January 25, 2005

America and the "Dutch Disease"


Something to think about the next time you're stocking up your Costco shopping cart with Chinese-made goods. A reader writes:

The US is quite literally destroying the productive, tradable goods sector of its economy, by maintaining an overvalued currency, supported by massive borrowing from other nations. This is not a new or unique observation. There is actually a term for this phenomena. It is called the "Dutch Disease". It is characterized by an overvalued currency, manufacturing decline, high investment in the non-tradable sector and disinvestment in production of tradable good.

The phrase "Dutch Disease" was coined in response to the performance of the Dutch economy after vast natural gas reserves were found near Groningen in 1959. Gas quickly become a lucrative export "competing" with traditional Dutch exports. By inflating the value of the Guilder, traditional exports were in effect, "crowded out" and declined. The impact was so prominent that it was studied and came to be a well accepted consequence of highly valuable natural resource exports...

Although the disease is generally associated with a natural resource discovery, it can occur from any development that results in a large inflow of foreign currency, including a sharp surge in natural resource prices, foreign assistance, and foreign direct investment. Economists have used the Dutch disease model to examine such episodes, including the impact of the flow of American treasures into sixteenth-century Spain and gold discoveries in Australia in the 1850s."

"Why does a dramatic increase in wealth have this paradoxically adverse consequence? The answer is found in a classic 1982 paper by W.M. Corden and J. Peter Neary. These authors divide an economy experiencing an export boom into three sectors: of these, the booming export sector and the lagging export sector are the two traded goods sectors; the third is the nontraded goods sector, which essentially supplies domestic residents and might include retail trade, services, and construction. They show that when a country catches Dutch disease, the traditional export sector gets crowded out by the other two sectors."

What does this have to do with the US? Hopefully the answer is obvious. The US has "created" a massive new export in recent years. The export is debt. Like any other massive new exportable good, it has displaced other traditional exports. Actually, the US has done this twice. First, in the early 1980s leading up to the Plaza Accord of September 22, 1985. And then more recently, in the 1990s as a consequence first of the Internet bubble and then later because of massive Federal deficits and the housing bubble.

Current US economic policies are a double blow to the economy. On the one hand the US is furiously accumulating debt that we owe to the rest of the world. On the other hand, we are systematically dismantling the manufacturing sector that produces the tradable goods needed to pay our nation's bills. Of course, these follies also impact employment in the manufacturing sector. The following graphs should provide a useful perspective.

Of course, the trade deficit is not the only reason for the decline in manufacturing employment. Productivity has been growing faster in manufacturing than other sectors. However, it is clear that without the trade deficit, the manufacturing sector would be roughly 50% larger than it currently is. This is equivalent to many (5/7) millions of jobs. Note that these are not net new jobs. The trade deficit has shifted employment out of the tradable goods sector into other parts of the economy. Without the trade deficit, employment would shift back. Total employment might or might not grow.

As the reader can see, the trade deficit is not just a source of future financial burdens (creditors expect to be paid). It is also a direct assault on the productive power of the US economy. The linkage would scarcely be clearer if foreign capital was used to pay for wrecking balls tearing down industrial America.

Many have commented that Bush's recent 2nd Inaugural address sounded a lot like JFK's in its emphasis on America's commitment to fighting tyranny abroad. The only real difference was in how Bush intends to finance his global crusade for freedom. Here's an actual, authentic excerpt from Bush's speech:

Let every nation know, whether it wishes us well or ill, that we shall pay any price, borrow any burden, sponge any spare change, cadge from any friend, scrounge from any foe, in order to assure the survival and the success of liberty.

Remember how back in the 1960s, Democrats would say that budget deficits aren't so because we just owe the money to ourselves? Well, our trade deficits aren't so bad either, because we just owe the money to the Red Chinese.


In related news, inventor Raymond Kurzweil, who had been taking 250 vitamin supplements per day in an attempt to live forever, announced that, after reviewing the rapidly mounting debt burden we were passing on to future Americans, he was switching to a new daily regimen of three packs of Lucky Strikes, a bottle of Jack Daniels, a dozen hits on a crack pipe, and one round of Russian Roulette.

Steve Sailer's homepage and blog is iSteve.com

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