Philosophical Conversations Public Opinion Junk for code
parliament house.gif
Think Tanks
Oz Blogs
Economic Blogs
Foreign Policy Blogs
International Blogs
Media Blogs
South Australian Weblogs
Economic Resources
Environment Links
Political Resources
South Australian Links
"...public opinion deserves to be respected as well as despised" G.W.F. Hegel, 'Philosophy of Right'

where's the economic analysis? « Previous | |Next »
April 26, 2005

At long last. The media are now reporting on the imbalances in the international economy in the relationships between the US and China. Radio National reported on the issue this morning. I listened to the report with interest as we drove back to Adelaide from Victor Harbor.

The report did not really focus on the US's out-of-control trade situation, even though the US trade deficit is on track to be around $700 billion for this year.


The report broke new ground in that it gave a space for Chinese voices to speak on the issue, and an explanation that the Chinese need to keep their economy growing at 7-9% in order to absorb their labour force. Can they sustain that level of growth? The question was not asked.

However, it was basically a recycling of the American position: it was all about the bad Chinese not floating their yuan and the poor American manufacturers suffering terribly from being so competively disadvantaged. A revaluation that reduced East Asia’s current account surplus was presented as the only option. That was the only reason presented for the slowing of the US economy.

The critical tone in the piece was directed at the Chinese not the Americans. The assumption of the report was that the US huge trade deficit, due to imports growing much faster than exports, was not an American problem. It was a Chinese problem.

There was no mention of the possibilities of dramatically growing US exports, or the possibility of a marked reductions in US import consumption (i.e. a US recession) through increased interest rates, due to US consumers living beyond their means. The question: 'why are US exports to countries, such as Canada, the EU, Mexico and Japan, stagnant?', was not even asked. Nor was any mention made of the US dependence on the export of its debt to finance its enormous trade deficit, or the need for the US to raise interest rates to ensure that East Asian central banks keep on supplying about 3/4 of the net financing of the US current account deficit

I'm now convinced that Australian journalists have little understanding of the workings, imbalances and relationships of the global economy. That is why they provide no analysis. That is why they just repeat the American spin as economic analysis.

| Posted by Gary Sauer-Thompson at 8:29 AM | | Comments (13)


I recall reading Chalmers Johnson's Blowback and being surprised at how much Asian capitalism differed to American/Australian capitalism. Arent those two differing style of capitalism contributing to the imbalance as well.

The Asian style of capitalism is predicated on strong export growth, and the US style of capitalism is based on private investment and personal consumption. The Asian nations are funding American cheap credit to keep their export driven economies running.

I think if US journalists dont get it, it is because they see the world as practicing "capitalism" which is to them, "American capitalism". ie there is only one form of our capitalism.

yeah you are dead right about this.

There is some good material in Chalmers Johnson's Blowback.

This passage confirms your point:

... most Americans failed to grasp how crucially Japan's industrial policy depended on its political and military relationship with the United States and on access to its vast market. Nor did they understand that the Japanese were investing the huge trade profits in American Treasury securities that were, in turn, helping to finance America's huge debts and making the American financial system critically dependent on Japanese savings."

They understand that now. Chalmer's continues:

"What Americans, including the revisionists, failed to see was that the Japanese economy, still devoted to exporting a vast array of ever more sophisticated and technologically advanced manufactured goods primarily to the American market, was generating an industrial overcapacity that would eventually threaten the health of the world economy."

Chalmers then points out that much of East Asia has emulated the Japanese form of mercantile capitalism, or become offshore manufacturing platforms for Japanese corporations.

Johnson understands this overcapacity as threatening to reach crisis proportions and as coming to a head in 1997. This overcapacity continues to be feature of the international economy.

Gary, I was also surprised to read how the Pentagon was a controlling force in the symbiosis. When the Secretary of State would raise these issues with Japan, the Japanese Government would ring the Pentagon and complain. Since Japan pays for US Forces to be stationed at Okinawa, the Pentagon tells the State Department to leave Japan alone.

So if Chinas does not have a military alliance with the US, such a symbiotic solution will not be available to fix the China-USA imbalance.

How then will it be resolved?

Spot on. You highlight the importance of thinking in terms of political economy which mixes inttitutions with economic and power relations, and the blinkers of neo-classical economics.

Consider what Chalmers Johnson says of the latter:

"Until the late 1950s, academic economics remained one of the social sciences, like anthropology, sociology, and political science-a non-experimental, often speculative investigation into the ways individuals, families, firms, markets, industries, and national economies behaved under different conditions and influences. It was concerned with full employment, price stability, growth, public finance, labor relations, and similar socioeconomic subjects. After it became the chief ideological counterweight to Marxism-Leninism during the Cold War, its practitioners tried to extract it from the social sciences and re-create it as a hard science."

It went mathematical in a Platonic sense. The script was almost wrritten by Descartes as by a hard science economist meant the classical mathematical physics of Newton. Johnson says:
"Its propositions were now expressed less in words than in simultaneous equations, the old ideas of Adam Smith reappearing as fully mathematized axioms, increasingly divorced from empirical research. Its data were said to be "stylized facts," and economists set out to demonstrate through deductive reasoning expressed in mathematical formulas that resources could be allocated efficiently only through an unfettered market. By now all these terms ("resources," "efficiency," "markets") had been transformed into abstractions..."

The upshot was that virtually all aspiring economists would in the future try to do so-called theoretical economics-that is, the algebraic modeling of markets-rather than old-fashioned empirical and inductive research into real-world economies.Economics split from the social sciences and took up a new position somewhere close to mathematics."
So we have a situation, familar to us today, w whereby economists are endlessly called upon by governmental bodies to testify that the American?Australian economy was unmatchable, even if it sometimes behaved badly because of overspending liberals, pork-barrel politics, or greedy monopolists.
Neoclassical economics became what Kuhn called a degenerating research programme, since:
"Alternatives to it were understood to be either converging with it or destined to fail. Economics no longer studied the economy; it spoke ex cathedra about what was orthodox and what was heresy. "

Meanwhile, empirical research on economic phenomena migrated to business schools, commercial think tanks, and the other social sciences.

It is a strong inditement. So Asian capitalism with its strong mercantile state was seen as heresy.

You ask: 'How will the China-US imbalance be resolved without a military alliance with the US?'

The US reponse to easing the imblance is for China to float its yuan, so as to reduce China's international competitiveness and allow US and Australian manufacturers to compete fairly with China.

Mark Crosby, an associate professor at the Melbourne Business School, says in an op.ed in todays AFR that revaluing the yuan will not do the job. It:

"... will do almost nothing to reduce the US-China imbalance. ..Imagine the Chinese government did float the yuan and it appreciated. A good estimate is that a 20 per cent appreciation would affect Chinese export prices by at most 4 per cent."

The reason is that in most categories of China's exports, goods have a significant amount of imported components that are usually priced in US dollars:
"A Chinese manufacture selling widgets to the US for $US100, but with imported components costing $US80, can still sell widgets at close to US$100 after a 20 per cent appreciation, because it is only the 20 per cent margin that is affected by the appreciation. If margins are allowed to fall, then export prices will rise by less than 4 per cent."

That appreciation is not enough to push up China's export prices and so help make US manufacturing competitive again.

The US has to get its own house in order. There is no getting away from it.

Gary, This article in the WaPo blames excess savings outside of America, and the lack of investment oppurtunities outside of America.

Whatever the problems, Americans can't fix them. The common view that our budget deficits (which Bernanke correctly thinks should be reduced) cause our trade deficits is simply wrong. The two are only loosely connected. That unconventional conclusion is also inconvenient, because it measures our powerlessness.

Interesting comment on economists turning mathematical and forgetting the power interactions. As I said there is also ignorance in the US that there can be many different types of capitalism.

I suspect in the US capitalism is free trade and there is no understanding that other nations would have a different style of capitalism. Because China trades with the US, it is assumed they are moving to an American style economy.

If Japan is any marker, China wont.

wbb, Probably via Taiwan. The Pentagon has an interest in that, so they or the State Department will probably tell the other to cool it and leave China alone at different times. China will probably manipulate that tension in the same way Japan has manipulated Okinawa.


That WOP article is certainly food for thought isn't it. The op.ed appears to be based on Ben Bernanke's Homer Jones lecture in March. Bernanke, an ex-Princeton University economist, and now a Federal Reserve governor, sees the US as a country most willing to absorb the rest of the world's excess savings and make up for the (relative) lack of consumption in the rest of the world.

Unlike many economic commentators in Australia, Bernanke does acknowledge that the huge global trade imbalances--huge US deficits, huge East Asian surpluses--are dangerous. And, unlike many Republicans, Bernanke also accepts that the US should fix its budget deficits. Goodo.

On the global imbalances issue Bernanke's argument is that, in an interconnected global economy, the huge flow of funds into the US sourced from the East Asian's trade surpluses acts to reduce U.S. saving and increases consumption. He says that means:

" Americans' low saving and high consumption offset foreigners' high saving and low consumption. The huge U.S. trade deficits result, because our strong spending sucks in imports, while foreigners' weak spending hurts our exports. In addition, converting foreign currencies into American dollars to invest here boosts the dollar's exchange rate, making U.S. exports less competitive on global markets.What we have here is a giant and unplanned recycling mechanism."

Fair enough. That is an accurate description of the workings of global marketplace.

The inference from this is what is crucial. Bernanke says that the main causes of the global imbalances lie outside the United States. The problem of today's global economy is that people elsewhere--in Europe, Asia and Latin America--are saving too much and spending too little. America can't fix this.


It is true that China is not consuming that much domestically as it is trying to soak up the huge unemployment through economic growth.It would be good if consumption growth also became from the motor behind China's economic growth as well as exports. It will be a long time before Chinese consumers are buying high tech US consumer goodies.

It strikes me that Tte fundamental problem is that America is not exporting enough to pay for its imports.

It is true that Canada, the EU, Mexico and Japan together absorb nearly two-thirds of total US exports, and that US exports to these countries are stagnant, or in decline. So rising US exports are not going to happen in the short term.

But is it the case that American exports are stagnant because the Canadians or Europeans are just not buying enough? Or is it because American products are not that good, and that American manufacturers need to lift their game?

Bernanke's conclusion, that the US liberal state is powerless, is a bit suss. The WOP piece sounds too much like the liberal free market invisible hand myth to me. The assumption is that the liberal state keeps its hands in the air to let the finely tuned market sings its bluesy song as the storm clouds gather. What is being denied is that it is the task of the state to see the larger picture and to do something about the problems that are in sight.

If exports are not going to increase to pay for imports, then imports need to be reduced. So why cannot the US address the domestic consumption side by reducing the consumer demand for low cost imports by squeezing the US credit fuelled consumption binge? Why cannot the US state move to choke off US consumption? Other countries are required to do it. So why do not the US monetary authorities (Federal Reserve) move to cool the red hot US housing market?

The US state is not powerless. We should be saying there is bad policy being made in Washington. The finger ought to be pointed at the Republican administration and Greenspan at the Fed for their policy paralysis.

Gary, All the empiricists and pragmatists have been kicked out of the Administration. The Bush Administration seeks political outcomes, not policy outcomes. Everything is judged by political standards. When Cheney said "Deficits dont matter" he meant they dont matter politically. That is how everything is judged and how policies are written up. THe Suskind book was probably the first insight into how that Administration operates. I agree that Greenspan has been complicit with it.

If you ran the White House what policies would you implement to have the US get its house in order?


What is the Suskind book? This one?

Re the economic policies. I guess it all depends on how one sees the connection/links between the expanding US fiscal deficits and the expanding current account deficit. Is it a causal relationship? If so what kind of causual relationship

Recall that Bernanke questioned the common view that our budget deficits cause our trade deficits on the grounds that the two are only loosely connected.

'Loosely connected'.It sounds very Humean to me.This empiricism denies the existence of causal relationships in the world.

In his Inquiry into Human Nature Hume says:

All events seem entirely loose and separate. One event follows another; but we never can observe any tie between them. They seem conjoined, but never connected. And as we can have no idea of any thing which never appeared to our outward sense or inward sentiment, the necessary conclusion seems to be that we have no idea of connexion or power at all, and that these words are absolutely, without any meaning, when employed either in philosophical reasonings or common life.

But that takes us into the metaphysics of a positivist neo-classical economics.

If we put that aside we can ask:

Has the stimulus to US demand created by the budget's fiscal deficit contributed to the current US external deficit?

Would a more responsible fiscal policy = less US domestic demand = fewer US imports = fewer exports to the US from the rest of the world?

I'm inclined to think so. Hence I would question Bernanke's 'loose connection'between the budget and current account deficits.

What is the implication of few imports from China caused by less domestic demand from US consumers? Given China's fixed exchanges with the US fewer Chinese exports to the US would translate into less reserve accumulation on their part. It would not mean fewer imports from the US given the low levels of domestic consumption in China.

So a tighter fiscal policy would be one line of attack.

Gary, "The price of Loyalty" was the one I meant. The one from O'Neill's notes. Had detail on how O'Neill and Whitman, both empiricists and independant thinkers, were ousted.

From my anecdotal observations in the DC job market, jobs that do projects for TLA government organisations mean you can add 20K to your salary.

I interviewed for a job that had something to do with the NSA. The software wasnt, but the data was theirs. I got the job, on the proviso the NSA ok'd it. They didnt (me being Aussie and all). It would have been a nice bump in salary.

Most of my mates are working in jobs where they are going for security clearances. In this environment you can name your price. I am excluded from that unfortunately.

The DC area survived the 2001-2003 downturn better than other regions (like Silicon Valley) as it was awash in federal dollars.

As to getting the deficits under control, I agree they should be, if for no other reason than it is irresponsible. If I managed my fiscal affairs in the manner I would not have a home.

Not the basis for policy, but more rational than claiming, "deficits dont matter [politically]".


I've been reading bits and pieces of Ron Suskind's The Price of Loyalty online.It brings back memories of what I had read in the media (NYT and WOP.)

Even conservatives are saying that the book's picture of the Bush administration rings true.

It paints a pictue in which President Bush often makes key decisions with little if any analysis or discussion among those with the job of implementing those decisions. Instead of figuring out why and how things should be done before acting, the Bush White House acts first and then create ex post facto rationalizations for that decision in lieu of serious deliberation.

So evidence and argument are routinely pushed aside when they get in the way of previously decided political outcomes. Hence the debasement of the policy process. It sounds like the Howard Government in Australia----it's all about doing whatever's necessary to win. Only Washington is much much worse than Canberra.

I remember that in 2001, the US government had been in surplus. But by 2002 the tax cuts, war, and a slowing economy had turned the surplus into deficit--it is running a $500 billion annual deficit. The Bush administration gets by by just keeping on borrowing more.

Why so? Because policy is being run by the political arm that is indifferent to what rising deficits will mean to economic and fiscal soundness of the US. The position was that deficits didn't matter in terms of being re-elected. Politics ruled over good policy.

It would appear that there was no place in the Bush administration for the old fashioned moderate Republican who sought to temper a love of capitalist competition with a dose of compassion for those it left behind. Presumably Paul O'Neill, the Secretary of the Treasury, was that kind of Republican. Hence the sack.