Home > Economics - General > Responding to the critics, part 1

Responding to the critics, part 1

January 28th, 2005

The Economists’ Voice has printed a comment by Thomas Grennes on my article on the US trade deficit. The abstract

John Quiggins’ article, “The Unsustainability of U.S.Trade Deficits” ignores the gains from international borrowing and lending and the gains from trading according to comparative advantage.

isn’t very informative, but he mainly argues against the idea of a zero current account deficit. Grennes misses my point fairly comprehensively. Here’s my draft response

Thomas Grennes’ letter ‘Neither Borrower nor Lender Be’, in response to my article on The Unsustainability of the US Trade Deficit illustrates my observation that ‘much analysis confuses the current account deficit and the goods and services deficit’. As stated in the summary, ‘Although substantial current account deficits can be sustained indefinitely, large deficits in goods and services trade cannot be. Even to stabilise the current account deficit, the United States must restore balance in goods and services trade within a decade or so.’ Grennes ignores this, and focuses entirely on the current account balance.

Grennes suggests that ‘a zero current account balance implies neither borrowing nor lending, and a zero balance appears to be what Quiggin advocates.’ In fact, I examine the adjustment needed to stabilise the current account at its current (historically high) level of 5 per cent of GDP, and show that this requires a fairly rapid return to balance or surplus on the trade account.

Even in the world of web-based journal publishing, it will probably take a month or two for this to get through the publishing process, so comments and suggested improvements are most welcome.

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  1. Tom DC/VA
    January 28th, 2005 at 15:20 | #1

    His response seems largely to be the typical optimist rhetoric. International borrowing does have benefits for countries that are underdeveloped and growing (or have the potential to grow) rapidly, which is exactly what happenned in the US in the 19th century. But for a mature country to borrow internationally to cover undersavings seems to me to be an entirely different proposition. He also fails to discuss who is borrowing and who is lending, which is a related but separate discussion from your TB/CAB distinction.

    Also, his comment on oil is entirely “gratuitous”. Viewing oil consumption as a constant as he does is about the least enlightened economic thought I’ve seen anywhere, and simultaneously manages to wave away little things like an expensive war in the Middle East. But I doubt you want to get into that debate in your response.

  2. January 28th, 2005 at 15:41 | #2

    Thomas Grennes’ letter “Neither Borrower nor Lender Be”, in response to my article on “The Unsustainability of the US Trade Deficit”, illustrates my observation that “much analysis confuses the current account deficit and the goods and services deficit”.

    Neither clear nor accurate he. As stated in my summary, “Although substantial current account deficits can be sustained indefinitely, large deficits in goods and services trade cannot be. Even to stabilise the current account deficit, the United States must restore balance in goods and services trade within a decade or so.” Grennes ignores this, instead focusing entirely on the current account balance.

    Grennes says that “a zero current account balance implies neither borrowing nor lending, and a zero balance appears to be what Quiggin advocates.” In fact, I examine the adjustment needed to stabilise the current account at its current (historically high) level of 5 per cent of GDP, and show that this requires a fairly rapid return to balance or surplus on the trade account.

  3. January 28th, 2005 at 16:46 | #3

    No, Tom, that isn’t what gave the USA a benefit in the 19th century. What they did was receive investment (directly or indirectly), then change the rules on outside investors to their disadvantage – sovereign risk in action. The details are fascinating and often as confusing as the dealings of the entrepreneur in Catch-22.

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