Re: US Trade Deficit As 'World Engine Of Growth'?

[Harry Veeder <eo200@xxxxxx>]

> From: Gunnar Tómasson <gunnar.tomasson@xxxxxxxxxxx>
> Date: Wed, 24 Sep 2003 14:38:49 -0400
> To: Gang8 <gang8@xxxxxxxxxxxxxxx>
> Cc: pkt@xxxxxxxxxxxxxxxx
> Subject: US Trade Deficit As 'World Engine Of Growth'?
>
>
> Dear Gang:
>
> In and after the mid-1970s, I made a nuisance of myself with the IMF Research
> Department through comments on their working papers on world economic issues
> to the point that, as one of the IMF's most senior officials (then and now)
> put it:  "Gunnar thinks the world is wrong and he alone is right."
>
> The alternative, as I saw it at the time, was to play dumb and acquiesce in
> the conventional wisdom embraced by leading academics, the G7 governments, and
> the IMF itself according to which a large U.S. trade deficit represented
> output- and employment-enhancing World Engine Of Growth.
>
> And so it did - much like the proverbial punch bowl which enlivened
> yesterday's party at the cost of today's hangover.
>
> And where did the conventional wisdom go wrong?
>
> The brief answer is indicated in the following passage from Keynes' letter to
> John Hicks, dated September 8, 1936:
>
> "I wish you would analyse in what way our discontent with my income concept
> arises.  In my book [the General Theory - insert] it looks, I think, more
> queer and complicated than it really is.  It is the final outcome of a greater
> amount of bad attempts and destroyed drafts than any other section.  But all
> it comes to is really the following: I commence with the conviction that one
> has in some way to identify income with the value of output."

What if one begins with a different "conviction"?
e.g. Income = saving + investment

Harry Veeder

> This is where the conventional wisdom parts company with Keynes.
>
> First.  It is not rooted in any intellectual "conviction" as distinct from
> transient fashion; and
>
> Second.  It ignores the implications for monetary economics of Keynes'
> "conviction" that one must "commence [by] identify[ing] income with the value
> of output."





> When "income is [identified] with the value of output," it is immediately
> clear that the putative World Engine Of Growth is a misnomer for the U.S.
> trade deficit become World Engine of Inflation.
>
> In turn, once that is recognized, the fact that World Inflation remains under
> "control" conveys a strong signal that structural aspects of world economic
> growth and development have been massively deflationary in the past thirty
> years.
>
> And where does that leave us?
>
> Briefly, any reduction in the U.S. trade deficit in the period ahead would
> create non-inflationary room for instituting Marshall-Plan type expenditures
> on social and economic development projects along the lines proposed by Joseph
> Stiglitz.
>
> Gunnar
>
>