The remarkable thing about the equation (S-I) + (T-G) = (X-M) is that it is an accounting identity or, put another way, a simple matter of the arithmetic adding up. Thus, it must hold for every country whether capitalist or socialist, whether under free trade or controlled trade (tariffs, quotas) and regardless of the monetary regime (capital controls, gold standard, fiat money, managed or free-floating currencies). And yet, this simple accounting identity drives real-time economic phenomena as Arnold described: whether a country is in a trade or current account deficit, whether its currency appreciates or depreciates, and whether it suffers rapid inflation or enjoys stable inflation.
A related point is that managing international trade and finance (tariffs, capital controls, exchange rates), as a first order effect, has no influence on the level of employment. Such management mainly affects the mix of employment - the types of jobs that the labor force performs, and hence whether labor is allocated efficiently to its highest and best use or inefficiently to other jobs.
The second order effect of such management is worse because incomes suffer, which affects household consumption, investment, and labor demand, almost surely for the worse.
I think this is right, but would generalize it to say
1. A tariff is just a special case of a tax. And a quota is just a special case of a regulation.
2. In most cases, there's enough other things going in the real world that the immediate, theoretical effects may be more than offset by everything else. Does every study show negative employment effects from raising the minimum wage? Nope. Am I reasonably certain that raising the minimum wage does have a negative effect? Yep. Should we focus our time on the the small theoretical effects or the other factors that tend to dominate them? Obviously the latter.
The static effects will of course follow the arithmetic because patterns of production, specialization, comparative advantage, and trade are fairly inelastic in the short term. The dynamic effects over the long term are a big question mark, especially since there is an enormous degree of, ahem, "regulatory uncertainty" when no one knows whether there will be a major change in policy will be just a few years now. Few care only about the short-term.
Not everything that counts can be counted , and not everything that can be counted counts . China needs to open up its economy and stop demanding patents from others and stop industrial spying . The Tech giants are tired of being gamed , taxed , fined by euros . No wonder they joined Mr Trump . It’s become way beyond comparative advantage. We have moved to another level . Times change.
Tariffs can be very valuable to political cronies who support crony capitalism and incompetent institutions. Blanket tariffs don't help, so "exceptions" will be created that have real value.
Or could it be that the USA just has a comparative advantage in creating new money? Trade is always a two-way street in the fulness of time, otherwise someone is just giving a gift, no?
I think I see what Arnold is driving towards, and it's an argument against the oversimplification you're making.
The typical simplified view of trade is that because the US produces an oversupply (relative to our needs) of ag products, and the Chinese produce more cheap plastic s#!t then they can consume, we trade ag products to the Chinese for their cheap plastic s#!t. Which leads to people thinking that in order to get the same amount of cheap plastic s#!t after we impose a tariff, we're going to have to send more ag products to China.
The reality is that the Chinese need food but American farmers don't want either Chinese renminbi or (much) cheap plastic s#!t. They want American dollars to pay their bills. So the Chinese have to find a some way to obtain American dollars in order to pay for the American ag products they want. They can get some of the money by selling cheap plastic s#!t to Americans (or other people but demand American dollars as payment) and the US government is more than happy to give them an IOU that comes with periodic payments in American dollars so they can use those American dollars to buy American ag products.
So when a tariff is imposed, there is something of an immediate price change in cheap plastic s#!t from China but that goes the US government, reducing its budget deficit. This doesn't lessen the Chinese demand for American dollars to buy American ag products so the real adjustment is going to happen in the amount of IOUs, and periodic payments in American dollars, that the American government gives the Chinese.
Trade with China is making me begin to doubt what economic theory teaches about the benefits of markets. The latest example is Temu, which seems to be China's low-priced version of a cross between Walmart and Amazon.com. The 'shopping like a billionaire ditty' on Temu's youtube ads grates on my nerves, and their women's clothing is the cheapest and ugliest looking s#!t I've ever seen. The clothing seems to be targeted primarily at two key demographic segments -- fat woman and young women who have been brainwashed by influencers like Taylor Swift and the Kardashian sisters. I get the feeling that the Chinese get their ideas about product development by watching American television, and consequently they amplify the worst aspects of American culture. It's creepy. Separate and apart from Temu, the Chinese-made meat thermometer that I purchase online last year is completely worthless.
Well done. It's a surprise that anyone DOES believe that trade restriction's affect the trade balance. Maybe this is hangover from a time when tariff revenue was the main source of revenue so some relation between tiffs and government saving. But more to the point, why woud anyone CARE what the trade balance is in the aggregate or with any particular country?
The 'traditional' buyers of US debt WERE countries like CHI, Nihon. Today, not only are they not buying, they are selling down whatever US T-Bills they own.
In the interim, HNWI's became the buyers of US debt. They too have absconded, and sold off their inventory.
Today US banks are the buyers of the USA's increasingly Brobdingnagian debt. ($1 Trillion per month).
Who's the next gimp in line to be the buyer of last resort?
Question I would love to hear the answer to. What happens when a country increases savings by raising T or reducing G or both and another country keeps buying your fiscal assets? Global depression?
The remarkable thing about the equation (S-I) + (T-G) = (X-M) is that it is an accounting identity or, put another way, a simple matter of the arithmetic adding up. Thus, it must hold for every country whether capitalist or socialist, whether under free trade or controlled trade (tariffs, quotas) and regardless of the monetary regime (capital controls, gold standard, fiat money, managed or free-floating currencies). And yet, this simple accounting identity drives real-time economic phenomena as Arnold described: whether a country is in a trade or current account deficit, whether its currency appreciates or depreciates, and whether it suffers rapid inflation or enjoys stable inflation.
A related point is that managing international trade and finance (tariffs, capital controls, exchange rates), as a first order effect, has no influence on the level of employment. Such management mainly affects the mix of employment - the types of jobs that the labor force performs, and hence whether labor is allocated efficiently to its highest and best use or inefficiently to other jobs.
The second order effect of such management is worse because incomes suffer, which affects household consumption, investment, and labor demand, almost surely for the worse.
I think this is right, but would generalize it to say
1. A tariff is just a special case of a tax. And a quota is just a special case of a regulation.
2. In most cases, there's enough other things going in the real world that the immediate, theoretical effects may be more than offset by everything else. Does every study show negative employment effects from raising the minimum wage? Nope. Am I reasonably certain that raising the minimum wage does have a negative effect? Yep. Should we focus our time on the the small theoretical effects or the other factors that tend to dominate them? Obviously the latter.
The static effects will of course follow the arithmetic because patterns of production, specialization, comparative advantage, and trade are fairly inelastic in the short term. The dynamic effects over the long term are a big question mark, especially since there is an enormous degree of, ahem, "regulatory uncertainty" when no one knows whether there will be a major change in policy will be just a few years now. Few care only about the short-term.
Not everything that counts can be counted , and not everything that can be counted counts . China needs to open up its economy and stop demanding patents from others and stop industrial spying . The Tech giants are tired of being gamed , taxed , fined by euros . No wonder they joined Mr Trump . It’s become way beyond comparative advantage. We have moved to another level . Times change.
Tariffs can be very valuable to political cronies who support crony capitalism and incompetent institutions. Blanket tariffs don't help, so "exceptions" will be created that have real value.
Or could it be that the USA just has a comparative advantage in creating new money? Trade is always a two-way street in the fulness of time, otherwise someone is just giving a gift, no?
"otherwise someone is just giving a gift"
You could call it tribute. If we never pay it back, that's what it will effectively be.
"otherwise someone is just giving a gift"
You could call it tribute. If we never pay it back, that's what it will effectively be.
"At any other point in history, the amount of goods and capital flowing into the US would be called tribute".
I think I see what Arnold is driving towards, and it's an argument against the oversimplification you're making.
The typical simplified view of trade is that because the US produces an oversupply (relative to our needs) of ag products, and the Chinese produce more cheap plastic s#!t then they can consume, we trade ag products to the Chinese for their cheap plastic s#!t. Which leads to people thinking that in order to get the same amount of cheap plastic s#!t after we impose a tariff, we're going to have to send more ag products to China.
The reality is that the Chinese need food but American farmers don't want either Chinese renminbi or (much) cheap plastic s#!t. They want American dollars to pay their bills. So the Chinese have to find a some way to obtain American dollars in order to pay for the American ag products they want. They can get some of the money by selling cheap plastic s#!t to Americans (or other people but demand American dollars as payment) and the US government is more than happy to give them an IOU that comes with periodic payments in American dollars so they can use those American dollars to buy American ag products.
So when a tariff is imposed, there is something of an immediate price change in cheap plastic s#!t from China but that goes the US government, reducing its budget deficit. This doesn't lessen the Chinese demand for American dollars to buy American ag products so the real adjustment is going to happen in the amount of IOUs, and periodic payments in American dollars, that the American government gives the Chinese.
Trade with China is making me begin to doubt what economic theory teaches about the benefits of markets. The latest example is Temu, which seems to be China's low-priced version of a cross between Walmart and Amazon.com. The 'shopping like a billionaire ditty' on Temu's youtube ads grates on my nerves, and their women's clothing is the cheapest and ugliest looking s#!t I've ever seen. The clothing seems to be targeted primarily at two key demographic segments -- fat woman and young women who have been brainwashed by influencers like Taylor Swift and the Kardashian sisters. I get the feeling that the Chinese get their ideas about product development by watching American television, and consequently they amplify the worst aspects of American culture. It's creepy. Separate and apart from Temu, the Chinese-made meat thermometer that I purchase online last year is completely worthless.
This was an immensely helpful explanation. Thank you!
Well done. It's a surprise that anyone DOES believe that trade restriction's affect the trade balance. Maybe this is hangover from a time when tariff revenue was the main source of revenue so some relation between tiffs and government saving. But more to the point, why woud anyone CARE what the trade balance is in the aggregate or with any particular country?
The 'traditional' buyers of US debt WERE countries like CHI, Nihon. Today, not only are they not buying, they are selling down whatever US T-Bills they own.
In the interim, HNWI's became the buyers of US debt. They too have absconded, and sold off their inventory.
Today US banks are the buyers of the USA's increasingly Brobdingnagian debt. ($1 Trillion per month).
Who's the next gimp in line to be the buyer of last resort?
https://www.usdebtclock.org/
btw, the USA has defaulted on its debt already. Who in the Kling Kommentariat knows the gory details?
Arnold??
Correct me if I am wrong, but doesn’t China have a fixed exchange rate with the US?
Question I would love to hear the answer to. What happens when a country increases savings by raising T or reducing G or both and another country keeps buying your fiscal assets? Global depression?