[Marxism] Autopsy on The Vampire

["Charles Brown" <cbrown@xxxxxxxxxxxxxxxxx>]

CSI: Trade Deficit 



By PAUL  KRUGMAN

Forensics are in. If you turn on the TV during prime time, you're  likely to


find yourself watching people sorting through clues from a crime  scene, 

trying to figure out what really happened.



That's more or less  what's going on right now among international finance 

experts. The crime in  question is the U.S. trade deficit, which according
to 

the broadest measure  reached an amazing $805 billion last year. The mystery
is 

how we've been able to  run huge deficits, year after year, with so few 

visible adverse consequences.  And the future of the U.S. economy depends on
which 

of two proposed solutions to  the mystery is right. 



Here's the puzzle: the trade deficit means that  America is living beyond
its 

means, spending far more than it earns. (In 2005,  the United States
exported 

only 53 cents' worth of goods for every dollar it  spent on imports.) To pay


for the excess of imports over exports, the United  States has to sell
stocks, 

bonds and businesses to foreigners. In fact, we've  borrowed more than $3 

trillion just since 1999. 



By rights, then, the  investment income â?? interest payments, stock
dividends 

and so on â?? that  Americans pay to foreigners should be a lot larger than
the 

investment income  foreigners pay to Americans. But according to official 

statistics, the United  States still has a slightly positive balance on
investment 

income.



How is  this possible? The answer, almost certainly, is that there's 

something wrong  with the numbers. (Laypeople tend to treat official
statistics as 

gospel;  professional economists know that putting these numbers together 

involves a lot  of educated guesswork â?? and sometimes the guesses are
wrong.) But 

depending on  exactly what's wrong, the U.S. economy either has hidden
strengths, 

or it's in  even worse shape than it seems.



In one corner are economists who think  the official statistics miss 

invisible U.S. exports â?? exports not of goods and  services, but of
intangibles like 

knowledge and brand-name recognition, which  allow U.S. companies to earn
high 

rates of return on their foreign investments.  Proponents of this view claim


that if we counted these invisible exports, which  they call "dark matter," 

much of the U.S. trade deficit would disappear.  



The dark matter hypothesis has been eagerly taken up by some  journalists, 

who like its upbeat message. It seems to say that the U.S. economy  is, as a


cover article in Business Week put it, "much stronger than you think."  



But there's a problem: U.S. companies operating abroad don't, in fact,  seem


to earn especially high rates of return. Why, then, doesn't the United
States 

seem to be paying a price for all its borrowing? Because according to the  

official data, foreign companies operating in the United States are
remarkably  

unprofitable, earning an average return of only 2.2 percent a  year.



There's something wrong with this picture. As Daniel Gros of the  Center for


European Policy Studies puts it, it's hard to believe that foreigners  would


continue investing in the United States "if they were really being
constantly 

taken to the cleaners."



In a new paper, Mr. Gros argues â??  compellingly, in my view â?? that
what's 

really happening is that foreign  companies are understating the profits of 

their U.S. subsidiaries, probably to  avoid taxes, and that official data
are, in 

particular, failing to pick up  foreign profits that are reinvested in U.S. 

operations. 



If Mr. Gros is  right, the true position of the U.S. economy isn't as bad as


you think â?? it's  worse. The true trade deficit, including unreported
profits 

that accrue to  foreign companies, isn't $800 billion â?? it's more than
$900 

billion. And  America's foreign debt, including the value of foreign-owned 

businesses, is at  least $1 trillion bigger than the official numbers say. 



Of course,  optimists have a comeback: if things are really that bad, why
are 

so many  foreign investors still buying U.S. bonds? And they point out that 

those  predicting problems from the trade deficit have been wrong so far.
But I 

have  two words for those who place their faith in the judgment of
investors, 

and  believe that a few good years are enough to prove the skeptics wrong: 

Nasdaq  5,000.



Right now, forensic analysis seems to say that the U.S. trade  position is 

worse, not better, than it looks. And the answer to the question,  "Why
haven't 

we paid a price for our trade deficit?" is, just you wait.  


  _____  

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