


Jan 21 2008 at 3:25pm

This is probably one of the best EconTalk podcasts I’ve heard. I’m not quite done listening yet, but you’ve already covered so many issues that I find myself straining against when I try to argue the benefits of free trade.
With regard to trading with foreign countries, I’ve found myself having to explain how currency exchange works. Many people seem to believe that when foreigners receive American currency in exchange for their products, all they have to do is go to a bank where is it magically transformed into their home currency. People just don’t seem to understand that these are trades, not transfers. The American currency still needs to be spent or invested by someone. It doesn’t just cease to exist, being replaced by foreign notes.
I don’t know why that’s such a difficult concept to explain but I would appreciate some insight into how to convey it more efficiently.

Tejvan Pettinger
Jan 22 2008 at 10:47am

It is a subject which generates a lot of emotion and diverse opinions. It is good to hear it explained in a clear way. Thanks


Brad Hutchings
Jan 22 2008 at 11:06am

This was definitely among the 50 best EconTalk podcasts ever! Actually, it was among the best 3. One question I’d love to see addressed is who the losers of protectionist policies are. Or who the projected losers of past protectionist policies which weren’t implemented would have been. Take computers… If they were still produced in California and Texas, would they still cost $2K – $3K in 1990 dollars for an entry level system? Take cars… Without Japanese and German competition, would we still be driving Pintos? Without WalMart, what would it cost to get nice Christmas gifts for all the kids in our lives?

Richard Sprague
Jan 22 2008 at 11:14pm

Yes, another great podcast.

A couple of questions:
1. You imply that a the current account deficit over the past 30 years is a good thing. What was the situation before that? Did we have a surplus, and was that bad/good?

2. What about the extreme cases: would it ever be possible for the trade deficit to be “too large”? Stock markets and the media seem concerned when the deficit hits new records; are they completely misguided?

Jan 23 2008 at 3:27am

I have to write an essay on CAD’s (good/bad) shortly, couldn’t have been timed any better. Awesome podcast, 2 thumbs up to EconTalk and Don Boudreaux on such a touchy subject.
William Poole (St Louis Reserve Bank and Milton Friedman all support this view that it is the surplus which leads the deficit ect.) I’m feeling good so i’ll try my best at some Q’s;

Brad Hutchings – depends. Surpluses are more political then economic, usually to maintain domestic income distributions and employment, just look at agriculture, they’re so politically powerful.
Tariffs, hurt alot of people, Is debatable as to their effectiveness. Some countries have worked, some haven’t. Depends on alot more then just the tariff per se – domestic policies and how they work with the tariffs.
But essentially, without tariffs, product prices reduce to the cheapest producer, hence why so much manufacturing is going east, nations producing only primary product don’t fare as well as manufacturing nations and so on.

Richard Sprague – 1) before 1970’s they weren’t as big. 1970’s had oil shock generating massive surpluses in the gulf, then wanting to put it places. Now when there are massive gulf, asian, european(german??) ect surpluses floating about, they want stable investments. Uncle Sam is unlikely to default as opposed to Russians or South Americans and the S& L crisis, so Americas where they go.
Combine that with opening of markets, flexible exchange rates which follow higher interest rates and stable investment oppurtunities, and you have the source of capital account surpluses. Before flexible exchange rates, CAD’s were bad i think…, as they had to be financed through reserves, currency devaluations.
2) Newspapers have to sell don’t they… 🙂 Depends on what you believe. – does the Capital account lead the current account, or does the current account lead the capital. New thinking says the former.
When most surpluses are from foreign governments who put their money in US cash or bonds, i can’t remember the stats here, but mostly aren’t earning much, rather the safety.
If this surplus cash is going into productive private investments, then basically they want a share of our growth, so logic says they want projects that will survive and pay them interest. At the same time, these projects generate more wealth within the US and if by chance they fail, don’t private bankruptcies happen all the time?

Ultimately, US and Australia have run CAD’s for a LONG time yet their growth has been/is outstanding, whereas economic theory always said the opposite would occur. The difference being, Australia has maintained balanced or surplus budgets, the US is in deficit – this can be too large i think, though some economists believe otherwise and point to the US budget surplus of late 90’s and corresponding crash in 2000 as its effect – (change of wealth from private to public).

On a side note i know of one economist who has linked the CAD to the current sub-prime issue so there’s a possible downside.

Hope that helps, feel free to correct me

Mark Selden
Jan 23 2008 at 1:26pm

Great podcast. I have a problem with this notion of the capital account offsetting the trade deficit. It doesn’t sound sustainable to me. Can it go on forever? Isn’t there a limited supply of US assets?

Interesting question is: What happens when all assets are foreign owned? I think our dollar will fall until it is low enough that Americans cannot afford foreign goods, eliminating the trade deficit.

Scott Anderson
Jan 23 2008 at 4:31pm

I don’t have a good comment for Mike Seldon’s question/comment other than that potentially US originated FDI investments may have a higher long term yield than foreign direct investments in T-Bonds such that the long term flow of capital is positive to the US. Below is some other commentatry that might be useful.

Once again, I thouroughly enjoy this portal and particularily EconTalk. This is an interesting topic because the very definition of globalization seems to presume that we are not fully globalized and that a discussion of geographic economics centers on national borders and exchange across those borders. Maybe this happens because currencies and trade stats help us to delineate economies but as alluded to in the broadcast, these currencies represent something else (an exchange of value)and trade stats do a poor job of defining what value was gained or lossed and to whom. Anyway a currency like the Euro or the dollar are not particular to a country.

One comment: Maybe the broader issue really isn’t globalization but rather how geography affects economics. I bring this up because it certainly is clear that local, state, national and even international governing body policy affect the economic equation in some ways. Companies locate geographically (locally, regionally, nationally)to optimize shareholder value (some 50% of international trade happens within company networks). Clusters of companies in an industry seem to locate and thrive in particular geographies. The result of these decisions is an aggregate flow of trade but like the market in general, we can describe what has happened but have a difficult time predicting and directing what should happen. Globalization is a kind of amorphous topic and difficult to derive meaningful information that is useful for making value optimizing decisions.

An example of a potentially more useful cut at geographical economics is the concept of industry clustering. Some set of advantages in a particular geography creates incentives for entire industry ecosystems to locate near one another in conflict with the notion that technology, transportation and communication would diminish the need for geographical concentration. Even China’s rise as a manufacturing power may be explained this way.

Michael Porter has written about this concept in books and articles. Amazon.com describes one of his articles “Clusters and the New Economics of Competition”. By anlyzing industries in clusters some geographical explanation allows us to begin to describe what happened, predict what likely will happen and prescribe what may improve what will happen.

Jan 23 2008 at 9:56pm


Page 102 [110 of 124 if using Adobe browser] of this report shows the balance sheet of American households and non-profits in the billions of dollars. Household and non-profits’ assets are equal to $72.7T. Liabilities are $14.2T. This is a networth of $58.6T and it keeps growing. The combined federal, states, and local governments also have a balance sheet on page 111 [119 of 124 in browser]. Assuming that the goverments cannot really recoup the assets they list — who wants to purchase buildings named for the porkers who seized the tax-payer money — the government (us; a sobering fact) has $8.5T in liabilities. Substracting for the government liabilities, that’s still $50T in net wealth.

Now, just like a home that appreciates in value as one pays a mortgage or a business that expands and increases its net profits while borrowing in the capital markets (through the issuing of debt instruments), if equity increases outpace debt accumulation, wealth is there to be realized.

I could not determine whether or not these numbers are adjusted for inflation but I can imagine that even if they were not, the net wealth increases shown year over year in these tables would still show REAL increases. Check it and see. And, if you go out of your way to bounce these numbers against the deflator, you may also wish to check it as a real per capita statistic, too.

Jan 24 2008 at 4:30am

I thought parts of this podcast were really bad. Although I love econtalk, it quite often picks dumb concerns and answers them while leaving intelligent concerns unanswered. Are you worried we will be confused by two potentially correct opposing arguments?

I think this is especially evident with the discussion of trade deficit as borrowing. It is true that it doesn’t matter whether GM owners sell stocks or bonds to raise capital, but that is because both are borrowing or in the US case drawing down on savings. When you get a loan, you are getting money now and paying money later. When you have an asset, you have a piece of paper that says you get rights to a stream of dividends. When you sell it, you get money now in exchange for payments later (giving up your dividend stream).

So in a real sense, the trade deficit is borrowing. It is giving up consumption later for consumption now. Now we happen to have savings, so borrowing means we are drawing down are savings, but that’s more of a semantic argument than a dismissal of the underlying economics.

Whether the trade deficit is a portend of something bad or not, then becomes a very interesting question? Some answers that say no it’s not bad. We are drawing down savings now, because the world is in a global saving glut. Or the U.S. is an especially good place to invest, so we get a premium from places like China (If you were a rich person in China, how much of your wealth would you keep there). Some more skeptical people think we are managing our finances poorly, either because of bad incentives or an irrational view of our life time earning potential. We have a negative private savings rate and a negative government savings rate, which some people think is pretty strange for a country that has a huge amount of people about to enter retirement.

There is lots to discuss and very smart people that study economics are on both sides of this debate, but econtalk so often just ignores the intelligent debate and discusses only the weakest arguments.

Mark Selden
Jan 24 2008 at 12:41pm

Lowcountryjoe, that’s very interesting that our balance sheet continues to rise in spite of the trade deficit. I still think we are in an untenable situation. Our economic growth is far less than our $750 billion trade deficit, so how is our balance sheet increasing?

The increase in our balance sheet must be a result of the sale of US assets to foreign investors. As Charlie points out, we are taking money now in exchange for payments later. I see that as a situation where one day, as US-owned assets become scarce, there will be less foreign money coming in. The reduced money coming in will force a reduced money going out. Our dollar will fall to a level that brings our spending in line.

I’m new to this (I’m sure you can tell), but I intuitively share Charlie’s well-stated opinion that there is another side to the trade deficit debate.

Russ Roberts
Jan 24 2008 at 1:44pm

Mark Selden,

The trade deficit isn’t debt…

So our net worth can keep growing.

There is another side. Google around and you’ll find it immediately. Almost all of the worriers are with think tanks with another agenda beyond the trade deficit–protecting manufacturing jobs for example. Very few academic economists worry about the trade deficit per se.

There is more to say on both the optimistic and pessimistic side that we couldn’t get to.

I think Don and I will revisit this topic in more detail.

Jan 24 2008 at 5:55pm

Mark & Charlie and anyone else for that matter:

May I suggest an informative post on a blog that may help your understanding on this subject? If you are interested, please look here and follow the additional links if you need.

Remember, debt — if that is the way you choose to look at this — is a good thing if it is used as leverage in order to make gains in equity. In other words, if one’s borrowed money is used to finance activities that bring returns to the borrower that are greater than the payments being made to the lender.

And, when you think about this, it makes perfect sense: lenders typically will not lend their money to questionable or dubious endeavors. But, because lenders are more conservative with their money, they seek a more consistent return while the borrower assumes the variability of the risks/rewards. Since it takes these two parties to tango, and they both benefit when there’s success, there’s a natural tendency for both parties to have do their homework going into the arrangement and for the borrower to strive for success into the future.

It is the right atmosphere for incentives to do their trick and error on the side of wealth creation. But, the borrower, in these instances is the primary beneficiary of the wealth – the equity – while the lender was satisfied in forgoing the equity for more security and stable repayments.

Jan 24 2008 at 10:25pm

There seems to be some confusion for one that a trade deficit must necessarily be either good or bad. Another that since some people worry about the trade deficit for some reasons that everybody that worries about the trade deficit must therefore have dumb reasons.

Here is a podcast by Brad Delong that offers a more holistic view at a much higher level (http://web.mac.com/jbdelong/Brad_DeLongs_iWeb/Coffee_and_Tea_Audio_Podcasts/Entries/2007/9/12_Global_Imbalances.html).

Also, I’m not altogether uncertain Greenspan doesn’t worry about global imbalances as he concludes, “If, however, the pernicious drift toward fiscal instability in the United States and elsewhere is not arrested and is compounded by a protectionist reversal of globalization, the adjustment process could be quite painful for the world economy.” (http://www.federalreserve.gov/boarddocs/speeches/2005/200512022/default.htm)

Russ seems to live in a long-run world where currency crises and painful market corrections are just short run blips, but these can have lasting and memorable destabilizing effects. Glossing over all of that makes econtalk very accessible to a wide audience, but it leaves out some of the most interesting parts of economics.

Mark Selden
Jan 25 2008 at 11:38am


I am glad to hear you might revisit the issue in more detail. Perhaps you could speak directly to positions that you see others taking that you feel are misguided. Please no discussion of the bad consequences of government intervention; you could spend a lifetime on that.

Just help us understand, when looking at the future of the US economy, which factors are relevant and how they are related.

As I type this, I’m realizing this post may be out of line; am I just asking for a podcast of Econ-101? Or worse yet “Survey of Economics”? If so, feel free to disregard this post!

Anyway, thanks for your work producing these enlightening podcasts, and thanks also for participating in the forums.

Jan 26 2008 at 9:43am

Another fine podcast, it was an argument in favor of globalization. There were points expressed to counter suggested dissenting opinion and these points were made very well, however the specifics of the architecture are not as important as the philosophy of social advancements through change. Is there a cure for expanded resources and wealth through globalization? Yes. Is there a cure for poverty in third world countries? Yes, globalization. Is there a cure for human nature?

I will use Boudreaux’s example of love. The couple sharing love found it in whichever way, whether it be from straying from another relationship or whatever. I accept that, lets talk about that commitment of the couple which they have for each other, there is a mutual obligation of commitment. Lets assume they are married, if the husband can receive a better home cooked meal from the neighbors wife (if it is healthier, more delicious, not burnt,etc.) than the balance of time gained from his own wife can be used to better care for her needs or the needs of the rest of their family. If the wife can receive massages from the neighbors husband, which may be more therapeutic than those given by her own husband, she will be more productive from the care, and this will net some time for the husband to attend to washing the car or working overtime. Unfortunately, the mutual commitment obligation of their human nature disallows this to happen, they will become jealous of each other, fight, and cause the efficiencies of the trade between neighbors to come crashing down. It is also the initial resistance given by opposition, for example when you ask your wife if you can go get a prostitute to fulfill certain needs she will undoubtedly say no without examining the benefits of the affair.

I don’t mean to get so extreme, but we do have a marriage situation here. Government and its citizens, employer and employees, they all share a marriage which contains this moral obligation. So how do you change it? How does the husband convince the wife to have a more open marriage? How does the wife convince the husband it is a net positive for another man to put his hands on her? How would you feel in these situations, I’m sure the steel worker feels that way.

Lets assume the committed find a way to open themselves up to these trades, then the argument becomes, globalization creates a less committed marriage, which results in a weak connection between the spouses. That is a valid fear, I’m sure steelworkers around the country see the marriage between citizen and government disintegrate as more jobs are lost, elevating the level of Katrinafication through a nations workforce. So how do you curtail this fear, because we know the benefits may outweigh the loss of jobs but the confidence level which had been strong for so many years, through the golden age of America’s prosperity, a marriage that had been strong for so long and appears may become weak through globalization.

Again, I am for the philosophy of globalization, after all it was trade that found this new world when Columbus was seeking a trade route. I want to start hearing answers regarding the human element, anyone have any?

Jan 26 2008 at 10:25am


your comment is a classical example of what Hayek famously said: the way we act in our families is not the way we should act in a larger society.

Jan 26 2008 at 7:48pm

Some thoughts on the discussion of trade deficits and whether they should be regarded as borrowing:
1. By definition, a trade deficit is balanced by a current account surplus: For each good or service purchased abroad, which is not paid for in other goods and services immediately [i.e., there is a trade deficit], the foreign exporter receives a financial claim (in the simplest case, in the form of dollar bills) [i.e. there is a current account surplus]
2. BUT: These financial claims (read: dollar bills) are accepted in return for the foreign goods and services ONLY because the exporter anticipates EX ANTE to be able to exchange (IN A SECOND STEP) the claims into US domestic goods and services or other assets of a value to him or her higher than the good provided. If this were not the case, there would not be any overall profit for the exporter. Obviously, if this could be anticipated, there would not have been a trade in the first place.
3. The foreign exporter may certainly be proven wrong EX POST. There are many possible developments e.g., due to high dollar inflation (with a worsening of the dollar exchange rate) or increased trading barriers which prohibit the conversion / redemption of the financial claim into goods or assets as anticipated. This may be of particular concern for fiat money (= pure paper money that does not have to be redeemed in any kind of asset), which derives its value purely from the trust of its users and all its derivatives (e.g., government bonds). In these cases, the exporter will not receive the return value for the goods / services provided resulting in an ex post loss for the exporter and a corresponding windfall profit for the American.
4. However, the second-order consequence of such negative ex post surprise for the foreign exporter should be considered because it could be devastating in the long run: Next time, the exporter will trust much less in American claims offered in return for his or her services and increases the dollar price to be provided for the good or service accordingly. In this sense, ex post is the ex ante for next time.

To me, this perspective leads to 3 conclusions:
a. A trade deficit is not necessarily “borrowing” in every sense of the word, since the value does not have to be given back by threat of bankruptcy. There may even be some effects relieving the net importers, such as a devaluation of the dollar, effectively reducing the value returned to the foreign exporter / financier.
b. These effects usually come at a price: Dearer funding next time. This may in effect be close to bankruptcy in many cases.
c. So in many respects we should treat a trade deficit AS IF it were some kind of borrowing. It could be dangerous to assume that the foreign exporter will be satisfied by holding on to dollars (or other claims) forever.

Do not get me wrong: The net transfer of claims (= capital import) is probably very beneficial for Americans and foreigners alike, since both may benefit from increased international division of labor and better allocation of resources. My suggestion was simply not to ignore the fact that the foreign exporter is justified to expect to receive adequate compensation for the exports shipped to the US in the first place and will adjust the terms if this expectation is not met.

In my view the focus of the discussion about the trade deficit should really be elsewhere: What kind of activity the current account surplus really finances. The core of the question is whether the capital imports indicated by the trade deficit are used to PRODUCE (i.e., create value), or CONSUME (i.e., deplete value). If any entity (households, county, company, country,…) consistently consumes more than it produces, it will get poorer. This holds true even if it manages to issue some financial claims to finance its consumption (whether it calls it borrowing or not and whether it shows up in some odd accounts) until the external providers of goods lose their trust in the productive capacity of the entity.

To me, most commentators in the media are taking the trade deficit as a proxy for excess consumption. But this need not be the case and leads to a somewhat different discussion.

Jan 31 2008 at 9:41pm

I thoroughly enjoyed the discussion on trade deficits and wealth creation in the Globalization podcast. I have a couple comments about how ‘free’ trade really is.

The podcast addressed basic free trade arguments, but I dont think many folks argue against basic economic trade theory–the idea of comparative advantage. Those who do should be ignored. But the intelligent ones who do argue against it for whatever reason, however, have a point, and it is to them that I think you are addressing a lot of your incredulousness–why dont they understand that free trade makes people better off, etc. I think you are not seeing their point (and they may be a little “impassioned” too, to put it lightly)

I sum up their main argument as “The US is big and bad and exploting other countries for corporate gain.” While this is not accurate, it is true that we have many direct and indirect subsidies for our exports. We also have import tariffs and quotas on other products which restrict trade and protect us. This creates unfair trade and resentment. Theoretical free trade exists some places (hong kong as you mentioned), but in places where it does not, those who critique it probably have a valid point.
Furthermore, I think they are wary (as am I because of rent-seeking) of anyone that lobbies the government on behalf of freer trade for their specific product. Usually this means the government helps them gain an unfair advantage–unfair trade once again. So, if the government truly talked about free trade and stood behind it in every aspect, that would be a lot different. But their history has been the opposite, and until they tear down sugar subsidies, domestic price supports, etc., I think critics have a very valid point.
Finally, you mention that trade within the US is very free and a reason we are so prosperous–I agree (although there are still plenty of laws on alcohol importation into different states–my uncle owns a bar in Cincinnati and cannot import Fat Tire beer because of arcane OH laws). Businesses that compete and develop together in the same country and have a shared economic experience (tax/subsidy structure, etc.) dont argue (much) in favor of restricting trade. However, when we expand the discussion to consider trading with different countries, especially where one is in much different shape, trade may be a little more painful for them/unfair to them.
Even within this country, there are examples of antagonism towards products made in another state. Midwestern farmers were (are?) angry that the US Bureau of Reclamation subsidizes water projects out here in CA to grow crops that compete with crops grown in the midwest without subsidized irrigation–these unfair advantages/subsidies create resentment and I completely respect the resentment. How can you not?
This is not an argument against free trade, but it is an argument for listening to those who claim there are problems when we want to open up trade (by removing barriers) because unseen internal subsidies are still present. Therefore, I think it is very difficult to convince other countries that we are playing fairly, especially when our government routinely subsidizes different groups and has shown no ability to refrain from doling out corporate welfare.

As a side note, regarding Don Boudreaux’s comment on the wealth of this country–I dont think everyone can bathe daily as you said (besides the ones who choose to live away from piped water). A minor point, but there are still some very poor in the US.

Feb 14 2008 at 5:23pm

Nice podcast!

I have some questions relating this podcast:

Current account deficit = capital account surplus, everytime?

China exports goods to US and receives dollars. Those dollars are reinvested back to US through
purchasing American assets and cause capital account surplus in US. But, if China decides to not buy US assets, how can be now current account and capital account balanced?

US buys car from China (only this transaction), so US has curent account deficit. US has to pay for this Chinese car – capital outflow, so American capital account deficit? (China is not going to buy any US assets, so no dollars come back to US, no capital inflows, what happens now?)


joe blowe
Feb 18 2008 at 3:59pm

Don touches on a point during the talk that is fundamental to the question:
If I was Mr.US of A and owned various properties, stock in a number of companies etc, and some cash.
If I then use the cash without producing anything to trade, I will be depleting my wealth for consumption. The people that accepted these dollars do so because I, Mr. US of A have a very stable personality and they can trust that they can use these dollars and buy my assets here and that these assets are worth what I say they are worth.
These dollars can only buy what I produce or buy my assets (stock options or ownership of my companies). If they are put in the proverbial mattress, then the buyer loses the gradual depreciation on the money.
The imbalance of payments does ultimately means ‘Living Beyong our Means’. Pay now or pay later.

Feb 26 2008 at 4:19am

I work and live in Asia in the field of trade, and I can definitely tell you one way the money flows back to the USA. Often a factory boss will have a lot of his family or children in the USA, going to school. They probably buy a house, etc.

So, a moderately successful factory owner might conceivably end up sending back a million dollars to the USA for two kids going through school, plus a house or two.

Often times the owner doesn’t even want the kids to continue in the family business.

Comments are closed.


Podcast Episode Highlights
0:36Intro. New book is in Greenwood Press Series, book price high, not Don's choice. Authors typically get only a fraction of a book's price because of marketing, etc. Writing goal was to be concise, clear, accessible. Quip: "I would have written you a short letter but I didn't have the time"--editing takes effort. Book is overview of globalization debate.
4:04Fundamentals of trade, trade makes us wealthy. Tendency is to see trade in goods as moving stuff around, better to have stuff you like and can't make. But that ignores the role of division of labor, specialization, increasing the size of the pie. Adam Smith, and David Ricardo. Smith's full title, asks what causes the wealth of nations. Wealth is created by division of labor and specialization in opening chapters. Observed that it causes wealth, 1. by reducing time spent moving task to task; 2. repetition increases skill; 3. specialization makes it more likely that machines will be invented, which releases human labor. Is that a negative, as opposed to craftsmen, unemployed? Foreign v. domestic labor. Ultimate resource is human labor; economizing on it makes us better off. Ricardo, principle of comparative advantage, Paul Samuelson said of it that it's the one thing in economics that is both true and non-obvious. Boudreaux's book's goal is to explain it. If Joe can do something at a lower cost than Sam, then Joe should specialize in doing that and Sam the other thing; and they should trade. They should do this even if Joe can do both things better than Sam. Kathy runs errands across campus to deliver documents, sacrificing less than department chairman would, even if it takes her more time because her legs aren't as long. How much of what you consume could you have produced? the people in your town? Virtually nothing. All around us in modern society.
14:00Smith-Ricardo interface, Buchanan and Yong Yoon's paper. Not all equally good at all tasks, so it matters how people get allocated to tasks. Most effective is to have people do what they are most productive at, where "most productive" doesn't mean what you are best at, but who has the lowest opportunity costs, what you forego. That's the Ricardian insight, size of pie today. That specialization gives rise to capital, and thus induces growth, Smith's insight. People who are put out of work, either by trade or application of machinery, both of which do the same things: make us wealthier but harm a particular group of people who are put out of work for a while. Boudreaux: that's the wrong language, but why? Time perspective. "Trade hurts some people"--e.g., the steel worker--misses the fact that the job the steel worker lost would not have existed had it not been for trade. Blog: man loses wife, who leaves him for another man. In a longer time perspective, he probably won the wife to begin with from some other man, so do we say that love has good sides and bad sides? Change inherently has unanticipated surprises, some good, some bad. Buy land in Montana and live without much trade, can forget about currency values, etc.; won't be buffeted by economic change. But can't escape change in weather; and either way you'll be dirt poor. And maybe dead. Jim Buchanan, constitutional bargain: agree to become part of this worldwide exchange nexus, and we get wealth that would otherwise be impossible. What we give up, our willingness to play by the rules: consumer sovereignty and entrepreneurial dynamism are critical to driving economic growth and material prosperity. We agree to adjust ourselves. In any one case, you can defect. Seems like a noble thing, John Edwards, Republicans as well; but if everyone does it there would be no growing prosperous society. Playing by the rules means you do not stop consumers from taking better deals.
27:47Not much opportunity to be a blacksmith outside Williamsburg, rural areas. Our emotions and our pocketbooks get tied up in these issues. Don't want to minimize the challenges, but what sustains our quality of life is this nexus of exchange, opportunity to interact by specializing. It has nothing to do with national borders. If dieting becomes the rage, candymakers can take the hit; has nothing to do with [international] trade. Trade is just another example of it. Most of us accept that there are times when we are going to be hurt. Tenured professors--people sometimes argue that they can say free trade is good only because their jobs are not at risk. Should anyone with a stake in the matter not be allowed to comment on trade because trade might up-end their jobs? Have to look at the arguments, not who is making the arguments. Podcasts are alternative to classrooms, so even tenured professors face competition.
35:25National borders. Manuel Ayau: If in 1988, it was good for Vaclav in Prague, western Czechoslovakia, to trade with Vladimir in eastern Czechoslovakia, is it any less important for the same Vaclav to trade with the same Vladimir now that the country is split in two? The economic relevance of political borders is zero. Governments are notoriously prone to protect. Hong Kong though has largely practiced free trade. United States itself is a gigantic free trade zone, 13 original states were a free trade zone. Why does the optimum amount of specialization occur between national political boundaries?
41:56Trade deficit. Confusion over money. Smith pointed out that wealth doesn't come from money, neither gold nor pieces of paper. Worry when money "leaves the country," trade with Canadian as opposed to trade with someone from another state in the U.S. Is a miser with a lot of money wealthy? Has opportunity but if money is never used, he's very poor, just holding lots of pieces of paper with pictures of presidents. Money that leaves the country is not gone forever. Canadians accept those dollars because they want to buy things priced in dollars--American goods, services, or assets. The money eventually comes back. Though, by the way, it would be good for Americans if it never came back! If we run a trade deficit, i.e., we buy more from foreigners than they buy from us, people worry. Current account deficit is trade in goods and services, as opposed to merchandise trade deficit is just trade in physical goods. Services are a large part of the U.S. economy, so first, merchandise trade deficit is not measuring much of U.S. trade. For 30 years we've run a current account deficit, but that means the money is still coming back--it comes back as demand for assets, measured in the capital account. When you add up the current and capital accounts, by definition they are equal and opposite: the balance of payments is 0. That, too, employs Americans. Other things equal, we have more capital here because it comes back in the capital account: more investment, R&D, other things equal, lower interest rates, etc., in the U.S. Sellers of the assets very much want buyers to bid on them and they want to sell them to the highest bidders. If you had stock in a company would you feel good if only people in your home town could bid on it? Want pool of bidders to be as large as possible. Economically, assets are not just idly held. Foreign direct investment is active involvement and control. People worry about that, but if the most creative idea for how to use a piece of capital machinery in Alaska happens to come from someone in Romania, we sacrifice that creativity by restricting who can buy our assets.
53:30Trade deficit or current account deficit is not a measure of our indebtedness. You can define those deficits as being debt, but that's not the way we use the word. Have Apple computer, previously had a Sony Vaio. Suppose after I bought the Vaio, Mr. Sony had stuffed the $2000 in a sock drawer. Then U.S. has a trade deficit, but there's no debt involved. If Sony takes the money and lends it to someone in the U.S. it becomes debt, but if he does something else like buying U.S. stock, there is no debt. Part of the trade deficit can be transformed into debt, but it is not automatically debt. U.S. Federal government borrows in the open market--from both U.S. citizens foreigners. The debt itself is because government spending exceeds taxes, though; it's not related to the trade deficit. Debt itself is not necessarily bad--allows for investment, buying factories, houses. Federal government's funding of programs with borrowing. When we run a trade deficit, we are given the privilege of consuming more than we produce. To do that, we have to attract capital. To say that we are "living beyond our means" is incorrect. John Makin article. Would you be upset if Bill Gates wanted to invest in you? Suggests you have promise. It's encouraging when U.S. investment account rises, foreigners have confidence in our future. Nationalizing U.S. industry would definitely reduce our current account deficit, but it would be disastrous for us! Doug Irwin, Free Trade Under Fire, 1/3 of U.S. imports are capital goods used in production--machinery, etc.--not just U.S. citizens on a buying spree. Hal Varian article on iPod components: all China does is assemble them, but it's counted as a Chinese product. It was American creativity, which is paid for when you buy an iPod; small amount for Chinese value added.
1:04:57Inequality, one of the concerns about globalization. Time travel example in book, imagine if your great-great-grandmother was transported to the home of Bill Gates; what would that person find remarkable? They would probably be dumbstruck most about things we take for granted: bathe daily in hot water that doesn't have to be hauled, indoor plumbing, keep all teeth, tuberculosis cured, TV, cars that drive at unheard of speeds, take pills called aspirin to relieve headaches, contact lenses. Difference between Gates's family's life and yours and mine is small compared to the difference between our lives and our ancestors' lives. No one in America starves, we have basic health care, little and curable head lice, music, TV, entertainment available for everyone. China and other countries are less poor because they have opened their borders, and we are less poor for it.
1:10:49Addendum: Last week's podcast, Munger on the Nature of the Firm, shoe store example: hard for a department store to compete with mall stores carrying similar merchandise because it has to impute a rent, figure out how much of its legal advice should be attributed to the shoe department, etc. Standalone store has more easily measurable information about its profits. Economies of scale that are held somewhat by department store are somewhat offset by standalone stores being parts of chains, which have their own economies of scale. Filters, economizing on search costs: department store has an advantage by being under one roof, but mall itself is all under one roof; standalone may be easier to search under because stores are well-marked. But department stores offer filters for quality, reducing variation in quality. Department store's brand name searches for me, and I'm willing to pay a premium for that comfort. That's likely what is offsetting the department store's disadvantage. Sears. Why does an author use a publisher when you could self-publish? Editing, marketing, but more: publisher is a filter that reassures book buyers that the book will be of a certain quality.

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