Archive for the Category International economics


America’s surging export of homes

Ben Cole directed me to this interesting story:

The National Association of Realtors released a report Tuesday that said foreign buyers and recent immigrants spent an estimated $153 billion on American properties in the year ending March 2017. That was a 49% increase over the previous year and the highest level since record-keeping began in 2009.

The purchases accounted for 10% of the total value of existing home sales in the U.S. The report did not include new homes.

The breakdown of sales between foreigners and recent immigrants was about 50:50.

[I wish they had data on new homes, as that’s the sort of home that foreigners tend to prefer.]

Of course the sale of homes to immigrants is not an export, but it does have a similar economic impact.  However the sale of homes to foreigners does represent a US export, and creates lots of goods jobs for American blue collar workers.  (Note that it doesn’t really matter whether they buy new or existing homes; the net effect on the housing market is the same.)  So the protectionists should be rejoicing, right?

Actually, just the opposite.  The US government does not even count these as exports.  Instead they are treated the same as net borrowing.  They are considered a part of America’s current account deficit, leading to all sorts of silly hand-wringing about how America is borrowing too much and living beyond our means.  In fact, we do borrow too much (due to the tax advantage of doing so), but that has nothing to do with the current account deficit.

I have a solution.  Treat international trade the way that we treat trade between American states.  Stop collecting records on imports and exports.  We don’t have data on the CA deficit of Texas or the CA surplus of Massachusetts, and that lack of data doesn’t seem to cause any problems. So stop doing so for the US as a whole.

You can still collect data on America’s net debt position (good luck with that!), if you wish to.

PS.  I have a post on “The German Problem” over at Econlog.

Current account deficits are forever

The back of the Economist magazine has current account deficits over the past 12 months for 42 major economies, comprising the vast majority of global GDP.  I noticed that they group neatly into 4 major blocks.  But first I’ll present the data for 5 regions:

1. Continental Europe (excluding Turkey):  $556.8 billion CA surplus

2.  East Asia:  $674.0 billion surplus

3.  English speaking countries (US/UK/Canada/ Australia)  $698.9 billion deficit

4.  Latin America:  $101.5 billion deficit

5.  Middles East/South Asia:   $116.0 billion deficit

Exceptions include Greece and Poland (which both have tiny deficits), Israel (which has a sizable surplus), and Indonesia and Philippines (which have tiny deficit). That’s it.

In theory, the numbers should add up to zero.  I presume the net global surplus reflects the fact that many of the smaller developing countries left off the list have CA deficits, and perhaps there is also a statistical discrepancy (measuring error.)

Let’s say I’m right that most of the missing countries are developing countries with deficits, and let’s mentally add them in with both Latin America and the Middle East/South Asia. Let’s call that big group “developing countries”, even though it technically excludes developing East Asia.  In that case the world has four blocks. Both English-speaking countries and developing countries have big CA deficits, and both continental Europe and East Asia have big surpluses.

So what’s going on here?  Basically, Europe and East Asia are investing lots of money in developing countries and English-speaking countries.  But why?

Developing countries have better growth prospects—thus India grows much faster than Switzerland and Singapore (two high surplus countries).  The English speaking world runs big deficits for several reasons:

1.  The Anglo-Saxon economic model is a good one, drawing in foreign capital.

2.  The Anglo-Saxon world is a safe place for investment, due to the legal system.

3.  The Anglo-Saxon world is a good place to move, as English is the global second language.  Thus if you are a Chinese person worried about the future of your country, Vancouver makes more sense than Vienna as a place to move if things go bad.  So you buy a house in Vancouver as a security blanket.

4.  The Anglo-Saxon world dominates high tech, which brings in lots of money that doesn’t show up in CA deficit data.

What am I missing?

I expect these “imbalances” to persist for many decades.  That’s because they are not “imbalances” at all, but rather equilibrium outcomes.  The world is basically Europe/East Asia on one side and English/developing on the other.  Why should that change in the future?

Rothwell on Autor, Dorn and Hanson

A number of people have asked me to comment on a new paper by Jonathan Rothwell, which criticizes a study by Autor, Dorn and Hanson (ADH) on the impact of Chinese imports on the US job market.

I conclude that the economic losses from trade are not as severe as the economics literature currently implies. Workers in the most import-exposed sectors face a risk of layoff and unemployment that is comparable to workers in other sectors, where competition comes almost exclusively from domestic businesses. While it is likely that less import competition would further lower the risk of displacement and boost wages for manufacturing workers, less competition would likely lead to a reduction in the ratio of product quality to price and a drop in consumer welfare. I accept the Autor et al. (2014) finding that import competition lowers wages for U.S. workers in the affected industries — but even still, I find that workers in the manufacturing sector continue to earn a sizable wage premium compared to those with similar experience and education levels in other sectors.

At the community level, these results should not be taken to mean that de-industrialization has been harmless to individuals or even communities. Rather, the results imply that deindustrialization as a result of Chinese import competition plays out no differently than deindustrialization as a result of other forces — such as domestic competition or technological change. Communities relying more heavily on industries facing import competition perform no  worse in this study on summary measures of economic development and consistently show higher growth rates in establishments. They seem to find ways to adapt, maintain wage growth and launch new enterprises.

That’s what I would have expected.  Not surprisingly, Autor, Dorn and Hanson contest Rothwell’s study.

Regardless of whether Rothwell is right or wrong, the press has done an extremely poor job in reporting the ADH study.  Trade economists already knew that specific industries, and even communities, can be hurt by import competition.  The press has suggested that the ADH study shows that China trade resulted in a net job loss to the US, a finding that really would be new.  But as Paul Krugman and I keep pointing out that’s just not so.  Their study is completely consistent with zero net job loss to the US.  That’s because the study looked at the period of 1990-2007, when monetary offset was fully engaged.  So there’s no plausible AD channel.  Of course you can make other arguments, but you can’t show aggregate effects with a cross-sectional study.

All the press coverage of ADH is much ado about nothing.  Maybe China did hurt the overall US labor market, but their study doesn’t show it.  I’m not surprised that the press ignores me, but I am a bit surprised they ignore Krugman, particularly since he has occasionally argued that China was stealing US jobs during the Great Recession.  No one can claim his critique of ADH was based on ideological bias.

PS.  Nor can Autor, Dorn and Hanson be accused of ideological bias.  For instance, they favor TPP.

PPS.  Before you try defending ADH based on non-AD channel arguments, you might consider that at various times in their paper they imply they do have an AD channel in mind.  For instance, when contrasting Germany’s trade surplus with the US trade deficit.

A strong dollar: Taking a deeper look

My previous post was rushed, and perhaps a bit tautological.  So let’s take a deeper look, and try to answer the comment left by Tyler:

One shift increases national wealth, however, and the other lowers it, so why is that not a strong presumption in the direction of my answer…?

Tyler probably wanted to make the dollar appreciation occur for no particular reason.  But of course he knew that there must be a reason, so he offered this:

For the relevant thought experiment, assume an exogenous shift in noise trading boosts the value of the dollar.

In simple supply and demand terms, that means the value of the dollar rises because noise traders suddenly increase their demand for dollars.  That’s what is commonly referred to as a “monetary shock”.  In this case, a contractionary shock. Recall that a contractionary monetary shock occurs when there is either a reduction in the monetary base (less supply), or an increase in base demand. Contractionary shocks also cause the dollar to appreciate.

Now here’s where things get complicated.  Tyler is clearly interested in real wealth, not nominal wealth.  But it’s not clear that a monetary shock will affect any real variable, either the real exchange rate or the level of real wealth.  Thus if money is neutral, then a contractionary monetary shock that appreciates the dollar by 4.3% will also cause all wages and goods prices and even stock prices to fall by 4.3%. This leaves the real wealth of Americans unchanged, they don’t even notice anything when they travel overseas.

Tyler would quite rightly respond that money is not neutral in the short run, and that a 4.3% nominal appreciation of the dollar would also imply a 4.3% real appreciation in the dollar, at least in the very short run before the price level had adjusted.  OK, so let’s go with that non-neutrality assumption, assuming sticky wages and prices.

But the problem with this assumption is that it really complicates the “ceteris paribus” problem.  If it’s really true that a contractionary monetary shock makes the real exchange rate appreciate, helping our tourists when they visit France, or buy French wine, it also, ipso facto, leads to higher real wages, which reduces employment and real GDP.  How does all this net out in terms of our welfare?  I don’t know.  To answer that question there is no shortcut to a plausible macro model that generates an optimal monetary policy for our domestic welfare.  In my view the “best” position for the US dollar in forex markets is the value it would hold if monetary policy was appropriate (say NGDPLT).  If NGDP is rising less than the target rate, then policy is too tight and the dollar is too strong, and vice versa

Tyler can change his assumption so that it’s no longer a monetary shock appreciating the dollar.  It could be a real shock (to S&I), which means the real value of the dollar appreciates even after sticky wages and prices have fully adjusted.  That might better fit the recent example of the US.  (But this is also confusing, because by this criterion the Swiss franc is very weak.  It would have to be much stronger to eliminate Switzerland’s huge current account surplus.)

I’m not as good at analyzing real shocks as nominal shocks, but my instincts tell me the answer will be “it depends.”

PS.  Ironically, Tom Powers just sent me this article:

Donald Trump is unsure if strong or weak US dollar is best for the economy

Is a strong dollar good?

Here’s Tyler Cowen:

Is a strong dollar better than a weak dollar?

Yes, for Americans though not for the world as a whole.  For the relevant thought experiment, assume an exogenous shift in noise trading boosts the value of the dollar.  That increases the wealth of individuals and institutions that are long dollars, and presumably this is the case for this country overall.  If you owned lots of ponies, would you not want the price of ponies to go up?

A weak desire to substitute into imports could blunt this result somewhat.  Or in other words, American tourists will benefit to a disproportionate degree.

I can imagine three scenarios:

A.  The dollar is currently below its optimal value for maximizing the welfare of Americans.

B.  The dollar is equal to its optimal value for maximizing the welfare of Americans.

C.  The dollar is above its optimal value for maximizing the welfare of Americans.

In case A, dollar appreciation makes Americans better off.

In case B and C, dollar appreciation makes Americans worse off.

The probability of case B is roughly 0%. So without knowing anything more I’d say there is a 50-50 chance of Tyler being right. His chance of being right is more than 50% if we can clearly establish the case for some sort of market or policy failure that results in the dollar usually being too weak for optimal welfare.  That’s possible, but it’s not obvious to me exactly what that distortion is.  And if true, it would suggest that “reverse beggar-thy-neighbor” policies might be optimal.

PS.  His noise trading assumption can be viewed as an exogenous increase in dollar demand, not motivated by fundamentals.  One can imagine other ways of getting a stronger dollar, such as a random drop in national saving.  His assumption seems aimed at getting a move in the dollar with the smallest deviation from the “other things equal” assumption.  I think his approach is plausible, and hence I do not object to the thought experiment on “reason from a price change” grounds.

Update:  It just occurred to me that my analysis only applies to tiny changes in the value of the dollar.  For large changes, random moves will push it in the wrong direction more than 50% of the time.