The St. Louis Federal Reserve Bank is justly renowned for its gargantuan and incredibly useful “FRED” economic database. If only the Bank would stick to making raw numbers available, rather than interpreting them, at least when it comes to America’s position and role in the global economy. Certainly, two of its recent posts are among the worst cases of peddling what I call “fakeonomics” published this year – and the competition has been pretty fierce.
In October, a Bank economist addressed the question, “Is the Large and Persistent U.S. Trade Deficit a Concern?” His answer? No, because “as long as the net investment income from the U.S. external account is sufficiently large, the trade deficit can be paid for….”
What’s an outrage is not this point, which is true. It’s what Senior Economist YiLi Chien left out. Principally, he ignored how a rising trade deficit subtracts from economic growth – and from all the hiring generated by that growth. As a result, also omitted in his piece was any mention that nearly all this damage takes place in the private sector, whose faster expansion is the economy’s only real hope for restoring sustainable prosperity. Sure, technically, Chien’s subject wasn’t changes in the trade deficit’s magnitude. But America’s shortfall didn’t just spring into existence out of nowhere. Before it was “large and persistent,” it obviously was much smaller.
Indeed, the ballooning of this trade deficit and its consequences over time is arguably the most important issue overlooked by Chien. Lots of the world’s best known economists believe it deserves much blame for the financial crisis, and thus for the ensuing recession from which the nation and world are still struggling to exit. Among those who have argued that “the global imbalances of the 2000s and the recent global financial crisis are intimately connected”? Kenneth Rogoff of Harvard (a former chief economist at the International Monetary Fund), Maurice Obstfeld of Berkeley – and a guy named Bernanke. And central to those global imbalances have been the gross imbalances in U.S.-China trade and the disastrous investment distortions (notably in housing) they helped produce.
These big economics names aren’t cited because they’re right all or even most of the time. They’re cited because they represent a major school of thought in his own profession of which Chien seems blithely unaware.
Sadly, this shoddy work doesn’t seem exceptional at the St. Louis Fed. In late November, the bank posted on foreign direct investment, with Assistant Vice President Christopher Neely asking why economists have been so unconcerned about rising foreign ownership of U.S. non-financial assets (along with U.S. government debt). According to Neely, his profession is fine with this trend because “Foreign investment creates jobs and raises wages for local workers, lowers interest rates for local business investment and permits consumers to borrow more cheaply when times are tough.”
He’s right to observe that “Indeed, 19th century economic development in the U.S. was substantially funded by foreign (largely British) investment.” But he never tells readers that the job-creation effects of such investment have long only been sometime results. One main reason? Although Washington no longer breaks down the figures, the data consistently showed that nearly all foreign direct investment financed the acquisition of existing assets, not the creation of new assets. And of course, such takeovers focus on achieving greater efficiencies, which often entails reducing employment on net, not increasing it – whether a foreign buyer is involved or not.
Downright laughable is Neely’s observation that foreign investment “permits consumers to borrow more cheaply when times are tough.” As Americans have now discovered, though, it also permits consumers to borrow more cheaply when their real incomes have been falling. Or hasn’t he heard of the financial crisis, either?
At least Neely mentions the national security concerns motivating much unease with foreign investment – though the creation of a U.S. government screening system for prospective defense-related transactions clearly invalidates his contention that “critics do not usually carefully define” such objections. But he utterly neglects another security-related worry that should trouble economists, too: the rise of foreign government sovereign wealth funds (SWFs) as players in the U.S. economy. When they acquire U.S. real estate and companies etc, that increases government’s economic role just as Washington’s nationalization of such assets would. Is Neely unconcerned about that? Does he suppose most other economists are equally blasé. (The fact that the answer to both questions is probably “Yes” points to one of the profession’s big blind spots.)
And such worries become even greater when the foreign investor – whether through its own SWF or through the so-called private companies it obviously controls – is China. Not to mention that the more of America China buys, the greater the domestic footprint of the world’s most corrupt major-country economic system. Or maybe Neely thinks the United States doesn’t have enough home-grown crony capitalism?
The importance of trade deficits and of foreign investment are legitimate subjects of debate, and public education is a legitimate and important subject for Federal Reserve banks. But these postings indicate that the St. Louis Fed has a lot to learn about the difference between education and propaganda.