{"text":[[{"start":8.28,"text":"The writer is a senior fellow of the Carnegie Endowment for International Peace"}],[{"start":13.969999999999999,"text":"One of the precepts of laissez faire globalisation — that unimpeded capital flows are a good thing — should be questioned more."}],[{"start":21.7,"text":"In a recent piece, Martin Wolf suggested that if the US is interested in a policy to reduce its trade imbalance, “the obvious one would not be tariffs but a tax on capital inflows”. But while he is certainly right, many economists oppose taxing capital inflows on the grounds that it would raise the cost of capital for American businesses and increase borrowing costs for the US government."}],[{"start":49.39,"text":"This claim, however, is based on a misunderstanding of the various ways in which a country’s internal imbalance can accommodate its external imbalances."}],[{"start":61.82,"text":"In classical economies, where credit creation is tightly constrained — for example under the gold standard that once tied the value of the dollar to the precious metal — net foreign capital inflows do indeed shift a country’s domestic imbalance in ways that lower domestic interest rates but under particular circumstances."}],[{"start":84.7,"text":"One is when the recipient country is a rapidly growing developing economy with high investment needs and limited domestic saving, for example the US during much of the 19th century. In that case, British and Dutch investment inflows lowered domestic interest rates by relieving the saving constraint that inhibited American investment. By pushing domestic investment higher than it otherwise would have been, this represented the textbook case for why capital should flow from capital-abundant economies to capital-scarce ones."}],[{"start":121.19,"text":"But when a country’s investment is constrained not by scarce saving but rather by inadequate domestic demand, or by competition from low-cost imports, increasing the supply of foreign capital may not spur investment. In fact, it can actually damp investment as the resulting higher currency makes domestically-produced manufacturing even less competitive."}],[{"start":146.48,"text":"When that happens the accompanying trade deficit is not caused by a surge in investment but rather by a shift in spending from domestic to foreign-produced goods. This forces businesses to reduce output and lay off workers. This is precisely the dynamic British economist Joan Robinson described in the 1930s when she criticised policies in surplus countries as “beggar thy neighbour”. Interest rates may decline, in that case, but as a byproduct of recession and rising unemployment."}],[{"start":181.56,"text":"However, we no longer live in a classical economy. Since the breakdown of the Bretton Woods financial system in the 1970s, the constraints on credit creation have largely vanished. Modern financial systems can expand credit as needed, unconstrained by fixed exchange rates or a gold standard."}],[{"start":200.84,"text":"This fundamentally changes how capital inflows affect advanced economies like the US. Rather than allow capital inflows to put downward pressure on domestic output and employment, as would have occurred in Robinson’s classical world, US policymakers try to sustain demand either by expanding the fiscal deficit or by adjusting monetary policy to encourage households to borrow and spend more. Since the 1970s, in other words, net capital inflows do not accommodate rising investment — they are more likely to set off an increase in household or fiscal debt."}],[{"start":242.43,"text":"This is also why the advanced economies that consistently absorb large net foreign capital inflows — the US, UK, and Canada — are distinguished among their peers not by lower interest rates, but by faster credit growth. Because capital inflows into these economies are not financing productive new investments that generate the returns needed to service the debt, they instead fund higher household or fiscal debt designed to prevent recessions caused by the leakage of demand abroad."}],[{"start":275.11,"text":"In the long run, this dynamic is unsustainable. It leaves recipient countries with a legacy of rising debt and the distorted economic structures needed to accommodate persistent deficits. More importantly, it also means that while taxing capital inflows will indeed reduce trade deficits for countries like the US, it will not do so while raising domestic interest rates."}],[{"start":301.7,"text":"Restricting capital inflows would not be without costs, especially to the global dominance of Wall Street, but it would address the real problem: the need to align the country’s external position with domestic needs, rather than passively absorbing foreign capital inflows, running the consequent trade deficits, and relying indefinitely on rising debt to balance the leaking abroad of domestic demand."}],[{"start":335.22,"text":""}]],"url":"https://audio.ftmailbox.cn/album/a_1753658782_9522.mp3"}