I don’t think that Bob Lutz was referring to absolute figures. More about trends. At least that is how I took him.

You are correct that the US trade deficits of the 19th century, as a result of foreign direct investment, benefitted the US, just as the direct investment in China has been benefitting China.

However, where financial investment is concerned, the more a country receives, the worse it does, as shown for developing countries by three IMF economists in this paper:
http://www.kansascityfed.org/PUBLICAT/SYMPOS/2006/pdf/PrasadRajanSubramanian.0811.pdf

The mechanism is simple, foreign loans strengthen a country’s currency and make its products less competitive.

Howard

Kevin C. Cheng did a good overview IMF paper on the economic implications of China´s demographics in 21st century.

I would instinctively go with Twofish argument on the metric of a 25 year old immigrant putting more into the society then a 65 year retiree and thus there is a positive relationship between a young population and return to investment and a negative one with an older population.

This isn’t the relevant metric. A 25-year old legal immigrant may be poorer than a 25-year old native person, but they put more into the Social Security and taxation systems than a retired 70-year old native.

Michael: Actually spent fifteen years as a Wall Street trade and banker. Perhaps that’s why I am a little skeptical of their claims.

I actively work on Wall Street, and you get to see the best and the worst of people and social systems. There is so much money and power flowing in Wall Street that it magnifies the character traits and personalities of the people in the system. Good things become very good. Bad things become very bad. New York City is full of both demons and angels all in a struggle for your soul, and it’s hard to tell who or what is a demon and who or what is an angel, because they look so much alike.

Michael: Closing the economy, in other words means that the impact of each fiscal dollar is greater, and so the USG needs to borrow and spend less to get the same employment impact.

But the closing the economy will hit productivity and job creation which means that less tax revenue and a greater necessity for job creation. One thing about trade is that comparative advantage works. Over the last decade multinational corporations have been able to restructure themselves to take advantage of pricing differences and generate huge amounts of wealth. Badly distributed wealth, but wealth nevertheless. Restructuring the economy to rollback all of those changes would be extremely disruptive, and more importantly disruptive in obvious ways.

I don’t think there will be much protectionist sentiment this year since everyone is afraid of losing their job. If you look at the 1980’s and 1990’s, the time when you will have lots of protectionist sentiment will be after the recovery starts getting underway. In that situation, you have a booming economy and but no new jobs yet, and in this environment it’s easy to make the case that the jobs are going overseas.

Michael: As for your third point, “Who is the US going to borrow from?”, I have addressed this a lot, as have Brad Setser and many others. The US will not have a problem borrowing.

If the US doesn’t something hugely radical with trade I think it may have huge problems borrowing from overseas.

Michael: In fact the US is seeing a rapid net rise in savings even after USG spending.

But without foreign money, this puts interest rates higher than they otherwise would be which hurts the recovery.

I don’t think that we are going to see too many radical proposals in how the global system works in 2009. There are just too many immediate problems to think too much about fundamentally changing the system. The interesting year will be 2010, which is an election year in the United States. It is also the start of the transition to power in China 2012. The top leadership of for 2012-2022 has already been decided, but there is the issue of everyone else.

By 2010/2011, either things will get better or they won’t. If they get better then people will have energy to start talking about fundamental economic changes and systematizing a lot of the changes that have already happened. If things don’t start getting better, then all of the fixes people have had will get discredited and people will be advocating fundamentally new economic theories.

Seatrus, I don’t think it is as easy as all that. There are compelling reasons to relax the one-child policy, and a few experts are advocating it, but the problem is that the relief comes only after 20-25 years. Until then the dependency ratio actually gets much, much worse.

Peter Schaeffer, I think you might be confusing two different demographic problems. One is about the size of the working population relative to the non-working. The other is about the funding of pension liabilities. I have no expertise to argue about the latter issue (although, for the record, I tend to be on the extreme side of the pro-immigration debate). My main point is that the US dependency ratio is fairly stable over the next several decades whereas Europe, Japan and, especially, China have rapidly deteriorating dependency ratios.

Howard, I don’t disagree with your analysis but I am not impressed by the argument that running trade deficits leads to underinvestment. The US ran trade deficits for most of the 19th century, during which time its productivity growth was the envy of the world, and has been running deficits for much of the past 30 years, but I don’t see evidence of significant underinvestment relative to Europe or Japan in terms of productivity growth.

Brian, I am not sure how quickly you read my post but neither I nor anyone who is thinking about the trade impact of demographic changes was arguing that the export of geriatric products was going to be the swing factor. I also did not in anyway suggest that demographic contraction is an onerous curse. My point was quite different – that the relationship between total population and working population has trade implications.

Observer, there is a very wide ranging debate on things the government can do to promote consumption, including not just the things you mention but also such things as allowing workers to organize for better wages, removing measures that force down interest rates and the value of the currency, and several other things.

Tyareasun, and I would add that US import numbers are also collapsing at an alarming rate. According to today’s AFP: “The US trade deficit fell a hefty 28.7 percent in November to the lowest level in five years but the improvement comes amid a sharp contraction in global commerce, government data showed Tuesday.”

Glen M. perhaps because he is at General Motors that Bob Lutz can say “the United States has been producing essentially nothing and importing everything from China and Japan and wherever.” Actually the value of US manufacturing is three to four times the value of Chinese manufacturing.

Leon, Arthur’s point is that the growth in exports started slowing earlier than many think if we measure it in RMB, not dollars. That may be true, although I am not sure why it is better to measure it in RMB rather than dollars. If we are interested in the growth impact of exports on China’s economy, the RMB may be the better currency for measurement, whereas if we wanted to measure the amount of overcapacity that the rest of the world is absorbing, it is better to measure it in dollars. At any rate, export growth may have begun slowing earlier than many think, but it did not go negative until recently. By the way, as one of the largest exporters in the world and with rapidly growing share of the world economy, the astonishing growth rate of China’s exports would have to decline for purely statistical reason.

From “Immigration in an Aging Society” (http://www.cis.org/articles/2005/back505.html)

“Legal immigrants are poorer than natives on average, resulting in lower tax payments. There is a large body of research showing that legal immigrants take many years after arrival to close the earnings gap with natives, by which time they are on average older than natives.32 This means they have lower lifetime earnings and Social Security payments because Social Security taxes are levied as a percentage of earned income. Studies that have actually looked at legal immigrant Social Security taxes support this conclusion. A 1998 study by the Urban Institute, which is generally regarded as a supporter of high immigration, found that legal immigrants in New York State paid only 85 percent as much in Social Security taxes as natives on average”

“And SSA is assuming that those earnings are the same as natives from the moment of arrival, which is almost certainty incorrect. In addition, because Social Security is redistributive, the lower average income of legal immigrants means that they will tend to have a more negative long-term impact on the system that is not considered if immigrants are treated as average taxpayers from the moment they arrive.”

The St. Louis Fed published a paper that bears on this subject. The title is “Is the United States Bankrupt?” (http://research.stlouisfed.org/publications/review/06/07/Kotlikoff.pdf). The author (Laurence J. Kotlikoff of Boston University) looks at the relationship between immigration and the future finances of the U.S. I quote

“CAN IMMIGRATION,PRODUCTIVITY GROWTH, OR CAPITAL DEEPENING SAVE THE DAY?

Many members of the public as well as officials of the government presume that expanding immigration can cure what they take to be fundamentally a demographic problem. They are wrong on two counts. First, at heart, ours is not a demographic problem. Were there no fiscal policy in place promising, on average, $21,000 (and growing!) in Social Security, Medicare, and Medicaid benefits to each American age 65 and older, our having a much larger share of oldsters in the United States would be of little economic concern. Second, it is mistake to think that immigration can significantly alleviate the nation’s fiscal problem. The reality is that immigrants aren’t cheap. They require public goods and services. And they become eligible for transfer payments. While most immigrants pay taxes, these taxes barely cover the extra costs they engender. This, at least, is the conclusion reached by Auerbach and Oreopoulos (2000) in a careful generational accounting analysis of this issue.”

Note that the Heritage foundation found that each low-skill immigrant family costs taxpayers (net) around $20,000 per year. See “Executive Summary: The Fiscal Cost of Low-Skill Immigrants to the U.S. Taxpayer” (http://www.heritage.org/Research/Immigration/sr14es.cfm) . Obviously, expanding low-skill immigration would impoverish America.

Finally I suggest checking the sensitivity analysis in the Social Security Trustees Report. It shows a rapid decline in the workers / retirees ratio across a wide range of immigration assumptions. Check out table VI.D3 in the LONG-RANGE SENSITIVITY ANALYSIS (http://www.ssa.gov/OACT/TR/TR08/VI_LRsensitivity.html#100036). In the low immigration scenario (790,000 per year) the trust fund is exhausted in 2040 and the annual balance for 2082 is -4.61%. In the high immigration scenario (1,375,000 per year) the trust fund is exhausted in 2042 and the annual balance for 2082 is -3.82%. Of course, this assumes that immigrants have equal skills compared to natives which is clearly not true.