The State of the Union

The New York Times reports that President Obama, in his State of the Union speech, will call, among other things, for encouraging exports.

Now, since exports must equal imports in the long run, encouraging exports is exactly the same thing as encouraging imports. And wouldn’t you expect that if you were out to encourage imports, your first step might be to stop discouraging imports, say by declaring an end to all tariffs and quotas on foreign-made goods?

In a sane world, that’s indeed what you might expect. But somehow I don’t expect it.


26 Responses to “The State of the Union”

  1. 1 1 Mike H

    I’ll add the book to my reading list.

    What about the short run, though? What are the effects of encouraging exports and discouraging imports?

  2. 2 2 The Money Demand Blog

    I guess Obama is more concerned about cyclical developments. Capacity utilization ratio is lower in the US compared to developing markets, so at this point in time it makes sense to increase net exports. Governments have various policies that distort trade and investment flows, but domestic import barriers are much less important now than trade-distorting policies of developing countries. Central banks of many developing nations have absurd policies – they accumulate reserves and invest them in US Treasuries at negative expected real yields. Currency pegs and capital controls is the most important intervention that reduces the gains from international trade and investment. Obama should spend his political capital in the area where the potential gains are greatest – and now this means that he should promote (net) exports and fight against foreign capital account distortions. The time to fight against domestic trade barriers was during the Clinton era.

  3. 3 3 The Money Demand Blog

    There is one additional reason why it makes sense to deprioritize domestic trade barriers. Bad monetary policy has created a de-facto interest rate floor, in turn this interest rate floor has created huge distortions all across the economy. Lower domestic trade barriers would reduce the equilibrium interest rate, and this will increase the damage caused by the interest rate floor. So net benefits of lower domestic trade barriers are lower than they appear, so Obama sensibly gives priority to other trade distortions.

  4. 4 4 AC

    Arguing that exports must equal imports is probably not the most effective case for free trade. Someone will quote some fellow to the effect that we’ll be dead by then. Better to argue directly that imports are not evil.

  5. 5 5 Jonathan Campbell

    Saying “exports must equal imports in the long run” is like saying “my income must equal my expenditures in the long run.” From this statement we should not conclude that it would necessarily be foolish for me to decide, one year, to increase my income while holding back on my expenditures.

  6. 6 6 Manfred

    I would add one more little piece to Steve’s argument. The exports of the United States are SOMEBODY’s imports in the world. SOMEBODY has to buy the stuff the US produces. Leaders of other countries could take exactly Pres. Obama’s stance as well, to encourage their own countries’ exports. But if everybody exports, and nobody imports, what happens? But this little piece of logic gets completely lost on demagogue politicians in Washington.
    Of course, emotion sells much better among the ignorant voting populace. Reason is just too harsh, too disciplinarian, and perhaps too complicated for such a populace to listen to.

  7. 7 7 Mark Draughn

    If by “encouraging exports” Obama means lowering regulatory and tax barriers to exporting good, then no harm done. In fact, it would be a good thing. On the other hand if exports are to be encouraged by picking winners and awarding subsidies, then we have a problem.

  8. 8 8 ryan yin

    Mike H,
    In the short run, Americans are materially poorer (they consume less), but work more, so measured GDP is up, so incumbents get reelected.

  9. 9 9 Manfred

    “If by “encouraging exports” Obama means lowering regulatory and tax barriers to exporting good, then no harm done.”
    Ok, fine. But then, why not do this for the economy as whole and not just the export sector?

  10. 10 10 Ken B

    “Sane” is not the issue. It is perfectly sane to lie to gain advantage. As we will see again tonight.

  11. 11 11 Will A

    The first step needs to be convincing the American public that “declaring an end to all tariffs and quotas on foreign-made goods” is best for our country.

    Now that the Republicans have a mandate a good first step at convincing America would be for House Republicans to vote to end all tariffs and quotas on foreign goods. They could call it the “Ending the Job Killing Tariffs and Quotas Act”.

    This would give Republicans a chance to bring the debate to the American public and take control of the issue.

    If in the Republican response to the State of the Union the Republicans don’t bring up the removal of all tariffs or even the encouragement of free trade, then the first step would be trying to convince Republicans.

  12. 12 12 RJ

    Steve wrote: Now, since exports must equal imports in the long run, encouraging exports is exactly the same thing as encouraging imports.

    Load of Austrian crap! There are many reasons why exports don’t necessarily equal imports in the long run. If I make a loan abroad and the country doesn’t pay it back, or becomes a failed state, then it’s as if I ‘exported’ my goods abroad with nothing to receive in return, even for the long run. I might as well have thrown my money/goods into the ocean. There is also the issue of price fluctuations in commodities of single export countries, especially vulnerable developing nations.

  13. 13 13 The Money Demand Blog

    RJ, this has nothing to do with Austrian theory, what Steve says is generally accepted by most economists. The problem with Steve’s argument is different. He ignores the main pressing issue of the day – China. China is forcing its poor citizens to save in crappy dollars that are accumulated in the central bank of China. Increased net exports could be a win-win – China could move closer to optimal balance of saving and spending, while U.S. could export more and thus increase the resource utilization ratio.

  14. 14 14 Will A

    @ The Money Demand Blog:

    Great point on how China is forcing its poor citizens to save in their bank.

    This would take us to the second thing to do in a sane world which would be to allow for free movement of citizens between countries. I.e. if a person doesn’t like what China is doing and would like to live in the United States, he should be allowed to move.

  15. 15 15 RJ

    Dear Money,

    And these economists are? I’ve yet to ever see, aside from within Hazlitt’s book just now (yes, he was a proponent of Austrian theory), any mainstream economist state this. Furthermore, I’ve yet to ever read it in any of my economic textbooks or study it as if it were a potential exam question. The only thing I can assume of this statement in any relation to what is taught is that if NX=NI, then there is a trade balance. If NX > NI, then there is a trade surplus. If NI > NX, then there is a trade deficit. Just plain macro 101 material.

  16. 16 16 Eric Nilsson

    The best way to discourage imports is a tariff. This was proven effective by the Hoover administration. By forcing people to pay more for a product, the administration also forced exporting countries to do the same with our exports. Either way, the only people who gained from this (and for a short time) were politicians.

    If I buy a Dell, that is a device made in America; are all components made in America? If I buy a Toshiba, that is a device made in Japan; are all components made in Japan? Are these devices assembled in the country in which the corporation resides?

    It would be great for every unskilled worker in the world, from those who add eyelets to sneakers or slap ketchup on hamburgers, to make the minimum wage in the United States for every hour worked. Western societies view that as justice; the people who are actually putting the eyelets in sneakers at $5 a day may not. They may have gone from making 30 cents a day to the wearying eyelet maker, much as girls and women in the 19th Century moved from farms to the Lowell textile mills. People learned then and people in other countries are learning now.

    So it might be best to discourage imports; it also might be best to build a wall around every part of the country (we can drop Hawaii and Alaska) and place a ceiling over the contiguous states, further discouraging imports.

    Pretty soon, we can all eat what we produce, read by the light of the sun, and wear what we can manufacture. I say bring back the 18th Century!

  17. 17 17 Michael L.

    Well also a Current Account deficit (which is what we have now) also has a Financial Account surplus that goes with it. Isn’t this essentially asking foreign investors not to invest in America anymore?

  18. 18 18 Al V.

    @Money and @Will A, we don’t have to facilitate the Chinese’s ability to buy U.S. investments and keep the Yuan from appreciating. If the U.S. were to balance it’s federal budget (a long shot), then China couldn’t buy dollars by buying T-bills. True, there are lot’s of other things they could buy, but it seems kind of silly for Obama and Geithner to complain about Chinese currency manipulation while creating the opportunity for China to do so.

    I feel like Dagwood in the “Blondie” cartoon. Herb the neighbor keeps on borrowing my tools and not returning them. I keep on complaining that he doesn’t return them, but at the same time I keep letting him borrow. If I’m going to keep letting him have the tools, whose fault is it? We know China is going to manipulate its currency – why do we keep giving them the tools to do it?

  19. 19 19 Mark Draughn

    Manfred: “why not do this for the economy as whole and not just the export sector?”

    Indeed. But every little bit helps. Not that I expect Obama to actually do this. I’m expecting an industrial policy.

  20. 20 20 The Money Demand Blog

    RJ, what about Greg Mankiw, I hope you agree he is a mainstream economist:

    Al V., federal budget balance has nothing to do with China’s dollar peg. Central bank of China would just accumulate a growing share of outstanding stock of federal debt. After that, they could start hoarding 100$ bills or move their reserves to FDIC insured commercial banks.

    Balanced federal budget is suboptimal from another perspective. In the presence of credit frictions, countercyclical variation in tax rates has very important supply side benefits. If taxpayers are credit-constrained, it makes perfect sense to temporarily reduce the tax burden and shift it to later times when taxpayers will have escaped the corner of their intertemporal budget constraint.

  21. 21 21 Will A

    @ Al V.:

    I think you missed the point I was making. My point wasn’t about what China should be doing, it was about the fact that some in China might not like what China is doing.

    In a sane world, if you didn’t like the regulations that you were forced to live under, you would be free to move to another place (U.S., Australia, Napal, etc.) to search for better opportunities.

    Open Markets should be as much about movement of services as it should be about movement of goods. As long as countries impose immigration limits and hiring policies based on where someone was born, we will never have open markets as it relates to services.

  22. 22 22 Al V.

    @Will A, I absolutely agree. If I lived in China, I wouldn’t be happy that my government was artificially surpressing my standard of living to make the country richer as a whole. I’d want a flat screen TV and an iPod too.

  23. 23 23 The Money Demand Blog

    @Al V.

    Negative real yield on dollars held by the central bank of China does not make the country richer as a whole.

  24. 24 24 Mark F

    This all reminds me of a funny Friedman quote on imports:

    “What would the people who sold us goods do with the money? They’d get dollars. What would they do with the dollars? Eat them?!”

  25. 25 25 RJ

    Dear Money,

    Hmmm…interesting. It still strikes me as odd that I’ve yet to hear of this in my undergrad studies, but I’m taking ‘international economics’ next semester so I’ll probably study it then. Again, it still seems odd to me that this would be the case, considering the reasons why that I listed in my first post.

  26. 26 26 answeringbigquestions

    Whew! And here I thought we have been running massive trade deficits for the past 30 years. Of course that’s impossible, as exports=imports in the long run.

    Thank God Steve is here to correct the data with his brilliant theories.

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