Warren Buffett: Thriftville vs. Squanderville (2003) [pdf](archives.democrats.science.house.gov)
archives.democrats.science.house.gov
Warren Buffett: Thriftville vs. Squanderville (2003) [pdf]
http://archives.democrats.science.house.gov/Media/File/Commdocs/hearings/2008/Oversight/22may/Additional_Documents_Gomory.pdf
20 comments
There seems to be some confusion about this in the comment so far: a trade deficit is different from a budget deficit and the two aren't really connected. A trade deficit means that the people of the United States, in aggregate, import more stuff then they export. This has nothing to do with the national debt or government budgets.
My first question was: how did the statistics he's quoting change in the subsequent dozen years?
Charts of 2007-2015 Q1: https://www.bea.gov/newsreleases/international/intinv/intinv...
More detailed data back to 1976: https://www.bea.gov/international/bp_web/tb_download_type_mo...
In short, the U.S. is now $7 trillion in the hole (39% of GDP), and most of that damage has been done in the past 5 years. In 2007 that hole was just $1.35 trillion. In 2014 alone the U.S. position worsened by $1.7 trillion.
-$1.2 trillion of this was due to exchange rates: other countries are running their printing presses faster than the U.S. is, so it is losing the competitive currency debasement race kicked off in 2008. This is not news, but it makes this number worse because it causes U.S. assets held by foreigners to appreciate faster relative to foreign assets held by U.S. citizens.
Price changes contributed another -$0.35 trillion. That is, even in local currencies, U.S. investments made by foreigners had a better return than foreign investments held by U.S. citizens.
Then all the way down at -$0.24 trillion was "net financial transactions", or the trade deficit, which is the thing Buffett's IC proposal would actually be able to control.
In other words, unless I have misunderstood something, balancing the trade deficit, or even running a substantial surplus is not going to solve these problems at the rate they are going. The question is how much of the current trends are sustainable.
Charts of 2007-2015 Q1: https://www.bea.gov/newsreleases/international/intinv/intinv...
More detailed data back to 1976: https://www.bea.gov/international/bp_web/tb_download_type_mo...
In short, the U.S. is now $7 trillion in the hole (39% of GDP), and most of that damage has been done in the past 5 years. In 2007 that hole was just $1.35 trillion. In 2014 alone the U.S. position worsened by $1.7 trillion.
-$1.2 trillion of this was due to exchange rates: other countries are running their printing presses faster than the U.S. is, so it is losing the competitive currency debasement race kicked off in 2008. This is not news, but it makes this number worse because it causes U.S. assets held by foreigners to appreciate faster relative to foreign assets held by U.S. citizens.
Price changes contributed another -$0.35 trillion. That is, even in local currencies, U.S. investments made by foreigners had a better return than foreign investments held by U.S. citizens.
Then all the way down at -$0.24 trillion was "net financial transactions", or the trade deficit, which is the thing Buffett's IC proposal would actually be able to control.
In other words, unless I have misunderstood something, balancing the trade deficit, or even running a substantial surplus is not going to solve these problems at the rate they are going. The question is how much of the current trends are sustainable.
The challenge of economic storytelling is always about which story lines to include, what's a major and relevant.
Real economies have other story lines. In this made up world, food is the only output and 8 hours per day equals a workers daily food needs. But in our world, investment can lead to technology and an improvement in the labour-output ratio, not just a future claim to output. Squanderville economists might claim that they are investing, not spending.
Investment and spending are economically fungible and hard to distinguish. But maybe squanders are are buying food with squanderbuck IOUs so that they can spend their 8 hours genetically engineering a better coconut tree, with twice as many coconuts per hour of labour and acre of land.
I'm not trying to contradict the story. In fact, I generally agree with the overall sentiment. I think it is immoral (aside from the economics) for governments to accumulate debts to be paid by future generations. In fact, I think we need to find mechanisms for accumulating national wealth for future generations. I'm just slightly wary of such storytelling.
I really disagree with his "tariffs by another name" ICs. This is a crazy plan. It would be enormously distortive and would have so many loopholes that the unintended side effects would be of epic proportions.
Trade restrictions are tackling the "problem" from the wrong end. The problem is overspending, deficits. It isn't imports. Imports are a result.
Real economies have other story lines. In this made up world, food is the only output and 8 hours per day equals a workers daily food needs. But in our world, investment can lead to technology and an improvement in the labour-output ratio, not just a future claim to output. Squanderville economists might claim that they are investing, not spending.
Investment and spending are economically fungible and hard to distinguish. But maybe squanders are are buying food with squanderbuck IOUs so that they can spend their 8 hours genetically engineering a better coconut tree, with twice as many coconuts per hour of labour and acre of land.
I'm not trying to contradict the story. In fact, I generally agree with the overall sentiment. I think it is immoral (aside from the economics) for governments to accumulate debts to be paid by future generations. In fact, I think we need to find mechanisms for accumulating national wealth for future generations. I'm just slightly wary of such storytelling.
I really disagree with his "tariffs by another name" ICs. This is a crazy plan. It would be enormously distortive and would have so many loopholes that the unintended side effects would be of epic proportions.
Trade restrictions are tackling the "problem" from the wrong end. The problem is overspending, deficits. It isn't imports. Imports are a result.
It seems unfair to lay the blame for this situation on the US government. After all, I expect most US government spending goes to domestic recipients, not to imports.
Asking for the US government to reduce its deficit is also not likely to be productive: It would certainly reduce US GDP and destroy jobs, but it's unclear how that would help balance international trade.
It is also not a good idea to ask for mechanisms to accumulate "national wealth" in the form of foreign assets, because (as the Euro crisis shows so clearly) that is a strategy that cannot be applied universally.
In the end, I suspect Buffett is right that some kind of tariff is required to "punish" the bad behavior of Thriftville.
Asking for the US government to reduce its deficit is also not likely to be productive: It would certainly reduce US GDP and destroy jobs, but it's unclear how that would help balance international trade.
It is also not a good idea to ask for mechanisms to accumulate "national wealth" in the form of foreign assets, because (as the Euro crisis shows so clearly) that is a strategy that cannot be applied universally.
In the end, I suspect Buffett is right that some kind of tariff is required to "punish" the bad behavior of Thriftville.
Ideally speaking, government debt is never paid back; only the interest is paid in perpetuity. The idea is that the debt creates more growth than the interest of the debt.
Of course politics means it's really more for making future generations pay.
Of course politics means it's really more for making future generations pay.
That's a very well-written and clearly argued piece, but you could apply the same logic to argue that it's a business should not raise capital on the stock market because it amounts to "selling the farm to feed your family". But most businesspeople would say that it's quite OK if the money is invested productively. As the owner of the business, you probably shouldn't care if your equity shrinks to 10% of the company, as long as the outside financing helps you grow it to more than 10 x the original size.
Similarly, it might not matter to Americans if eventually 90% of US-based assets are owned by foreigners, as long as the 10% that's owned by Americans is huge.
So this whole "Our national wealth will soon be owned by foreigners" scenario is probably not as bad as it sounds.
The way Buffett phrases it also seems misleading on a language level. He talks about "foreign ownership of OUR assets". But how can you say they are YOUR assets if they were paid for by foreign investors? If a US company sells 50% of its shares to a German bank, and uses the money to build a plant, can you say "OMG, Germans own 50% of OUR plant"?
The way Buffett phrases it also seems misleading on a language level. He talks about "foreign ownership of OUR assets". But how can you say they are YOUR assets if they were paid for by foreign investors? If a US company sells 50% of its shares to a German bank, and uses the money to build a plant, can you say "OMG, Germans own 50% of OUR plant"?
In Buffet's example foreign investment is caused by the trade deficit, not the other way around. The investments are made to protect the transfer of wealth that already took place. In other words, people in other countries are buying US assets with the money that we gave them. This isn't really comparable to selling equity in exchange for money that will be used to invest in future growth.
That's true, in his example he makes a point of stressing that the foreign value is consumed rather than invested. But it's not clear that that's what happens in real life. For example, if China sends an excess of resources to "the US", and in return "the US" gives China shares or bonds issued by US companies, then the extra resources are presumably used by these companies in a productive way. (When a company acquires capital on the market, it is usually to invest it.)
BTW, it seems to me that foreign investment is always caused by a trade deficit, not the other way around. If the Rest of the World (RoW) wants to invest in the US, it has to acquire dollars. The only way RoW can acquire dollars is to sell more stuff to the US than it buys from the US. In other words, it has to be in trade surplus with the US. So the US has to be in trade deficit.
BTW, it seems to me that foreign investment is always caused by a trade deficit, not the other way around. If the Rest of the World (RoW) wants to invest in the US, it has to acquire dollars. The only way RoW can acquire dollars is to sell more stuff to the US than it buys from the US. In other words, it has to be in trade surplus with the US. So the US has to be in trade deficit.
>so this whole "Our national wealth will soon be owned by foreigners" scenario is probably not as bad as it sounds.
So to be clear: Buffet's solution is still likely to be better?
So to be clear: Buffet's solution is still likely to be better?
Depends on which is preferable to you:
- a smaller US economy that's 100% owned by Americans
- an economy that's larger (potentially more than 2x), but is 50% owned by foreigners
- a smaller US economy that's 100% owned by Americans
- an economy that's larger (potentially more than 2x), but is 50% owned by foreigners
Warren Buffet is someone business people should read for style tip, I reckon.
The disclosure he does is such a contrast to the positive spins style that exists almost everywhere else. His writing reads as far more trustworthy and a lot of that has to do with style.
The disclosure he does is such a contrast to the positive spins style that exists almost everywhere else. His writing reads as far more trustworthy and a lot of that has to do with style.
He did have that particular letter copy-written by an excellent editor though, which undoubtedly helps a lot :)
> "But first I need to mention two reasons you might want to be skeptical about what I say. To begin, my forecasting record with respect to macroeconomics is far from inspiring."
This seems apt. While I agree with his sentiment we currently have the situation of a strong US Dollar despite continuous high US deficits - in contrast to his forecast. Europe is going the route of limiting deficits (as Warren Buffet suggests in his letter) and receives lots of criticism for this from US economists.
This seems apt. While I agree with his sentiment we currently have the situation of a strong US Dollar despite continuous high US deficits - in contrast to his forecast. Europe is going the route of limiting deficits (as Warren Buffet suggests in his letter) and receives lots of criticism for this from US economists.
Trade deficits are driven by national savings and investment rates, which can be in turn driven by all sorts of mostly benign social or cultural factors, and so its hotly debated whether they matter at all.
DeLong has some explanations, claiming that savers around the world pay a premium for dollar denominated assets, which really messes up this entire analysis. [0]
The upshot is that the rate of return on our foreign assets tends to be better than the return to foreign investment in the US. [1]
That could be right, at least makes some sense... foreigners are just buying something to say they bought something in the US (as a hedge against political catastrophe? maybe still a good buy).
So if it's true that there's a rate of return gap, then our massive "purchases" abroad are really investments that will pay for themselves. If so, we'll probably reinvest those returns, often abroad, so we'll never wipe the deficit, and probably even add to it over time, even while coming out ahead.
[0] https://web.archive.org/web/20070806050555/http://www.j-brad...
[1] http://econlog.econlib.org/archives/2006/08/do_we_even_have....
DeLong has some explanations, claiming that savers around the world pay a premium for dollar denominated assets, which really messes up this entire analysis. [0]
The upshot is that the rate of return on our foreign assets tends to be better than the return to foreign investment in the US. [1]
That could be right, at least makes some sense... foreigners are just buying something to say they bought something in the US (as a hedge against political catastrophe? maybe still a good buy).
So if it's true that there's a rate of return gap, then our massive "purchases" abroad are really investments that will pay for themselves. If so, we'll probably reinvest those returns, often abroad, so we'll never wipe the deficit, and probably even add to it over time, even while coming out ahead.
[0] https://web.archive.org/web/20070806050555/http://www.j-brad...
[1] http://econlog.econlib.org/archives/2006/08/do_we_even_have....
Here is a link to the same content in a typeface that has more reasonable kerning and is easier to read.
http://www.berkshirehathaway.com/letters/growing.pdf
http://www.berkshirehathaway.com/letters/growing.pdf
The import certificate scheme would violate WTO rules regarding free-trade. You can't just levy what is essentially a tariff on imports after you have committed to free trade as a condition to enter foreign markets.
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But what if the citizens of Squanderville have a bunch of guns and aren't afraid to engage in ruthless activity to prop up their lifestyle?