Tuesday, May 20, 2008

The Alfred E. Newman Approach to Trade

Sometimes believing that something is true is enough to make someone think it is true. Even when the facts disagree.

Many economists believe that a decline in the dollar will lead to a drop in the U.S. trade deficit. And so in spite of the facts, they believe that it is happening. The only problem is... it isn't.

Today's example in a long line of similar misstatements comes from yesterday's WSJ column by C. Fred Bergsten of the Peterson Institute. Speaking of the costs of reduced trade negotiation authority for the president, Bergsten wrote:

We will lose billions of dollars worth of exports and the associated high-paying jobs – just at a time when improvements in our trade balance, fortified by continuing growth abroad and a highly competitive dollar, are cushioning our slowdown.

For the first quarter of 2008 the U.S. trade deficit was $210 billion. For the first quarter of 2007 the U.S. trade deficit was $202 billion. Improvement? What improvement?

So... why isn't the falling dollar helping the trade deficit? I can tell you in three letters: oil.

Factoring out petroleum, the trade deficit has been coming down. But the deficit in oil has been going up and up. Overall, it is a little bit worse than a wash.

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