The visible hand in economics

The frogs challenge: Discuss imports

Posted on: July 29, 2008

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 :)

Claim One:

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.

Claim 2:

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.

Conclusion

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!

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35 Responses to "The frogs challenge: Discuss imports"

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“Any push to constrain peoples choices in this sense will reduce social welfare”- Don’t you mean to say (based on rest of the article) that not constraining choice ,of imports, reduces social welfare ?

“Don’t you mean to say (based on rest of the article) that not constraining choice ,of imports, reduces social welfare ?”

No, as I was disagreeing with the idea of fiddling with imports in order to “improve our trade balance”.

What did I say that made you think I would want to artificially constraint how much we import?

Excellent post. Treasury recently put out a paper that strongly supports your argument: The Contribution of Foreign Borrowing to the New Zealand Economy. It notes, among other things, that per capita wealth (in the net capital stock sense) has been increasing despite running current account deficits.

Political parties would embarrass themselves less if they never mentioned trade deficits again.

Imports are the wonderful benefits that we get in exchange for pernicious exports. With exports we take real valuable things and send them away for little green pieces of paper that are basically useless except inasmuch as they let us buy wonderful imported things.

For how many centuries must mainstream economists battle mercantilism before the bloody idea is finally dead?

“For how many centuries must mainstream economists battle mercantilism before the bloody idea is finally dead?”

As long as people are suspicious of the “gains from trade” we will always have to put up with this sort of stuff :P

If there was some way to convince people that trade is not a zero sum game, then we probably wouldn’t have this problem.

Actually, even if we can do this there still might be a problem. One way of viewing international trade over time is like a prisoner’s dilemma – this type of phenomenon is enough to convince people that we should have protectionist policies, even if everyone would be better off if all countries removed protection. Damn it.

But it’s a prisoner’s dilemma where playing off-diagonal makes you worse off. Dominant strategy is to open up regardless of what everybody else is doing except in highly unlikely scenarios that turn up in textbooks but can’t be expected to hold in real life.

“But it’s a prisoner’s dilemma where playing off-diagonal makes you worse off”

Well it wouldn’t be a prisoner’s dilemma then I guess :P

Now I agree with you completely for a small open economic. But, for a large economy it’s a maybe.

Lets not forget that a large economy can influence the world interest rate – thereby implying that they can influence credit conditions in their own favour. In the case where we have multiple large countries, a prisoners dilemma can exist, where countries can benefit from deviating from a free trade style agreement.

That’s my “except in highly unlikely scenarios” caveat (and terms of trade argument). Sure we can identify them on the blackboard, but every case of deviation from free trade will be sold on the basis of those special cases regardless of whether they really obtain. If we get what, 20, 30, 90 deviations justified on the basis of a special case that really applies only in the case of 1 or 2 of them, isn’t it better just to reckon that the losses from allowing deviations from free trade are higher than the losses from forbidding them? See Levy’s work on robustness…

Levy, David. 2002. “Robust institutions”. Review of Austrian Economics. http://ideas.repec.org/a/kap/revaec/v15y2002i2-3p131-42.html

The Levy paper:

Levy, David. 2002. “Robust institutions.” Review of Austrian Economics. 15:2-3, 131-142.

“If we get what, 20, 30, 90 deviations justified on the basis of a special case that really applies only in the case of 1 or 2 of them, isn’t it better just to reckon that the losses from allowing deviations from free trade are higher than the losses from forbidding them?”

Yes. Ultimately, the large economy case will only apply to really large economies – which is why the argument that protectionism will be magically useful in NZ is ridiculous. When people apply it to NZ, they are taking a special case and misapplying it – in this sense I agree with you.

However, I am nervous about just ignoring the case, and thereby not describing how it doesn’t hold – as by doing so people think that they have an additional piece of information, and will just ignore the true things we have said.

Trust me, the buy NZ made campaign annoyed me as much as it annoyed you – just ask my partner :)

Personally, I feel that the sort of trade policy the Greens are pointing at indicates a “we know best” frame of mind – this upsets me, as I believe that no-one knows what satisfies the individual better than the individual. Hopefully, I have made that case somewhere in this convoluted post ;)

I was confusing social welfare with ” social welfare payments” :-) My mistake.

Being a Fine Arts graduate not an economist “the buy NZ made campaign annoyed me as much as it annoyed you “- annoyed me be cause of it’s xenophobia.

“annoyed me be cause of it’s xenophobia”

The xenophobia is implicit in the campaign – and I agree it was very irritating. The whole “biting your nose to spite your face” nature of the campaign, which will reduce New Zealander’s incomes also really irritated me :)

But if you are xenophobic and gain utility from the fact that you are buying an NZ made good then this could offset the loss in income;)

However, given the green party’s current representation in parliament I think it’s safe to assume that the majority of the population don’t have the same value on something being NZ made and thus it’s bad policy….

“But if you are xenophobic and gain utility from the fact that you are buying an NZ made good then this could offset the loss in income ;)”

Very true. But if the “xenophobic” behaviour is based on mis-information we can’t call it optimal. I wonder if people would support the policy if the Greens told people that if they brought NZ made their real incomes would fall :)

Matt: so how does this apply (if at all) to KIwibank and it’s equally xenophobic advertising campaign ? Is there really any benefit in us owning our own banks ?

“Matt: so how does this apply (if at all) to KIwibank and it’s equally xenophobic advertising campaign ? Is there really any benefit in us owning our own banks ?”

Benefits to “Kiwibank” aye. Well the justification for Kiwibank was simply that there was tacit collusion between the other banks and significant barriers to entry, so the government felt that the cheapest solution to this would be to make its own Bank.

The best way to think about the whole issue is simply to remove the phrases bank and finance sector from the discussion and merely talk about firms and an industry. In this sense, government entry COULD make sense if competition is being restricted in some sense. Furthermore, if you believe there is some “social benefit” (e.g. security in the case of a bank run, a bank that loans funds based on the discount factor associated with society rather than the associated firms discount factor), however these claims are tenuous at best

Now all that crap in the ads about our money being shipped offshore does annoy me. We sold the asset for some capital value, and now we are having to pay out some flow of dividends based on that. It isn’t the Australian Banks fault if we wasted the capital inflow associated with their sale – even if we did waste it!

The ad’s work because they make people feel like they are being screwed over and that the government can ride in there and make everything better – which is a fundamental exaggeration.

However, if someone wants to make the competition argument for Kiwibank then thats fine – you can make the same argument for opening up ACC to competition while it remains in the public purse ;)

“I wonder if people would support the policy if the Greens told people that if they brought NZ made their real incomes would fall :)”

The Greens’ defining delusion is that costly change makes you richer e.g. today:

We could easily support all of our farmers and grow all our own food. We could quickly and easily make the shift to a form of food production that used far less oil. We could probably even subtlety change our diet to reflect the healthy, fresh food we grow locally rather than import from overseas. All without any loss of lifestyle.

Which sounds fantastic, why can’t I have a pony too? :)

“The Greens’ defining delusion is that costly change makes you richer e.g. today:”

Where is this?

Sorry, that third paragraph was supposed to be a quote from here

I don’t see the point of what they are writing. If we currently produce enough food to be self-sufficient then rising food prices is good for us – as the food we trade is now worth more relative to other things – and so we can import and consume more.

What exactly is their policy recommendation? They make it sound like the government needs to do something, but then don’t really say anything except that we could be healthier and “more fuel efficient”.

I think this policy relies on altruistic farmers who will sell food to New Zealanders at prices lower then what they could recieve by selling in the world market. That might leave consumers “without any loss in lifestyle”. The farmers however would have less money.

I saw an interesting piece on the news about a while ago about a small town in the US (I think) that was trying to implement a policy like what the greens advocate. I think everything had to come form within 30 miles or something like that. It was amusing because one of the the local famrers (can’t remember what his crop was) kept selling all his produce elsewhere because he could get way more money for it. That really pissed all the locals off!

“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.”

But people spend most of their lives at work so how they earn their living and all the elements leading to job satisfaction are important also.
The other thing is that you can’t assume happiness flows from consumerism or you might call someone like Imelda Marcos the happiest woman in the world.
Sure the comparative advantage thing stands as far as the basic items go but then it gets silly.

Claim 2 Frog assumes demand increasing while supply declines (Peak Oil) and is probably referring to more rail over trucking. Walkable cities, better buildings etc.

What I don’t understand is how the system corrects a trade imbalance the dollar falls?
What part does a globalised real estate market play?

“But people spend most of their lives at work so how they earn their living and all the elements leading to job satisfaction are important also.”

Yes, but they are not a substitute for imports – as Paul discusses in more detail on his blog.

http://antidismal.blogspot.com/2008/07/imports-good-exports-bad.html

“The other thing is that you can’t assume happiness flows from consumerism or you might call someone like Imelda Marcos the happiest woman in the world.”

You are confusing one persons benefit with anothers – we can’t compare the happiness people get from consumption, but we can say that an individual benefits from consuming more.

Mixing up the two is a cardinal sin in economics, but I’ll figure you this time ;)

“Claim 2 Frog assumes demand increasing while supply declines (Peak Oil) and is probably referring to more rail over trucking. Walkable cities, better buildings etc.”

Sure, but if that is the case they should face peak oil directly, instead of trying to weasel it into every discussion. Just because something may have a good unintended consequence does not mean its a good policy!

“What I don’t understand is how the system corrects a trade imbalance the dollar falls?”

The assumption is that, overtime, the value of exports will rise more than the value of imports from a fall in the dollar – and as a result the trade balance will improve. This appears to hold empirically, so people are pretty happy with it.

“What part does a globalised real estate market play?”

It depends. It could influence consumption by equalising rates of return on housing among different countries. If we want to talk about the current account, It could influence the capital account by either allowing purchases here, or leading to purchases overseas which create a dividend (rent).

Why do you ask?

It was very nice to Visit your Great Blog !
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The reason I ask about the globalised real estate market is that I’m wondering what role it plays as a tool by government, other than the more overt “needed skills”.
What effect does net migration have on balance of payments?
I notice some people on blogs suggesting that the government should “free up” migration to boost the property market (versus letting houses prices fall to an affordable level).

“What effect does net migration have on balance of payments?”

Well I think net migration would probably increase the current account deficit, as they consume imports, but it depends on whether they are working or not as to how it would influence the current account deficit as a proportion of GDP. Furthermore, if they go and work in export sectors it might even improve both :P

Ultimately, we only let people in who have a sufficient amount of capital (physical or human capital) and as a result, it would be a net improvement on our nations asset position – which is what actually matters.

“I notice some people on blogs suggesting that the government should “free up” migration to boost the property market (versus letting houses prices fall to an affordable level)”

In the long-term it won’t have as much impact on the value of a house – as it will just lead to more construction. This presumes that we have sufficient land to build on – given our small population I’m sure it could be sorted out :)

I don’t see why we have to try and leave house prices over-inflated. People have been saying the values didn’t match fundamentals for a long time – why should we reward people for ignoring this? Furthermore, why should non-house owners help pay for someones house>

Thanks! Really interesting. Big ups!

Thanks! Really funny. Big ups!

Oh, Thanks! Really interesting. Greets.

[…] have discussed this before (see claim one when we took up the frogs challenge).  It is unclear whether forced “self-sufficiency” will improve or worsen our current […]

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