Knowing that (X-M)=(S-I)+(T-G) is absolutely essential to understanding international trade and finance. Here, we turn two towns and two crops into numerical tables to make the equation intuitive.
I love these posts! I used the earlier ones to help clarify a presentation I did, and was able to shock a PhD candidate in one of the lesser disciplines (i.e. not economics) into saying maybe he should learn some economics. And as an amateur history buff, I love your piece on Kuznets and WWII. I think you are right, national income accounting is more important than the atom bomb!
I can't help but notice some problems with this analogy. First, in the production side of the house, there's a fifth possibility. To whit, Consume, Save, Government stores, Export, and WASTE. Corn that was eaten by rats, scattered all over the road in a truck accident, spoiled, etc... We can use that waste to stand in for embezzlement, and any number of crooked dealings by either politicians or other criminals.
On the Wheat bought (note, I'm looking at the Hereville side on this, but Therevilles complaint would be similar) Consume, Save to plant, and Store. Uh, we've said that Hereville only grows corn. Why would they be saving seed to plant wheat? This falls apart on that piece. Then there's the Waste piece on the incoming wheat. With Rats and truck accidents standing in for criminality, and other wastes.
And then we come to the Balance of payments piece, where your numbers make sense but the end result is sort of not discussed. In fifteen years of this, suddenly Thereville owns Hereville, due to the fact that they've continued to pour loans into Hereville's economy and bought shares, until one day they literally own Hereville, and the citizens are at best sharecroppers. Can't happen? Not part of the model? It's the PRC's model for taking over nations, and it's been working.
Thanks. This is a simple example. The real NIPA do include provisions for breakage and spillage and such. I said Hereville was storing what seeds for future crop diversification. There is nothing in this that says Thereville will ever “own” Hereville. Part of the financing was a 1% equity stake. That stays 1% until Hereville either sells them some more stock or buys this back. As for debt, if your enterprise grows faster than your debt, no one is “owning” you. I’ll guarantee that Elon Musk has more debt today than when he started, and no one owns him. Trump Hotels has always had debt, but they don’t own Trump. My personal has debt has risen over the years ans I have bought more and more expensive homes, but my savings have grown faster. No one owns me, annd my credit rating is right ant the top. Imprudent borrowing can, of course, put you in destructive debt, but there’s nothing in this example to suggest that is the case.
See, when you cross from theory and national models, to reality and international models, you step out of the realm of "economics" and into the realm of "power politics." Yes, Musk, Trump, etal can relax knowing that they're just too big and too rich to deal with predatory lending, as are you, and short of such a run of bad economic news as to put us back in 1931, so am I, (at which time, money is no longer important at all, and most places revert to a barter economy, or worse.)
But Jose's bodega on the corner, and the nation of Panama have something in common, other than the accent. They're both subject to potential predatory lending. With Jose's place, that looks like either some guys with tats all over their face repeatedly trashing the place, while Jose's credit rating keeps going down as he tries to keep up, until he's stuck going to the lender of last resort, or going bankrupt. Either way he ends up losing the place, to the guys behind the punks with tats. Or it looks like a couple of guys in nice suits that come in and say "nice place ya got here, be a shame if somewhat was to happen to it." in bad Italian accents.
With Panama (chosen for an example, it's happening in about 35 countries that I am aware of) it looks like an ambassador from the PRC offering ridiculously low rates to conduct really needed improvements... Until you learn that those improvements come with a permanent PRC military presence, as "part of the deal." Then you discover that the balloon payments are more than your GDP, but they'll forgive them in return for "certain concessions." Suddenly, you're owned.
The NIPA are not theory. They are just large-scale accounting systems. Counting actual real-world stuff and arranging the data in ways that make it difficult to succumb to intuitive asshattery. Nothing in this article says "free trade is good" or "tariffs are idiotic" or "Vietnam has a comparative advantage in furniture manufacture." The NIPA, and that monumental equation (X-M)=(S-I)+(T-G), are true by definition because we have DEFINED exports, imports, saving, investment, taxes, and government spending in ways that MAKE that equation true. It's tree under free trade, it's true when there are tariffs, it's true when there is no trade, BECAUSE THAT IS HOW WE HAVE DEFINED THOSE VARIABLES. It's not theory. It's not academia. It's arithmetic.
If Politician A says, "I have two kinds of fruit in my refrigerator--apples and oranges--and I only allow apples and oranges in my refrigerator. And I want to have more apples and more oranges in my refrigerator, but fewer pieces of fruit in my refrigerator," he is not being "real-world" or "nationalistic" or "a master negotiator." Rather, he is being an ignorant dumb-ass who doesn't understand basic arithmetic. Similarly, if Politician B says, "I want foreign investment money to pour into America AND I want our trade deficit to go away, that politician is not being "real-world" or "nationalistic" or "a master negotiator." He, like the fruit fool, is simply exhibiting ignorance of arithmetic.
To some extent, we can be more sympathetic toward Politician B's ignorance, because that arithmetic requires a deep dive into how we define X, M, S, I, T, and G and how they fit together. Counting fruit is easy and intuitive. But in the end, promising that we'll have more foreign investment and a smaller trade deficit is as dumb-assed as promising that we'll have more apples, more oranges, and fewer pieces of fruit.
As my articles explained, thanks to Kuznets, his colleagues, and the NIPA, U.S. war planners had the real-world logic of these equations at their disposal while Germany, Japan, and Italy were trying to have more apples, more oranges, and fewer pieces of fruit. That was the entire point of these articles--not tariffs, free trade, or comparative advantage.
All the homespun settin-back-in-your-rockin-chair-stories about Pedro and Jose you can muster do not invalidate arithmetic.
When President Trump promises that tariffs will enrich America, I disagree as strongly as possible and add--as I have done before--that tariffs are likely to wreck many of his goals that I agree with. But that, indeed, is an opinion, an hypothesis, an argument that we can have. But when President Trump promises to bring investment flowing into the U.S. AND promises to reduce our trade deficit, he is promising, "More apples, more oranges, fewer pieces of fruit."
No country in human history has ever enriched itself by imposing tariffs and other protectionist measures, but that has nothing at all to do with simple accounting truth-by-definition of (X-M)=(S-I)+(T-G).
With foreign investment like that, who needs enemies?
I think the econ min-maxers, fake comparative advantage proponents and algo efficiency experts of our financial elite, who have coincidentally prospered so spectacularly with the great globalist grift of the last thirty plus years, should be made to go stand in the corner of the room. The world is not as you hope it to be even with your magical algebraic equations.
Funny, neither do I. But I do recognize a catastrophic system (policy) failure when I see it: our "free trade" fixation that rotted us from the inside because it wasn't free and certainly wasn't fair. Now we can't make some pretty important things and we have a hollowed out social structure/work force. We didn't even get the "engagement" benefits. Nope, somehow we imported their values and became more like them.
The vast number of jobs lost in America have been lost to domestic competition and to domestic automation. Other than a handful of tax havens and such, Americans have the highest per capita income in the world. The populist fist-waving is an expression of deep, angry jealousy of people who would be regarded as dirt-poor in the United States. Per-person income in most countries of the European Union is lower than per-person income in the very poorest state (Mississippi). The average person in China earns around $13,000 per year. For much of the 19th century and into the 20th century, Argentina was nearly the wealthiest country on earth. Then, populism took root and Juan Peron promised, in effect, to Make Argentina Great Again. Tariffs, moving production back home, blocking trade. Precisely the same arguments as we're hearing. And Argentina has spent a full century as an economic toilet bowl as a result.
Do you even hear yourself Margaret? Populist Fist Waving Angry Jealous Dirt Poor? You should drive around America some and visit the people who live paycheck to paycheck, have maxed credit cards and don't own equities, their homes or fine art. Sure we are a rich country. Our poor are the envy of Chad. But that doesn't mean we haven't been screwing them over. They deserved better from our so-called "Elites and Experts."
It's like that meme with the dog sitting in the room with the flames licking up all around him. "This is Fine." No, it isn't. And the solution certainly isn't more "Free Trade" which isn't free. If you can figure a way to make it free and fair without slave labor and the grifters of finance slurping away at the trough, well, let us know.
And it would be nice if we could at least make our own ships, chips, pharmaceuticals and that kind of stuff. You know that stuff that you need to defend yourself. Making the IP is great. But that stuff get's stolen awfully easy. We make more. They steal it. But oh, well.
Finally, you get more of what you subsidize. We subsidize the CCP's internal social stability. We subsidize the Euroscleroritic "Protect Me and My neo-feudal socialist aristocratic free ride." So, although I'm well credentialed and well off, I'm waving my fist too. I know when somebody has been eating my lunch. I'm angry and populist for a reason. Used to be a Neo-con and hope to be forgiven for that sin. I was young and naive. God have mercy on my soul.
You are right. But quit calling it free trade. The proper term is "voluntary exchange"
Voluntary exchange occurs between two persons, not two countries. Anytime the politicians and "policy" get involved, we no longer have voluntary exchange, do we? Fair? What a hoot. The word has no meaning, which means it can't really be used to communicate. Who did the "hollowing" Passive voice doesn't get it.
We are not rotted. Our politicians are rotted, but that's absolutely nothing new. Be part of the solution instead of part of the chirpies on the sideline who have it all figured,but have no action and no suggestions for action.
Now, all you have to do is rewrite this is a way the President will understand
Your turn.
I love these posts! I used the earlier ones to help clarify a presentation I did, and was able to shock a PhD candidate in one of the lesser disciplines (i.e. not economics) into saying maybe he should learn some economics. And as an amateur history buff, I love your piece on Kuznets and WWII. I think you are right, national income accounting is more important than the atom bomb!
Thanks! By all means, spread the word.
I can't help but notice some problems with this analogy. First, in the production side of the house, there's a fifth possibility. To whit, Consume, Save, Government stores, Export, and WASTE. Corn that was eaten by rats, scattered all over the road in a truck accident, spoiled, etc... We can use that waste to stand in for embezzlement, and any number of crooked dealings by either politicians or other criminals.
On the Wheat bought (note, I'm looking at the Hereville side on this, but Therevilles complaint would be similar) Consume, Save to plant, and Store. Uh, we've said that Hereville only grows corn. Why would they be saving seed to plant wheat? This falls apart on that piece. Then there's the Waste piece on the incoming wheat. With Rats and truck accidents standing in for criminality, and other wastes.
And then we come to the Balance of payments piece, where your numbers make sense but the end result is sort of not discussed. In fifteen years of this, suddenly Thereville owns Hereville, due to the fact that they've continued to pour loans into Hereville's economy and bought shares, until one day they literally own Hereville, and the citizens are at best sharecroppers. Can't happen? Not part of the model? It's the PRC's model for taking over nations, and it's been working.
Thanks. This is a simple example. The real NIPA do include provisions for breakage and spillage and such. I said Hereville was storing what seeds for future crop diversification. There is nothing in this that says Thereville will ever “own” Hereville. Part of the financing was a 1% equity stake. That stays 1% until Hereville either sells them some more stock or buys this back. As for debt, if your enterprise grows faster than your debt, no one is “owning” you. I’ll guarantee that Elon Musk has more debt today than when he started, and no one owns him. Trump Hotels has always had debt, but they don’t own Trump. My personal has debt has risen over the years ans I have bought more and more expensive homes, but my savings have grown faster. No one owns me, annd my credit rating is right ant the top. Imprudent borrowing can, of course, put you in destructive debt, but there’s nothing in this example to suggest that is the case.
See, when you cross from theory and national models, to reality and international models, you step out of the realm of "economics" and into the realm of "power politics." Yes, Musk, Trump, etal can relax knowing that they're just too big and too rich to deal with predatory lending, as are you, and short of such a run of bad economic news as to put us back in 1931, so am I, (at which time, money is no longer important at all, and most places revert to a barter economy, or worse.)
But Jose's bodega on the corner, and the nation of Panama have something in common, other than the accent. They're both subject to potential predatory lending. With Jose's place, that looks like either some guys with tats all over their face repeatedly trashing the place, while Jose's credit rating keeps going down as he tries to keep up, until he's stuck going to the lender of last resort, or going bankrupt. Either way he ends up losing the place, to the guys behind the punks with tats. Or it looks like a couple of guys in nice suits that come in and say "nice place ya got here, be a shame if somewhat was to happen to it." in bad Italian accents.
With Panama (chosen for an example, it's happening in about 35 countries that I am aware of) it looks like an ambassador from the PRC offering ridiculously low rates to conduct really needed improvements... Until you learn that those improvements come with a permanent PRC military presence, as "part of the deal." Then you discover that the balloon payments are more than your GDP, but they'll forgive them in return for "certain concessions." Suddenly, you're owned.
The NIPA are not theory. They are just large-scale accounting systems. Counting actual real-world stuff and arranging the data in ways that make it difficult to succumb to intuitive asshattery. Nothing in this article says "free trade is good" or "tariffs are idiotic" or "Vietnam has a comparative advantage in furniture manufacture." The NIPA, and that monumental equation (X-M)=(S-I)+(T-G), are true by definition because we have DEFINED exports, imports, saving, investment, taxes, and government spending in ways that MAKE that equation true. It's tree under free trade, it's true when there are tariffs, it's true when there is no trade, BECAUSE THAT IS HOW WE HAVE DEFINED THOSE VARIABLES. It's not theory. It's not academia. It's arithmetic.
If Politician A says, "I have two kinds of fruit in my refrigerator--apples and oranges--and I only allow apples and oranges in my refrigerator. And I want to have more apples and more oranges in my refrigerator, but fewer pieces of fruit in my refrigerator," he is not being "real-world" or "nationalistic" or "a master negotiator." Rather, he is being an ignorant dumb-ass who doesn't understand basic arithmetic. Similarly, if Politician B says, "I want foreign investment money to pour into America AND I want our trade deficit to go away, that politician is not being "real-world" or "nationalistic" or "a master negotiator." He, like the fruit fool, is simply exhibiting ignorance of arithmetic.
To some extent, we can be more sympathetic toward Politician B's ignorance, because that arithmetic requires a deep dive into how we define X, M, S, I, T, and G and how they fit together. Counting fruit is easy and intuitive. But in the end, promising that we'll have more foreign investment and a smaller trade deficit is as dumb-assed as promising that we'll have more apples, more oranges, and fewer pieces of fruit.
As my articles explained, thanks to Kuznets, his colleagues, and the NIPA, U.S. war planners had the real-world logic of these equations at their disposal while Germany, Japan, and Italy were trying to have more apples, more oranges, and fewer pieces of fruit. That was the entire point of these articles--not tariffs, free trade, or comparative advantage.
All the homespun settin-back-in-your-rockin-chair-stories about Pedro and Jose you can muster do not invalidate arithmetic.
When President Trump promises that tariffs will enrich America, I disagree as strongly as possible and add--as I have done before--that tariffs are likely to wreck many of his goals that I agree with. But that, indeed, is an opinion, an hypothesis, an argument that we can have. But when President Trump promises to bring investment flowing into the U.S. AND promises to reduce our trade deficit, he is promising, "More apples, more oranges, fewer pieces of fruit."
No country in human history has ever enriched itself by imposing tariffs and other protectionist measures, but that has nothing at all to do with simple accounting truth-by-definition of (X-M)=(S-I)+(T-G).
I also like these posts. One question: should "wheat" be "corn" in "Add to that the income from wheat exports that they temporarily save ($100K)"?
With foreign investment like that, who needs enemies?
I think the econ min-maxers, fake comparative advantage proponents and algo efficiency experts of our financial elite, who have coincidentally prospered so spectacularly with the great globalist grift of the last thirty plus years, should be made to go stand in the corner of the room. The world is not as you hope it to be even with your magical algebraic equations.
Sorry, but I don’t subscribe to the Bernie Sanders/AOC worldview.
Funny, neither do I. But I do recognize a catastrophic system (policy) failure when I see it: our "free trade" fixation that rotted us from the inside because it wasn't free and certainly wasn't fair. Now we can't make some pretty important things and we have a hollowed out social structure/work force. We didn't even get the "engagement" benefits. Nope, somehow we imported their values and became more like them.
The vast number of jobs lost in America have been lost to domestic competition and to domestic automation. Other than a handful of tax havens and such, Americans have the highest per capita income in the world. The populist fist-waving is an expression of deep, angry jealousy of people who would be regarded as dirt-poor in the United States. Per-person income in most countries of the European Union is lower than per-person income in the very poorest state (Mississippi). The average person in China earns around $13,000 per year. For much of the 19th century and into the 20th century, Argentina was nearly the wealthiest country on earth. Then, populism took root and Juan Peron promised, in effect, to Make Argentina Great Again. Tariffs, moving production back home, blocking trade. Precisely the same arguments as we're hearing. And Argentina has spent a full century as an economic toilet bowl as a result.
Do you even hear yourself Margaret? Populist Fist Waving Angry Jealous Dirt Poor? You should drive around America some and visit the people who live paycheck to paycheck, have maxed credit cards and don't own equities, their homes or fine art. Sure we are a rich country. Our poor are the envy of Chad. But that doesn't mean we haven't been screwing them over. They deserved better from our so-called "Elites and Experts."
It's like that meme with the dog sitting in the room with the flames licking up all around him. "This is Fine." No, it isn't. And the solution certainly isn't more "Free Trade" which isn't free. If you can figure a way to make it free and fair without slave labor and the grifters of finance slurping away at the trough, well, let us know.
And it would be nice if we could at least make our own ships, chips, pharmaceuticals and that kind of stuff. You know that stuff that you need to defend yourself. Making the IP is great. But that stuff get's stolen awfully easy. We make more. They steal it. But oh, well.
Finally, you get more of what you subsidize. We subsidize the CCP's internal social stability. We subsidize the Euroscleroritic "Protect Me and My neo-feudal socialist aristocratic free ride." So, although I'm well credentialed and well off, I'm waving my fist too. I know when somebody has been eating my lunch. I'm angry and populist for a reason. Used to be a Neo-con and hope to be forgiven for that sin. I was young and naive. God have mercy on my soul.
If you had any reason for anyone to read your words, you would use your real name. What do you fear?
You are right. But quit calling it free trade. The proper term is "voluntary exchange"
Voluntary exchange occurs between two persons, not two countries. Anytime the politicians and "policy" get involved, we no longer have voluntary exchange, do we? Fair? What a hoot. The word has no meaning, which means it can't really be used to communicate. Who did the "hollowing" Passive voice doesn't get it.
We are not rotted. Our politicians are rotted, but that's absolutely nothing new. Be part of the solution instead of part of the chirpies on the sideline who have it all figured,but have no action and no suggestions for action.
Masterful, Robert. I would like to recruit your wonderful writing to Threesville, https://www.amazon.com/Morality-Capitalism-Dialogue-David-Kendall/dp/1503233243 . I believe you could bring it to life far more than I have so far.
I'll have a look, and let's talk.