February 21, 2010
Should the Government try to Stimulate US Exports?
Should the Government try to Stimulate US Exports? Becker
Posner shows, among other things, the basic impossibility of doubling US exports during the next five years. I consider whether such a policy makes sense, even if it could be achieved. My short answer is that it does not.
In economies that have full employment except during recessions, which describes the American economy, increased exports do not create jobs, any more than building football stadiums creates jobs, although many commentators and businessmen continue to lament the jobs lost to China. What increased exports do under full employment conditions is transfer jobs from producing for domestic consumption and domestic investment to producing for export. The share of American GDP devoted to exports has about doubled during the past 50 years without having any noticeable impact on either the employment or unemployment rates. Part of the reason for this little impact is that imports increased even more rapidly than exports did, but the main answer is that some workers and capital shifted from producing for domestic uses to producing for foreign uses.
Many countries want to increase their exports in good part because of the continuing influence of the old mercantilist tradition that countries should try to accumulate more assets, such as gold. In earlier times, increase in gold reserves equaled the difference between the values of exports and imports. In present times, there is considerable envy of China's accumulation of over $2 trillion worth of reserves because China exports many more goods and services than it imports. The US and other countries that import much more from China than they export to China have been pressuring China to appreciate its currency in order to encourage Chinese consumers and businesses to import more from other countries, and to reduce imports by other countries of Chinese goods.
I have argued earlier (see my post on our old website for Nov. 23, 2009) that China has been accumulating more reserves that the optimal amount that would promote its own interests. Since China has far more than enough reserves to manage even large fluctuations in its trade balance, the Chinese people would have greater real wealth if its government allows the Yuan to appreciation. An appreciation of its currency would reduce China's exports and raise its imports.
While China has been hurt by its mercantilist policies, I believe that the US and other developed countries have gained rather than lost from China's policy of undervaluing its currency. China has exchanged goods produced by hard-working labor, and costly raw materials and capital for paper, like US Treasury bills and bonds, that yield low interest rates. The financial assets that China is accumulating is not yielding much more in the way of income than the mercantilist goal of accumulating zero interest bearing gold in exchange for goods produced by labor, materials, and capital.
A common response to the analysis I just gave is that it is too "economic". It is claimed that from a geo-political view, China has the United States at its mercy due to its large accumulation of US debt. According to this argument, China could threaten to sell these assets, thereby raising interest rates on American debt, and creating chaos in the market for American debt. The truth is just the opposite, for, if anything, the US has China over the barrel. For the US could threaten to inflate away much of the burden of its debt, and thereby greatly reduce the real value of China's assets. The US could also use the Fed to maintain relatively low interest rates, even though this would likely increase inflation as well.
In fact, while China has very large holdings of US debt, it does not have much leverage on the market for this debt. For one thing, there is little debt of other governments that China would consider good substitutes for its US Treasury bills and bonds. Particularly now, with the major fiscal problems of the PIIGS (Portugal, Ireland, Italy, Greece, and Spain), EU debt does not seem like an attractive alternative. Moreover, China in fact has little monopoly power in the market for US government debt. Despite its vast holdings, China has no more than about 10% of the US debt held by the American public or foreign governments. A 10% share of the market for an asset does not provide much control over interest rates on that asset, especially when the asset is part of a much larger worldwide market for governments, private bonds, and equities. China may be willing to take some losses in order to pressure the US in its military relations to Taiwan, and other geo-political areas of conflict. But its threats in the government bond market have little credibility since China would suffer much more than the US would.
I am not claiming that the American government and American consumers have been saving enough. Since the US' deficit between imports and exports is the mirror image of its deficit on capital accounts with other countries, fiscal deficits have affected the trade balance. for this reason and others, the huge federal deficits during the past couple of years, and also earlier in this decade, are very worrisome, especially if the American debt/GDP ratio continues to rise rapidly during the next few years. However, the basic problem is not US exports, but it is getting the federal government to cut its spending, and to implement policies that increase the rate of growth of the US economy.
Double Exports in Five Years? Posner
President Obama in his State of the Union Address announced a program to double U.S. exports in the next five years and by doing so create 2 million new jobs. The program mainly involves a $2 billion increase in loan guaranties to exporters by the Export-Import Bank and greater efforts to negotiate trade agreements with foreign countries and to enforce U.S. laws against "unfair" international trade practices, such as "dumping" foreign goods in United States markets, at below-cost prices.
Of all the "job programs" undertaken or contemplated by our government, the President's plan to double exports in five years seems to me the most fatuous.
Total U.S. exports of good and services in 2009 were $1.553 trillion, and total imports $1.934 trillion (the net trade balance was therefore a minus $380.7 billion). See U.S. Bureau of the Census, Foreign Trade Statistics, www.census.gov/indicator/www/ustrade.html. Exports were therefore about 11 percent of Gross Domestic Product. If GDP increases by 2.5 percent a year for the next five years, and exports grow proportionately, then by 2015 they will have grown by 13 percent. The President wants them to grow by 100 percent. (If they would grow by 13 percent without any governmental effort, then the President's 100 percent program, if it succeeded, would actually have increased exports by only 83 percent—though of course the government would take credit for all 100 percent!)
How his program could accomplish this is incomprehensible to me. The increase in loan guaranties by the Export-Import Bank would reduce exporters' interest costs by reducing their risk of losing money by extending credit to a foreign purchaser, but that would be a minor boon to exporters. Likewise, anti-dumping enforcement and other efforts to prevent "unfair" pricing by foreign companies importing to the United States are likely simply to provoke retaliation--limiting our exports—as happened in our recent tiff with China over imports of tires.
That leaves the negotiation of trade agreements with foreign countries. The problem with them, from a job-creation or deficit-reduction standpoint, is that they increase bilateral trade—imports as well as exports—and so have no average tendency to increase exports. Moreover, they are difficult to negotiate because of opposition by producers and workers, in both countries (if it is a bilateral agreement), to allowing increased imports; the opposition to increased imports is based on the fact that they can result in reduced domestic production and employment. At the same time, increased imports benefit consumers and some producers (imports are often inputs into domestically manufactured goods), but generally these effects are more diffuse than the losses of sales and employment caused by imports, and so do not have as much political weight. A Democratic Administration is apt to be particularly sensitive to union opposition to free-trade agreements.
Increasing exports is a standard and perfectly sensible response to an economic downturn. Exports are by definition domestically produced goods or services, so an increase in exports increases production and hence employment. But the usual way of stimulating exports is by devaluation, which increases the amount of a nation's goods and services that foreigners can obtain with their foreign currency. Moreover, devaluation increases the domestic price of imports, which in turn stimulates domestic production to replace some of these now more expensive imported goods.
Our government has been trying to create a modest inflation, primarily in order to reduce debt burdens, reduce real wages (in order to reduce layoffs), and reduce hoarding (since inflation has the effect of a tax on cash balances) and thus stimulate consumption. Inflation increases the price of exports, but, especially if it is modest, is likely to be offset by a fall in the value of the dollar relative to foreign currencies. A high rate of inflation, however, which is a looming possibility because of the Federal Reserve's "easy money" monetary policy, would probably have a significant negative effect on exports.
We have large trade deficits with China and other Asian countries that pursue protectionist policies, but there doesn't seem to be anything we can do about that. We have no leverage with those countries. They accumulate large dollar reserves as a result of running large trade surpluses with us by virtue of their policies—and we borrow the dollars, becoming these countries' debtors. The indirect effect of our foreign debt on our exports is an illustration of the gravity of our fiscal situation, to which the government seems at last to be paying some heed—though not in its job programs.
An improvement in our trade balance would be a good thing because it would reduce the federal deficit as well as making us less dependent on the goodwill of foreign countries, but increased exports offset by increased imports would not affect the balance.
Finally and most questionably, the proposal to double our exports assumes that foreign export-oriented countries like Germany and China would stand idly by while we "stole" their export markets. Obviously they would respond—with their own export-stimulus programs, which would be likely to negate ours.