Should the Government try to Stimulate US Exports? Becker

Posner shows, among other things, the basic impossibility of doubling US exports during the next five years. I consider whether such a policy makes sense, even if it could be achieved. My short answer is that it does not.

In economies that have full employment except during recessions, which describes the American economy, increased exports do not create jobs, any more than building football stadiums creates jobs, although many commentators and businessmen continue to lament the jobs lost to China. What increased exports do under full employment conditions is transfer jobs from producing for domestic consumption and domestic investment to producing for export. The share of American GDP devoted to exports has about doubled during the past 50 years without having any noticeable impact on either the employment or unemployment rates. Part of the reason for this little impact is that imports increased even more rapidly than exports did, but the main answer is that some workers and capital shifted from producing for domestic uses to producing for foreign uses.

Many countries want to increase their exports in good part because of the continuing influence of the old mercantilist tradition that countries should try to accumulate more assets, such as gold. In earlier times, increase in gold reserves equaled the difference between the values of exports and imports. In present times, there is considerable envy of China’s accumulation of over $2 trillion worth of reserves because China exports many more goods and services than it imports. The US and other countries that import much more from China than they export to China have been pressuring China to appreciate its currency in order to encourage Chinese consumers and businesses to import more from other countries, and to reduce imports by other countries of Chinese goods.

I have argued earlier (see my post on our old website for Nov. 23, 2009) that China has been accumulating more reserves that the optimal amount that would promote its own interests. Since China has far more than enough reserves to manage even large fluctuations in its trade balance, the Chinese people would have greater real wealth if its government allows the Yuan to appreciation. An appreciation of its currency would reduce China’s exports and raise its imports.

While China has been hurt by its mercantilist policies, I believe that the US and other developed countries have gained rather than lost from China’s policy of undervaluing its currency. China has exchanged goods produced by hard-working labor, and costly raw materials and capital for paper, like US Treasury bills and bonds, that yield low interest rates. The financial assets that China is accumulating is not yielding much more in the way of income than the mercantilist goal of accumulating zero interest bearing gold in exchange for goods produced by labor, materials, and capital.

A common response to the analysis I just gave is that it is too “economic”. It is claimed that from a geo-political view, China has the United States at its mercy due to its large accumulation of US debt. According to this argument, China could threaten to sell these assets, thereby raising interest rates on American debt, and creating chaos in the market for American debt. The truth is just the opposite, for, if anything, the US has China over the barrel. For the US could threaten to inflate away much of the burden of its debt, and thereby greatly reduce the real value of China’s assets. The US could also use the Fed to maintain relatively low interest rates, even though this would likely increase inflation as well.

In fact, while China has very large holdings of US debt, it does not have much leverage on the market for this debt. For one thing, there is little debt of other governments that China would consider good substitutes for its US Treasury bills and bonds. Particularly now, with the major fiscal problems of the PIIGS (Portugal, Ireland, Italy, Greece, and Spain), EU debt does not seem like an attractive alternative. Moreover, China in fact has little monopoly power in the market for US government debt. Despite its vast holdings, China has no more than about 10% of the US debt held by the American public or foreign governments. A 10% share of the market for an asset does not provide much control over interest rates on that asset, especially when the asset is part of a much larger worldwide market for governments, private bonds, and equities. China may be willing to take some losses in order to pressure the US in its military relations to Taiwan, and other geo-political areas of conflict. But its threats in the government bond market have little credibility since China would suffer much more than the US would.

I am not claiming that the American government and American consumers have been saving enough. Since the US’ deficit between imports and exports is the mirror image of its deficit on capital accounts with other countries, fiscal deficits have affected the trade balance. for this reason and others, the huge federal deficits during the past couple of years, and also earlier in this decade, are very worrisome, especially if the American debt/GDP ratio continues to rise rapidly during the next few years. However, the basic problem is not US exports, but it is getting the federal government to cut its spending, and to implement policies that increase the rate of growth of the US economy.

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