I recently saw our fellow Austrian Peter Schiff debating a Keynsian. One of his main objections to our current economic system is that our economy is not production based, but spending based. But I also recently read that the USA is the worlds number 1 producer. How can one makes sense of this if the criticism of productivity is to remain valid?
Peter Schiff is broadly incorrect. If we did not produce more than we consume we’d be going through capital deaccumulation. This is not the case. All growing economies are “production based”, because it’s only through production that an economy can grow.
and what of his critique that Americans consume too much and save too little?
Can you elaborate on that Jonathan?
We have to encourage saving, especially right now… .
I was about to ask the same thing haha. I mean theres gotta be something to this production arguement
Sam29: “I recently saw our fellow Austrian Peter Schiff debating a Keynsian. One of his main objections to our current economic system is that our economy is not production based, but spending based. But I also recently read that the USA is the worlds number 1 producer. How can one makes sense of this if the criticism of productivity is to remain valid?”
I’ve heard Peter question the validity of subjective government productivity reports verses the fairly objective trade deficit. Also I think that productivity is relative to the size of the country. The US is a big country so it should be the number one producer. The more important point is that the US needs to produce more than it consumes. A tiny country might be 100th in overall production but if it produces 3 times what it consumes then it’s still a good thing.
Jonathan, in terms of growth, are you talking in terms of GDP, or just raw industrial production data of various quantities? If the latter, I’m sure you know better than I the problems associated with such “growth.” I actually figured there was a relation between the US trade deficit, and the Chinese currency peg(and previously their bond purchases helping maintain the US dollar’s value in spite of the Fed’s debasement), causing the US, to basically be in a situation whereby it can allow itself to have its consumption subsidised by production from the East while in the mean time US industry has been hampered by strangleholding regulations.
I’m probably not as well versed as you in economics, let alone international economics, but am I completely off base here?
Is this completely correct? We largely export credit, and import the products of other countries. We still have a trade deficit no? We seem to import more then we produce to export. Then promise our future productivity as collateral.
There has also been a steep decline in domestic savings just up until before the bust. I would say that there are at least some points which could argue capital consumption.
this whole post would be better if you gave us the article or video on Peter Schiff… because maybe if he did say that productivity is bad but maybe he explained himself afterwards or explained how he thinks productivity is bad…
http://www.youtube.com/watch?v=xX0BGBs7fEE
Go to about 8:25 to see the productivity portion of the discussion.
Is there a chart that measures growth of productivity thats takes into account inflation?
IMO Peter may have accepted a bad premise. I agree with him that I would not trust government figures, though I don’t know that we’ve become less productive, or even stagnated.
I’m not sure the context Peter was talking about, but I can try and elaborate on what I think he was saying. I believe Schiff was reffering to the fact that over the years (starting in the late 60s/early 70s) the U.S has moved away from a “production” based economy (one with savings, trade surplus, strong incentive for businesses to produce here) to the so called consumer service economy. Due to higher regulations/taxes in the U.S, manufacturing has moved to Asia because it is more efficient there. The U.S doesn’t produce or save for everything it consumes, it borrows. We are able to import goods and borrow money while other countries (ex. China) pegs their currency to the dollar, holds our dollars (some 60% of M0 is held outside the U.S), and buys our bonds. Since the 80s, our budget deficits have exploded. Consumer debt and debt as a percentage of Household earnings rose considerably. Our yawning trade deficit shows no sign of correction. Our trade deficit isn’t even the good kind of trade deficit (one where we import capital that will improve our country’s productivity/capital structure to repay the bill later), but made mostly of consumer goods that will not enhance future productivity. Savings rates have plunged. Some of these things might have “improved” in the last year or so (consumer debt/trade deficit is down, savings rate is up), but thats not due to the U.S correcting its fundamentals but getting poorer.
We might be the world’s largest economy/major producer/exporter, but taking into consideration all of our other problems we are a stagnating consumer economy. AFAIK, compared to most non thirdworld countries, our trade deficit problems, savings problems, consumer debt/government debt/foreign borrowing are very out of hand.
Even if we are borrowing money from the Chinese to do the consuming?
I think that they got peter off guard… this wasn’t peter’s best interview but we shouldn’t make anymore excuses for him, unfortunately, he was wrong on this…
Abskebabs,
I’m referring to growth in the quantity of economic goods. All growing economies are “production based”, because production is the only means by which an economy can grow.
I don’t know to what degree China affects our ability to consume. It would be impossible for us to consume more than we produce to the degree that our wages directly depend on production to exist (this includes the production of services, not just tangible economic goods). It’s true that Chinese subsidization of our consumption (and production, if we are buying capital goods from them) allows us to buy more goods than we otherwise would, but they don’t subsidize our ability to pay wages—that is dependent on our ability to produce. To the extent that our aggregate nominal demand for Chinese goods represents consumption, that is a loss in capital and not a gain, if anything.
I think there is an argument that we have suffered a loss in production, but we are still “production-based”.
It’s not the first time Peter Schiff has said some strange things. He also said that if China stopped financing our t-bills our economy would collapse.
So what? It still spends more than it produces, ergo the growing debt.
So what? It still spends more than it produces, ergo the growing debt.
How one follow from the other? The growing debt is a government debt, not a debt for the economy as a whole. That the government spends more than it produces is obvious, because government production is negligible (otherwise, it would be pay to pay for its own spending programs). Yes, the government is undertaking capital deaccumulation, but this is not net capital deaccumulation for the economy as a whole. As long as the private sector produces more than the government consumes and the private sector consumes there is capital accumulation, but it also means that economic growth will take place at a much slower pace (which is why European countries have very, very low growth rates).
From Wikipedia:
This is a list of countries by external debt, the total public and private debt owed to nonresidents repayable in foreign currency, goods, or services,[1] where the public debt is the money or credit owed by any level of government, from central to local, and the private debt the money or credit owed by private households or private corporations based in the country under consideration.
| United States | 13,450,000,000,000 | 30 June 2009 | 43,758 |
94%
|
| - | - | - | - | - |
13 trillion dollars. 94% of GDP. That was a year and a half ago , and it’s more now.
So you are saying that even though we have to hand over 13 trillion dollars, 94 percent of our GDP, to foreigners, we must be in good shape, producing more than we are consuming? Imagine if you had to hand over 94 percent of everything in your house to someone, in return for nothing. 94 percent of the food in your fridge, of the clothes in your closet, of the furniture, of the appliances, of the very space your rooms take up. Instead of, say a 3 room house, you will have one room, that room a fifth the size of the room are sitting in now. That’s what we are headed for. Call it capital deaccumilation.
As for the argument that we must be producing, or else how could we be paying wages? We are borrowing to pay wages. 94 percent of our economy is borrowed.
Peter Schiff’s argument about without the Chines buying our treasuries we are ruined is very simple. The US govt plans to spend 2 trillion dollars a year, every year, more than it takes in. Where is the difference coming from? Borrowed from the Chinese. If they stop lending us [=stop buying our treasuries], do you think the govt will stop spending? We all know the answer, as announced by Ben Bernanke very publicly. We will have QE2, then QE 3,4,5 etc. Which means printing mountains of money, which means hyperinflation, which means collapse of our economy. Not a wild statement at all.
Excellent points, but what about the Chinese? A collapse of the dollar, hyperinflation, and a huge drop in American imports cannot possibly be good for the Chinese. While our economy is heavily misallocated (over consuming based on debt) isn’t the Chinese economy equally misallocated (over producing for export to foreigners who can’t pay back)?
I remember that Schiff has said that said that the Chinese can just buy their own manufactured goods, but won’t that require a huge reallocation of resources which would involve unemployment and societal instability?
I agree with you and Schiff that there are problems with the American economy, but it doesn’t seem like everyone else is in a good position either.