Walmart vs Boeing, Which Enhances US Economic Welfare?

When Walmart imports inexpensive Chinese consumer goods, it causes US consumption to rise, both of the imported goods themselves and of domestic goods as well, now more affordable due to both an increased residual consumer purchasing power and an increased purchasing power of the monetary unit resulting from the reduction of the money supply remaining in the US. This all results in an increased standard of living in the US.

On the other hand, when Boeing exports a 747 to China, it is using up both material and human resources in exchange for money. This money increases the purchasing power of Boeing shareholders and employees, but the result is the bidding away of consumption from almost everyone else. Total consumption is likely to be lower as no new consumer goods are produced, and some are lost as productive resources are re-directed outward. Also, the purchasing power of the monetary unit is reduced with the increase in the money supply. What we seem to have is large increases in the standard of living for those involved in the 747 production and export and small decreases in the standard of living for the hundreds of millions not so involved. There is no valid way to produce a net of the contrasting effects.

Both imports and exports are the result of voluntary, mutually beneficial exchange. However, imports seem to have positive overall welfare effects, whereas exports seem to be largely re-distributive in nature.

Of course, this violates the conventional wisdom that tends to say that exports are good and imports are bad, and seems to indicate that usefulness of trade balances is questionable, so feel free to identify any flaws you find in the arguments above.

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I'm not sure why we care

I'm not sure why we care about the US v. China or even export v. import. I mean, aside from a series of calculations meant to describe economic activity over a certain arbitrarily defined area, does any of that serve a purpose?

dollars and cents

If you have most of your wealth tied to a particular currency, it might be in your best interest to follow the value of that currency which is based on an arbitrarily defined area.

Mercantilism

The "conventional wisdom" to which you refer appears to be mercantilism. It's been getting critiqued since forever. Your critique seems fine to me.

The Chinese had to exchange

The Chinese had to exchange something in order to get the dollars to buy the Boeing. So there is no net change in the supply of dollars, just a mutually beneficial exchange of a Boeing for Chinese goods.

Your analysis makes sense,

Your analysis makes sense, except you forgot to put in there the part about Jobs. Exports create more jobs internally to the US while import create more jobs in the country they come from. While exports bring in more money to the country, thereby lowering the over-all value of the Dollar, it does create more jobs.

There are no such thing as import and exports.

There are only exchanges, as you mentioned. It so happens that one of the good commonly exchanged is money, that's all. Any distinction between import and export is purely artificial.

consumption as welfare???

Globalization is essentially the extension of the division of labor across national borders. Increasing global trade raises the average standard of living, though individually some people gain more than others. Some of which may even lose out on the deal (American factory workers vs. Chinese factory workers vs. general consumers). We probably all agree on that.

However, you don't get wealthy through consumption. Once you trade your money for a unit and use that unit up, you are left with nothing but the memories. When as a country you are running a trade deficit, you are effectively exporting your wealth. It's great we can trade our dollars for trinkets produced in China, but that isn't making us wealthier. Wealth is created via capital investment used for the production of goods.

Boeing by making airplanes more efficiently than anyone else, is able to pay American workers (and it's shareholders) who can then purchase American services, American goods and foreign goods. Boeing can also invest money in its own capital to increase its productivity again benefitting everyone involved. Sure they might buy some commodities, but so would a foreign plane maker. If we can produce an item more efficiently than anyone else in the world, we are getting richer.

Currently, the U.S. is consuming MUCH MORE than it is producing. If we were making loads of airplanes, and using that money to purchase Walmart trinkets, we'd be alright. No net decline in wealth. But we wouldn't have a trade deficit. Instead, we're taking out loans on our houses to buy the latest HDTV at Walmart. Big decline in wealth.

As for purchasing power of the currency, the dollars don't decrease when you trade them to a foreign country. Now the foreign country has those dollars. A trade deficit doesn't increase the purchasing power of a currency, it decreases it.

Traditionally, when countries ran up a huge trade deficit, their trade partners with huge surpluses of their currency would ask for a gold settlement. Countries with trade imbalances were forced to alter their policies to keep the numbers in better balance and not lose their entire horde of gold.

Now that's not the case. In lieu of production, the government is using inflation to pay its debts. Right now, the US couldn't pay it's debts if it wanted to without immediately destroying the currency (which it's currently destroying little by little). The fact that China is kind enough to trade boatloads of its stuff for an increasingly worthless currency is very kind of them. It's also keeping price inflation lower than they would otherwise be which is temporarily raising the standard of living in regards to what 's being sold in Walmart.

But how long can this go on for? And is our welfare really improved? IF consumption of imported goods is so good, why not just have the Fed print out $500 for every American that they can only use on imported goods? And if $500 is good, then $5000 would be even better! Heck, why not make us all millionaires! $5,000,000 to everyone to spend on foreign goods!!!

Consumption without prior production does not increase the welfare of a country. At best, it postpones the day the bills come due. There are no free lunches.

Wealth vs Consumption

Joe K,

What you're missing is that wealth is a means, consumption is the end.

If everyone built a 747 every week and sold it to China in exchange for dollars, or gold, or any other exchange-valued good, everyone would become fantastically wealthy in a nominal sense, but it would be meaningless if the supply of consumer goods actually consumed (in the present or the future) didn't increase. The wealth can be used to import consumer goods, or to import production goods that lead to the increased production of consumer goods, but wealth itself only redistributes consumption and increases price levels.

Differentially, people who become more wealthy have a bigger claim to the supply of consumer goods, but the overall standard of living depends on consumption.

Regards, Don

Steven Landsburg makes this

Steven Landsburg makes this very point in Chapter 5 of The Armchair Economist: "The export business is the downside of international trade. [In my example,] you don't enjoy doing the other classes' laundry, but you do enjoy eating their brownies....All mainstream economic models assume that people strive to consume more and work less."

take this job and shove it

Of course consumption is the fun part.

If I write out a million dollars worth of bad checks for all sorts of luxury goods, I could really live it up. That is until I'm caught and tossed in jail. But everyone that I screwed is worse off.

It's exchanges with other efficient producers that increases the standard of living of those on both sides of the trade.

Imports vs. Exports

Joe:
The point is that most people, if you asked them, would say that running a perpetual trade surplus would be a good thing, and running a perpetual trade deficit would be a bad thing. This is precisely backwards. If, every year, we could print up a trillion dollars and send it overseas in exchange for a trillion dollars worth of goods, and the foreigners who received the money just would just stick it in a vault and leave it there forever, that would be great for us. We'd be getting a trillion dollars worth of stuff for the cost of printing the money.

Likewise, it would be stupid for us to export a trillion dollars worth of stuff every year and just keep the money in a vault forever. We'd be wasting 7% of our GDP.

We can talk about what the trade deficit means and what causes it, and whether it's a good or a bad thing in light of the fact that it's unlikely to continue forever. But understanding that trade deficits are the upside and trade surpluses are the downside is critical to any kind of intelligent analysis of the issue.

Maybe I am missing something...

Don,

Maybe I am missing something. Without wealth (acquired via investment or production), there is no consumption. Without future oriented production (or capital investment), there's nothing to spend but savings or debt. A trade imbalance is a transfer of wealth from one country (on a large scale) or person (on a small scale) to another. Individually, this doesn't mean much. As other commenters have mentioned... an exchange is an exchange. I'm going to have a large net trade imbalance with the stores around me, and a completely different imbalance with my paying clients. However, in total, if my production falls behind my consumption, then I'm going in debt. Should that happen, I'm obviously not wealthier. And my standard of living is going to go down unless I change the equation.

If you are spending your savings on some consumer good, you are not as wealthy as you were before the purchase. You may be subjectively happier that you have a new HDTV, but there was a price to pay. If you're going to work the next day and make enough money to replace what you paid for the TV, then you are becoming wealthier, and will continue to increase your standard of living.

I don't argue that the imports from China help keep the price inflation of many consumer goods down. This is good... the division of labor at work.

However, the lack of exports shows that we aren't holding up our end of the bargain. What are we producing? What is China getting in return for their production? If we're shipping them our dollars, then we are simply transferring our stored wealth to them. Now the Chinese can buy more stuff, but do we have anything to sell them? Do we have any money left to buy our own things?

And what do we get for this transfer? Some new cheap trinkets that will be broken in a few years.

I'm not against global trade, but I believe that a huge trade imbalance shows that we aren't as competitive in the global market as other countries. It shows that as a whole the people in the country are probably getting poorer as our trading partners get richer.

Certainly, there's no point in production without consumption. However, you can't have consumption without production. THAT'S what a large trade imbalance implies to me... that we're consuming without producing as much in return.

I'll finish with some data from a report by Niall Ferguson:

The personal savings rate among Americans stood at just 0.2 percent of disposable personal income in September 2004, compared with 7.7 percent less than 15 years ago. Whether to finance domestic investment (in the late 1990s) or government borrowing (after 2000), the United States has come to rely increasingly on foreign lending. As the current account deficit has widened (it is now approaching 6% of GDP), U.S. net overseas liabilities have risen steeply to around 25% of GDP. Half of the publicly held federal debt is now in foreign hands; at the end of August 2004, the combined U.S. Treasury holdings of China, Hong Kong, Japan, Singapore, South Korea, and Taiwan were $1.1 trillion, up by 22% from the end of 2003.

What happens when the bill becomes due? I don't know but it sure isn't going to raise the average standard of living.

Big Box stores

Here in Humboldt County Californian we have been debating the impact of Big Box stores. I wrote this editorial on the subject:
The big box vs. local entrepreneurs
http://richardslist.org/bigboxvs.html
or
http://richardslist.org