[Marxism] Autopsy on The Vampire

Charles Brown cbrown at michiganlegal.org
Tue Apr 25 09:42:53 MDT 2006

CSI: Trade Deficit 


Forensics are in. If you turn on the TV during prime time, you're  likely to

find yourself watching people sorting through clues from a crime  scene, 

trying to figure out what really happened.

That's more or less  what's going on right now among international finance 

experts. The crime in  question is the U.S. trade deficit, which according

the broadest measure  reached an amazing $805 billion last year. The mystery

how we've been able to  run huge deficits, year after year, with so few 

visible adverse consequences.  And the future of the U.S. economy depends on

of two proposed solutions to  the mystery is right. 

Here's the puzzle: the trade deficit means that  America is living beyond

means, spending far more than it earns. (In 2005,  the United States

only 53 cents' worth of goods for every dollar it  spent on imports.) To pay

for the excess of imports over exports, the United  States has to sell

bonds and businesses to foreigners. In fact, we've  borrowed more than $3 

trillion just since 1999. 

By rights, then, the  investment income — interest payments, stock

and so on — that  Americans pay to foreigners should be a lot larger than

investment income  foreigners pay to Americans. But according to official 

statistics, the United  States still has a slightly positive balance on


How is  this possible? The answer, almost certainly, is that there's 

something wrong  with the numbers. (Laypeople tend to treat official
statistics as 

gospel;  professional economists know that putting these numbers together 

involves a lot  of educated guesswork — and sometimes the guesses are
wrong.) But 

depending on  exactly what's wrong, the U.S. economy either has hidden

or it's in  even worse shape than it seems.

In one corner are economists who think  the official statistics miss 

invisible U.S. exports — exports not of goods and  services, but of
intangibles like 

knowledge and brand-name recognition, which  allow U.S. companies to earn

rates of return on their foreign investments.  Proponents of this view claim

that if we counted these invisible exports, which  they call "dark matter," 

much of the U.S. trade deficit would disappear.  

The dark matter hypothesis has been eagerly taken up by some  journalists, 

who like its upbeat message. It seems to say that the U.S. economy  is, as a

cover article in Business Week put it, "much stronger than you think."  

But there's a problem: U.S. companies operating abroad don't, in fact,  seem

to earn especially high rates of return. Why, then, doesn't the United

seem to be paying a price for all its borrowing? Because according to the  

official data, foreign companies operating in the United States are

unprofitable, earning an average return of only 2.2 percent a  year.

There's something wrong with this picture. As Daniel Gros of the  Center for

European Policy Studies puts it, it's hard to believe that foreigners  would

continue investing in the United States "if they were really being

taken to the cleaners."

In a new paper, Mr. Gros argues —  compellingly, in my view — that

really happening is that foreign  companies are understating the profits of 

their U.S. subsidiaries, probably to  avoid taxes, and that official data
are, in 

particular, failing to pick up  foreign profits that are reinvested in U.S. 


If Mr. Gros is  right, the true position of the U.S. economy isn't as bad as

you think — it's  worse. The true trade deficit, including unreported

that accrue to  foreign companies, isn't $800 billion — it's more than

billion. And  America's foreign debt, including the value of foreign-owned 

businesses, is at  least $1 trillion bigger than the official numbers say. 

Of course,  optimists have a comeback: if things are really that bad, why

so many  foreign investors still buying U.S. bonds? And they point out that 

those  predicting problems from the trade deficit have been wrong so far.
But I 

have  two words for those who place their faith in the judgment of

and  believe that a few good years are enough to prove the skeptics wrong: 

Nasdaq  5,000.

Right now, forensic analysis seems to say that the U.S. trade  position is 

worse, not better, than it looks. And the answer to the question,  "Why

we paid a price for our trade deficit?" is, just you wait.  


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