The Electric Commentary

Thursday, February 02, 2006

Update: The World Keeps Getting Better

On Monday, Paul posted a link to a Cafe Hayek post in which Don Bourdeaux compared the number of work hours necessary to buy certain Sears products in 1975 versus comparable products today. The results seemed to show that it takes a lot less time at work to get the same stuff today than it did 30 years ago. An anonymous commenter had some issues with Paul and Don's analysis:

"Thank you China for providing us with all these low cost goods for us to enjoy. This trade policy, where we can spend less for more and just owe and pay someday down the line... Who looks at deficits anyway?

It's like the processed food nowadays -- such an abundance of good things. We can kill ourselves with consumption, and worry later when the bill comes due.

In fact, a few years back, an analogy re. Cheaper gas prices here might have been viewed as a good thing too.

You have to think of these things long term big picture Paul, not just about your household or when you are in the market for freezer or fridge. Your size and price comparisons are cute but limited, not true economic analysis, my friend."

Today, Don at Cafe Hayek is responding to similar arguments:

"Contrary to JR's suggestion, it's not true that, if things once made in the U.S. are no longer made in the U.S., Americans are borrowing more from foreigners. The relationships that JR implies in his post aren't real.

Most fundamentally, let's make the extreme assumption that everything Sears sold in 1975 was made in America and that everything it sells today is made not-in-America. This fact (if it were a fact) in no way implies, or even suggests, that Americans are borrowing from foreigners. It might well be the case that America's comparative advantage over the past 30 years has shifted from producing things such as hand tools, television sets, paint, and automobile tires into producing commercial aircraft, Hollywood movies, magnetic-resonance-imaging machinery, and other goods and services not sold by department stores. That is, Americans are exchanging MRI machines, Pixar animation, and Boeing jets for electric hand tools, tires, and lawn mowers.
Of course, the United States is running a trade deficit (as it has done since 1976), meaning that at least part of what foreigners spend their dollars on is not U.S. goods and services but, rather, dollar-denominated assets.


As I've written on other occasions, this fact, the existence of a trade deficit, does not mean that Americans are borrowing from foreigners. It means only that foreigners are holding dollar-denominated assets (including, possibly, dollars themselves) rather than cashing these out for U.S.-made goods and services.

Good or bad? We applaud when Americans don't rush to spend their dollars on goods and services but, instead, invest these dollars. Why in the world (so to speak) should we feel differently about foreigners doing the same? If it's good for the economy for Joe in Jackson Hole to save and invest in America, why is it not good for Gerhard in Gummersbach or Milton in Malaysia to do so?"

11 Comments:

  • "We applaud when Americans don't rush to spend their dollars on goods and services but, instead, invest these dollars. Why in the world (so to speak) should we feel differently about foreigners doing the same? If it's good for the economy for Joe in Jackson Hole to save and invest in America, why is it not good for Gerhard in Gummersbach or Milton in Malaysia to do so?"

    Um, because Gerhard is not playing on our team? I mean, good for him, in a purely economic analysis. But it's not good for U.S., us spending on material goods, them saving and us doing the owing to them.

    I'm a saver myself, love these higher interest rates!, wish more Americans were fiscally disciplined. But overall, looking at how this consumption is affecting our country, even if you are in the upper strata, it should concern you that a good number of your countrymen are consuming more than they can afford -- low-priced, well-built? goods or not.

    Sure, freedom of choice and all that. But those low cost freezers come at a price, big picture wise.

    By Anonymous Anonymous, at 11:12 AM  

  • Why don't you want Gerhard on your team? Actually, what do you even mean by that? WHY is it bad, for you or your team, when Gerhard saves American dollars?

    "Sure, freedom of choice and all that. But those low cost freezers come at a price, big picture wise."

    Indeed. And that price is $229.88.

    http://www.sears.com/sr/javasr/product.do?BV_UseBVCookie=Yes&vertical=APPL&pid=04625702000&subcat=Upright+Freezers

    By Blogger JesusIsJustAlrightWithMe, at 11:29 AM  

  • "I am NOT advocating protectionism, I'm advocating pragmatism. A "free" market must also be a "fair" market. By "fair" I don't mean protection of obsolescence. I mean a government, specifically China, should be required to provide an enforceable Uniform Commercial Code and tribunals for relief. India is much better established in this matter, yet, China, continues to receive the bulk and benefit of our trade. Why is that? Well it is because Chinese labor is subsidized and Indian labor is not. U.S. Chinese policy is not only unfair to poor Americans, it is also unfair to all of India AND the rest of the underdeveloped world. It is a good policy for the rich. Now, if you are in possession of a useful commodity, such as oil, such as Exxon/Mobile, you will, whether through design or destiny, end up with quarterly profits of $10 Billion dollars. The largest contributor being the U.S. citizenry. As always, the least able to afford suffer the most. If there is any economic wisdom to be gained here it is this: GO LONG...ON EVERYTHING."

    By Anonymous Anonymous, at 11:33 AM  

  • "Indeed. And that price is $229.88."

    Friend, that is the short-term price.

    By Anonymous Anonymous, at 11:35 AM  

  • "In the case of China's outsized capital accounts, for example, they're saving to excess and not spending. Why? I suspect that it's largely because they don't have anything particularly compelling to spend it on, as their domestic consumer economy is primitive. It also suggests to me that Chinese wage rates could be far higher (I'll let one of these cracker jack economists here correct me if I'm wrong)--why should the government be holding all that cash? Give it back to the people who earned it. That they don't do it, of course, is largely due to the fact that it is a STATE RUN economy by a bunch of Communist octogenarians who don't want to give up control. "

    By Anonymous Anonymous, at 11:40 AM  

  • "So, in this case, so far, the "cons" are being borne by the Chinese, while we reap the benefit of lower interest rates and cheap goods. The distinct warning to us, however, is that, at some point, if Europe and other regions ever get their economic acts together, or if China's domestic economy matures, the US may no longer be the destination of choice for that capital, at which point we may well see a serious reversal of what we see today. So, no, I'm not quite as sanguine as Don seems to be; I think we DO have some things to be concerned about."

    By Anonymous Anonymous, at 11:41 AM  

  • "Foreign investment makes available a huge supply of cash for mortages at a very attractive interest rate. Prime property then becomes affordable. A lower interest rate allows me to finance a larger purchase price than I would otherwise be able to afford. If I am fortunate to already own property in an attractive area, say Southern California. Then I can ask a high price and sell my property, since it is desireabe, and money is available, and affordable. I can then take the proceeds from the sale, move away from the coast, buy an equivalent or larger property for a fraction of what I received from the sale and pocket the rest. I'm set! My neighbors?

    My neighbors, on both the coast and inland, are shocked to see the increase in their property tax liability. Incidentally, my property tax liability increases. While the value of their assets may increase, they have to live somewhere and, unlike me, have no desire to sell. So, how are they benefitted? "

    By Anonymous Anonymous, at 11:45 AM  

  • That is a tax problem, no?

    Anyway, if you're sick of cracker jack economists, how about a nobel laureate?

    MILTON FRIEDMAN: Why - who -- how would they dump it?




    CHARLIE ROSE: They would sell it back.




    MILTON FRIEDMAN: Sell what?




    CHARLIE ROSE: The interest on the debt that they have. The dollars they have.




    MILTON FRIEDMAN: To whom? To whom would they sell it?




    CHARLIE ROSE: Your point is that there is no buyer.




    MILTON FRIEDMAN: Well, there are buyers, of course there is always a buyer. At what price?




    CHARLIE ROSE: But wouldn`t that be destabilizing?




    MILTON FRIEDMAN: Who would lose money? Who would lose money on that kind ...




    CHARLIE ROSE: Wouldn`t that be destabilizing? Wouldn`t that suggest a lack of confidence in the American economy?




    MILTON FRIEDMAN: Yes, it might. But the people who would lose by it would be the foreigners who held that and who dumped those dollars.




    CHARLIE ROSE: Well, then are they in a frozen position then, so that they - they have no flexibility?




    MILTON FRIEDMAN: They are not in a frozen position. They are in a position they want to be in, because that`s why they are holding these assets. Because they are afraid of risk, of political risk.




    CHARLIE ROSE: What happens if they would allow ...




    MILTON FRIEDMAN: And in general, let`s suppose foreigners start dumping their assets here. They would dump them at distressed prices. They would have no ...




    CHARLIE ROSE: Once it started (INAUDIBLE) would begin.




    MILTON FRIEDMAN: And who would buy them? The people at home, here, the people in the United States, who had confidence in the United States. So what you would have would be that the assets would go from weak hands to strong hands. It isn`t going to happen, because there is no reason for foreigners to dump the dollars.




    CHARLIE ROSE: But nothing is certain, is it? I mean, certainly in economics ...




    MILTON FRIEDMAN: Of course not. Nothing is absolutely certain. But you can be pretty damn sure of what is likely to happen and what isn`t.




    CHARLIE ROSE: What might -- but argue the other side. What might cause someone to say we`re holding too many dollars and - and we don`t think it`s healthy.




    MILTON FRIEDMAN: There is only one thing that would cause them to do that, and that`s if we engage in inflation.

    By Blogger PaulNoonan, at 6:16 PM  

  • "For a libertarian, you sure like the politics of dependence."

    How so? Dependence on what? The market?

    By Blogger DannyNoonan, at 6:57 PM  

  • Foreign investment is just trade. Foreign investors are not being forced by us to invest, they do so because they believe that doing so makes them better off. Trade benefits both parties. Foreign investment is no different.

    If it becomes too expensive for one party, we will find other partners, or concentrate our buying power in other areas. If the incentives dictate that Americans should start saving more, they will. There is no loser here. Of all countries, America is the least dependant in the long run. Most of what we are "dependant" on, like oil for instance, we could produce domestically if the price rose enough (especially if it rose high enough to justify conversion of oil shale). This is true of most products. We import because it is efficient. It is good to be efficient. If incentives change to make importing inefficient, we will cease importing.

    By Blogger PaulNoonan, at 7:15 PM  

  • Foreign investment is part of the market. An increasingly important part. we're going to have to depend on it

    By Blogger DannyNoonan, at 7:15 PM  

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