Trade and debt
If it’s true as the evidence seems to indicate that New Zealand’s free trade for growth agenda is leading to larger and larger current account deficits, what does that mean for our economy? I thought it was worth reposting this comment of Andrew’s from yesterday for debate:
Trade deficits have the opposite problem in that they create a debt which one day must be paid off with trade surpluses, & due to interest accumulating in the modern money economy, the surpluses in the future must be much greater than the deficits which incurred the debt problem in the first place.
For every 5% consumed over & above what we produce this year, we may have to produce 10% more than we consume at some point in the future.
Current account deficits must be matched with capital movement surpluses, i.e. foreign investment in the domestic economy increases, creating a burden of debt to repay with interest. As the repatriation of return on foreign capital goes into the current account on the negative side as well, as long as that balance remains negative, we get further & further into debt. We start running out of assets to sell off to repay it - first companies & bank deposits, then land. We become a nation of renters & workers for our foreign landlords & bosses.
Only two ways to remove this debt problem, one is start running big current account surpluses, the other is to become absorbed into one of the creditor economies.
While the Greens have never opposed international trade or trade agreements axiomatically, they have argued that the economic criteria for measuring them needs to be more than just GDP growth. Growth is a flawed and short term measure of economic wellbeing.
March 21st, 2008 at 10:56 am
hey cool!
in my view it is important we select the right remedy for these problems, which i consider to be regulation of capital flows & foreign ownership.
i hope this thread does get some debate
March 21st, 2008 at 11:32 am
Interesting article on this topic:
infoplease.com/cig/economics/trade-deficits-bad-good.html
Some economists see trade deficits as a good things, as they enable a country to import capital to finance investment in productive capacity. Trade deficits can therefore boost employment.
“Perhaps the best view of trade deficits is the balanced view. If a trade deficit represents borrowing to finance current consumption rather than long-term investment, or results from inflationary pressure, or erodes U.S. employment, then it’s bad. If a trade deficit fosters borrowing to finance long-term investment or reflects rising incomes, confidence, and investment—and doesn’t hurt employment—then it’s good. If a trade deficit merely expresses consumer preferences rather than these phenomena, it is immaterial.”
March 21st, 2008 at 12:32 pm
I had a really interesting tho brief conversation with Don Brash about current account deficits when he was Nat leader. I asked him what he thought we could do about it and he said quite straightforwardly that he didn’t know. Which i thought was refreshingly honest. But he did allude to the debate within economists as to whether it mattered or not, he didn’t seem convinced either way.
myself, I’m with Andrew, it is a problem!
March 21st, 2008 at 1:07 pm
Now we just need to think about how the State collects more tax revenue than absolutely required, and it’s share of the blame when it forces lower and middle class Kiwis to run at a deficit. The government surpluses typically mean that real people have tightened their belts needlessly. The government’s high spending forcing interest rates up at the expense of people trying to pay off a mortgage hasn’t helped either.
March 21st, 2008 at 1:14 pm
Interesting accounts above.
‘trap’ or not, WFF certainly appears to help many ‘real people’.
March 21st, 2008 at 1:22 pm
Do only “real people” have kids?
March 21st, 2008 at 3:43 pm
# BluePeter Says:
March 21st, 2008 at 1:22 pm
> Do only “real people� have kids?
what a peculiar question. Of course only real people have real kids, though imaginary people may have imaginary kids.
March 21st, 2008 at 5:34 pm
How about making all export earnings (including capital inflows) tax free and counter it with a capital gains tax (at the same rate as any other form of income). What would happen then?
March 22nd, 2008 at 7:48 am
If it’s true as the evidence seems to indicate that New Zealand’s free trade for growth agenda is leading to larger and larger current account deficits, what does that mean for our economy?
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We have a housing affordability problem yet, when selling started for Pegasus Town (the largest subdivision in the Southern hemisphere), locals were limited to one property; Singaporeans could buy as many as they wanted.
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The latest North South magazine says builders are still building leaky homes.
It also devotes a page to typical Kiwi houses from the past noting how well built state houses were to the “developer driven” junk of today
March 23rd, 2008 at 8:02 pm
good trade deficits vs bad trade deficits…. they say that the definition of “broke” is when you have to borrow to finance current consumption, while the definition of “bankrupt” is when you have to borrow even just to pay the interest on existing debt. new zealand falls under the latter description.
despite all the “deficits don’t matter!” & “debt doesn’t matter!” arguments, i suspect brash has never actually believed this. i seem to recall at one point he wanted to make nz’s national debt his signature issue in politics, but this got swept away by the ultra-right-wing programme & populist maskings that programme hid behind. all very well to be refreshingly honest, but do we really need MPs who have no idea what to do about the country’s problems? it’s more probable that he, like me, suspects that regulation is realistically the most applicable solution, but that this fact was unpalatable to him.
our deficits didn’t just come about because we suddenly became poor at producing or at exporting, nor did a previously sober race suddenly say “hey these credit cards are great! we can spend more than we earn!” in fact we’re probably better exporters than ever before, with an economy more focussed on our export industries instead of on the old inefficient import-replacement manufacturing.
while a situation like this is more complex than can be fully accounted for in generalities, in the main we didn’t get into debt from trade imbalances - the problem is primarily generated from the other side of the equation - trade imbalances arise from capital movement imbalances. the precipitate liberalization of capital markets & ownership regulations along with the sale of state assets have dragged investment into the country (not so much into new productive capacity but simply into acquisitions), which has kept the dollar high & hence foreign stuff cheap. the government compounds that problem by insisting on defending the high dollar (because allowing imort prices to adjust to long-term levels is called… inflation!) which not only alleviates the perception of risk for foreigners making an investment into such an already indebted country, but which keeps the rate of return high & attractive. add the inflating property market dragging capital away from the productive sector & there is little incentive for households to save & defer expenditure.
simply devaluing the dollar today would be a mistake. although it would hurt foreigners currently holding nz equity or debt, it would make investments here even cheaper for foreigners in the short term while ironically reassuring such investors that nz was now on a sounder economic footing for the future. it is also questionable whether we can instantly adjust to exporting more & importing less, or whether for a while we would simply keep on importing but at higher prices.
that is why i consider direct regulation of capital movements & foreign ownership, perhaps to the extent of some nationalisation, (& perhaps through taxation as samiam suggests: in particular ensuring the corporate tax rate is at least as high as the highest personal tax rate) is the place to start dealing with the issue, the sooner the better.
i acknowledge that besides these core issues there are other matters contributing to the problem, such as student debt. offering long-term loans to kids who are bulletproof & confident that their glittering career, supported by the qualification for which they are paying, will make repaying the loan easy, seems irresponsible. the reality is that like other western countries we are producing highly qualified pizza delivery drivers.
the phrase “over-educated” would be a bit harsh, everyone has the right to education, but i consider the government’s role should be the provision of free public libraries, broadcasting, websites etc. - not to process masses of people through a commercial qualifications framework.
March 25th, 2008 at 8:28 am
Andrew, how dare you suggest that my $45 thou indebted, design qualified, niece would be a Pizza Delivery girl! She’s a cafe tart, woops I mean Barista.
Seriously I believe a lot more of NZ’s social ills can be laid at the door of our balance of payments deficit. We spend more than we earn = debt = family stress = both parents have to go to work = problem kids etc etc.
Funny though, the government(s) would never burst the bubble by introducing some form of balance of payments ‘fiscal responsibility act’. The ‘great unwashed’ are far too addicted to the ‘have now-pay later’. Imagine having to save up to buy that plasma screen! Unthinkable.
March 25th, 2008 at 9:41 am
as i’ve said, in my view the balance of payments fiscal responsibility act would act upon the capital side of the accounts. the results of shifting from consumption to production on an economy-wide basis might not necessarily be as unthinkable for us & our nieces as you might suppose. it might mean for example she could actually find work in her specialized area of design instead of at the bar, & could have a satisfying creative (& maybe even well-paying) career.
March 25th, 2008 at 11:53 am
Ive suggested a “tobin” tax to Cullen in my letters to him. It hasn’t formed any part of his replies. Maybe I will add it to the next letter I send (pointing out that the official inflation numbers of the USA are nonsense).
I don’t see how we can expect to have any sort of sane monetary policy without doing something to insulate us from the idiocy that passes for monetary policy in other countries.
BJ