Tuesday, January 04, 2005

Economics lessons cribbed from other blogs.

Steve Antler looks at the data on the exceptional productivity growth since 1995 and declares "there is no precedent" for it. Productivity is the root of all good economic things -- improvements in wages, profits and standards of living all come from continually being able to produce more value at less cost, so let's hope it keeps up!

That's the good news.

Now, do you want to know more about this "trade deficit" business, how it matters and what matters to it? Macroblog points to "A Hitchhiker's Guide to the U.S. Current Account Problem", from the Federal Reserve Bank of Cleveland. Neither good news nor bad news, just informational. Although becoming better informed is always good news.

Now the bad news...

Arnold Kling gives us Edmund Phelps explaining what may not have occurred to many about the connection between our Social Security/Medicare entitlement policies and the trade deficit/value of the dollar.

To wit (my simplification): In a "normal" world the Baby Boomers during their working years would have saved to meet their future retiree living and health care costs, and as they did the US as a whole would have saved on net and run a trade surplus, building up investment balances abroad. Then when the Boomers retired they would have drawn down those balances, and their consumption of their savings abroad would produce a trade deficit -- a balanced full cycle.

But Social Security and Medicare have given Boomers the illusion that they don't need to save, so they've saved less than they would (and should) have. And of course, the government hasn't saved either -- very much the contrary. So we as a nation are nearing the point where we should be just starting to turn from saving on net (trade surplus) to consuming on net (trade deficit) when we have in fact been under-saving and over-consuming (trade deficit) for the last 20 years. Not good.

The Boomers haven't yet realized the coming consequences of their, and the government's, under-saving. Phelps explains...
At the present time households are badly under-predicting their future tax liabilities -- or, if the U.S. government is going to cut entitlements -- over-predicting their future benefits. Either way, they are spending too much, so the current account cannot get out of deficit. Once households are better informed their spending and the dollar will both drop...
So everything will work out in the end. One just wonders how traumatic the process of households becoming "better informed" will be.
Once expectations are closer to reality -- once households expect a tax increase or a benefit haircut or both -- we will see significantly reduced consumption, thus lower imports, more output left for export, and a much weaker dollar. That is too bad. But the longer we wait to get back to reality the worse it will be.
OK, which of our politicians will do their civic duty to minimize our future problems by taking the lead in informing the public to "expect a tax increase or a benefit haircut or both", getting us all "back to reality". Any volunteers?