absent policy to encourage exports / restrain imports, what prevents, why shouldn’t we expect an expansion like during the aughts? the benefit from petroleum balance is already passed, China is likely dominant in new industries (autos, batteries, etc) going forward. 1/

one can make 4% into the new zero (i don’t recommend it, but if long-term US NIIP/GDP stability is your measure of alarm, okay), but then you do need some kind of policy or plan to defend 4%. /fin

good piece on this here. www.rabobank.com/knowledge/d0... yes, it’s true that the decline in US NIIP has in recent years been driven by US asset outperformance. (dark antimatter) but in prior years was restrained by underperformance. (dark matter) 1/

one might call it oscillation around a center of gravity defined by the cumulative current account. so, yeah, if the current account can be stabilized at less than GDP growth, this center should continue to remain pretty stable. but that’s a pretty big if, absent some policy to stabilize it! /fin

in this context, capital-side policy refers to the opposite of current-account-side policy, specifically with respect to balance of payments. loans subsidized via income-contingent repayment are a form of industrial policy, not intended to regulate balance of payments. 1/

what i’m referring to more specifically by “capital-side policy” is something like a foreign payouts tax, as described here. drafts.interfluidity.com/2025/04/01/i... 2/

the two are complementary, i think. in general, absent balance, any form of fiscal stimulus risks leaking to external demand, contributing to trading partners’ mercantilism. 3/

the ability to impose a (near) balance constraint reduces this risk with respect to industrial policy by stimulus (which i consider far preferable to industrial policy by tariffs). 4/

so i think a foreign payouts tax makes more plausible income-contingent repayment (and other forms of subsidy), not bc the tax recoups the cost, but bc under balance, the fiscal expenditure will flow only to domestic balance sheets, susceptible to taxation and/or redistribution by domestic policy 5/

i think all of this is very Ricardian! Ricardo’s comparative advantage trades were balanced. He did recognize that gold could “balance” trade reflecting past wealth rather than comparative advantage, but perceived mechanisms that would limit gold-“balanced” trade, eventually enforce balance. 6/

those mechanisms don’t so reliably work when gold is replaced by securities, especially fiat denominated securities. a foreign payouts tax is just a mechanism to reimpose the kinds of constraints Ricardo perceived existed naturally under a gold standard. /fin

i don’t think there is a really good measure of tradables capacity. overall GDP is wrong, since much economic activity is not internationally tradable. exports are an underestimate, the economy produces more tradables than it exports and there may be more tradables capacity than actual production 1/

exports was a “cheap” alternative to GDP that’s readily available, but not “right”. i don’t know what right would be. 2/

by Ricardo do you mean species flow? i don’t think that mechanism really functions in a fiat world, particularly with respect to an issuer of widely accepted fiat. the price level is pretty decoupled from the internat’l balance in modern economies. but that’s maybe not what you’re referring to? /fin

i agree with @martinsandbu.ft.com on the jobs case! manufacturing (like production in general) is not a jobs program. the wealthier we get, the more paid work will migrate to services we value for very human-specific reasons, relationships, care, trust, insight, just the pleasure of interaction. 1/

but i think he was a bit slippery in migrating from the general case to the weaker jobs case. what we want from manufacturing is not jobs, but capabilities: “we” need to be capable of making and doing things, and the only way to build and sustain and improve that kind of capacity is doing. 2/

why do “we” need to be capable of doing these things? the obvious shut-down-conversation case is “national security”, but the broader cases are national resilience and technological capability. the last but not least case is conflict avoidance. 3/

the traditional liberal case that interdependence breeds peace has failed spectacularly and famously over and over. today live in an era of @himself.bsky.social’s weaponized interdependence. 4/

peace is better served by reducing the vital-national-interest-ness of cross-border entanglements than by magnifying those and hoping the cost of breaking anything overwhelms inevitable strife. 5/

and all of this is before we consider the case of the financial side of unbalanced trade. the US has been a bit of a special case, pre-now, bc of the centrality of the dollar and apparently inexhaustible willingness of trading partners to hold USD assets, even through weakening-dollar periods. 6/

but trade imbalance often presages financial crises, both domestic and international. or sometimes orderly devaluations, but the more market participants anticipate devaluations, shockingly, the less there is actual trade imbalance. the anticipation disciplines the trade. 7/

the last bit considering is who “we” are in this story. must it be a nation-state? is the EU one “we” or many countries? why can Florida run a persistent trade deficit with other states? (I imagine it does, not sure.) Why was that a bigger problem for Greece? 8/

I think the answers here have to be textured. for resilience and national security, “friendshoring” might be sufficient. indeed, from a resilience perspective, you want to diversify across domestic and foreign supply, as well as among foreign suppliers. 9/

as @martinsandbu.ft.com suggests in the piece and a reply, there’s nothing special about balance, the arbitrary zero point, for national security or resilience. unbalanced friendshoring may be fine, with sufficiently reliable friends. 10/

but to say there’s nothing special about zero doesn’t mean it’s fine to stray arbitrarily negative for indefinite periods of time. if you are going for resilience by diversification, you do want a meaningful domestic component to your portfolio. too negative too long and you’ll lose that. 11/

the main, most important thing (for a large, diversified economy with geopolitical pretensions) is to maintain generalized capacity, or “metacapacity”, and that requires substantial, continuous doing and improving of things in the world you value and rely upon. 12/

(hypothetically a trade deficit country whose paper is coveted abroad could use the fiscal flexibility to run a kind of noncommercial industrial university system, maintaining, building, innovating capabilities that could be scaled up should terms of trade shift. 13/

whether this could “work” without the feedback of market discipline is, i think, an open question, but it’d obviously be hard to get right, and hard politically to sustain.) 14/

the place where that zero point of balance is not in fact arbitrary is the financial side. 15/

“friendshoring” might assist with resilience and national security with sufficiently good friends, but durably unbalanced trade means someone is accumulating promises from a “friend” whose economy may be shifting from the tradables that might repay them. 16/

again, quantities matter, a country can run a deficit small deficit relative to its growth indefinitely, and the potential burden of accumulated promises will remain modest. even on the finance side, the zero point isn’t magic, we shouldn’t make a fetish of it. 17/

but if the scale of accumulated promises is growing relative to the deficit economy, that’s going to yield problems if it continues indefinitely, perhaps even do damage to that “friend” assumption in friendshoring. 18/

that’s why i think the “we” ultimately has to be defined by fiscal union. Florida can run its deficits, because we gradually and as a matter of course redistribute to fill in the holes in net worth it would otherwise yield. 19/

(we in that last meaning other states, the rest of the fiscal union including surplus states.) 20/

the EU can become more relaxed about its internal trade balances if it builds up similar redistributive and mutual insurance mechanisms between states. 21/

but across the boundaries of fiscal unions, i think it will remain important to seek “rough balance”, and so balance should be our norm. 22/

if we end up with some persistent deficit countries, but with deficits small enough to be overwhelmed by growth, that’s fine. 23/

but letting zero be the normative attractor serves that cause of “small enough to be overwhelmed by growth”. 24/

without that norm, we find ourselves untethered, making excuses, eventually in crises internally due to lost capability and externally due to accumulating promises that will become one party’s terrible burden or another party’s unfair loss. /fin (sorry!)

addendum: i want to be very clear that i think Trump’s tariffs are hideously stupid, even though overall balance is a thing the US legitimately should work toward. i’d propose a foreign payouts tax to help us grope towards balance. drafts.interfluidity.com/2025/04/01/i...