4
On the trade deficit
The chasm between US imports and exports grew by a 16% in July to $32 billion, according to the Commerce Department. While that sounds like a bad thing, it could be a sign of confidence in the economy.
Exports grew 2.2%, indicating growing demand overseas. Imports gained 4.7%, signaling increased business activity in this country.
But overall, is having a trade deficit a negative for the US? University of Maryland economist Peter Morici says yes. He argues the trade deficit caused the recession:
Money spent on Chinese coffee makers and Middle East oil cannot be spent on U.S.-made goods and services, unless offset by exports.
When imports substantially exceed exports, Americans must consume much more than the incomes they earn producing goods and services, or the demand for what they make is inadequate, inventories pile up, layoffs result, and the economy goes into recession.
From 2003 to 2007, Americans borrowed to consume more than they produced but when mortgages failed, the shortfall in demand for domestic products drove up unemployment, choked consumer spending and thrust the economy into recession. Now huge stimulus spending is required to resuscitate business activity.
John Tamny of Real Clear Markets respectfully disagrees. He argues that since individuals and companies, not countries, do the trading, a trade deficit does not signal economic foundering:
Sure enough the country that is Switzerland can lay no physical claim to oil, but its citizens consume quite a bit of it due to their success in other endeavors. Imports, far from impoverishing as Morici claims, are the ultimate compliment because they signal productivity on the part of the importer.
Morici concludes that the trade "deficit" is an economy killer, but since the only kind of trade is the balancing kind that occurs between individuals, the more logical conclusion is that when this supposed deficit increases, our economy is growing for individuals doing what they're best at and being rewarded with more investment for pursuing their specialty.
It's an interesting debate. It's possible both viewpoints are correct. In a recession, an increase in the trade deficit doesn't necessarily indicate a further slowdown in the economy. Possibly, quite the opposite. On the other hand, running a trade deficit long term might seriously undermine an economy's foundation.
What do you think?
Seems a bit like the problem of the chicken and the egg (although, genetics clearly says the egg came first). did consumer spending habits cause the trade deficit, or did the trade deficit cause conusmer spending habbits?
Seeing as how the individual isn't really aware of the trade deficit, I'd have to say that it is more of a symptom than a disease.
As to if a trade deficit is a good thing. Well, probably a moderate trade deficit is a good thing as it distributes capital to the rest of the world and spurs economic growth in developing countries, but there is certainly such a thing as too much of a good thing.
Peter Morici has been right on this for a long time. Unfortunately, due to our WTO agreements and other trade policies the U.S. cannot suddenly stop allowing imported goods. The only solution is a national campaign to encourage Americans to voluntarily purchase MADE IN USA goods.
Wider trade gap good? They sell us more, we give them more dollars is good? Less production and jobs for Americans and more for China is good? That’s doublespeak. If my competitor sells more than I do I win? Talk about dumbing down America. I think we just hit bottom. It goes to show how wrong Free Trader thinking is. But Wait, . . .If you disagree they yell PROTECTIONIST, . . . . That is, until their profit line dips. Then they become real protectionists, like you’ve never seen, and start looking for the bailout brigade to save their sorry butts. Be gone you profiteering self-centered sellouts. It’s a new day! Get ready for more patriotic blowback.
America . . First. . . Last . . .and Always! . . . . HOOAAHH!
When I buy an inferior product for an inflated price, I do so for charity. Think Girl Scout Cookies. Most of my shopping is based on the highest quality to price ratio that meets my needs. Where a product was made is typically irrelevant.
If there are trade deficits, then so what?
Cons:
1) Money flows out of the USA
2) Net incomes are flat or falling in the USA
3) Jobs growth is stagnant or negative in the USA
Pros:
1) I the consumer gets the most value for each dollar - even though income growth is stagnant Americans can feel richer (if they have a job) because deflation makes money more valuable.
2) Incomes rise around the world, growing middle classes by double digits, and increasing the global demand for all products, including American goods and services.
Finally, think about the reverse case. What if America had net trade profits for decades on end? That would mean the USA is removing wealth from the rest of the world to enrich its people. That would quickly cause resentment and inflame conflict. How popular would the USA be in the middle East, Asia, and Africa if it were NOT pouring net billions of dollars into buying natural resources and manufactured goods? Those net trade deficits are the key to the relative peace around the world because they finance the growth of fat & happy middle class populations around the world. Fat & happy people do not start wars.
