Though I generally thought that Krugman's simplifying perspective and historical support were quite interesting and somewhat compelling, I struggled to accept wholeheartedly his position on trade deficits. Some of this is most likely my own lack of understanding (the economics of trade are very complicated, it appears), but I also thought that Krugman explained this phenomenon less well than the others.
Particularly striking to me was Krugman's favorable assessment of the idea that the budget deficit and the trade deficit are closely linked. Though he does not completely endorse the conception of these "twin deficits," he does conclude that the United States could, if it really wanted to, erase the trade deficit, but this would require a balanced federal budget. I was curious to understand how this hypothesis might have held up under the infamous Clinton surplus (beginning shortly after the publication of the 2nd edition of this book).
I pasted graphs below, but interestingly enough I did not see the correlation that Krugman among others predicted. Though there was a surplus from 1998 to 2001, over the same time period the trade deficit continued to grow both as a % of GDP and as absolute dollars - we do not see the reduction in the trade deficit that was supposed to mirror the budgetary surplus. Furthermore, the deepening of the deficit in 2009, though obviously a symptom of the financial crisis, tracks actually with a reduction in the trade deficit. This makes sense given the contraction of the US economy (decreased demand), but fails to support Krugman's hypothesis.
US Surpluses/Deficits (Inflation Adjusted): http://www.davemanuel.com/charts2/surpluses_and_deficits_1940-2011.html (not the most official source, but a pretty graph which matched all the others I found too)
US Trade Deficit as a % of GDP: http://static.seekingalpha.com/uploads/2009/3/6/saupload_trade_def_to_gdp.jpg
US Trade Balance in $:
http://seekingalpha.com/article/272498-can-the-u-s-become-a-net-exporter-again
Particularly striking to me was Krugman's favorable assessment of the idea that the budget deficit and the trade deficit are closely linked. Though he does not completely endorse the conception of these "twin deficits," he does conclude that the United States could, if it really wanted to, erase the trade deficit, but this would require a balanced federal budget. I was curious to understand how this hypothesis might have held up under the infamous Clinton surplus (beginning shortly after the publication of the 2nd edition of this book).
I pasted graphs below, but interestingly enough I did not see the correlation that Krugman among others predicted. Though there was a surplus from 1998 to 2001, over the same time period the trade deficit continued to grow both as a % of GDP and as absolute dollars - we do not see the reduction in the trade deficit that was supposed to mirror the budgetary surplus. Furthermore, the deepening of the deficit in 2009, though obviously a symptom of the financial crisis, tracks actually with a reduction in the trade deficit. This makes sense given the contraction of the US economy (decreased demand), but fails to support Krugman's hypothesis.
US Surpluses/Deficits (Inflation Adjusted): http://www.davemanuel.com/charts2/surpluses_and_deficits_1940-2011.html (not the most official source, but a pretty graph which matched all the others I found too)
US Trade Deficit as a % of GDP: http://static.seekingalpha.com/uploads/2009/3/6/saupload_trade_def_to_gdp.jpg
US Trade Balance in $:
http://seekingalpha.com/article/272498-can-the-u-s-become-a-net-exporter-again
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