Read on Twitter
Just to clarify some of the stakes from yesterday's debate/discussion on fiancial flows and international trade. (Thanks again, @jainfamilyinst!) Here's the position I was arguning for. I think @NathanTankus and @jonsindreu would agree, but don't want to speak for them. 1/
2/ The starting point is that neither consumption behavior nor financial flows can affect trade flows except through some concrete causal mechanism. The fact that our national accounting conventions organize them through certain identities is neither here nor there. 2/
At a macro level, the only mechanisms available are relative prices and relative income growth rates. The only way macroeconomic developments in country X can move its trade balance toward surplus, is by reducing its prices and/or its income relative to its trade partners. 3/
In particular, the *only* way a tax on financial inflows into the US can reduce the US trade deficit, is by causing some combination of a depreciation of the dollar, or slower US growth. (The latter would come through higher interest rates and tighter credit.) 4/
This means that, viewed as a tool to shift the trade balance, a tax on financial inflows is exactly equivalent to some combination of broad-based tariff and tighter monetary policy. 5/
I personally do not think that it would be a good idea for the US to adopt a policy of higehr interest rates and tariffs, so I also do not think it would be a good idea to tax financial inflows **for the purpose of reducing the trade deficit**. 6/
As it happens, I think the case for capital controls is very strong, just for other reasons. As @DanielaGabor and @MonaAli_NY_US noted on the call, the real point of capital controls is to increase policy space for peripheral countries and reduce the dominance of the dollar. 7/
Now, @M_C_Klein and @michaelxpettis would say they agree with tweet 2 in this thread, that you need a mechanism to explain trade flow changes. But they would not agree with tweet 4. But 4 is just the application of 2 to the specific case. at hand. 8/
The frustrating thing for me and I think others, is that Klein and Pettis say "yes, yes, of course we agree cuasal mechanisms are needed," and then they go on making accounting-based arguments without giving causal stories, or even actively rejecting them.
So just a minute ago, Klein suggested that a tax on financial inflows could cause foreigners to buy more US goods even if it did not affect US incomes or relative prices. That's accounting magic. https://twitter.com/M_C_Klein/status/1294312381510688770?s=20
