No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Fifteen: Issues in International Economics 372 Of course, there is no free lunch, and foreigners are not giving us more goods and services just because they like us. When they have a trade surplus with us (the other side of the coin of our trade deficit with them), they are building up savings denominated in dollars. They don’t put these dollars under a mattress; they take them and purchase claims to future consumption through the capital account . They may buy treasury bills, or shares of Apple Computer, or the Rockefeller Center . Regardless of what they purchase, if U.S. residents don’t purchase a similar amount of foreign financial assets, we will have a surplus in our capital account to offset our current account deficit. In effect, what we are doing is trading future consumption (what ownership of the capital account assets represents) for present consumption. We might think of this as negative, but it also in a similar way reflects the choices of foreigners. They may want to produce today in order to consumer tomorrow. For a nation with an aging population, like Japan, it may be very much in their interest to let us consume the goods they produce today in exchange for goods that we will produce for them tomorrow. So the important conclusion we reach is this: when we run a balance of trade deficit, we are consuming more than we otherwise could today, and promising to consume less than we otherwise could in the future. Is this behavior wise on our part? There are at least three considerations that we should examine. First is the moral question that is nearly identical to that of borrowing money for current consumption, which we raised in our review of interest rates. As we stated in chapter 12, there is no explicit, biblical prohibition on borrowing, but the consistent Christian position is that borrowing is not desirable—certainly not to finance consumption if we can at all avoid it. To the extent that our balance of trade deficit is to finance investment in productive activities, it may very well make sense. If instead it is simply supporting current consumption, then we (the current generation) benefit while impoverishing future generations. Unfortunately, our trade deficit seems to track our federal government budget deficit, as shown in Figure 15.7 , suggesting foreigners are recycling dollars from our trade surplus into government debt. To the extent that government spending is primarily supporting current consumption, the trade deficit is not positive. Second and related, Scripture admonitions against debt are most appropriate here. In Deuteronomy 28, God promises blessings and curses to the Israelites. If they are faithful, they are told in verse 12 that “The LORD will open for you His good storehouse, the heavens, to give rain to your land in its Figure 15.7, Trade Balance Vs Budget Balance. 6 1948 1955 1962 1969 1976 1983 1990 1997 2004 2011 4 2 0 -2 -4 -6 -8 -10 -12 % Balance of Payments (BOP) = 0 Capital Acct (KA) · Current Account (CA) · Capital Account (KA) · Change in Official Reserves Balance of Trade (NX) · Also called trade surplus or deficit · = Exports (G&S) - Imports (G&S) · Change in foreign ownership of domestic assests minus change in domestic ownership of foriegn assests Current Acct (CA) · Balance of Trade (NX) · Net Factor Income (NFI) · Net Transfer Payments Figure 15.6, Balance of Payments Must Balance. When we hear of a trade deficit (reflected in the current account) it must be balanced by (usually) a surplus in the capital account. It could also be financed by an outflow of a country’s official reserves. Capital account: a measure of foreign investment in a country; typically the capital account roughly balances the current account.