A couple of points thoughts today
- I’ve said that the ability of the US to borrow cheaply has primarily financed tax cuts for wealthy Americans. I want to be clear. I do not mean that wealthy Americans should have been taxes so as not to increase the deficit. I mean that if I do my best to imagine a world in which cheap borrowing was impossible that the result I get is not a much smaller welfare state but higher taxes on high income Americans.
I want to reiterate that its not clear to me that this has made America poorer. Indeed, using your high credit rating to borrow cheaply and lend dearly is a time honored way of getting rich. It seems to me that America has used this method and that the national as a whole is likely wealthier than it would have been if it had run balanced budgets.
This entire complex seems inextricably bound up in the phenomenon Mike Mandel is trying to detail. I think I understand his point to be this: we look at our national statistics and think that we are getting better at turning raw materials into goods and services using traditional engineering expertise. Instead, we are getting better at using our special economic position to engineer favorable terms for goods supplied to US Multi-nationals. While the first represents a knowledge base that is more or less stable, the second depends on our unique position in the world, which is not likely to last.
Its not clear to me that this has worked out well for lower skilled Americans. We have a tendency to think that productivity gains will just flow down to the bottom. Yet, there is no magical reason for that. It has traditionally happened because spillover effects could not be captured, knowledge built on knowledge, etc. However, a world in which gains are being created in ways that can be captured is not necessarily a world in which the poor benefit from those gains. Thus, despite our strong intuition otherwise, the counterfactual in which the US didn’t have this special position might be better for low income Americans.
This position – at least at first glance – seems good for the world as a whole. In some international finance discussions it is noted that the dollar regime may have been crucial to allowing nations to safely build up large current account surpluses. It occurs to me that this may be a general phenomenon. We think of the economic advantage of banks is that they allow more investment by providing relatively cheap loans. However, they may also “allow” more work in that they make it safe for individuals to run large current account surpluses at a given time. If there were literally no way to do this then there would be a strong decreasing marginal return to work simply because there was nothing to you could do to store the proceeds. Even holding it in precious metals risks theft. A safe storage vehicle is then a compliment to supplying labor.