Wednesday, February 15, 2012

Fair and Balanced Trade with China

Once again, President Obama has shown a lack of understanding of the simplest of economic fundamentals. Yesterday he reiterated his argument that Chinese trade policy is what causes our balance of payments problems. Nothing could be further from the truth.

The problem that the US has is that we have no domestic savings, but we do spend a significant amount on investment (plant and equipment spending, for example). Where do the funds come from to fund our domestic investment, since every beginning economics student understands that savings must equal investment?

If we don't save, then we must "import" savings from other countries. China has a private savings rate that exceeds, by some estimates, forty percent. Since China has an excess of savings and we have a dearth of savings, Chinese savings are "imported" to the US. This is the balance of payments problem, not some issue with currency valuation or Chinese import controls.

No amount of China bashing will ever reduce the massive US balance of payments deficit. Only if Chinese domestic savings collapses or if the US increases its own savings rate will the balance of payments move toward zero.

It is worth noting that all of Obama's economic proposals actually encourage Americans to save less not more by promising to take care of their health care, mortgage problems, old age, ad infinitim. Why save? Big government will come to your rescue.

Their are good reasons why China should get rid of import controls and let their currency freely fluctuate in value, but nothing China could do, short of lowering their domestic savings rate, can move the needle on the US balance of payments problem. We created that problem by our own policies that encourage people to save as little as possible.

Obama is not the only one who seems not to understand this issue. Add Romney, Newt Gingrich, Donald Trump, Tim Geithner, etc., to the list of folks that don't understand this simplest of issues.

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