Lou Dobbs - Angry and Confused

During breathers from his immigration tirades, Lou Dobbs continues his campaign to alarm and misinform the American public on economic matters. Moneyline of Monday October 22 included a segment on the U.S. trade deficit with China ominously titled “Red Tide Rising.” The segment touched on the expected points: the size of the U.S.-China current-account imbalance, China’s allocation of $200 billion to a sovereign wealth fund, and this fund’s investment in U.S. private equity firms Blackstone and Bain Capital (all voiced over alternating shots of Chinese factories and U.S. stock exchanges. This segment was remarkable for Dobbs’ total lack of argument as to why the U.S. current-account deficit with China was hurting the U.S. economy overall. As usual, Dobbs substituted hyperbole and intonation for evidence and explanation, taking for granted that a current-account deficit with China is a bad thing.

To assume this, however, is economic nonsense. Running a trade surplus is by no means necessarily indicative of overall economic health (ask Japan, whose large annual current-account surpluses throughout the 1990s arose despite anemic GDP growth). Similarly, running a trade deficit by no means consigns an economy to stagnation; the U.S. in the 90’s enjoyed fabulous macroeconomic conditions amid rising external imbalances. Though America’s massive demand for Chinese imports undoubtedly hurts certain domestic producers, sating this demand benefits American consumers. Simply denouncing the size of a trade deficit provides no framework for weighing this impact and thus conveys nothing.

Even more remarkable than Dobbs’ dubious mercantilist rhetoric is his willingness to denounce U.S. trade deficits and in the same monologue express outrage over recent declines in the value of the dollar, citing both as evidence of “the absence of American economic leadership.” An excerpt from the segment:

DOBBS: And the total surplus for China and its trade position works out it be just about -- oddly enough -- the same as the U.S. trade deficit with Communist China.

ROMANS: It's funny how that works out.

DOBBS: Isn't it interesting, too, that this government, this administration hasn't got a clue, has not been able to speak forward in any forward manner about what they're going to do in terms of a dollar that is falling like a rock against the euro -- and now the yen, as well -- and most -- and the largest basket of world currencies.

Don't you find the lack of leadership -- dare I say it, bush administration people -- listen up White House, you've got a job to do. It isn't just some sort of absurd free market, faith-based nonsense in which you keep your mouths shut and don't pursue the national interests. Yet here we are.

This is totally contradictory! As any intro econ student knows, a falling dollar will reduce U.S. demand for foreign imports and boost demand for U.S. exports (as has happened to some extent over the last two quarters). Other things equal, a falling dollar will shrink the size of the U.S. trade deficit; to be, as Dobbs is, both for a strong dollar and against U.S. trade deficits defies the simple logic of international trade.

Some might claim that fluctuations in the value of the dollar are irrelevant to trade with China because China pegs the yuan to the dollar (or at least restricts its float to within a narrow band). China’s intervention in the foreign exchange market, however, only serves to strengthen the dollar (at least vis-à-vis the yuan), contributing to Dobbs’ goal of a stronger U.S. currency. Unless Dobbs can articulate some reason why a current-account deficit with China is particularly dangerous, the yuan-dollar peg leaves intact the basic inconsistency between praising both trade surpluses and a strong currency as signs of economic health.

On a more technical note, I would argue that one can assess the U.S.-China trade imbalance only by first understanding its root causes. Within the basic framework of (exports-imports)=(savings-investment), several forces can drive the size of a country’s external imbalances. In a recent working paper, Andrea Ferraro of the New York Federal Reserve Bank examines three potential drivers of trade dynamics between the U.S. and its G-7 trading partners (note that this does not include China). 1) Productivity Differences: If country A has higher productivity growth than country B, then country A assets will offer higher returns. In a world of perfect capital mobility, country B will seek to create a current-account surplus with country A and then use the foreign-exchange proceeds to invest in country A’s relatively higher-yielding assets. 2) Demographic Shifts: In a world where people of different ages have different propensities toward saving, the age structure of an economy’s population will determine its quantity of savings relative to investment, hence exports relative to imports. 3) Fiscal Changes: Since public saving or dissaving (e.g. a central government budget deficit or surplus) is on component of overall saving, fiscal changes can also affect an economy’s demand for imports relative to exports.

After constructing a stylized two-country model and fitting it to several years of data, Ferraro determines productivity differences to be the overwhelming driver of America’s external imbalances (demographic shifts played a lesser role and fiscal changes a very minor one). In other words, within the universe of G-8 trade, U.S. current-account deficits are a symptom of economic robustness – high productivity growth relative to other G-7 countries – rather than economic decay. One hopes that Ferraro or another researcher will extend this framework to U.S.-China trade to determine whether a similar pattern holds. Even without this, the Ferraro paper suggests one disastrous method to reduce America’s trade deficits: slow U.S. productivity growth. Hell, slower productivity growth wouldn’t only reduce our trade deficits, it would also probably create fewer job opportunities for illegal immigrants. Sounds like a policy Lou Dobbs nationalists could love!