Romney Wins First Prize—For Absurdity

Dolors& Sense

by Sanford Rose

KISSIMMEE Florida—(Weekly Hubris)—10/8/2012—Debate # 1 highlight: Romney won’t fund public broadcasting if it means borrowing from the Chinese.

Does it make any difference who lends us money?

If government spends more than it takes in, it creates a budget deficit, which is in economic terms a form of “dissaving.”

In the last few years the government has had to dissave, or subtract from private savings, because consumers and businesses were overdoing the savings shtick—that is, not spending enough to take current output off the market.

Had the government not run a deficit, output would have fallen by more than it actually did.

Saving is a good thing, but it can be overdone and, when it is, government must play the role of consumer of last resort.

Other things equal, however, budget deficits push up government interest rates and thereby stimulate another round of saving.

In an open international economy, the lure of higher interest rates causes investors in other countries to buy US government bonds, thereby driving rates back down.

But when they exchange their currencies for dollars to buy US bonds, foreign investors raise the value of the dollar, which weakens the US trade balance by discouraging exports and subsidizing imports.

Thus the budget deficit is related to the trade deficit.

If the foreigners did not buy our bonds, our trade deficit would be lower but, for any given budget deficit, our interest rates would have to be higher.

The effect on the US economy would be similar, however. Trade deficits subtract from US output (because demand is being satisfied from foreign, not domestic production). But so do higher interest rates.

Thus, apart from the political ramifications, it makes comparatively little difference from whom we borrow.

Debate #1 was not about foreign affairs; it was about the economy.

To single out, and in effect demonize, one source of international savings, the Chinese, is both beside the point and inane.