Bernanke Solves the Wrong Deficit

Federal Reserve chairman Ben Bernanke recognized today that America's trade deficit played a central role in the global economic crisis. Then after he recognized the problem, he went on to solve a different one.

Start with the real problem, America's trade deficit. America is spending more than it earns, and buying more than it's selling. Our trade deficit in 2008 was $706 billion.

We know we're addicted to oil. We're also addicted to cheap stuff imported from China (made cheap by devalued currency and near-zero workplace or environmental protections). America's problem is a huge efflux of dollars, as our wealth departs for foreign lands.

The Asian export tigers have a smaller problem, but they have one too -- an excessive reliance on excessive American consumption. The danger is, in Bernanke's own words, "ever-increasing and unsustainable imbalances in trade and capital flows."

So America has a trade deficit. The world has an unsustainable imbalance. That's un-good.

Bernake's solution to this trade deficit? Reduce the federal budget deficit.

If you listen quickly, it may sound like reducing a deficit to reduce the deficit. But listen carefully. Bernanke wants to reduce a different deficit.

Sure, the federal budget deficit is high. It may be a problem (though not as bad as it seems) but it's a different problem.

The ultimate underlying problem is this trade deficit. And we need to solve it. We need to solve it the good old fashioned way. By making things, building things and selling things. Fundamentally, we need to sell more than we buy. That's what Bernanke said the problem was.

And to solve that problem -- the trade deficit -- government spending may be needed in the short term. We may need to stimulate the economy by building roads, train tracks and windmills -- investments that increase our productivity over time. We may need to invest in research and development of ideas whose commercial application will come later (think internet). In short, we may need to eat some federal budget deficit in the short run to solve the problem of both deficits in the long run.

Ironically, the recession has been good for our trade deficit. We can't buy as much and don't have as much money to spend. But it can't last and we don't want it to. We want to rebuild our economy, though differently this time. The current crisis must plant the seeds for the economy of the future. That's the conclusion Bernanke flirted with, but didn't say.

This post originally appeared at Campaign for America's Future.

We're hosting a conference on the New Economy in DC on October 29.

 

 

Comments

[marinara]

Do foreign nations buy treasury debt? Does the treasury dump it's debt on the market? Two points that the blogger doesn't consider. With respect to Eric Lotke, we have to avoid extremes, and one prime target is our Federal deficit. Although the trade deficit is very very important, we have to think short term just to avoid the financial meltdown we postponed in 2008.

[vascopyjama]

Pretty hard to sole the trade deficit when you don't manufacture anything anymore. But maybe Mr. Bernanke is talking about those bit of paper that Wall Street manufacture.

[therealredstateblues]

there is a case to be made that reducing the federal deficit could help with the trade deficit

in this way

the reason we don't do anything about unfair trade with china is precisely because we owe them so much money - that is why Geithner and Obama backed way from the currency manipulation thing - we don't want to offend our bankers now we?

When Bejing says jump washington says how high

we may never be able to do anything meaninful abut trade until we rid ouselves of beholdenes to foreign interests - the two go hand in hand

[lightningbolt]

Of course Bernanke is not going to solve the national debt problem. If the national debt gets paid off, the Federal Reserve will cease to exist and its member banks will no longer be able to collect their dividends. Bernanke's mission is to keep the U.S. in perpetual debt so that the Fed's owners can continue collecting a dividend on the interest.

[TWKT]

We also need to export the services that we are good in. We are after all a service economy.

[Eric Lotke - Huffpost Blogger]

TWKT: yes, we need to export services, and yes we're good at it.
The problem is order of magnitude. Look at that bar chart. We aren't (and probably never can) export enough services to make up for all the goods. And services can go away too. We need a strategy. (See my recent paper on the G-20 at ourfuture.org). Eric Lotke.

[Scarborian]

We're busy outsourcing our service industries to India because it's more profitable for Wall Street. How are we going to solve either deficit if all we have left is fast food restaurants.