Some nuances to Robert’s last reply
a) Free movement of capital to third world countries to produce for its home markets should not necessarily benefit them at the expense of first world countries. On the contrary it is beneficial for first world countries. Reisman makes clear that “loss of capital” to third world countries is compensated by: (a) Lower import prices which make up for the loss of nominal wages; (b) Capital allocated where it is more productive cumulates at a higher rate in third world countries, which results in most of this capital being ploughed back into USA. This new capital invested in USA (be it “financial” or “real” assets) bids up productivity of USA labor. I refer to Reismans’ “Capitalism” for a full account of this fact.
b) Even if USA workers were not better off, USA considered as a whole (capitalists and workers) would be much better off. The gains to be derived by capitalists resulting from free movement of capital are enormous.
c) What really happens (and this is what bothers “welfarists”) is that migration of capital results in the erosion of the tax base. Such erosion jeopardises the welfare state. It might even happen that the less competent USA workers might actually see their purchasing power being reduced, since it may well occur that the losses of welfare benefits exceed the gains brought about by free movement of capitals. Therefore, irrespective of the gains or losses for workers arising out of globalisation, what really worries the “establishment” is the loss of a tight grip over the most productive citizens (the owners of capital). If Mr. Roberts contends that free movement of capitals jeopardises the whims of the State, he is right.
d) Mr. Robert’s ideas are based on the premise that the “State” has the right to control the use of private property, that the individual should sacrifice himself to the State’s interests. HERE IS THE CRUX of this debate: Whether the State has the right to have a group of enslaved milk cows and whether the cows’ milk is for the benefit of the collective. Libertarians deny this right. Mainstream thinks otherwise. However, it seems quite “un-American” to maintain such views. USA was founded on the premises of individualism, the pursuit of one’s own happiness and self reliance. Such three principles clearly contradict the view that the individual should sacrifice for the State (that is for others, be it fellow nationals or foreigners). If America falls prey to the collective ideas to be found in the rest of the world, the days of America as the leading power of the world are counted.
Posted by Jose Ferre
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Paul Craig Roberts has for some time now been arguing a thesis which says that the law of comparative advantage is somehow no longer valid because allegedly countries like China and India has a absolute advantage in everything and that with the free flow of factors of production this means that China and India will take over the entire world´s production of tradable goods and services. He further claims that the huge U.S. trade- and current account deficit proves his thesis. Yet there are several fatal flaws in this argument
1. To begin with, Roberts has a very near-sighted focus on the United States. If his theory were correct, surely this must affect other countries than the US. All rich countries should experience trade deficits. This, however, is not true. In fact, most rich countries have current account surpluses. This is the case in almost all northwest European countries except for Britain and it is also true in the case of Canada and relatively rich East Asian countries like Japan, South Korea, Taiwan, Hong Kong and Singapore. Except for the US it is only Britain, Australia and New Zealand who has current account deficits among rich countries, as well as the 3 poorest countries of the euro area, Spain, Portugal and Greece. In Europe it is the rich high cost countries -many of whom have higher labor costs than the United States- such as Germany, Luxemburg, Belgium, Holland, Switzerland, Finland and Scandinavia which have very large surpluses while the poorer low cost countries in Southern and Eastern Europe has huge deficits.
Of particular interest is the huge current account surpluses of Hong Kong and Singapore. They are 2 countries with a income level at Western European level, they are 100% commited to free trade and have no trade – or capital movement restrictions whatsoever and they are very geographically close to China (particularly Hong Kong). If any countries should have deficits due to the absolute advantage in everything which China allegedly have, then Hong Kong and Singapore should be the ones.
Yet, reality is the opposite of what Robert’s theory would predict. Hong Kong has a current account surplus of roughly 10% of GDP (equivalent to a annual surplus of $1,1 trillion for the USA) while Singapore has a current account surplus of 21,5% of GDP (equivalent to a annual surplus of $ 2,4 trillion for the US). At the same as the US current account deficit has risen sharply, Hong Kong has gone from a deficit of rougly 4% of GDP in 1997 to its current 10% surplus. And this without resorting to devaluations, as the Hong Kong dollar has had a fixed exchange rate (A currency board) at 7,80 versus the US dollar since 1983.
What drives trade/current account balances are not as Roberts would suggest, wage levels but rather the level of national savings (Which ceteris paribus means a higher surplus/lower deficit) as well as a country´s attractiveness for investments (Which ceteris paribus means a lower surplus/higher deficit). As East Asian countries has a extremely high savings rate this reflects itself partly in a higher level of investment than in the US, but also in huge current account surpluses as they are not attractive enough to absorb all the savings they generate.
2. Roberts is trying to confuse people by saying that the United States both have a trade deficit and a deficit in capital flows. But as he should know, this is impossible. As all transactions has a credit and a debet, any trade deficit must be associated with a net capital inflow. Roberts´ suggestion that the United States has both a trade deficit and a net capital outflow is not only factually incorrect, it is about as likely as the existence of a squared triangle. It is per definition impossible (Although it is possible that government statistics show this due to the problems involved in data collection).
Even while basing his theory on the suggestion that the economic equivalent of squared triangles exist, he does however briefly acknowledge that squared triangles don´t exists. But he dismisses the fact that the US has a huge capital inflow by claiming that this is irrelevant since allegedly the only thing that matters are the flow of foreign direct investment (FDI).
However, this distinction between FDI and other investments are irrelevant. Because even if the foreigner doesn´t directly invest in factories or other real capital he will do it indirectly by raising the level of investable funds above the level which domestic savings would permit. It makes no difference if a foreigner directly invest in a plant or if he buys a government bond since the seller of that building can invest in a factory with the money the foreigner has provided.
Many people are easily misled by Roberts since this is an indirect process. But saying that capital inflows which aren’t FDI don´t contribute to investment is just as misleading as saying that people who don´t engage in direct exchange and pay the goods and services they buy with the goods and services they themselves produce , but instead engage in indirect exchange through money are not offering any real values to the people they buy goods and services from. This is of course false. Even if the car worker don’t try to pay for their foods with actual cars, they are paying for it by contributing to the production of cars in exchange for money. This money can then be used to buy food and the food producers can use the money to buy cars or they can buy a hair cut from the barber which can later use that to buy cars. Similarly, even if the foreigner don´t directly use his money to invest in the construction of factories or real estate, they are still raising the level of real investments by buying a bond which the seller of the bond can later use to invest in a factory, or the seller can use to buy stocks, which the seller of the stock can use to invest in a factory.
Whether or not the foreigner directly or indirectly invests in real assets, he is still raising the level of investment above the level which the supply of domestic savings would permit. This fact alone is enough to invalidate Roberts´ theory. Since if there were an net outflow of capital, as in Germany, Switzerland, Hong Kong and Singapore this would mean a boost to that country´s net exports. Or if a trade deficit arose, as in the US, this reflects a inflow of capital. Roberts´ scenario of outflow of capital is thus not relevant to today´s US since the US in fact has a enourmus capital inflow.
As for the flow of the other main factor of production, labor, the US has a net inflow of that too. It is known as immigration. China and India are in fact the two biggest countries of origin for legal immigrants, aside from Mexico of course. By contrast the flow of immigrants from the US to China and India are virtually non-existent, aside from a few Chinese and Indians returning to their home countries.
3. Roberts envision that somehow China and India will have a absolute advantage in everything because of their low wage leve. Actually, the only thing they have is a absolute advantage in labor cost. While American workers have an disadvantage in their wage level they have other advantages which in many cases outweigh their high cost. Like for exampel, better scientists (Most Nobel laurates are Americans) or other workers, more accumulated real capital, more reliable justice system and less corruption, unique nature (Relevant in tourism as you can´t go on a trip to California while being in China), better infrastructure etc.
I must say this blog is awing. I was wondering is there anything that our diary agreement would do for group from Country ?
With reborn dolls, the effect is amplified since it is not just eyes, but touch, that’s engaged whenever you hold or rock a reborn ‘baby’. Custom Berengeur, Ashton Drake, or Edward Middleton babies grab the attention of celebrities also as the general public. Finally, reborn babies seem to be well-loved by nostalgic and grieving parents and grandparents.
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