Monday, May 28, 2007

Greg Mankiw's Excellent Explanation

If Congress proposed to raise our taxes, and use the tax revenues to purchase lots of Chinese treasury bonds, China would certainly enjoy lower interest rates, but wouldn't most Americans object to this proposal? Of course. But then why do we object when China does basically the same thing, and helps finance investment in the U.S. economy? We might object because it possibly makes the Chinese worse off, but nobody makes that argument.

Read Greg Mankiw's excellent explanation of why the current account deficit and capital account surplus with China is not a big deal. "While some jobs are lost to import competition, other jobs are gained because of lower interest rates and greater investment spending that capital inflows finance."

Note: We get a $200 billion capital inflow annually from China.

1 Comments:

At 10/13/2007 8:36 PM, Anonymous Mauricio said...

Maybe other things should be taken into account when discussing this topic. Perhaps Americans are consuming, whereas the Chinese are investing. Besides, debt means that eventually the consumption of future generations will have to decrease, when the Chinese will be able to sit back and enjoy the returns on their foreign assets, not to mention the growing power of China as a consequence.

 

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