December 13, 2012
When all you have is a hammer, everything looks like a nail. Bernard Baruch
In review of trade policy best suited for our Nation it is time for an overhaul and start developing a more complete toolbox. As Kevin Kaiser so poignantly stated in his article in CNN Money:
“The economists that make the world's crucial monetary policy decisions are
the same economists who authored most textbooks in use. While superficially
appealing, their theories lack empirical evidence, are riddled with internal
inconsistencies, and are based upon tenuous assumptions. Specifically, their
models are built on downward sloping demand curves, upward sloping supply
curves, perfect competition, rational consumers, benevolent dictators, and
general equilibrium; there is no dynamic analysis, no consideration of disequilibrium, and no role of private sector debt” (Kaiser, 2011).
The policy cross as shown to the left indicates that as e increases m decreases, and current account improves. To offset this, an increase in g is required. The EE curve is positively sloped in the (e,g) space. An internal equilibrium is attained when the output is at the full employment level thereby raising the interest rate. Moreover, because the economy is fully employed, real output cannot increased beyond a point. Thus, an increase in inflationary pressure occurs, thereby raising domestic price, which shifts the LM curve to the left. Thus, along the IE curve, government spending and interest rate are directly related.
As a Post Keynes-Industrialist, the tendency to lean towards comprehensive human market behaviors and interdependent structural issues makes developing a one-size-fits-all policy, such as the policy cross, for internal and external balance a challenge. This is particularly true when evidence for any one theory to-date has not proven to be exact and reliable....
References: Hill, H. (2011). Global Business Today. New York: New York McGraw-Hill
Kaiser, K. (December 16, 2011) It 's time for economic theory to evolve. CNN Money. Retrieved on December 14, 2012 from http://finance.fortune.cnn.com/2011/12/16/its-time-for-economic-theory-to-evolve/
Johnston, M (October 8, 2011). AS and A2 Macroeconomics: Internal and External Balances. Econofix. Retrieved on December 12, 2012 from http://econfix.wordpress.com/2011/10/08/as-and-a2-macroeconomics-internal-and-external-balances/
Kling, A. (2004). The trade balance. Retrieved on December 13, 2012 from http://arnoldkling.com/econ/macro/trade.html
Krugman, P (2009). “How Did Economists Get It So Wrong?” The New York Times, September 2. Retrieved on December 14, 2012 from http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html
News Release: US International Transactions. Retrieved on December 14, 2012 from http://www.bea.gov/newsreleases/international/transactions/transnewsrelease.htm
Wong, C-H. Adjustment and the Internal-External Balance. Retrieved on December 14, 2012 from http://rbidocs.rbi.org.in/rdocs/content/pdfs/L-1b.pdf
World Economy Expenditure Changing Retrieved on December 14, 2012 from http://web.pdx.edu/~ito/Expenditure_changing_switching_RE_-HI.pdf
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