Surprise, surprise — America’s economics laureates are uneasy about the U.S. trade deficits. (As first published in the American Prospect on August 13, 2001.)
Are America’s trade deficits too high? Judging by the American intellectual establishment’s body language, the answer is no. The press continues largely to ignore the deficits, and so does just about everyone in Washington, D.C. The country’s economists have set this tone of complacency. Their view has long been based on the assumption that markets can do no wrong—that no matter how bad the trade numbers get, it’s simply an expression of the market’s wisdom. But now, we may be witnessing the first stirrings of a change of heart.
I tracked down the 10 U.S. economists who most recently won a Nobel Prize and put the same simple question to each of them: Was last year’s current-account deficit—which includes not just goods and services but also financial flows—too high? That deficit, I reminded them, represented a record 4.5 percent of gross domestic product. (Up until 1983, it had never exceeded 1 percent.)
Only three of the laureates responded to the question, and they were evenly split: One said yes (Robert Solow), one said no (Gary Becker), and one fell somewhere in between (Daniel McFadden). All the others—Robert Fogel, James Heckman, Robert Lucas, Harry Markowitz, Robert Merton, Douglass North, and William Sharpe—indicated either directly or through assistants that they did not want to get involved.
The fact that so many chose to duck the issue speaks volumes. Most of the nonrespondents are believers in free markets. Fogel, Heckman, and Lucas are professors at the University of Chicago, that temple of conservative economics. As disciples of the free market, they should have blessed whatever trade numbers have been served up by the ever wise invisible hand.
Considering their silence, it’s reasonable to assume that my question put them in a difficult spot. They can’t lightly repudiate their belief in laissez-faire, yet they know very well that the United States is entering dangerously uncharted waters in tolerating trade deficits on the present scale.
Fogel, Heckman, and Lucas offered no reason for their refusal to comment. Markowitz, Merton, and Sharpe said that the trade deficit was outside their field of expertise. Douglass North declined to respond on the grounds that economic theory offers no guidelines by which the question could be addressed scientifically.
Such caution in speaking about a topic of great public interest seems out of character for a group of laureates. Nobel Prize winners have come forth with strong opinions about the Kyoto global-warming treaty, stem cell research, and the “Son of Star Wars” missile-defense system. In the past decade, economics laureates in particular have issued statements on everything from the Balanced Budget Amendment (they were against it) to free trade with China (they were for it). They have urged market solutions to the world’s environmental problems and have poured scorn on George W. Bush’s tax plan.
As the only laureate I polled who said he was unconcerned about the deficits, Gary Becker—also a University of Chicago professor—managed to sound not so much complacent as reassuring. “The size of the deficit may be a good sign,” he said, “if it means we are importing capital for productive purposes.”
Meanwhile, Daniel McFadden, who is a professor at the University of California at Berkeley, was less worried about the short term than about the long term. “As long as foreign investors are prepared to buy American securities, there is no problem,” he told me. “It seems likely, however, at some point, that foreign investors will repatriate their funds.” Translation: The dollar would collapse and U.S. interest rates would soar. “The whole financial system is based on trust,” McFadden added. “As long as we have trust, the elaborate house of cards will hold up.”
Of all the laureates polled, Robert Solow, professor emeritus at the Massachusetts Institute of Technology, seemed the most comfortable addressing the issue. Like McFadden, he was concerned about the problem of financing the deficits. “The current deficit is too high under the circumstances,” he said. “I do not think any abstract, safe level can be stated out of context. The key is whether small changes in economic conditions would bring about capital flight (remembering that the debt is almost entirely in dollars).”
Later, Solow elaborated in The New York Times: “If the debt is not under control, or if some event makes the debtor appear less creditworthy than before, the creditors may decide that they are not willing to finance a country’s growing debt. . . . They may even want to liquidate part of their investment in search of diversification. If such a thing happened to the United States, there could be very unpleasant consequences for Americans.”
Strong words. Of course, only time will tell whether they are borne out by events. It is clear, though, that there is an issue here. Even if most economists want to keep their head in the sand, it behooves both the press and the Washington policy makers to keep an eye on developments.