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.
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.
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?
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.
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.
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.
Correct me if I am wrong, but doesn’t China have a fixed exchange rate with the US?
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.
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?
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.
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.
This was an immensely helpful explanation. Thank you!
"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.