaw. With no additional spending, while asleep at the wheel the present debt will go from $19trillion to $38trillion, then to $76trillion, to $142trillion…maybe then, perhaps your great-grand children will ask, “What were you thinking?” MMTers are correct that the debt NEED NOT be paid, but we must FIRST correct the fatal “exponential flaw.” READ: National Debt becomes money deposited in the Central Bank as US TREASURY BEARER BONDS at 0% Interest (USTBB) need only be paid on demand by each holder- there is no growth of debt.
    To those who “buy” the debt, it is really just a very safe savings account, identical to a bank CD but totally safe because it is Constitutionally guaranteed.
    EXACTLY, why China will not convert its $3.5trillion and be happy with USTBB – and we will no longer have to give them @ $200billion of new money. Nor would the 10%ers that hold this ‘debt’ wish to spend it (that would be ,perhaps, maybe a great boost of income for the 90%ers), or allow the banks to hold their lifetime saving, knowing that they will be subject to risk (they know how trustworthy they are with money.).
    Quote Thomas Edison, “…Whereas the currency, the honest sort provided by the Constitution pays nobody…” But the owners of the debt that is now on deposit.
    ***”The ease with which the government’s debt could be paid in this way was demonstrated in January 2004″, As the chairman of the Coinage Subcommittee observed in the 1980s.
    ***The ease with which the government’s debt could be paid in this way was demonstrated in January 2004****
    As the chairman of the Coinage Subcommittee observed in the 1980s, the entire federal debt could actually be paid in this way. The Federal Reserve has already established that it can issue $4.5 trillion in accounting-entry QE without triggering hyperinflation. In fact, it has not succeeded in triggering the modest inflation the exercise was designed for. As with QE, paying the federal debt in this way would just be an asset swap, replacing an interest-bearing obligation with a non-interest-bearing one. The market for goods and services would not be flooded with “new” money that would inflate the prices of consumer goods, because the bond holders would not consider themselves any richer than before. They presumably had their money in bonds in the first place because they wanted to save it rather than spend it. They would no doubt continue to save it, either as cash or by investing it in some other interest-generating securities.
    The ease with which the government’s debt could be paid in this way was demonstrated in January 2004, when the US Treasury called a 30-year bond issue before its due date. The bonds were redeemed “at par” to avoid a 9-1/8% interest rate, which was then well above market rates. The Treasury’s January 15, 2004 announcement said that payment would be made “in book entry form,” meaning numbers were simply entered into the Treasury’s online money market fund (Treasury Direct). In effect, the money just moved from an online savings account to an online depository account, converting interest-bearing bonds into non-interest-bearing cash.
    Where did the Treasury get the money to refinance this $3 billion bond issue at a lower interest rate? Whether it came from the private banking system or from the Federal Reserve, it was no doubt created out of thin air. As Federal Reserve Board Chairman Marriner Eccles testified before the House Banking and Currency Committee in 1935:
    When the banks buy a billion dollars of Government bonds as they are offered . . . they actually create, by a bookkeeping entry, a billion dollars.
    The US government can just as easily create this money by a bookkeeping entry itself. It can and it should, to avoid the interest charges that compound the national debt and make it unrepayable.
    Quoting Thomas Edison again:
    If the Nation can issue a dollar bond it can issue a dollar bill. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20%. Whereas the currency, the honest sort provided by the Constitution pays nobody but those who contribute in some useful way.http://ellenbrown.com/…/how-obama-could-beat-the-debt-ceil…/

  7. December 4, 2016 at 8:53 pm

    The cat may be coming out of the bag.
    The wisdom of GREG MANKIW:
    What was a hint by Trump, “The repatriation of the Corp. US dollars overseas.
    ““Corporate Repatriation of Trillions of U.S. Dollars”.

    DONALD J TRUMP knows we can use the $1 to $5 Trillion ( U.S. Dollars )owned by US Corporations that is frozen overseas.

    Within first 30 days in office, a special deal will be made to repatriate these trillions of dollars.

    The corporations will be offered the right to purchase “Special 2016 5 Year Treasury Bonds with 0% interest…TAX FREE.

    This $1 to $5 trillion dollars will be used to create 25 million new jobs. $1 to $5 trillion will be used to purchase “TAXPAYER INCOME REVENUE PRODUCING ASSETS that will create 25 million new jobs. Done while producing a stream of tax revenue to be used by Congressional appropriations.

  8. Edward Woodford
    December 5, 2016 at 5:05 am

    If you invest a $trillion or more of repariated profits, it will be spent on state of the art automated plants. Hence no 25 million jobs and such new jobs as do get created will likely mainly be where existing jobs are: the counties that voted for Clinton that produce 65% of US GNP not the Trump voting counties which produce 35% of GNP. And folks in the latter do not move to jobs as West Virginia shows. Nor do they educate up. So pie in the sky….but time will tell.

  9. December 6, 2016 at 3:06 pm

    I once looked at Mankiw’s text for awhile—it seemed really old school (some sort of refurbished version of P Samuelson) and was so lacking on most of everything (maybe i missed it but i only saw a few mentions of ‘market inneficiency’ and ‘externalities’—its like he had missed last 40 years of economic research, especially last 20). I had seen also his blog and op-eds on occasion.

    I gues my view of trade deficits is that is USA buys everything from China—and spends all their money–the China will use that money to buy everything in USA. So everyone will be living on a Chinese plantation as a slave, though they will have a cell phone and other nice things. You get what you pay for. (This is same problem with the ‘fair tax’ promoted by some in USA –eg Koltikoff (eliminate all taxes except sales tax). Within 10 years, a dynamical model suggests all the property will be concentrated in a few hands. )

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