Written at Peterson Institute for International Economics (PIIE), Dr. Maurice Obcefeld has a great, non-technical work that addresses the claims made by Michael Pettis (among others) that he must “control” the claims.
First, there is a difference between trade balances (differences between exports and imports) and current accounts (SOM financial transactions such as exports, imports, and income from investments and transfers). But for the purposes here, I don’t worry too much about the difference. It’s not that important to the point I’m making. Let’s start so that it doesn’t get in the way.
In National Inome Accounting, checking accounts are the difference between national savings and national investment (for those interested in algebra, you can find them here). Mathematically, we are:
Current Account = Savings – Investment.
The identity of this accounting is ignorantly simple. If you think your current account deficit (i.e., your investment is more of a greeter than a savings (unfair claims you will reach quickly), the solution is simple.
But what can a realistic government do? At that point, it emphasizes “realism” to create confusion. Reformers love to propose behavior that is completely divorced from reality. Realistically, there is nothing the Muim government can do. Most of the factors of savings and investment are exogenously determined. It doesn’t seem like individuals are making budgets. Rather, national savings and national investments are determined by factors that go far beyond government control. It is determined by the desires of people within the borders, the desires of people outside the country, plans by businesses, and countless other factors. In other words, savings and investment are emerging. They are not levers that you can use to tug and fine-tune, and not slings that you can operate. It’s not that they’re difficult to manage. It is impossible to manage them. That simple accounting equation hides the magnitude of complexity.
Of course, governments can influence one aspect of identity: savings. National savings consist of private savings and government savings. The government can increase savings (i.e. it doesn’t work in a deficit), everything else could be held equally, reducing the current account deficit. However, even that method has limitations to its method, as output has been discovered. Furthermore, the government has sought to influence private savings and investments through various incentives and capital management, but incentives are not mixed control. They don’t always work, and offerings will ultimately have consequences.
All of this assumes that the current account deficit is a bad thing and should be avoided. But we cannot go far from the truth. In many cases, trade deficits are a sign of good, like leftins of Robert Calveau Expen, a professor of economics at Central Washington University.
Countries that often enjoy rapid economic growth have long-term current account deficits. This relationship may stem from the fact that rapid economic growth and strong investments go hand in hand. If the driving force is the discovery of new natural resources, technological advancements, or implementation of economic reforms, periods of rapid economic growth can be a period when new investments are unusually profitable. Investments need to be funded with savings and if the national savings of the country are not sufficient for all new profitable, researchable projects, the country will rely on foreign savings to fund the difference. Therefore, there will be a net financial inflow and a corresponding checking deficit. As long as the new investments are profitable, they generate additional revenue needed to repay the contracted claims to undertake them. If the current account deficit reflects a strong and profitable investment program, they work to boost production and employment growth rather than destroying employment or production. (International Economics, 18th ed, pg 302, original emphasis).
Current account deficits are not a bad thing if there is a renewable research opportunity like the US. That’s why the U.S. Humble has been running current account deficits for over 40 years and frequently set new record levels for industrial production, and remains one of the most productive places in the world. But that could change with Trump’s trace war. If a country moves to the US to avoid tariffs, it’s them, they are a lot of definitions and operate more beneficially in the US than overseas. Collectively, the trade deficit arising from a trade war is a concerning sign.
