Paul Krugman has been a hero of mine during the long, bleak reign of Bush the Younger, articulating arguments against Bush’s philosophy and policies oh these many years. Krugman is one of the leading authorities on international trade, however, and so I was holding my breath, intellectually speaking, waiting to see what would happen when there were global economic troubles.
I can exhale, because he’s revealed his Panglossian side: our current economic troubles are the result of a “global savings glut” — that is, the U.S. is the victim of its own success. Foreigners are investing in our country because we are so wonderful, and the problem is that they got snookered into investing in scams like sub-prime mortgages.
What’s this got to do with the environment? Krugman’s argument, which was made first by now Fed Chairman Ben Bernanke (and the folks at the Cato Institute), distracts attention from what I think is the true problem: the decline of manufacturing. If people would understand the real problem, they might be more open to a greening of America by revving up manufacturing of renewable energy technologies, public transit, and retrofitting, to name a few.
But first let’s take a look at what Krugman said:
[In a speech in 2005] Mr. Bernanke asked a good question: “Why is the United States, with the world’s largest economy, borrowing heavily on international capital markets — rather than lending, as would seem more natural?”
His answer was that the main explanation lay not here in America, but abroad. In particular, third world economies, which had been investor favorites for much of the 1990s, were shaken by a series of financial crises beginning in 1997. As a result, they abruptly switched from being destinations for capital to sources of capital, as their governments began accumulating huge precautionary hoards of overseas assets.
The result, said Mr. Bernanke, was a “global saving glut”: lots of money, all dressed up with nowhere to go.
In the end, most of that money went to the United States. Why? Because, said Mr. Bernanke, of the “depth and sophistication of the country’s financial markets.”
Now, Krugman rightly uses this logic to argue for better regulation of said financial markets. But the problem is the answer to the question, why is the U.S. in such debt? Because the obvious answer is, the trade deficit, that is, the tidal wave of goods coming into the U.S., being offset by a much smaller wave (“swell”, for you surfers out there) of exports going out.
Specifically, in 2006, we imported 1,559 billion dollars worth of nonpetroleum goods, and 302 billion dollars worth of petroleum; but we exported 1,023 billion worth of goods, yielding a trade deficit in goods of 838 billion. We exported 423 billion dollars worth of services and imported 343 billion, so our movie industry did not save us from having a huge problem: how do you make up for the 759 billion dollars of goods and services that came into the country that were not exchanged for goods and services? You give people dollars, which is a claim on the future goods and services, and assets, of the United States — in other words, you go into debt.
So there are trillions of dollars floating around the world from our trade deficits. Much of that money comes back into the U.S. in order to buy U.S. assets and companies — for example, Merrill Lynch and CitiGroup recently sold parts of themselves in order to stay afloat, and the dollars used to buy them came from the trade deficit. Another huge reason that people in other countries are willing to take dollars for their goods instead of our goods is that the oil countries only sell their oil in dollars. Of course, that leaves trillions of dollars in the hands of oil countries, who then can buy chunks of the U.S.
But that’s the good news; if the international markets should “decide” that the dollars aren’t worth much — that is, they can’t buy much with them — then the value of the dollar will plummet and our imports will become much more expensive.
Now many economists will claim that our exports will also become much cheaper if the dollar declines, but this is where the decline of manufacturing comes in. It may be the case that our manufacturing base has become so shriveled that there aren’t enough exporters left to take advantage of the cheaper dollar. Whole industries have been outsourced, so who’s left to take up the slack? Indeed, who’s left to build the solar panels, solar thermal farms, windmills, trains, etc. to create a sustainable economy?
The “global savings glut” is actually a global dollar swamp. The solution is to ramp up our manufacturing industries so that we can eliminate the trade deficit by making more of our own stuff at home and exporting more of it abroad, and the green economy, as Al Gore has been pointing out for decades now, is a perfect opportunity to do just that.
So next time you hear talking heads pontificate about global financial pinball machines, pay attention to the real problem, manufacturing — or the lack thereof.
Note on data: import and export data was obtained from this Bureau of Economic Analysis web page, “U.S. Trade In Goods IDS-0008”, from the zipped Excel files, IDS0008_Exports_Current.xls, and IDS0008_Imports_Current.xls, and also “U.S. International Transactions, 1960-present” (Excel file). Try it, it’s fun!