What China Knows That You Don't: U.S. Economists Are History's Biggest Patsies

forbes ^ | 5/25/2014 @ 12:15PM | Eamonn Fingleton

[ckilmer]

Few economists have had a more distinguished career than Martin Feldstein. After graduating summa cum laude from Harvard in 1961, he became a fellow at Nuffield College, Oxford. In 1977, he won the John Bates Clark Medal, the most prestigious award in American economics. He went on to become chairman of the Council of Economic Advisors in the Reagan administration and is now a member of President Barack Obama’s Economic Recovery Advisory Board.

[ckilmer]

Does all this mean Feldstein has made an outsize contribution to U.S. prosperity? Probably not. On the contrary, Feldstein’s biggest real contribution has been to the prosperity of quite a different nation: China. His policy prescriptions have proved invaluable to Beijing  in winning Washington’s acceptance for China’s controversial mercantilist trade strategy.

Feldstein’s most historically significant idea is that America has only itself to blame for its huge trade deficits. Never mind that China and other East Asian nations pursue highly protectionist policies that cripple American exports and leave U.S. manufacturers at a profound disadvantage in global competition.

He is the leader of a highly influential “blame America first” clique among economics scholars that has proved decisive in shaping U.S. trade policy in the last forty years.  Others who make similar arguments include Gregory Mankiw, Laurence Kotlikoff, Yukon Huang, Douglas Irwin, and  Daniel Griswold.

Feldstein offered a good summary of the clique’s position in a recent article in the Financial Times. He contended that America’s huge bilateral trade deficits with China – the largest bilateral imbalances between any two nations in history – are nothing to do with Chinese policies. Rather they  supposedly result entirely from U.S. domestic inadequacies, mainly a low U.S. savings rate.

Thus, in Feldstein’s view, China’s strenuous efforts since the early 1980s to boost its trade surpluses count for nothing. He mentioned in particular a policy of keeping its yuan massively undervalued. Supposedly Chinese leaders are just wasting their time.

China’s exports on the move: blame the U.S. savings rate. (Photo credit: Wikipedia)

There is another side to this story, however. While it is an accounting certainty that when a nation’s investment rate is higher than its savings rate, it will run a current account deficit, this is not the same thing as saying that a low savings rate causes a current account deficit. The fact is that causality can run either way. In other words, far from a low savings rate causing  large current account deficits, the reality may be that large current account deficits cause a low savings rate.

And, pace Feldstein, this is what seems to be happening in the real world.

Certainly, as the Washington-based trade economist John Benedetto points out, East Asian governments, buoyed by their nations’ huge current account surpluses, have for more than a decade now been massive buyers of U.S. Treasury bonds. Writing in the Journal of International Commerce and Economics, he suggests that, in the eleven years ended 2012,  foreign purchasers accounted for 43 percent of all U.S. Treasury security issues, and most of the purchases were made by foreign governments. Among these latter the Beijing government was probably the largest actor and as of 2012 its holdings probably totaled more than $2 trillion.

Although Benedetto does not say so, it seems clear that the trend has had a powerful effect in keeping U.S. interest rates low and thus in drastically reducing the incentive for American savers to save.

It is a fair guess that, if the East Asians had not invested so heavily in U.S. Treasury bonds, U.S. interest rates would have surpassed the levels they reached in the Carter years – shooting up perhaps beyond 20 percent. This in turn would have greatly increased the incentive for Americans to save (and probably more important greatly reduced the incentive to borrow). Thus the U.S. savings rate would have been powerfully boosted – again to levels not seen since the Carter years. A higher savings would therefore have reduced or even eliminated the current account deficits.

As Alan Tonelson of the United States Business and Industry Council has pointed out, by so aggressively buying U.S. government debt, China is the functional equivalent of a drug pusher pushing the U.S. to borrow more than is wise.

Why don’t we hear more of the anti-Feldstein side of the argument? Why indeed. The fact is that few policies in American history have been more heavily supported by lobbying money than America’s one-way opening to China. Many huge U.S.  importers, most notably Walmart, benefit from forestalling any rise in the yuan’s dollar value.

Meanwhile many other U.S. corporations overtly or covertly promote China’s agenda in Washington as a way of currying favor with top leaders in Beijing. In former times, the most notable corporation in this regard was AIG (until it almost disappeared down the plug-hole during the Wall Street crash a few years ago).

Other corporations who generally promote Beijing’s agenda in Washington include Coca-Cola and McDonald’s. They do so as a quid pro quo for the fact that they enjoy perhaps the most privileged access of any American corporations in China. Unfortunately for the United States (if by no mistake, as far as the Beijing authorities are concerned), they do remarkably little exporting from the United States. Rather they create in China most of the added-value they sell there and thus are Beijing’s idea of perfect American corporations.

The result of its various trade policies is that China has boosted its exports from a mere $57 billion in 1988 to $2.21 trillion last year — an increase of more than 38-fold in a single generation. In the circumstances it is probably no surprise that the U.S.  current account deficit has shot from $106 billion to $361 billion in the same period.

All this notwithstanding, Feldstein and his colleagues cling to the view that China’s trade policies are counterproductive. As for Chinese leaders, their view of American policies – and policy analysts – is unrecorded.

[Pearls Before Swine]

The US is the spending and credit addict; China is an enabler.

[Cringing Negativism Network]

America needs to bring back America production.

Stop importing everything.

We are going into a great deal of national debt, we need to make stuff right here.

[Zhang Fei]

Wikipedia on Eamonn Fingleton:

He is best known for his analyses since the mid-1980s of the Japanese business, financial, and manufacturing system, and he has applied lessons from Japan's experience to US, European, and other policy questions. As deputy editor of the international banking magazine Euromoney in the late 1980s, he questioned the sustainability of Japan's super-high land and stock values.^[2] He was one of the earliest critics of financialization, arguing that there is no substitute for advanced manufacturing industries (highly capital-intensive, know-how-intensive industries typically making capital equipment, new materials, and leading edge components) as the main pillar of an advanced economy.^[3] He suggests that the United States made a catastrophic mistake in the 1990s in allowing leadership in such industries to pass to Japan. This was a major theme of his 1995 book Blindside: Why Japan Is Still on Track to Overtake the U.S. by the Year 2000. It was named one of the Ten Best Business Books of 1995 by BusinessWeek.^[4] In 2012, he wrote an article for the New York Times Sunday Review called "The Myth of Japan's Failure" ^[5] which updated his view that Japan has continued to best the United States all through the “lost decade".

[Olog-hai]

Willing enabler, if it means the USA falls and Red China rises for the “good” of World Communism.

[PapaNew]

There's nothing wrong with having a supposed "trade deficit." All that means is you are buying more goods that you are selling because the market demands it. The consumer is getting the lowest price for the best product. That's a good thing.

What does Hong Kong produce? It doesn't have any natural resources to sell yet it is a rich domain, because the market and trade is free of government interference and wealth pours in.

Free trade is always beneficial to both side whether you are a buyer or a seller.

[3Fingas]

The Chinese are doing what we did to the British. They are promoting their manufactured goods over imports. Makes sense to me. China is in a better position than we are because their wealth is real as opposed to our illusory wealth derived from financial products and the retail or imported goods. The Chinese do own a lot of our debt so that does leave them vulnerable is some ways, influential in others. Yeah, I have heard the free-trader arguments. I don’t buy them. America was at its peak when it actually manufactured stuff here. Cheap energy and rising costs in Asia might help to reverse this trend and bring manufacturing back home.

[Cringing Negativism Network]

I disagree.

America has 17.5 trillion now in debt, and that is constantly increasing.

We need to make things right here.

[WashingtonSource]

Bump

[DonaldC]

“America needs to bring back America production.

Stop importing everything.

We are going into a great deal of national debt, we need to make stuff right here.”

The problem is either, “everyone wants the corner office but nobody wants to build it”, or “everyone wants 1st world products and services at 3rd world prices.”

Until we change the county’s mindset, the situation will not change and socialism will continue to creep further and further in.

[Mr. Jeeves]

Producers are evil. The IRS says so, and they are honest public servants, so I believe them. Best to keep all tbat nasty “making stuff” in China where our elites don’t have to look at it. :)

[PapaNew]

That's government deficit: spending over its revenue. That's different from trade deficits.

And BTW since you mention it, the biggest problem with government spending is by far the amount being spent, not the deficit. You must cut off at least 80% of the $4 trillion budget and cut taxes to a low flat tax - 10%-15%. Shrink the size of government. Big government is our greatest threat and defeating it our greatest challenge.

The other thing that must happen is to try to elect the right people but more importantly, make it politically profitable for the wrong people to do the right thing - (Milton Friedman).

Do these things and the deficit will not be much of an issue. But if you only focus on the government deficit, you haven't' attacked the root cause and may unwittingly give excuse for raising taxes.

[dadfly]

a financial relationship where one party lends unsecured money to an other in order to enable the second party to buy the goods produced solely by the first, is not “free trade” by any stretch of the imagination.

in fact, that’s like unto the same scheme the robber barrons enforced over their “employees” via the company store.

no, i call that relationship by another name.

[rbg81]

This article is WRONG—the truth is much worse than that.

The Federal Reserve is now the biggest buyer of US debt, not the Chinese. And the Fed is getting permission to do this from Congress. Which means the Fed is creating $$ out of thin air to buy our own debt to keep our interest rates artificially low?

Why? Because if the Federal Government had to pay a reasonable interest rate on the deficit, it would not have the $$ and the Entitlement state would collapse, quickly followed by the entire US economy. In short, low interest rates are financing the deficit. This is a stealth tax paid by SAVERS, who really should be getting a fair interest rate for the $$, but aren’t.

If the US dollar were not the world’s reserve currency, we could not get way with doing this. Which is why Russia and China efforts to create a new reserve currency scare the stuffing out of Washington.

[PapaNew]

Nobody’s forcing the American consumer to buy Chinese products over domestic or other products. The consumer will buy the best product at the best prices. This so-called “dumping” idea is a bunch of B.S.

[dadfly]

then, effectively now mind you, why do i have to struggle so hard, and even fail most of the time, to find products to buy that aren’t stamped MADE IN CHINA?

[PapaNew]

Because you are an end user. Many OEM’s, domestic manufacturers, and distributors find their best prices for the quality come from China. So they as consumers are choosing their best price and quality to get YOU, the end user, the same.

[dadfly]

:), the prices are going up and the quality i see is largely crappy. anyway, that is irrelevant to this discussion about the *cause* of our trade imbalance.

but by your response (ie, talking about us consumers having a “choice.”), you seem to be in sync with this so called economist; ie, blaming the US consumers and producers for its current trade deficit.

sorry FRiend, i’ve already reasoned past this false idea. our politicians and bankers are and have been for a long time in league with china’s politician’s (and the world’s) rigging this game. wittingly or unwittingly, the result is our current financial disaster and perdicament. anyway, thanks for the debate.

[PapaNew]

our politicians and bankers are and have been for a long time in league with china’s politician’s (and the world’s) rigging this game

To the degree that government interferes directly or indirectly through subsides, we don't have free trade or free market enterprise do we?

Government interference, not the free market, is the problem with limited choices. The free market works by the voluntary opportunity and cooperation in the competitive market of supply and demand. If you want government interference, you favor the problem, not the solution.