Relaxing Over Trade Deficits

Brian Doherty | February 13, 2004

The U.S. trade deficit has (again) hit a record high. ($42.5 billion for December.) Yes, American citizens and companies continue to buy lots of things from overseas, with little concern for how much those people overseas are buying from us. (Contemplate your trade deficit with your grocer, and feel your blood boil!) Cato Institute trade analyst Daniel Griswold did a good job in this paper from 1998 explaining the reasons why trade deficits ought not be much of a concern, whether or not you believe people ought to be able to buy and sell from and to whom they please.

Comments

|2.13.04 @ 1:21AM|#

The study of economics should be required in all public schools. Problem is: How do you teach politically correct economics?

|2.13.04 @ 1:31AM|#

It's called from each . . . to each . . .

|2.13.04 @ 1:40AM|#

Economics would be great. Even better would be business skills- i.e. money, investments, assets/liabilities, etc.

Unfortunately, someone who is a school teacher isn't likely to have much experience with that sort of subject matter.

|2.13.04 @ 2:08AM|#

There are no teachers of economics?

|2.13.04 @ 2:17AM|#

there is plenty of economics taught in school, liberals run the whole damn thing and if they had their druthers they would start arresting people for counter-revolution.

|2.13.04 @ 2:17AM|#

there is plenty of economics taught in school, liberals run the whole damn thing and if they had their druthers they would start arresting people for counter-revolution.

|2.13.04 @ 2:17AM|#

there is plenty of economics taught in school, liberals run the whole damn thing and if they had their druthers they would start arresting people for counter-revolution.

|2.13.04 @ 2:18AM|#

there is plenty of economics taught in school, liberals run the whole damn thing and if they had their druthers they would start arresting people for counter-revolution.

Mo|2.13.04 @ 2:18AM|#

We had an econ class in my high school. I never took it because I couldn't fit it into my loaded schedule. Put me in the group that advocates not only basic economic education, but also personal finance. It should include, but not be limited to, mortgages, credit cards (and how they'll screw you), equity and fixed income markets, basic budgeting and how to deal with credit agencies. These are all things I've had to learn on my own, the hard way in some cases, and I would've been saved a lot of time, pain and money had I gotten exposure to these concepts earlier (investment games barely count and helped little). It's a lot more useful than home ec. and woodshop, both were required in Jr. High.

I say this as an intelligent person that had a minor in economics and worked in equities. Lots of my friends who don't have the same background and still struggle with these issues and frequently come to me for advice.

|2.13.04 @ 2:22AM|#

I don't remember economics ever being required. The closest we came to it was picking stocks and tracking them for a month.

If we're going to have public schools, then what is the point of them? If it is to prepare children to become adults then they need to the three R's and they need to taught HOW to think, not necessarily what to think.

It seems real world survival skills would be beneficial- especially things on personal finances/economics. The notion that having a nice car doesn't mean that you're rich, it means that you either are in debt or you dumped a bunch of money into something that will depreciate rapidly over 5-10 years would be valuable. Though competition would be fierce, all of us would be benefit if there are more savy investors running around.

|2.13.04 @ 2:36AM|#

Jesus H, Philip!
Take...your hand...off...the mouse.

|2.13.04 @ 3:06AM|#

I had two years of economics during my bac days; I believe I have said before but I read Say and other French libertarian or capitalists in that period. Of course I also read Marx, Keynes, etc.

|2.13.04 @ 3:14AM|#

I think that you need an econ class to really understand a good history or government class. History and politics are pretty meaningless if you can't follow the money.

|2.13.04 @ 3:21AM|#

I had an econ class in high school. Sadly, the teacher was from the Keynesian school of thought, not Austrian. He taught us about the Keynesian Cross and how taxes supposedly create wealth through a government multiplier. If this is what they still teach, I'd prefer they don't have economics at all.

max power|2.13.04 @ 3:28AM|#

Now hang on a second: I will admit that I only read the executive summary, but it seems that the paper is trying to say that deficits are not the cause of job loss, etc, and that politicians should not resort to protectionist measures to combat a trade deficit. A conclusion with which I heartily agree.

But this is not the same thing as saying that a deficit is nothing to worry about... the deficit is a symptom of a problem that we actually SHOULD be very worried about, which is that Americans consume more than they produce, and are falling ever further into debt.

The "trade deficit with the grocer" analogy makes no sense to me, because the grocer is just one other person (or "country" to follow the analogy). You can have a trade deficit with the grocer (and others) because your employer has a trade deficit with you. If your OVERALL trade deficit is negative, it means you are spending more than you make, which is bad whether you are a person or a country.

|2.13.04 @ 4:48AM|#

It's ignorant schoolchildren who will grow up one day and take away your rights.

|2.13.04 @ 5:20AM|#

mp, let me recommend a deeper reading of the report. US dollars that are spent on imports have nowhere to go except to eventually come back home. A "trade deficit" could just as easily be called a "foreign investment surplus", so we win by having access to cheap imports (for goods where we have a comparative disadvantage) and by increased foreign investment in U.S. companies (presumably in industries where we are at least perceived to have a comparative advantage).

Warren|2.13.04 @ 5:33AM|#

Thanks to Congress and Bush, that pesky trade deficit will disappear, just as soon as unrestrained deficit spending collapses the dollar

|2.13.04 @ 8:28AM|#

Speaking of all the opinions:
Let's see, from the low trade deficit in 1991
to the ever increasing record breaking years
from 1992 to 2000 can be blamed on Clinton.

Does the president really control the economy?

Yet, those same Clintonian years the massive debt
went from doomsday-is-coming highs to zero,
while the welfare rolls were cut in half,
and could be credited to Clinton.

Does the president really control the economy?

Who's to credit or who's to blame,
when neither the rise in the trade deficit
nor erasing the debt was due to Clinton.
Is Clinton or Bush or any president in control
that they actually know what they are doing
to the economy, or rather, what the economy
has to do with what they are doing?

Does the president really control the economy?

Economic experts argue on Wall St & in colleges
over the reasons for what happened.
No one knows which interpretation is true,
even in hindsight, they can't be sure,
so how are we to know which expert knows
the present, much less which economic theory
fits the future, what tomorrow may hold.
Inflation is bound to come, but it doesn't.
The economy is in recession, then it grows.

Common sense says
that it is NOT good when wealth
flows away from you, continuously.

Common sense says
that manufacturing jobs can't be lost overseas
without it hurting us, but, it does help them!

Yet, while 5% of the world population, the USA
contributes a third of the world's productivity,
as much as Japan, Germany, Britain, & France combined.

Common sense says:
it's a good sign to produce so much.
Still, the US consumes so much more than most others.

But the US has, from 1991 to 2000, increased GNP.
So we are spending, not saving, do go into debt
But we are also producing, being more productive?

One-half of the trade deficit is oil and autos.
What if the flow of oil slowed and prices rose?
What if the economy slows, the debt squeezes us,
and the printing presses start making more money
and rampant inflation pushes interest rates to 17%?

What would rapid (1977 inflation) bring to you?
Would your debt burden lighten, get easier to pay,
as your pay increased but your payments didn't?
Would your low interest rates of 5% on your home
feel good as new loans were going at triple that?

I'm saying that too much is made
of the national debt, of trade deficit,
of the power and knowledge of Greenspan,
and the president. I'm saying I can talk
and talk and talk, and seem to make some sense,
but I don't know NUTHIN' about NO economy!!

I believe there are economic THEORIES,
experts aplenty, and that NO one knows
what the heck is going on with the economy
past that growth seems good and that growth
can't last forever, but comes and goes.

Does anyone really control the economy?

Bruce Gottfred|2.13.04 @ 8:47AM|#

The trade deficit issue is a very fascinating one for me and I've been bringing it up on my blog now and then. I think the issue is pretty serious, for the reason that anything that cannot go on forever, eventually ends.

Right now the Asian central banks are artificially manipulating the currency markets to keep the exchange rates to a level that allows them to maintain a trade surplus with the US. They buy the dollars that their exporters want to sell with their own newly minted currencies. They are essentially subsidising consumption in the US. Mobile is right, this is to the US's advantage -- cheap goods are better. And he's right that the exported dollars will and do come back to the US -- they have no where else to go. They come back as foreign investment -- mostly into safer T-Bills and such -- and keep interest rates in the US low.

The problem is that Asia cannot continue to buy American debt forever. Cheap credit encourages reckless borrowing. As debt payments become a greater percentage of US income -- and they will, even at the current low rates of interest -- lenders are going to want better terms. Then the game starts to unwind as the holders of this immense pile of dollar-denominated government, corporate, and consumer debt start to try to cash out. In my opinion, the US economy is based on a credit bubble that cannot grow forever and is not easily deflated.

Now the culprit for all this is the Asian central banks that don't want a freely operating currency market. A functioning currency market would raise the Asian currency's values until the trade gap dwindled. As well, by intervening as they do, they rob their workers of the real fruits of their labors -- increased spending power.

I could go on and on with this (I am probably quite tiresome at parties), but I want to leave a thought for some of the brilliant economists that pass through here regularly. (If any of them are still reading.) It's a bit of a conspiracy theory (which are fun, right?).

Ok, here goes. Can the sudden recklessness of recent US federal spending have something to do with keeping this game going? If there was no new flood of nice, safe US treasury notes for the Asian central banks to buy, would some of them start selling, resulting in a crash in the US dollar and an increase in interest rates? Is it possible that the crazed frenzy of spending in Washington is actually keeping the dollar afloat -- at least until the election?

|2.14.04 @ 12:48PM|#

> The problem is that Asia cannot continue to buy American debt forever.

max power|2.15.04 @ 12:48PM|#

Yes Mobile, I agree... but in this case, the ever-increasing foreign "investment" is mostly in bonds that we will someday have to pay back!!! That's not so good.

Gutenberg Gene|9.10.04 @ 3:35AM|#

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