Are you tired of the unending debate about exports and the trade deficit? Too bad, because this debate isn't going anywhere. Brad Setser gets back to the question of tangible and intangible industry and the effect on the deficit. Today he continues a debate with BusinessWeek writer Michael Mandel, who had a recent cover story on why the US economy is stronger that the data would indicate.
Here are a few interesting points:
Moreover, even if Mandel is right, the United States lack of domestic savings still has a cost. Borrowing from China to finance US education implies that China gets some of returns on the US investment. Right now, the interest rate China charges is low, but that might change. Similarly, US investment abroad is not financed out of US savings, but out of foreign savings. It is a management contract so to speak - the world lends money to Starbucks to invest in China. And it expects to get paid interest on its loan.
Perhaps Don Boudreaux's arguments are wearing off on me, but I don't see how it matters who the debt is to, if the money is well spent. If the education spending is worthwhile (which it may not be, of course), then the U.S. should welcome Chinese investments into our education. The fact that the individual getting the education has to pay pack some of their future earnings to Chinese creditors, as opposed to American creditors, won't really matter to them.
Setser:
There is no doubt that the US does better exporting intangibles than exporting tangibles. But that is a low bar for a country that imports twice as many tangible goods as it exports.
The only question is does it all add up.
I suspect not.
A point of clarification. The export of "intangibles" can come from foreign direct investment. Starbucks sets up shop in Beijing, with the profits flowing back to the US. Or from the exports of services - the screening of a US film in Beijing counts as a service export, as do the royalties the world pays Fox for Simpson's reruns and Microsoft for the use of its software. Or from the export of a good. Boeing planes that leave Seattle for Beijing require lots of design and engineering.
What matters in each case is the net external revenue the US gets. The profits on Starbucks Beijing. The royalties on Microsoft's software (net of Microsoft's imports of software from the rest of the world). Boeing's external sales (net of its imports of Japanese, European and other components).
US intangible exports are not limited to Starbucks, McDonalds and Microsoft. The US, for example, could also export its expertise at fund management to China, or even Saudi Arabia. 2 and 20 pays a bit better than assembly work. That may require some changes though. Wall Street still tends to make its money - at least right now - managing America's wealth, structuring transactions that let American investors avoid US taxes, helping hedge funds trade and selling US debt to the world. Not by using US based labor to manage the world's wealth. There is a reason why the Wall Street Journal dropped its international page from its US edition.
Read the whole thing. I'm starting to think that mere words aren't sufficient in this debate, and that what we need is flow charts and maps showing how and where, at what rate, and at what margins money is sloshing around the globe.
hi
Posted by: nation prozac | June 30, 2006 at 09:35 PM