Of Deficits and Economic Participation

Which is the real problem for economic participation: domestic budget deficits, or national current account deficits? In part due to the fact the first issue remains unaddressed (even as revenue falls short), policy makers are ramping up the rhetoric, of the latter. Of current account deficits, Scott Sumner recently wrote that "we do borrow too much (due to the tax advantage of doing so) but that has nothing to do with the current account deficit", and added:

I have a solution. Treat international trade the way we treat trade between American states. Stop collecting records on important and exports. We don't have data on the CA deficit of Texas or the CA surplus of Massachusetts, and that lack of data doesn't seem to cause any problems. So stop doing so for the US as a whole.

In a sense, blaming national current account deficits for economic problems, is akin to putting the blame for economic problems on someone isn't "in the room". Except this assessment falls short. The wealth of a nation's trade role, can be represented in many national rooms. It also figures in the ways the participating rooms are constructed.

Consider how nations have improved their standard of living, over time. This has been made possible to the extent governments embrace economic activity beyond their own borders, via both tradable and non tradable sector activity. While the financial sector brings these international connections together, there are positive effects closer to home, as well. International monetary flows particularly contribute to the composition of productive agglomeration, in prosperous regions.

Nevertheless, non tradable sector activity needs alternatives which don't require using the resource flows of open economies to define asset and service costs. Why? The spread of today's income levels became too extensive around the turn of the century, for some nations to successfully maintain complete economic participation. Protectionism is the threatened response of isolation at a general equilibrium level, to this circumstance.

Yet fortunately, it's not necessary to take such a draconian step. Alternate equilibrium could be used to isolate coordination factors between assets and services for lower income levels, and yet remain completely open to global tradable sector activity. Doing so, could also reduce the domestic budget burdens which do represent a true threat.

The problems of economic participation and societal coordination, are hardly just an issue for lower income levels and their fragile connections along the margins. Consider the earlier ambivalence of Fed remarks, regarding high skill service providers and seemingly everyone else, in a most telling FOMC transcript from September 2008 - the infamous meeting which put "Great" in the Great Recession:

MS YELLEN. I agree with the Greenbooks' assessment that the strength we saw in the upwardly revised real GDP growth in the second quarter will not hold up. Despite the tax rebates, real personal consumption expenditures declined in both June and July, and retail sales were down in August. My contacts report that cutbacks in spending are widespread, especially for discretionary income. For example, East Bay plastic surgeons and dentists note that patients are deferring elective procedures. [Laughter].

Inexplicably, these worrisome developments elicited laughter from the group. Might it have been nervous laughter? Nevertheless, her report didn't stop the misplaced determination to "fight" inflation, even as deflation was knocking at the door.

Though today's monetary tightening is nothing like what occurred in all too recent memory, it serves as a reminder that nations have yet to address the source of their real problems, at home. When economies don't have a chance to evolve, neither do they stand still. What else could explain the return of mercantile thought - much of which hasn't been taken seriously, since nations were only beginning to emerge in the global spotlight?

Meanwhile, policy makers confuse global trade and aggregate demand, and hope to "bring jobs back home". Yet this approach would not bring greater wealth, or broader economic participation, At worst, it could possibly undermine much of the progress which open economies have achieved. Instead of undermining the conditions of general equilibrium in an ill fated attempt to restore long term growth, why not make room for alternate equilibrium scenarios, so as not to destabilize open economies. Budget deficits are indicative of a lack of balance between the aggregate supply and demand of domestic non tradable sector activity - not the supposed trade "imbalances" of nations.