Yet Another Unconvincing Argument
The deficit redistributes wealth from relatively poor workers to relatively rich asset holders. The rich make a lot of money financing the deficit, while the poor get bad jobs because the deficit crowds out private investment, making workers less productive than they would otherwise be. This is a nice, elegant, classical argument, and I used to like it a lot back in the 1980s.
Today I’m not so sure. Is anyone making a lot of money financing today’s deficit? US investors are making a little bit: about 2.5% after inflation (but before taxes), judging by TIPS yields. Fully hedged Japanese investors are making exactly nothing. (The cost of hedging US Treasury securities into yen just offsets the interest on those securities.) Unhedged foreign investors (mostly central banks) will probably end up losing money.
Is the deficit crowding out private investment? Probably not in the US, because Asian central banks are willing to finance whatever deficit we throw at them. Moreover, the elastic part of investment in the US today seems to be in housing rather than productive assets. Is the deficit crowding out private investment in the Asian countries that finance it? By most accounts, China has too much investment already. Japan has near-zero interest rates, so there’s apparently not much of a crowd at the investment market. Generally, in Asia, the product demand coming from the US seems to be doing more to encourage investment than to discourage it. The crowding out argument applies when the world economy is running at or above potential. Today, it’s not.
Come back in a few years. If Japan has been running a convincingly positive inflation rate, maybe I’ll try to revive this argument.
Today I’m not so sure. Is anyone making a lot of money financing today’s deficit? US investors are making a little bit: about 2.5% after inflation (but before taxes), judging by TIPS yields. Fully hedged Japanese investors are making exactly nothing. (The cost of hedging US Treasury securities into yen just offsets the interest on those securities.) Unhedged foreign investors (mostly central banks) will probably end up losing money.
Is the deficit crowding out private investment? Probably not in the US, because Asian central banks are willing to finance whatever deficit we throw at them. Moreover, the elastic part of investment in the US today seems to be in housing rather than productive assets. Is the deficit crowding out private investment in the Asian countries that finance it? By most accounts, China has too much investment already. Japan has near-zero interest rates, so there’s apparently not much of a crowd at the investment market. Generally, in Asia, the product demand coming from the US seems to be doing more to encourage investment than to discourage it. The crowding out argument applies when the world economy is running at or above potential. Today, it’s not.
Come back in a few years. If Japan has been running a convincingly positive inflation rate, maybe I’ll try to revive this argument.
Labels: budget deficit, economics, government spending, income distribution, macroeconomics, public finance, taxes
posted by knzn at 7/12/2006 07:39:00 PM
8 Comments:
You are knowledgable and smart. Who are you?
Never mind. Where did you get your degree(s) in economics?
"crowding out" ???
I would think one could make an argument that allowing China to fix the exchange rate as it does, tilts the returns on manufacturing investment. It would be hard to see why China does it, if it didn't tilt dollar returns on manufacturing investment, favoring China and disfavoring U.S. locations.
So, whatever "crowding out" would otherwise have occurred has been transformed by the PBC into high returns on manufacturing investment in China and correspondingly low returns on manufacturing investment in the U.S.
There is so much uninformed talk about differences in wage rates driving globalization and China investment, that it is easy to not notice the unopposed financial manipulation.
The U.S. is being handsomely compensated by China, but disinvestment in U.S. manufacturing is, nevertheless massive. I'm sure you could give this phenomenon a clever name "xxxx equivalence" and become famous and all.
Where did you get your degree(s) in economics?
Answering that would bring me dangerously close to having an identity. Let’s just say it’s a very old, well-regarded university in the Boston area.
That's nonsense, Bruce.
The economy, and the policies that created it, are just perfect. Exports are up 40% from the previous year. :) Productivity growth, one of the most important of economic metrics, is the highest it's been in decades. :) We have full employment, and wage growth is accelerating, especially at the lower levels. If Republicans can maintain their control of Congress, America will be well served. :) >
>U.S. output and capacity rise for June
The 0.8 percent jump in output could signal inflation to the Federal Reserve.
July 17 2006: 9:40 AM EDT
WASHINGTON (Reuters) -- Output at U.S. factories, mines and utilities rose by a bigger-than-expected 0.8 percent in June and capacity use also topped expectations in signs of a hot economy that could weigh on an inflation-wary Federal Reserve.
Capacity use rose to 82.4 percent, the highest rate since 82.5 percent in June 2000, the Federal Reserve reported on Monday.
Analysts were expecting a 0.4 percent gain in industrial production and a capacity use rate of 81.9 percent.
The 6.6 percent rise in industrial production in the second quarter was the largest quarterly rise since a 7.7 climb in the fourth quarter of 1999.
The 82 percent capacity use rate for the April-June quarter was the highest since an 82.6 percent use rate in the second quarter of 2000. Manufacturing output in June rose at 0.7 percent on gains in automotive production, while mining output jumped 1.2 percent and utilities output climbed 0.7 percent.
Manufacturing capacity use was 81.1 percent, the highest since May 2000.
Find this article at:
http://money.cnn.com/2006/07/17/news/economy/output.reut/index.htm
T: I think Bush's economic policies have been phenomenonly successful, and have consistently said that I think it is a political mistake not to acknowledge that success. The only fault I find is that the benefits have targetted Bush's base exclusively, and, of course, that's not a fault at all, if you are a Republican.
The issue I addressed in my comment had to do with manufacturing investment, and not output. Business investment, particularly in manufacturing, has been remarkably weak, given all the good news on output and profitability. That is, given the high levels of output and profitability, I would expect higher levels of investment than we have seen.
Given the high levels of profitability, American business, in general, has no pressing need to borrow to finance investment, so interest rates are pretty much irrelevant at this point. China is not irrelevant.
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