Wednesday, November 14, 2007

Can Robert Rubin Be Wrong?


Paul Krugman and Greg "No Comments" Mankiw don't like what Robert Rubin has to say about the relation between national savings and the trade balance.

I have my own un-orthodoxy:

Higher savings, should lead, eventually, to higher growth rates. That may well support higher real rates of interest. One way or another, this usually leads to improvements in the terms of trade, but not the trade balance. (Technically, high-yielding currencies should depreciate, but they don't always).

I'll take a stab at this:

A US functionary recently asked me if I knew any way that a lower government deficit could lead simultaneously to a stronger dollar and a lower trade deficit without causing a recession. When I said no, he was disappointed: his superiors were insisting that he produce a report asserting that it could.
A small, labor-equalization tax might do the trick. It's sort of like forced savings that reduces the deficit and lowers consumption, without causing a recession...

So, for instance, if the labor-cost differential was 85% and a small tax cut that down to say, 50%, it would still be immensely profitable to invest capital alongside overseas labor ...

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