Saturday, May 20, 2017

Tillerson Economics and the Saudi Arm Deal

Secretary of State Rex Tillerson discussed the latest arm’s deal with the Saudi government today. Hanna Trudo covered the joint address with Saudi Arabian Foreign Minister Adel bin Ahmed Al-Jubeir in Riyadh today:
Tillerson said Saudi Arabia's direct investment in the U.S. would bring "hundreds of thousands" of jobs to American workers. Earlier, Trump said it had been a "tremendous day; tremendous investments for the United States. Hundreds of billions of investments into the United States, and jobs jobs jobs."
While this will be the headline story, note what else Tillerson said:
Tillerson also said the new defense deal — which includes upgrades to Saudi communications, missile defense, maritime, border and cyber security — lowers the demands on the U.S. military. “This huge arms sales package reduces the burden on the United States to provide the same equipment to our own military forces,” he said. “It will strengthen Saudi security forces for the future so Saudi Arabia is more capable of carrying a greater share of the burden.”
Deficit hawks may see this as good news but let’s step back for a moment. The $109 billion in arms sales is for the next decade amounting to an additional $11 billion in new exports on a per annum basis. So we are talking about only 0.06% of GDP in new exports but this only gets worse if we take Tillerson at his word that as the Saudis spend more on their own defense, we spend less. In other words, exports rise by $11 billion per year and Federal purchases fall by $11 billion per year. Good news from a deficit hawk perspective but no net increase in U.S. aggregate demand. So Trump’s “jobs, jobs, jobs” amounts to nothing but his usual political posturing.

7 comments:

Sandwichman said...

"supporting tens of thousands of new jobs in the US defence industrial base"

In other words... the military-industrial complex.

https://youtu.be/8y06NSBBRtY

Bruce Wilder said...

"In other words, exports rise by $11 billion per year and Federal purchases fall by $11 billion per year. Good news from a deficit hawk perspective but no net increase in U.S. aggregate demand."

I will concede nothing to others in my contempt for Trump.

But, . . .

Are we leftists now so far gone into senility that we no longer care at all about the quality of consumption?

What changes in this scenario is that U.S. final demand is satisfied by the consumption of arms produced when the $11 billion is spent domestically, but when we produce for Saudi Arabia, the U.S. trades its arms for other goods. Depending on what those other goods purchased in exchange for arms are, that can be a net gain in welfare, no?

It sounds as if the trade off is Saudi investment funds, rather than goods to satisfy final demand. The arms are "buying" Saudi mobilizing credit, which may well prove to be ephemeral or come with its unacceptable price tag in terms of future income streams flowing back to the miscreant rulers of Saudi Arabia.

So, I offer no defense of the Trump reasoning here. I am just saying your reasoning could be better. This discovering that things Bush and Clinton and Obama were doing routinely are bad, bad, bad because the ridiculousness of Trump draws attention to just how bad they are and have been should be an opportunity for humility as well education.

ProGrowthLiberal said...

Bruce - admittedly there is much more to say about this deal. I'm not at all happy with the military industrial complex as Sandwichman rightfully tags it. It is bad enough when we fund it. But now we are outsourcing this to the Saudi government? Really?

I was hoping for additional comments such as yours. This is just the beginning of this conversation. And yea - my opening took the easy road here.

rosserjb@jmu.edu said...

pgl,

Good post.

Of course the Saudis have been buying large amounts of weapons from US forever. The alliance goes back to a meeting between FDR and King Salman's dad in 1945 when FDR was heading for home from Yalta shortly before he died. Underlying that is the 1928 Red Line Agreement between what is now BP, Shell, and what was then Jersey Standard, later Exxon, now Exxon Mobil. In 1938, Jersey Standard geologists struck oil, but it did not become commercially profitable until the late 40s, after FDR's meeting with old Abdulaziz bin Rahman al Sa'ud, known in the pop western media as "Ibn Saud."

ProGrowthLiberal said...

The Red Line Agreement:

https://history.state.gov/milestones/1921-1936/red-line

An interesting read as to how the West has divided up the resources of what used to be the Ottoman Empire.

rosserjb@jmu.edu said...

BTW, WaPo reports today make it clear that this deal is not what it is cracked up to be, although Trump is making a big fuss about it. Most of it was already negotiated by Obama and represents largely a continuation of arrangements already ongoing. Obama had blocked certain parts of it, not all that much, because of Saudi misbehaviors in Yemen, with Trump changing that and backing the Saudi misbehaviors in Yemen. So, the deal really is not that much of a change from what was going on before.

The other aspect of it is that it is really a set of Memoranda of Understanding between the Saudi government, or parts of it, and US companies. But substantial parts of it involve production that will happen in Saudi Arabia, as much as half of many parts of it, thus leading to a stimulus to Saudi Arabian employment rather than US employment. The significance for the US economy of this is being way overexaggerated.

ProGrowthLiberal said...

"substantial parts of it involve production that will happen in Saudi Arabia, as much as half of many parts of it, thus leading to a stimulus to Saudi Arabian employment rather than US employment."

As I thought. Tillerson basically said we have outsourced the war on ISIS to the Saudi government which means fewer US jobs. Not that less boots on the ground in the Middle East is a bad thing.