The debate rages on

money.jpgApparently the debate on trade deficits and dark matter goes on. Joining the choir recently is Brad Delong who also takes a shot at the Hausmann and Struznegger paper and Micheal Mandel.

Apparently, Brad does not believe in the dark matter argument;

"Do I believe in Hausmann and Sturzenegger's "Dark Matter"? No. This post is in the interest of explicating an interesting line of argument only.

I believe what Rudi Dornbusch said: that when highly intelligent and respected economists begin evolving plausible theories that--this time--the trade deficit is sustainable, that is the time to start running for the hills, because the crash is near."

Apart from this statement above Delong's post contains a good explanation of what this dark matter argument actually is all about.

Also Michael Mandel is keeping the discussion alive with his recent post responding to among others Brad Setser's latest gizillion word post :) on the topic. According to Michael Mandel the discussion about dark matters and trade deficits misses the point.

"I believe that most of the discussion of the trade deficit and dark matter misses the big picture. Let's take a step back to get some perspective. In my view there have been two very dramatic changes in the U.S. economy compared to ten years ago. First is the remarkable and unanticipated acceleration of productivity growth. Second is the equally remarkable and unanticipated widening of the measured trade deficit, a hallmark of globalization."

What relationship is there then between a growth in productivity and a widening trade deficit? Mandel's points to the fact that things do not add up;

"Seemingly, these two facts point in opposite directions. After all, if you become more productive, you would expect to borrow less rather than more. The puzzle gets bigger rather than smaller."


I think omitting the acceleration of productivity from the discussion of the trade deficitis a big mistake. To my mind, it is essential to come up with a framework which handles both “big facts” simultaneously. That's what I will discuss in my next post."

So, we see a widening trade deficit which is odd because it occurs on the back of "higher than expected" productivity growth. Where is all this productivity going then? Incidentally, I may be able to help Mandel here. According to two working papers from NBER the rise in American productivity have gone into to the top tier incomes of the US.

1. "Where did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income" Ian Dew-Becker and Robert Gordon; December 2005

2.  "The Evolution of top incomes: A historical and International perspective" Thomas Piketty and Emmanuel Saez; december 2005

(from the Gordon and Dew-Becker paper)

"Our most surprising result is that over the entire period 1966-2001, as well as over 1997-2001, only the top 10 percent of the income distribution enjoyed a growth rate of real wage and salary income equal to or above the average rate of economy-wide productivity growth."

What does this data mean then? The linkage to the trade deficit could be that the spendings of top incomes tend to materialize more in import than low/middle incomes spending which would then mean that the specific rise in productivity in the US has a widening effect on the trade deficit. Is this plausible?