In a discussion on our trade balance frog blog states that mainstream economists won’t talk about the import side of the ledger. Now I’m a mainstream economist (I think I should put that on my business card 🙂 ) so I decided that I should take up the challenge.
So lets have a look at the tables. First I will discuss Frog Blog’s claims about the import series, and then I will discuss the way I see it:
Update: Anti-Dismal captures the essence of confusion surround the issue of exports and imports here, fundamentally reminding us all that it is consumption that is good – not employment per see (the end is the target, not the assumed means!). Very good 🙂
Don’t expect to hear any mainstream economists or politicians asking how much of that stuff could we have made here, giving jobs to New Zealand workers
First off, we have an unemployment rate of 3.6% – there are plenty of jobs out there. Even if protectionism did increase job numbers (which is most likely doesn’t) this isn’t the issue.
Now back onto the “making stuff here” issue. If it was cheaper to make the stuff here (including the opportunity cost) than it was to import it, we would “make it here”. If we were to “make it here” there would be an opportunity cost – fundamentally we wouldn’t be able to use our resources to make something else. This implies that although imports would be lower if we made what we imported here, exports could well be lower as well – as we would be making less of the things we are relatively good at making.
This idea stems from comparative advantage. Fundamentally, as long as we focus on making the things that we as a country are best at making (relative to the rest of the world) then we will be able to afford to buy a greater quantity of stuff compared to the situation where we make things which we are relatively worse at creating.
This is why economists focus on exports instead of imports. Exports provide our nations external income, while imports are something that the nation chooses to purchase. If we increase our export incomes by being more efficient, we can buy more imports, which will make people happier.
Ultimately, trying to move imports in house does not ensure that our trade position would improve – it may well worsen. Furthermore, as we would be able to create less “stuff” without trade, society would likely be worse off.
If oil can fall nearly US$20 a barrel and still be skyrocketingly high that should be the signal we need to do something about our economy’s reliance on imported goods, especially oil
This argument is again, in the wrong direction. If we were running a consumption trade deficit then the issue would be is it affordable for the nations households to be running up this debt, given time preference, assumed economic growth etc.
Now, if oil prices collapse and we are running a consumption trade deficit (and we assume that there “is a problem”) then I don’t think the problem is our “reliance on imports” – it may be the fact that the current generation is highly discounting future generations, or has an unrealistic expectation that future incomes will increase a lot. The decision to buy another car or an iPod is not akin to “reliance” or “dependence” in the sense that Frog Blog is painting it.
Saying that we should create these imported goods here again ignores the fact that in order to do this we have to stop producing something else here – so we end up with lower export incomes, households missing out on a good that would have otherwise been produced here, or both.
My view on imports
Frog Blog appears to have stuck to a very consumption based view of imports – I would just like to note that there has been a large increase in plant and machinery imports over the last year, this is INVESTMENT.
If we are running a trade deficit because we are investing in the country, then we have to take into account that in the future there will be an increase in production because of it – surely no-one has a problem with borrowing to fund investment, which is what this is.
According to Table 14, the value of machinery and plant purchases were up 24% on a year earlier in June, this was on top of a 17% increase in the year earlier. Although part of this increase is due to the falling exchange rate – it does imply that capital investment has continued to growth strongly.
Now this isn’t quite as sparkling as it sounds – as the growth all stemmed from April investment in the Tui Oil field of $447m. This almost accounts for the June deficit itself (which was $679m). As a result, if we are going to discount that specific investment, we should be willing to admit that the deficit was smaller than it appears.
In seasaonally adjusted terms Frog Blog points out that the deficit is worse – it is $1.9bn over the quarter. However, table 14 tells us that we were importing $2.5bn worth of capital goods alone. As long as the capital goods are expected to create sufficient value I really don’t see an issue here.
Should we be concerned about our burgeoning balance of payments deficit (which includes more stuff than just the trade numbers), yes to a degree. However, suggesting that we “control our imports” (which is effectively like saying that people should be allowed to buy less) is not the right method for doing this.
Furthermore, when we look at our trade balance we have to realise that part of it is consumption and part of it is investment – and as a result the way we view our trade balance should depend on what is happening to these individual components.
Economists are right when they say that the best thing that government can do to improve the trade deficit is work to open borders and increase efficiency, because imports are determined by peoples choices given their expectations and preferences. Any push to constrain peoples choices in this sense will reduce social welfare – which is surely the goal of any government policy!