Let’s give thanks to Rob Portman, the Republican senator Ohio, who offered a nice break all the lies in Tampa last month, and instead offered us some good old-fashioned bad macroeconomics.
In his speech at the Republican National Convention, Mr. Portman castigated the Obama administration for not taking a tougher line on China — which is actually something I’ve complained about too — then offered a completely wrong explanation. President Obama won’t take on China, Mr. Portman said, because “Obama could not run up his record trillion dollar deficits if the Chinese did not buy our bonds to finance them.” O.K., let’s ask the question: How much overseas financing does the United States, as a whole, need?
The answer is that it’s determined by an accounting identity, which means capital inflows equal the current account deficit, a broad measure of the trade balance including income on investments. (Trade can adjust to capital flows instead of the other way around, but that’s a longer story).
So what has happened to the current account deficit as a share of gross domestic product in the Obama era? Um, it’s way down, according to data the Bureau of Economic Analysis.
How is it possible that we’re borrowing much less foreigners when the government deficit has gone up so much? The answer is that the private sector is deleveraging, having moved into massive surplus as consumers try to pay down debt and corporations hold back on investment in the face of weak consumer demand.
All those government deficits have only partly offset this move, so that overall national borrowing overseas is down, not up.
But what would happen if the private sector stopped deleveraging? The answer is, we’d have a strong economic recovery, which would among other things greatly reduce the budget deficit.
A side implication of this point, of course, is that for the time being that deficit is a good thing, helping to support the economy while the private sector unwinds its excessive leverage.
So who’s actually financing the budget deficit in the United States? The private sector. We don’t need Chinese bond purchases, and if anything we’re the ones with the power, since we don’t need their money and they have a lot to lose.
In fact, we don’t want them to buy our bonds; better to have a weaker dollar (a point that the Japanese actually get.)
To make excuses for Mr. Portman, lots of people keep getting this wrong, even after all these years. But really, truly, the last thing we need to worry about is whether the Chinese love our bonds.
A POLITICAL TARGET
During a speech delivered at the Republican National Convention in Tampa, Fla., in August, a senator claimed that President Obama has been soft on China’s unfair trade practices because the nation is a major buyer of United States bonds.
“We are as beholden to China for bonds as we are to the Middle East for oil,” said Robert Portman, a Republican senator Ohio. “This will end under Mitt Romney.”
The Republican campaign platform, presented at the convention, is partly based on the accusation that the Obama administration made “a virtual surrender” to China with regard to issues such as currency manipulation and the theft of American intellectual property. Mr. Romney, the Republican presidential nominee, has said that, if elected, he would consider imposing harsh tariffs on Chinese imports to the United States if the nation’s current policies continue.
But some commentators contend that the logic behind the G.O.P.’s hard stance on China and Mr. Portman’s arguments is ill-informed. “The density of nonsense here almost defies explication,” wrote Matt Yglesias, a business and economics correspondent, on Slate about Mr. Portman’s claims. “The Middle East exports oil to (among other places) the United States. The United States exports bonds to (among other places) China.”
Dylan Matthews, a commentator at The Washington Post, noted in an online article that China has actually stopped manipulating its currency. “That makes the claim that we need the Chinese to buy our bonds to keep interest rates on U.S. debt low highly dubious.”
In Britain and the U.S., Economic Mysticism Endures
In a lot of ways George Osborne, the chancellor of the Exchequer (or finance minister) is Britain’s answer to Paul Ryan, the Republican nominee for vice president. True, he’s a toned-down version — no Ayn Rand, please, we’re British — but other aspects of the package are there in full force: Mr. Osborne is articulate, has a vision that’s completely at odds with everything we actually know about macroeconomics, and he was for a while the darling not just of the right but of self-proclaimed centrists on both sides of the Atlantic.
Mr. Osborne’s big idea in 2010 was that Britain should turn to fiscal austerity now now now, even though the economy remained deeply depressed; it would all work out, he insisted, because the confidence fairy would come to the rescue.
Never mind those whining Keynesians who said that premature austerity would send Britain into a double-dip recession.
Strange to say, Britain’s recovery stalled soon after Prime Minister David Cameron and Mr. Osborne began their new policies, and the country is now in a double-dip recession.
So is Mr. Cameron rethinking his faith in Mr. Osborne? According to the Financial Times, no. “Mr. Osborne continues to enjoy David Cameron’s backing and will stay as chancellor when the prime minister this week conducts his reshuffle, expected to take place on Tuesday,” wrote the political editor George Parker in an article published on Sept. 2.
Instead of a real policy rethink, what Mr. Cameron and Mr. Osborne apparently have in mind is a set of basically minor twiddles involving credit and planning authorizations, which seem highly unlikely to make any significant difference.
Still, there is criticism within the Tory party — except what the dissidents want is not a return to conventional macroeconomics, but “right-wing shock therapy.”
I was particularly struck by this, in the Financial Times’s article: “Although the chancellor insisted that the economy was ‘healing’ he told the BBC’s Andrew Marr there were many obstacles ahead adding: ‘There is no easy route to a magical recovery.’ ”
That sounds wise and restrained, but it’s actually completely wrongheaded. Britain is suffering lack of demand; it could have a quick (not magical) recovery if policy steps were taken to stimulate demand. It’s the belief that the country can’t recover quickly, not the belief that it can, that constitutes economic mysticism.
And the slump — which has now, in Britain, lasted longer than the slump in the 1930s — goes on.
Memories of the Bush Administration
John Updike once wrote a novel titled “Memories of the Ford Administration.” It was largely about sex in the era “after the sexual revolution but before the microbes.”
This isn’t about that. It’s about lies and the lying liars who tell them.
I spent a large part of the George W. Bush years contending, at first almost alone, against the conventional wisdom that, even if you didn’t like his policies, Mr. Bush was a bluff, honest guy. In truth he was deeply dishonest — and all it took to see that was a look at his economic proposals and how he sold them. It was partly because I had reached a judgment on economics that I was able to see the very similar pattern in the selling of the Iraq war, and conclude — really, really almost alone, at least in the pages of major newspapers — that we were being misled into invading another country. Why did Mr. Bush have this reputation for honesty? Because he seemed like a nice, gregarious guy, and because most pundits don’t do actual policy analysis.
And boy, did I get savagely and personally attacked for pointing out the obvious. It really wasn’t until Hurricane Katrina that the obvious went mainstream.
The Paul Ryan affair has felt very similar. Once again you had an obvious flim-flam man — obvious, that is, if you actually looked hard at his proposals. But for quite a while the Beltway, once again demonstrating its unfounded faith in the power of up-close-and-personal impressions, didn’t want to hear it.
I’ve heard that the usual suspects were very angry at me for questioning his bona fides.
It’s starting to look, however, as if the life cycle of the Ryan myth is proving a lot shorter than the Bush version. Even people who were fanatical defenders of Mr. Bush and Krugman-haters seem to have had enough of Mr. Ryan’s shtick, thanks to a dishonest speech at the Republican National Convention last month.
And I think this matters. Mr. Ryan’s true constituency isn’t the Tea Party, it’s the commentariat; strip him of his unjustified reputation as an honest policy wonk, and he’s just another mean-spirited ideologue. Indeed, his character may itself become an election issue. And it should.
