Trade Deficits: The Cause of Our Economic Troubles
Raymond L. Richman
Many of the most serious economic problems facing the
It is a problem we are going to have to deal with. Because the trade deficits have gone on so long, there is no easy solution. Anything we do will incur heavy costs. Our solution, we believe, is the least costly.
Is it true that the trade deficits are really the cause of these problems? Let’s take a look.
1. The falling dollar. When we import more than we export, foreigners earn US dollars. Converting those dollars into their own currencies in the foreign exchange markets increases the supply of US dollars and causes the dollar to fall relative to other currencies. In 2000, a dollar was valued at 1.05 Euros; in 2008, it was valued at 0.64 Euros, a forty percent drop.
Some countries including
Nevertheless, we believe devaluation of the dollar is a poor way to try to restore a long-term chronic trade balance for a variety of reasons both economic and political, spelled out in the afore-mentioned book.
2. The de-industrialization of the
Some economists argue that the decline of the manufacturing sector is natural, the effect of increased consumption of services relative to goods. But our imports consisted of goods overwhelmingly, including sophisticated products like computers. Our deficit of goods in 2007 amounted to $826.5 billion, while we had a trade surplus in services of $119 billion. We may be producing fewer manufactured goods but we are consuming more. Were trade in balance, many of those goods would be produced here and the manufacturing sector would not be in free-fall.
4. Slow economic growth. As Keynes pointed out and as all schools of economics agree, the engine of economic growth is investment. Exports work similarly to stimulate the economy. However, Keynes cautioned against using tariffs and other trade barriers to gain a trade surplus calling it a “beggar-your- neighbor” policy. And that is what many countries are doing to us, stimulating their economies by using any means to gain and perpetuate a trade surplus at our expense.
The huge trade deficits are a drag on the economy. The very definition of gross domestic product (GDP) is the sum of the value of all goods and services produced and consumed in the
5. Soaring commodity prices, especially oil and its derivatives. Most commodities are traded in world markets using the US dollar as the standard. The price of all commodities, including oil, is quoted in dollars. The astronomic rise in the world price of oil is due to rapidly increasing demand for gasoline and diesel and other uses for oil and its relatively stagnating supply. The
6. The stock market and real estate bubbles. The foreign investment in American stocks and bonds boosted share prices and bond prices and lowered interest rates. Greater risk-taking was encouraged. Amateurs became stock traders and real estate speculators. Wall Street became a huge gambling casino. This contributed to an economically unwarranted boom in stock and real estate prices. The stock market bubble burst in 1999 and the real estate bubble in 2007.
7. Reduced power of the Federal Reserve system to affect interest rates and the money supply. The behavior of prices of goods and securities are controlled more by the foreign purchases of
So what can we do to bring our trade in reasonable balance with the rest of the world. Under the rules of international trade, we can impose barriers to imports from countries with which we have chronic trade deficits. Tariffs may be imposed which would work like a revaluation of their currencies. The advantage of tariffs is that the revenues derived would be substantial. In the afore-mentioned book, we argue for limiting imports to, say, a varying percentage of our exports to them during the previous year, using a device suggested by Warren Buffett, namely, import licenses or certificates. These should not be described as protection. They are not intended to beggar our trading partners, merely to prevent them from beggaring us.
A substantial amount of the deficit consists of imported petroleum and petroleum products, the latter for military and aviation use. They amounted to $330.7 billion in 2007, $50.6 billion in 1998. (What can one say about a country that allows foolish environmental considerations to prevent drilling in the ANWR and on other public lands?!) There are huge subsidies being spent to develop alternative fuels and to use electricity powered hybrid vehicles. No one expects a significant development in less than a decade. One possibility would be to impose gasoline rationing. The demand and supply of petroleum is highly inelastic. A 25 percent reduction in our demand for foreign oil can be expected to result in a fall in the international price of oil of perhaps 20 percent or more. We rationed gasoline during WWII and a rationing plan for emergency implementation is maintained by the U.S. Department of Commerce.
Of course, these are not all of our troubles. These include the federal budget deficit and a tax system that penalize saving and encourages consumption, the high costs of medical insurance and services, an unsatisfactory educational system, a sluggish economy to which the trade deficits contribute, improved public transportation and other infrastructure, etc. Many of these unresolved problems, like the trade deficits themselves, are due to naïve, incompetent, venal, ignorant, and client-serving politicians and non-government organizations (NGO’s) and those who support them. All of which leads to the spending of money by the federal, state, and local governments on things they have no business spending taxpayer money on. Between the environmentalists and the free traders, we are embarked on national suicide.