Comments on economics, mystery fiction, drama, and art.

Friday, January 27, 2012

Tradeable output, balance of payments, and U.S. Defense dspending

Kevin Drum and Matt Yglesias have a little back-and-forth today about why what matters (as far as the international trade position of the U.S. is concerned) is tradable goods and services, not manufactured goods.  And they actually agree.  Yglesias goes on to argue that, right now, we really don't have a significant balance of trade problem (which is an arguable position), but I want to make a different point.

We know that the U.S. devotes hugely more resources to defense that any other country in the world; according to this web site, the U.S. accounted for more than 1/3 of worldwide defense spending in 2007 (and I can't think of a reason why that would have declined in the intervening 4-5 years).  U.S. defense spending in 2007 was about $2.2 trillion.  I think we need to think about all this defense spending a little differently than we have historically. 

In 2007, the U.S. exported about $1.65 trillion worth of goods and services, while importing about $2.54 trillion.  So the trade deficit was about $0.89 trillion.  But think about all that defense spending.  What percentage of that is actually the U.S. providing security services to Europe, to Japan and South Korea, to the Middle East, to, in effect, much of the rest of the world?  (We're doing that because it's in our self-interest to do so, I grant you, but it means that other countries are enabled to devote fewer resources to the production of defense services than they otherwise would.)  And then we give those defense services away--we don't charge anyone for them.

According to this wikipedia article, about 1/7 of all U.S. military personnel are deployed outside the U.S.  If we conservatively allocate only 10% of U.S. military spending to providing a "public good" to the rest of the world, then we're "exporting" about $0.22 trillion worth of defense services for which we do not get paid.

Which makes the balance of trade deficit look somewhat smaller.


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