Semi-Daily Journal Archive

The Blogspot archive of the weblog of J. Bradford DeLong, Professor of Economics and Chair of the PEIS major at U.C. Berkeley, a Research Associate of the National Bureau of Economic Research, and former Deputy Assistant Secretary of the U.S. Treasury.

Saturday, December 17, 2005

Mark Thoma finds Paul Blustein answering questions about the trade deficit:

Economist's View: The Trade Deficit: Northville, Mich.: Why is it the U.S.A. deficit has gone so long uncheck[ed] that we now owe every country around the world boat loads of money. Is it that this administration is so corrupt and greedy it does not care?

Paul Blustein: Actually, I think some people in the administration care quite a bit about the problem. Not all--some think the problem is overblown, and some of their rhetoric has certainly reflected that. But in talking to people like Tim Adams, the undersecretary of the treasury for international affairs, I'm quite struck by the fact that he seems determined to take measures that will ameliorate the global imbalances. ...

Monroe Township, N.J.: Why is China willing to hold a large part of US debt? Can they use the debt aggressively against us?

Paul Blustein: ...The Chinese are "willing" to hold our Treasury securities for one important reason--for the past decade or so, they have rigidly linked their currency, the yuan, to the U.S. dollar, ... As for the second part of your question, if you read Saturday's story, ... I quoted from a Foreign Affairs article by Nouriel Roubini and Brad Setser. They pointed out that the Chinese COULD use their vast holdings of Treasury securities against us, by threatening to dump them, in some sort of foreign policy confrontation. Of course, that would hurt the Chinese a lot--perhaps more than it would hurt us; it's hard to say. But one way of thinking about this is that it's a sort of "balance of mutual terror"--a term used by former Treasury Secretary Larry Summers. It's not a very healthy situation, in other words.

Burke, Va.: In his recent book recent book "Three Billion New Capitalists" Clyde Prestowitz's argues that the trade deficit in combination with budget deficits and a debt-dependent economy will result in an "economic 9/11" where the dollar collapses and interest rates sky-rocket. What ... changes in policy would be necessary to avert these sequences of events?

Paul Blustein: ...I think there's pretty broad agreement among economists on both the right and left about what ought to be done. First of all, the U.S. needs to increase its savings... Second, Asian countries need to raise the value of their currencies. ... Third, Europe needs to take steps to increase its growth, so that Europeans would import more too. But Europe is a far smaller part of the global imbalance problem than is Asia. ... Not all economists agree, of course, but the consensus is pretty broad. ...

I note that Blustein's answer (3) contradicts his answer (1). In answer (3) he says that the most important thing is for the U.S. to boost its savings rate. Getting the federal budget into surplus is the best way to do that. It will be a cold day in hell before the Bush administration does so.

In answer (1), however, Blustein claims that there are people in the administration who "care quite a bit about the problem" and mentions Treasury Undersecretary Tim Adams. What measures is Adams going to take to "ameliorate global imbalances"? I see no sign he is going to take any--to urge the White House to shift the budget into surplus would, Adams knows, be the ultimate career-limiting move on his part.

I realize that Blustein wants Tim Adams points. But surely some intellectual consistency could be maintained from one minute to the next?

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