For most of my lifetime the UK has had a Balance of Payments problem. This is not the much discussed current problem of the government's expenditure exceeding its income, thus appearing to require stern "fiscal rules" (though we've had that as well) but the balance of our our external payments. As a country we have persistently spent more money on the products of other countries, imports, than we have earned by selling British products to other countries, exports.
Imports have to be paid for in foreign currencies. Exports earn foreign currencies. The two must, in the long run, balance.
One of the main methods of bringing the two into balance has been to make our exports cheaper and so more attractive, and our imports dearer and less attractive, by lowering the value of our currency , devaluation
When I was a boy we casually referred to five shillings (a quarter of a £, or now 25p) as "a dollar." That was because $4 could be bought for £1. (To be exact, slightly more, $4.03). A half crown (2/6d) was "half a dollar" in schoolboy slang.
In 1947 the government devalued the pound to £1=$2.8. So British products abroad become roughly 1/3 cheaper, and imported products 1/3 dearer.
However, it didn't do the trick in the long run so in 1963 we devalued again to £1=$2.4
That didn't do the tick either, and from 1972 onwards the £ has been allowed to float: find its own level according to market forces. Today it is valued a $1.35.
If you plot those figures on a graph: 4.03. 2.8. 2.4, 1.35, against time you will have an accurate picture of the efficiency of the British economy over the past 80 years under the stewardship of the two major parties.
To continue this simple guide.
We automatically think of exports as products sold abroad. But they needn't be. If foreigners come here and buy products that is as much an export as sending the product to their country to sell it there. Tourists coming here and spending their money on hotel bills, transport, restaurants, theatres, souvenirs etc. are therefore adding to the "exports" side of the Balance of payments.
Similarly when we go abroad and send our money, which we have changed into foreign currencies, that is the equivalent of importing.
So, to get to the subject of the post, foreign students coming here to buy our education, and while they are here renting rooms, eating meals, travelling, going to the gym, buying clothes, going to concerts etc, are making a contribution to our export earnings.
On Thursday a substantial decrease in the the level of immigration was announced. Sir Keir Starmer took the credit: Labour's policies were working. The Tories insisted that the reduction was actually the result of their policies.
A large part of the reduction is due to increased restrictions of foreign students.
Having spent all of the post war years making desperate attempts to boost our exports, the two major parties are now competing to claim the credit for cutting them
You couldn’t make it up.
Imports have to be paid for in foreign currencies. Exports earn foreign currencies. The two must, in the long run, balance.
ReplyDeleteThat’s not true, is it? Some imports can certainly be paid for in Sterling (for example, imports from counties whose own currencies are less stable than Sterling, so the producers would prefer to receive Sterling than their home currency).
Anyway you need to read this page: https://www.investopedia.com/articles/investing/051515/pros-cons-trade-deficit.asp
And understand: ‘Trade deficits are neither inherently good nor bad.’
I think I’ve worked out your problem (well, one of them).
ReplyDeleteYou know the ‘lump of labour’ fallacy, right? You seem to be suffering from what we might call a ‘lump of wealth’ fallacy where you think that there is only a fixed amount of wealth in the world, such that if we have a persistent trade deficit then it must mean that our wealth is gradually draining away and we will eventually be left with nothing.
But this is, of course, not how things work in the real world, any more than the lump of labour is real.
I’m sure that our politician and the Governor of the Bank of England would be delighted if your extraordinary theory that external payments deficits don’t matter becomes accepted. In the meantime they should continue to try to balance the books.
DeleteFor the sake of simplicity I stuck to the core description of the issue in the original post. As I’m sure you well know there are a number of methods which can be used to tide us over a temporary deficit. We can run a higher rate of interest to attract “hot money” (loose currency looking for a better return), we can sell of our assets to foreigners (railways, water companies, ARM), we can try to persuade foreigners to invest in the UK (FDI). If used in the long run the first two of these these have a debilitating effect on our economy. and in the third the foreign owners may have the state of their profits (which go abroad) as a higher priority than the interests of Britain.
Yet that is how we have survived, especially since 1979. Former Governor of the Bank, Mark Carney, now PM of Canada, called it “living off the kindness of strangers.”
I’m sure that our politician and the Governor of the Bank of England would be delighted if your extraordinary theory that external payments deficits don’t matter becomes accepted
DeleteI only wish I were smart and perceptive enough to come up with an extraordinary economic theory! But no, I'm afraid this is just me repated generally-accepted economic orthodoxy. I'll give you the link to try to explain it you you, but first I must point out that you have mistyped. I never wrote that 'payments deficits don’t matter'. Of course they matter, in the sense that they tell you something about the economy. They are a symptom. What I wrote, and what is generally accepted, is that they aren't inherently bad.
Think of it like having a pulse rate of 55 beats per minute. If you're an unfit fatso and your pulse drops that low you better head to Casualty quick, because something's seriously wrong. But if you're a reasonably regular gym-goer in good shape, that is a pretty good sign. A pulse rate of 55 beats per minute matters, in that it tells you something but it's not inherently bad: whether it's bad or not depends on your health as a whole.
Similarly, running a trade deficit matters but it's not inherently bad: it depends on the health of your economy as a whole. If your economy is healthy and growing, then running a permanent trade deficit is not a problem and might even be a good sign (the United States has run a permanent trade deficit sing the nineteen-seventies and nobody would say they didn't have a healthy economy).
On the other hand if your economy is stuck in zero-growth, recession-in-all-but-name, barely-alive torpor, then running a trade deficit could well be a sign that you're about to hit the skids permanently. But in that case it's not the trade deficit that's the problem, it's the lack of growth, and fixing the trade deficit will do diddly squat to fix the economy because the fundamental underlying problems will still be there. (In fact this is the position Britain is in — our economy is shot and everything the Labour government is doing is making it worse, but I have resigned myself to the fact that, just as in the nineteen-seventies, we are going to have to go bust before people realise that the state has grown beyond what we can afford and we have to elect a proper Conservative government to sort out the mess left by the last few governments that, whether Labour or Conservative, were addicted to putting the state on steriods and pumping up public spending).
Anyway the link for your education: https://fee.org/articles/milton-friedman-the-way-we-talk-about-trade-confuses-the-issue/
As I’m sure you well know there are a number of methods which can be used to tide us over a temporary deficit.
There are but, as I point out and is generally economic orthodoxy, there's a big difference between a fundamentally-flawed economy trying to ride out a temporary trade deficit, which is bound to lead to disaster, and a fundamentally healthy and strongly growing economy, which can indeed run a permanent trade deficit forever without any problems.
Former Governor of the Bank, Mark Carney, now PM of Canada, called it “living off the kindness of strangers.”
Isn't Mr Carney generally agreed to be the worst governor of the Bank of England in modern times? Certainly on his watch the Bank failed in its single duty, to control inflation, when, in early 2021, when even a blind lobotomised squirrel could see that the vast money-printing machine that wast switched on to fund the furlough scheme was going to lead to a huge inflationary spike, the committee he chairs refused to raise interest rates to cushion the clow and instead stuck its fingers in its ears, meaning that when the bubble finally burst the inflation spike was hard higher and longer than it needed to be.
I have no doubt he will now take the opportunity he has been given to ruin Canada just as thoroughly as he did the Bank of England.
I've read your Milton Friedman link.
DeleteFrom the final sentence: "it’s actually the US that has perpetrated the “greatest theft of merchandise in the history of the world” – totaling to more than $3 trillion in accumulated “stuff surpluses” over the last decade representing the amount of goods the US has “stolen” from the Chinese people since 2008!" the key word is "theft."
The US can get away with it because its currency dominates world trade (for the moment.) Other countries can't. America's moment will be curtailed when China flexes the strong muscles it has developed by accumulating that currency currency and uses it to increase its influence (as it is already doing throughout Africa and in the South Pacific.)
the key word is "theft."
DeleteNo, it isn't! Did you not understand the article at all? The whole point is that nothing was stolen by either side in the transaction! The whole point of the article is that there was no 'theft'!
The point is that trade between countries is just like trade between individuals: both benefit. Trades freely entered into are positive-sum: if I sell you something then we both gain from the transaction (or we wouldn't have entered into it). You got something you value more highly than the money you paid (or you wouldnt' have paid it) and I get money, whihc I value more highly than the thing I sold (or I wouldn't have sold it for that price).
The article is pointing this out, and saying that if you say the party which benefited 'stole' from the other then you can just as well say that the United States 'stole' from China. But the reason the article says that is not to say that is the 'true' way to look at thinks but to point out that the whole framing of it as a zero-sum game where if one party benefits the other must have lost (and therefore been the victim of 'theft') is just wrong. In reality nobody was 'stolen from' because both parties benefited.
The US can get away with it because its currency dominates world trade (for the moment.)
No, not true. It's got nothing to do with currency. It's about comparative advantage.
You seem to be stuck in some bizarre pre-twentieth-century mindset where you think a nation's wealth is determined by how much gold it has in its vaults, which is just bonkers. That hasn't been true since the industrial revolution.
A nations' wealth is determined by how innovative its economy is. If a nation keeps innovating, it keeps getting richer, and it can then use those riches to import stuff its people want. On paper this shows as a trade deficit, but who cares? The country is still getting richer and as long as it keeps innovating it's not going to 'run out of' wealth to pay for the imports; so it can run the trade deficit for ever, as long as it keeps innovating.
America's moment will be curtailed when China flexes the strong muscles it has developed by accumulating that currency currency and uses it to increase its influence (as it is already doing throughout Africa and in the South Pacific.)
I don't even understand what you mean by this and I don't think you do either. What do you mean by 'China flexes [its] muscles'? Do you mean China sells its accumulated US treasury debts? That would cause pain for the United States all right, by crashing the price of US bonds, but it would cause more pain for China, so it's hard to see why they would do it. But if not that then waht do you mean?
Let's try to explain this as if to a child… imagine, in the days when wealth really was gold, there was a country (let's call it Eldorado) which contained an inexhaustible gold mine. Well, clearly Eldorado can run a permanent trade deficit, right? It can keep buying imports with the gold from its mine, even if it never exports anything.
DeleteInnovation is like that inexhaustible gold mine. Innovation creates wealth by allowing us to do new things, or giving us more efficient ways to do old things. That's how Britain became rich off the industrial revolution. So a country which keeps innovating can, like Eldorado, keep importing, paying for those imports with the fruit of its innovation, and so run a trade deficit for ever.
(Except the innovation is even better than the gold mine, because the gold mine doesn't actually directly improve the lives of the citizens of Eldorado: if they try using its gold as their own currency they will quickly find that inflation strips away its domestic value, though at least they can still buy imports with it. But innovation does improve the lives of the citizens of the innovating country, as it gives them new things that they can do and more efficient ways to do old things, as well as allowing them to buy imports from countries which have different comparative advantages to make their lives even better. Innovation is better than gold, in other words.)
Do you understand now?
Yes, and stand by my version of the situation.
DeleteYes, and sand by my version of the situation
DeleteActually imports and exports always do balance in a sense but if the is a surplus of imports over exports, then there will be a transfer of capital to pay for them. And, yes, Peter is absolutely correct. If the number of foreign students and their dependents is reduced then they no longer make a contribution to the export side of the equation and WORSE cease to make a large financial contribution to our struggling universities and the businesses that surround them, shops, rented housing, transport and so on. All because some idiots think that dependents (and students) get welfare and health services, whereas in fact they pay for them and their dependents, for the most part, get jobs and contribute to the exchequer. My wife's nephew, a British/Canadian, a lecturer and well published academic,has to pay upwards of £10,000 a year towards the health care of his wife and family (all young and fit) and has just been told he will now have to wait 10 years instead of five for his wife and children to apply for citizenship. The result is that they will be returning to Canada and his excellent contribution to UK academia will be lost. There will of course be 3 less immigrants.
ReplyDeleteActually imports and exports always do balance in a sense but if the is a surplus of imports over exports, then there will be a transfer of capital to pay for them.
DeleteIn a sense, yes, but not in an important sense. What you write there is true on a static view: inflows balance outflows. But the economy isn’t static. Writing ‘ if the is a surplus of imports over exports, then there will be a transfer of capital to pay for them’ implies that running a trade deficit means we (if Britain is the country running the deficit) must be getting poorer, but that’s not true. If the economy is growing, then we could run a permanent trade deficit while still getting richer all the time.
There isn’t a ‘fixed pie’ of wealth such that if we are exporting wealth then we must be getting poorer.
All because some idiots think that dependents (and students) get welfare and health services, whereas in fact they pay for them and their dependents, for the most part, get jobs and contribute to the exchequer.
As I pointed out before, some do contribute, while some are a net drain on the country. Pointing out a single example of an immigrant who does contribute doesn’t stop that being true.
Do you have figures to back up that ‘for the most part’? Intuitively, I would suspect that that is not the case; for most things in this sort of area, the distributions are heavily lopsided, such that a few immigrants would contribute a lot to the economy and then there’d be a long tail of immigrants who are a drain, such that most immigrants, numerically, are a drain but those few who do contribute, contribute so much that the average immigrant’s contribution is positive or close to positive. But I don’t have figures, that’s just my intuition: do you have figures?
In any case, whatever the distribution, we know that not all immigrants are net contributors, and therefore the best policy would be one that keeps out the ones who are a net drain, while letting in those who contribute — especially those who contribute a lot.
You know I think it’s funny that, for people so vociferous in their condemnation of Mr D. J. Trump, you have fallen for the exact same mercantilist fallacy that is driving him to do such damage to his own country.
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