Posted by
GunnyG© on Tuesday, January 23, 2007 1:00:22 PM
Trade Deficits and the Economy
by S. King, CEO
My wife, having spent a week in California called last night and was really depressed ... listening to NPR for a week might do that to you ... the liberal perspective on life is like that group in high school that could never succeed at anything and so formed up to complain to the administration that they were being bullied by the winners and got the standards reset so that everyone could get D's and graduate. So, they all did and now they are in Congress. It is also apparent that they barely earned a D in Economics.
The fact that Harry Reid constantly complains about the trade deficit, which is really an early argument toward government controls is either: a) evidence that he doesn't understand anything about economics (which would be frightening), or b) evidence that he is a savvy politician and knows that the clarion populist call to "save our children and grandchildren from having to shoulder this enormous debt" is a no-brainer vote getter from mindless idiots who have not a clue as to how their daily bread and butter actually arrives.
Not only is the trade deficit not bad for the US economy, it is the best thing that could possibly happen to it and for the rest of the world as well. So, here is econ 101 short form:
Trade is driven by investment flows. When people from other countries invest vast amounts of money in the US, we run a trade deficit because of our global accounting - see below. The US, in contrast to the unstable, stagnant, terror-ridden, free-market endangered rest of the world is a safe, transparent, low-inflation haven that provides a slam-dunk return, and so why wouldn't everyone invest here?
Unfortunately, because of that screwy score card, Harry either believes that we are in trouble or gets to use the outcome for political gain. For example, if China sells $1 billion in say, tennis shoes to Wal-Mart and then uses that money to buy a micro-chip factory in Shanghai, we call that an "export" and Harry stupidly cheers. If on the other hand, they use that money to build a chip factory in Virginia, which by the way then creates hundreds of jobs for engineers and salespeople, we call it an "import" and Harry and the rest of the Democrats decry the "import" and our resulting trade "deficit". (BINGO!)
Joe six-pack and his buddies at NPR stupidly and lazily line up behind and vote for the Democrats who want to put an end to the trade deficit through government controls. Because all anyone hears from the doom and gloom media is that the US is an aging society that is drowning in debt and burdening the world with risk, we have distorted our domestic and international policy making. The media is a lot like academic economists. They vote largely Democratic and cannot stand the fact that the current American boom has happened under a Republican watch. And, what a boom. Record stock market. Economic growth averaging more than 3% since 9/11. Since the tax cut of 2003 on income, dividends and capital gains, the US GDP has expanded by an amount greater than the size of China's entire economy.
Academic economists write of job losses at old-line manufacturers but ignore the larger and more diffuse number of jobs created at smaller private service companies. They whine about the trade deficit but fail to mention the flip side of capital surplus - the flow of foreign investment cash pouring into the US - keeping the stock market high and borrowing rates low. Maybe the disconnect between the headlines and the actual markets have more to do with the fact that academic economists see their influence waning. If the world's economies run best on a Hayek-Schumpeter-Freidman-Laffer free-market model, then economists of the meddling sort have little to do - except b*tch.
Joseph Stiglitz, a Columbia economics professor, Nobel Prize winner and card-carrying member of the sour punditocracy recently wrote a sky-is-falling piece in the Guardian (of course) entitled "2007: Will the Dam Break?" Stiglitz sees a flood coming. "At the root of America's economic problems are measures adopted early in Bush's first term. In particular, the Administration pushed through a tax cut that largely failed to stimulate the economy, because it was designed to benefit mainly the wealthiest taxpayers." Yet, Joseph, how do you explain why tax revenues have increased to historic levels since that tax cut?
Later in the same article, he says, "America's household savings became negative for the first time since the great depression." He uses Commerce Department data which only factors in actual savings deposit accounts at Banks. No real estate. No 401(k)s. No stocks. No bonds. No treasury notes. No other assets on American household balance sheets. This is like offering evidence of global warming based on the claim that 2% of the polar ice cap is melting while ignoring the other 98% that is freezing. Calculated properly, US households have more financial savings - and in most years add more - than the rest of the world combined. What a great country, huh?
Econ 101 - longer form: The US is the world's biggest producer, exporter, seller, saver and innovator. On average it adds 30% more to global GDP each year than all of Asia (45% more in 2006) with one tenth the population. US employment, wages and profits are at record levels. America is the biggest source of foreign aid and the only major source of its most effective component: private donations. All the result of tax cuts "for the rich".
Despite the sour fiscal predictions, the federal budget is on course to be in balance by 2010 with debt-to-GDP ratio well below the Clinton Administration's average - if we did nothing. Harry and his friends simply cannot reconcile the claim that our trade deficit costs jobs and adds to global financial risk - while we enjoy a 4.5% unemployment rate and the eager flow of long-term, low-cost foreign capital into US investments. What's the problem again, Harry?
Selling our economy short may be causing even more damage to our international economic policy. We are now apologizing for the global trade imbalance. We accept blame for growing our economy and population faster than our trading partners (which draws in imports) and providing more attractive investments (which brings in foreign capital). The primary burden should be on the trade-surplus, capital-outflow countries to enhance their economic climes, not on us to diminish ours. Russia has two exports - natural gas and weapons - and two customers - Europe and Iran. All of Europe's natural gas comes form Russia and all of Iran's weapons come from Russia. How does that model look?
The world has huge economic problems. Europe's low birthrate, high unemployment and exodus of human capital are of bigger consequence to the world than the US trade deficit, yet the trade deficit dominate's the G7's agenda and world headlines. Japan and South Korea are still relying on corporatism instead of economic flexibility, a global liability as their workforces shrink. Russia's bleak hope is to create energy monopolies fast enough to prevent the Islamic world and China from overrunning its sparsely populated borders. Much of Latin America and Africa are decapitalizing, running IMF-mandated (International Monetary Fund) fiscal and trade surpluses (capital outflows) that have contributed to their multi-decade stagnation in per capital income.
Despite the rich global environment for economic progress, the US - low on self-esteem - has focused on China's yuan as the 21st century's economic scourge. US exports and global growth would get a much bigger boost if more countries joined China in growth promoting currency stability than if China joins them in currency instability. Begging China to add to the yuan's value at the dollar's expense parades our weak image and enhances China's strength.
At the same time, Latin America seems to have decided the US is one of the weak links in the global economy and has reached out to Europe and China for investment and free-trade agreements with the he view that those are the economic relationships of the future. The real problem with the trade deficit is not what it is doing to our economy or Harry and his friends using it for political gain, but that it is now being misread by some of the rest of the world and has resulted in weaker relationships and the clouding of our economic vision here at home, even as our economy enters its third decade of robust expansion.
Many in Congress, the Treasury Department and business believe that we should have "reciprocal trade" with other countries, that is to say no deficit or surplus. That is equivalent to saying that a business should have reciprocal relations with every one of its accounts. I have been running a deficit with Albertsons, Safeway and Whole Foods for over 40 years, yet somehow my economy is just fine. This is a classic, preposterous, stupid and destructive congressional notion. This year marks the 400th anniversary fo the settlement in Jamestown, VA. Since that time, America has run trade deficits for all but 50 some-odd years. Just look at what all that bad economics has done.
Have a prosperous day.