I think your argument makes a lot of sense, but I struggle to reconcile it with the empirical points your opponents bring up. You could say there’s concentrated costs to communities affected by offshoring related to employment and dignity/well being, but your opponents would say there are net neutral or even net positive labor market outcomes, with net negative labor market impacts when we try to protect effected industries (what about their dignity?) You could say that persistent CA deficits erode manufacturing employment, but your opponents would point out that employment in manufacturing has been a secular downward trend in most industrialized economies. You could say a reserve currency issuer must run a CA deficit but your opponents might point out that the US during Bretton Woods did not experience persistent CA deficits. There’s so much all being said, and both sides make sense to me in theory, but what are the facts? Is the decline in manufacturing employment due to persistent trade deficits or mostly automation? Are persistent CA deficits mostly explained by the US being the reserve asset issuer, or is this just the standard savings/investment story? Would appreciate any empirical work you can point to. Thanks.
There are a couple of issues here. One, I think that the point that I was trying to get across is that these aren't necessarily either/or arguments -- and thus I'm not sure that it can be solved by simply comparing the empirical evidence. The go to reference on the behavior of the real exchange rate and its effect on trade flows is "Deindustrialization, Reindustrialization, and the Real Exchange Rate" by Paul Krugman. This paper is important because it demonstrates the difficulty with testing relationships between the real exchange rate and patterns of de/re-industrialization. Since patterns of production will only adjust when the real exchange rate hits an upper or lower bound, one can get essentially get any result. Because of this, studies have to try to find some large exogenous variation in the real exchange rate. When there are such significant movements, you do see the de-industrialization that is predicted. To my knowledge, much of this work has been done for places like Japan and Brazil and the former Communist bloc. The same logic would apply to the United States. However, the fact that it serves at the center of the international monetary system makes it hard to get proper identification through some truly large exogenous shock.
Similarly, things were somewhat different under Bretton Woods. Prior to the Bretton Woods agreement, the U.S. ran persistent trade surpluses. As has been previously pointed out, the center of the financial world at that point had been a net creditor. The U.S. had been a net creditor. In fact, the Marshall Plan was designed not only to rebuild, but also create opportunities for trade and business opportunities for American businesses. The aid provided by the U.S. was largely used to purchase U.S.-produced goods and services. Combined with the economic revitalization, this boosted U.S. exports.
But this began to break down during the Bretton Woods period, particularly in the 1960s. The Kennedy administration in particular took many steps to try to maintain the system while limiting dollar outflows from the U.S. In fact, that was what the debate about the Triffin dilemma was about back then -- that the system would eventually become unstable. Kindleberger disputed this in his claim that the U.S. was simply serving as an intermediary to the rest of the world. However, as Farhi and Maggiori point out, these ideas aren't all that different if one recognizes that there can be "run-like" behavior just like a bank.
Yes, my "opponents" would say that trade is on net positive, despite the losers, but that isn't all that different from what I would say -- and have said. This is a standard result in international trade theory. There are winners and losers from trade, but the net benefits are positive. The question is whether that should be sufficient. This comes down the the difference between Kaldor-Hicks efficiency and Pareto efficiency. Kaldor-Hicks efficiency just means that the total benefits exceed the total costs, regardless of the distribution of benefits and costs. A Pareto improvement is one in which at least some people are better off, but no one is worse off. These are very different criteria. Nonetheless, one can go from a Kaldor-Hicks efficient outcome to a Pareto efficient outcome by having the winners compensate the losers. Since the net benefits are positive, there will still be some additional benefit left over for the winners such that they are better off and the "losers" are made no worse off from the transfers. However, I find that many economists are opposed to such transfers because they fear it will lead to rent seeking. But I don't think the answer is that simple. To me, to answer what should be done under those circumstances requires deeper thoughts not only about ethics but about the political ramifications of withholding such transfers.
But the broader point here is that I'm not sure that a lot of these things can be easily distinguished. For example, as it relates to the balance of payments, I'm with Jurg Niehans. He argued that that there are several competing theories of the balance of payments, but that none of these can be clearly distinguished from the other in the sense that things like trade elasticities and money demand are clearly both important to international trade flows. In addition, having the reserve currency is not the only reason that a country could run a persistent trade deficit. I would also point out that countries like the UK, who have also run persistent trade deficits have seen their currency depreciate relative to the dollar. Furthermore, I would argue that it is not that the decline in manufacturing is either caused by technological progress or the artificial strength fo the dollar. I would say that it is some combination of the two.
My intention in posts like this is to highlight the degree to which there is government involvement in a lot of this. When it comes to trade, there is often a tendency in popular discussion to attribute all trade flows as simply determined by the market. But trade policy is inherently political. Governments are routinely concerned (whether one thinks it is a good idea or not with trade deficits and surpluses). Central banks have some influence on interest rates and exchange rates. In addition, the Treasury Standard itself might not have been created out of some grand design, but it was created through the deliberate actions of U.S. policymakers. The proper question is to try to determine what the world would look like in the counterfactual world in which such involvement wasn't happening. That is a really hard thing to do, as your comment suggests.
I think your argument makes a lot of sense, but I struggle to reconcile it with the empirical points your opponents bring up. You could say there’s concentrated costs to communities affected by offshoring related to employment and dignity/well being, but your opponents would say there are net neutral or even net positive labor market outcomes, with net negative labor market impacts when we try to protect effected industries (what about their dignity?) You could say that persistent CA deficits erode manufacturing employment, but your opponents would point out that employment in manufacturing has been a secular downward trend in most industrialized economies. You could say a reserve currency issuer must run a CA deficit but your opponents might point out that the US during Bretton Woods did not experience persistent CA deficits. There’s so much all being said, and both sides make sense to me in theory, but what are the facts? Is the decline in manufacturing employment due to persistent trade deficits or mostly automation? Are persistent CA deficits mostly explained by the US being the reserve asset issuer, or is this just the standard savings/investment story? Would appreciate any empirical work you can point to. Thanks.
There are a couple of issues here. One, I think that the point that I was trying to get across is that these aren't necessarily either/or arguments -- and thus I'm not sure that it can be solved by simply comparing the empirical evidence. The go to reference on the behavior of the real exchange rate and its effect on trade flows is "Deindustrialization, Reindustrialization, and the Real Exchange Rate" by Paul Krugman. This paper is important because it demonstrates the difficulty with testing relationships between the real exchange rate and patterns of de/re-industrialization. Since patterns of production will only adjust when the real exchange rate hits an upper or lower bound, one can get essentially get any result. Because of this, studies have to try to find some large exogenous variation in the real exchange rate. When there are such significant movements, you do see the de-industrialization that is predicted. To my knowledge, much of this work has been done for places like Japan and Brazil and the former Communist bloc. The same logic would apply to the United States. However, the fact that it serves at the center of the international monetary system makes it hard to get proper identification through some truly large exogenous shock.
Similarly, things were somewhat different under Bretton Woods. Prior to the Bretton Woods agreement, the U.S. ran persistent trade surpluses. As has been previously pointed out, the center of the financial world at that point had been a net creditor. The U.S. had been a net creditor. In fact, the Marshall Plan was designed not only to rebuild, but also create opportunities for trade and business opportunities for American businesses. The aid provided by the U.S. was largely used to purchase U.S.-produced goods and services. Combined with the economic revitalization, this boosted U.S. exports.
But this began to break down during the Bretton Woods period, particularly in the 1960s. The Kennedy administration in particular took many steps to try to maintain the system while limiting dollar outflows from the U.S. In fact, that was what the debate about the Triffin dilemma was about back then -- that the system would eventually become unstable. Kindleberger disputed this in his claim that the U.S. was simply serving as an intermediary to the rest of the world. However, as Farhi and Maggiori point out, these ideas aren't all that different if one recognizes that there can be "run-like" behavior just like a bank.
Yes, my "opponents" would say that trade is on net positive, despite the losers, but that isn't all that different from what I would say -- and have said. This is a standard result in international trade theory. There are winners and losers from trade, but the net benefits are positive. The question is whether that should be sufficient. This comes down the the difference between Kaldor-Hicks efficiency and Pareto efficiency. Kaldor-Hicks efficiency just means that the total benefits exceed the total costs, regardless of the distribution of benefits and costs. A Pareto improvement is one in which at least some people are better off, but no one is worse off. These are very different criteria. Nonetheless, one can go from a Kaldor-Hicks efficient outcome to a Pareto efficient outcome by having the winners compensate the losers. Since the net benefits are positive, there will still be some additional benefit left over for the winners such that they are better off and the "losers" are made no worse off from the transfers. However, I find that many economists are opposed to such transfers because they fear it will lead to rent seeking. But I don't think the answer is that simple. To me, to answer what should be done under those circumstances requires deeper thoughts not only about ethics but about the political ramifications of withholding such transfers.
But the broader point here is that I'm not sure that a lot of these things can be easily distinguished. For example, as it relates to the balance of payments, I'm with Jurg Niehans. He argued that that there are several competing theories of the balance of payments, but that none of these can be clearly distinguished from the other in the sense that things like trade elasticities and money demand are clearly both important to international trade flows. In addition, having the reserve currency is not the only reason that a country could run a persistent trade deficit. I would also point out that countries like the UK, who have also run persistent trade deficits have seen their currency depreciate relative to the dollar. Furthermore, I would argue that it is not that the decline in manufacturing is either caused by technological progress or the artificial strength fo the dollar. I would say that it is some combination of the two.
My intention in posts like this is to highlight the degree to which there is government involvement in a lot of this. When it comes to trade, there is often a tendency in popular discussion to attribute all trade flows as simply determined by the market. But trade policy is inherently political. Governments are routinely concerned (whether one thinks it is a good idea or not with trade deficits and surpluses). Central banks have some influence on interest rates and exchange rates. In addition, the Treasury Standard itself might not have been created out of some grand design, but it was created through the deliberate actions of U.S. policymakers. The proper question is to try to determine what the world would look like in the counterfactual world in which such involvement wasn't happening. That is a really hard thing to do, as your comment suggests.
Thank you for the thoughtful response.
the risky asset less than return on the safe > the risky asset less the return on the safe
hegemon would every make that choice > hegemon would ever make that choice