Prof. Steve H. Hanke: ‘In Economics, Identities Play An Important Role’ – OpEd
By Peter Tase
On November 12th, Economist Steve H. Hanke, professor of Applied Economics at The Johns Hopkins University, published in Forbes Magazine an analysis about the current efforts to reduce the trade deficit led by the White House. In his article Prof. Hanke notes: “President Trump repeatedly and proudly proclaims that his trade war strategy and tactics are designed to narrow the trade deficit. But, the facts make it clear that the President’s strategies are not working. Indeed, his assertions have been refuted again and again. Most recently, the U.S. Commerce Department reported that the U.S. trade deficit for both goods and services in the first three quarters of the year jumped by 5.4% over the same period last year.”
Prof. Hanke emphasizes: “The facts make it clear that Trump’s war plan is wrongheaded—a bust. Yes, Trump is losing his battle to shrink the trade deficit. Why? President Trump, alongside many business leaders, has strong views on international trade, particularly the U.S. external balance. He believes an external deficit is a malady caused by foreigners who manipulate exchange rates, impose tariff and non-tariff barriers, steal intellectual property and engage in unfair trade practices. The President and his followers feel the U.S. is victimized by foreigners, as reflected in the country’s negative external balance.”
Furthermore Economist Steve Hanke notes: “This wrongheaded mercantilist view of international trade and external accounts has its roots in how individual businesses operate. A healthy business generates positive free cash flows – revenues exceed outlays. If a business cannot generate positive free cash flows on a sustained basis, take on more debt or issue more equity to finance itself, then it will be forced to declare bankruptcy.
Business leaders employ this general free-cash-flow template when they think about the economy and its external balance. For them, a negative external balance for the nation is equivalent to a negative cash flow for a business. In both cases, more cash is going out than is coming in.
But, this line of thinking represents a classic fallacy of composition. This is the belief that what is true of a part (a business) is true for the whole (the economy). Alas, economics is littered with fallacies. These cause businessmen to confuse their own arguments about international trade and external balances almost beyond reason.”
In continuation Prof. Hanke underlines: “The negative external balance in the U.S. is not a “problem,” nor is it caused by foreigners engaging in nefarious activities. The U.S.’s negative external balance, which the country has registered every year since 1975, is “made in the USA,” a result of its savings deficiency.
To view the external balance correctly, the focus should be on the domestic economy. The external balance is homegrown; it is produced by the relationship between domestic savings and domestic investment. Foreigners only come into the picture “through the backdoor.” Countries running external balance deficits must finance them by borrowing from countries running external balance surpluses.
It is the gap between a country’s savings and domestic investment that drives and determines its external balance. This is demonstrated by the “savings-investment identity.” In economics, identities play an important role. By definition, they are always true. Identities are derived generally by expressing an aggregate as a sum of parts, or by equating two different breakdowns of a single aggregate.”
To read the original publication please click here.
This is a good summary for the original article. Both of the original article and this summary do not provide any new item to the theories of international trade and balance of payments. All students in any principle of economics are taught that Tariffs will increase the prices of the countries imposing the tariffs.
Domestic cost of production will rise and profitability will decline, which will cause a decline in investment, employment, and income. Consumers will pay higher prices and the government will receive the tariff tax as revenues.
Eventually, inflation can increase to the reduction of the aggregate supply. Recession can happen, and histroical evidence does support the theory.
Additionally, countries subjected to the tariffs will retaliate by imposing tariffs on the country which imposed the tariffs first. This action and reaction will have negative consequences on the world economy and slowdown in world economic growth will follow.
The US economy under Trump is having a slowdown and economic growth with all the fake data is about two percent. Inflation is rising but many items whose prices are rising are excluded from the calculation. Unemployment rate if phony too. No country has 3,5 percent of unemployment and tries to have zero and negative interest rate. Jobs created are lousy jobs with very low pay. People are in debt and students are having debt of more than 1.5 trillion.
Trump’s economics is phony economics which helps the top financers and the wealthy only without trickledown. Those are getting all the Fed’s printed money at low rates of interest and use the funds in fictitious finance such as the stock market to make more money and wealth at the expense of others. Money velocity is very low which means the dollar is not changing hands because the wealthy are hoarding the cash when they recieve it. Owners of properties are having many increases in their properties due to the decline in interest rates. A person such as Trump is having great valuations of their properties. Their properties are more than doubled in value. Now, Trump is alot richer for his calling for the Fed for cutting the interest rate. Trump wants negative interest rates too because if he or his business borrows billions his business will receive returns from the lenders.
The best solution for the the US economy’s problems is to increase the eal productivity and economic growth by more real investments, innovations, technological advance, elimination of people debt, and reduction of inequality by helping the working people and by creating high-pay jobs. The country many need a new economic system that is not controlled by monopoly capitalism and corruption. These are the best means to increase saving, growth, and competition in the world economy. Tariffs do not work at all.