It has baffled economists for decades. How can the US continuously run massive trade deficits, year in and year out, without suffering the ordinarily expected adjustments such imbalances imply? Countries running trade deficits should see the foreign exchange value of their currency decline; domestic inflation thereby increase, along with unemployment, and real domestic wages decline. But none, or very little of that, has happened to the US, and it has been running trade deficits for over twenty years. What gives?
The economics academia, possessed of physics envy so severe it seeks to quantitatively model every human relationship, considers dollars (or other currency) as something like the physicists’ electron or photon, imagining dollars as the economic entities doing the work of the economic system the same as photons and electrons in particle physics, leaping from one quantum state to the next depending on the energy applied or lost. But the attempt to quantize all human relations through the metric of currency leaves a gaping blind spot in economic analysis, particularly when it comes to America’s trade imbalances. The quantization fetish fails to capture America’s most valuable export—the one against which all those trade deficits are balanced–because it is nigh well impossible to put a dollar figure on the value of the security America exports around the world. Since the end of the Cold War, America has been the lone power capable of imposing its will by force in every corner of the globe. And it was about the end of the Cold War (roughly, 1990) when America began running continuous trade deficits, as the following graph from FRED, the St. Louis Federal Reserve Bank’s data base, illustrates:
Now, it must be cautioned that correlation is not causation, and America’s trade deficits also epically grew during the eighties (at a time when America’s power waxed as the Soviet Union’s waned). And that none of this could be modeled in a scientifically acceptable manner. But sometimes in causation analysis, doubts inherent to any claim of causation must be set aside in order that reasonable, and well-reasoned, deductions can be made. Ascertaining causation in the social sciences is more art than science, which is why they are so hard. Trade deficits as large as indicated should have resulted in a decline in the value of dollars internationally, particularly against major US trading partners. Such has not, generally, been the case, as the following graph, also from FRED, indicates:
The value of the dollar was stable or rising all through the nineties, when trade deficits really exploded. The peace dividend for the world, and the dividend to America for its status as lone superpower, was apparently quite robust. That the dollar has declined internationally roughly since the terrorist attacks of 9-11, with an uptick during the recession, indicates that America’s world hegemony may be waning. But the fact it can still run massive trade deficits indicates that perhaps it has not waned by much.
The price of an aircraft carrier battle group poised off the coast of Asia, making sure international shipments get through unmolested, is easy enough to calculate. The economic value of the peace of mind arising from the security that it provides is beyond the ken of modeling. Security is of utmost importance and value to all economic systems. Without security, the respect and enforcement of property and contract rights upon which economic transactions depend is problematic and uncertain, and without enforceable property and contract rights, there is nothing to trade. America is able to ceaselessly run apparently massive trade deficits without untoward consequences because America exports a commodity easily as valuable as the trinkets and baubles from China, or oil from international markets, etc., it imports.
America’s security export is the lynch pin of the global economic system. It is the reason the dollar remains the world’s reserve currency and safe haven during economic turmoil. It is the main reason the American government can borrow on outrageously cheap terms, even in the face of massive fiscal deficits. The world depends on America to police its lanes of commerce. In tribute, the world allows (if mainly unwittingly) the American economy to do get away with doing things that would otherwise be heavily penalized were it not so critically positioned.
Which brings us to Syria. The world depends on American military might to give meaning to commercial obligations. It does not depend on the US to manage each nation’s internal affairs, except as a nation’s internal turmoil might threaten the security of international transactions. Syria is a tiny country. Were it to vanish tomorrow, the world economic system would barely notice the loss. Intervention in Syria is economically warranted only if its sectarian turmoil seems likely to spill over its borders and affect the security of international transactions. Proclaiming a determination to intervene depends, as President Obama did, upon which type of weapon Syrians use to inflict death and destruction, misses the point, unless the security of international transactions is deleteriously affected by the particular choice of weaponry.
It seems clear that Obama did not think before he spoke when he warned Syria that using chemical weapons would cross a “red line”, forcing US intervention. For one, there is no good reason to pick out chemical weapons as the weapon of mass destruction that would cross the line. Chemical weapons are profoundly ineffective and inefficient at achieving battlefield ends. They, like all weapons of mass destruction, kill indiscriminately, but controlling the size and duration of the kill zone is notoriously difficult. A chemical weapon is apt to kill, or at least inconvenience, the troops of the side that deployed it as much or more as it kills or inconveniences its targets. For that reason, though chemical weapons have been around in their modern configuration since at least World War One, they have been only rarely utilized on the battlefield. And even if they have been deployed in the Syrian civil war (it’s not clear for sure whether they have, or even which side might have used them), their use would not necessarily pose a threat to the security of international commerce. Japan lost several of its citizens to a ricin (a nasty form of nerve agent alleged to maybe have been used in Syria) attack on a subway, but its economy, and the international economic system, chugged right along. The US is expected to ensure the overall security of international commerce, not to prevent every ne’er do well who is so inclined from exploding a bomb, a task which would be impossible even for the most powerful human force the world has ever known.
But simply by Obama tying intervention to the type of weapons used in the conflict, he may have indirectly impaired the security it is the function of the US to protect. Deciding to intervene or not based upon the type of weapons lacks a reasonable basis. Just because it now appears that chemical weapons may have been used, the case for intervention or not hasn’t changed, but an economically costly intervention may be forced upon the US in order to prove that it means what it says when it issues international ultimatums and bluffs. If it ever appears that a schoolyard bully is only bluffing with his threat of violence, he must either initiate violence to prove his bluster, or slink away to bluff no more. If America has to intervene solely to protect the tough reputation it requires in order to be an effective guarantor of international security, i.e., if intervention is not otherwise directly necessary to achieve international security, then it will be an economically wasteful intervention, spilling blood and treasure with the only hope of gain being the prevention of loss. Too many such interventions, and the economic losses could add up to enough that America’s role as guarantor of international security might be substantially weakened.
It might be argued that human lives are at stake in Syria, and they are owed more than a cold economic calculus in considering whether to intervene; that it is immoral to consider human lives so callously. But the US only has the option to intervene because it is strong enough economically and militarily to do so, and if it embarks too frequently on costly interventions with little or no prospect of gain (e.g., Iraq and Afghanistan), it will indelibly impair its ability to do the task—ensuring the security of international transactions—upon which the world depends. The US is to the world what it was once considered GM was to the US—what is good for the US is good for the world. The US does the greatest good for the greatest number of people by keeping its power dry, intervening in the internal affairs of other nations only when events unfold that present a direct threat to the US, or to the international security regime it provides.
As of right now, the case for intervention is unclear. Nobody really knows for sure whether or not chemical weapons have been used, or if they have, by which side, so Obama’s bluff hasn’t yet been called. Syria does not pose a threat to international security, or at least the threat it poses as a result of the civil war is no worse than the threat, as something of a rogue nation, it has always posed. The best thing to do in the case of such ambiguity, particularly in the context of a civil war, is nothing. Be prepared to act if the war spills over the borders and starts affecting the smooth conduct of international trade. Other than, it’s just wait and see. And keep piling up those trade deficits for so long as the world will allow.