I noted in a previous post how the level of America's industrial output cannot possibly be healthy if it causes us to run a trade deficit with other nations. So yes, we really do have a sickly manufacturing sector on our hands.
This has provoked a flurry of complaints about how trade deficits don't really matter.
This is a familiar line, especially from libertarian economists like Dan Griswold of the Cato Institute, who referred to the trade deficit as an "accounting abstraction" in his recent book defending free trade.
For a start, this is a silly way to characterize anything with a dollar sign in front of it, simply because all numbers in economics are, in some sense, accounting abstractions. Numbers are an abstract measure of things in the real world, including wealth, and the trade deficit is no different. By that standard, being a millionaire is an "accounting abstraction." So is being insolvent. A number on a ledger is not a loaf of bread, a car, or a bar of gold.
More fundamentally, the idea that the deficit is just an abstraction is identical to the seductive idea that trade deficits somehow don't represent real money. We measure the deficit in dollars, but somehow these aren't "real" dollars, not dollars that anyone ever had to earn, or pay back, or could spend. They're a kind of magic money, as unreal as the values of bubble-inflated securities before the financial crash. They're postmodern, unreal, virtual, free.
So let's get back to first principles and carefully review why America's trade deficit represents real money and is therefore a real problem.
To understand trade deficits, just think through the logic below, step-by-step:
Step 1) Nations engage in trade. So Americans sell people in other nations goods and buy goods in return. ("Goods" in this context means not just physical objects but also services.)
Step 2) One cannot get goods for free. So when Americans buy goods from foreigners, we have to give them something in return.
Step 3) There are only three things we can give in return.
3a) Goods we produce today.
3b) Goods we produced yesterday.
3c) Goods we will produce tomorrow.
This list is exhaustive. If a fourth alternative exists, then we must be trading with Santa Claus, because we are getting goods for nothing. Here's what 3a) -3c) above mean concretely:
3a) is when we sell foreigners jet airplanes.
3b) is when we sell foreigners American office buildings.
3c) is when we go into debt to foreigners.
3b) and 3c) happen when America runs a trade deficit. Because we are not covering the value of our imports with 3a) the value of our exports, we must make up the difference by either 3b) selling assets or 3c) assuming debt.
If either is happening, America is either gradually being sold off to foreigners or gradually sinking into debt to them. Xenophobia is not necessary for this to be a bad thing, only bookkeeping: Americans are poorer simply because we own less and owe more. Our net worth is lower.
This situation is also unsustainable. We have only so many existing assets we can sell off, and we can afford to service only so much debt. By contrast, we can produce goods indefinitely. So deficit trade, if it goes on year after year, must eventually be curtailed -- which will mean reducing our consumption.
Even worse, deficit trade also destroys jobs right now. In 3a), when we export jets, this means we must employ people to produce them, and we can afford to because selling the jets brings in money to pay their salaries. But in 3b), those office buildings have already been built (possibly decades ago), so no jobs today are created by selling them. And in 3c), no jobs are created today because the goods are promised for the future. While jobs will be created then to produce these goods, the wages of these future jobs will be paid by us, not by foreigners. Because the foreigners already gave us their goods, back when we bought from them on credit, they won't owe us anything later. So we will be required, in effect, to work without being paid.
The above facts are all precisely what we should expect, simply on the basis of common sense, as there is no something-for-nothing in this world. And that is what the idea that trade deficits don't matter ultimately amounts to. There do exist, however, ways of shifting consumption forwards and backwards in time, which can certainly create the illusion of something for nothing for a while. This illusion is dangerous precisely because the complexities of modern finance, and the profitability of playing along with the illusion while it lasts, both tend to disguise the reality.
Most of these complexities amount to ways of claiming that the wonders of modern finance enable us either to borrow or sell assets indefinitely. But as long as one bears the above reasoning firmly in mind, it should be obvious why none of these schemes can possibly work, even without unraveling their details. These financial fairy tales usually boil down to the fact that a financial bubble, by inflating asset prices seemingly without limit, can for a period of time make it seem as if a nation has an infinite supply of assets appearing magically out of thin air. (Or a finite supply of assets whose value keeps going up and up.) These assets can then be sold to foreigners. And because debt can be secured against these assets, debt works the same way.
But, of course, as America learned in the recent financial crisis, you can't cheat reality forever. There is no free lunch (one of the few points on which I agree with Milton Friedman), and yes, trade deficits are real money. And I'm happy to bet 1,000 units of accounting abstraction with anyone who believes otherwise.
http://www.citizen.org/documents/FinanceReregulationFactSheetFINAL.pdf
To Rescue Main Street, We Need to Curb the WTO
"...The WTO rules require deregulation – and lock-in – of financial services that countries “liberalize” under these terms.
[snip]
For instance, the Glass-Steagall Act created a firewall between commercial and investment banks to prevent the former from speculating with consumers’ savings. But the U.S.’ 1997 FSA commitments noted an intent to change Glass-Steagall to conform with WTO rules. The Gramm-Leach-Bliley Act, which did so, passed in 1999 – the year the FSA went into effect..."
It is true that the US is exporting job through imports, but the solution to that is to create jobs here, not grouse about China giving us stuff we want to buy. US corporations are sitting on trillions of dollars in saving, but are not hiring, and US banks have been recapitalized by the Fed and Congress, but are not lending.
China wants our technology, they want to jump ahead of us in R&D, they want a skilled population; they're not the stupid ones, we are for giving them everything they need to move ahead of us.
An extract:
"The size of the U.S. trade deficit is ultimately rooted in macroeconomic
conditions at home and abroad. U.S. saving falls short of what is sought to finance
U.S. investment. Many foreign economies are in the opposite circumstances, with
domestic saving exceeding domestic opportunities for investment. This difference of
wants will tend to be reconciled by international capital flows. The shortfall in
domestic saving relative to investment tends to draw an inflow of relatively abundant
foreign savings seeking to maximize returns and, in turn, the saving inflow makes a
higher level of investment possible. For the United States, a net financial inflow also
leads to a like-sized net inflow of foreign goods — a trade deficit. ...
Policy action to reduce the overall trade deficit is problematic. Standard trade
policy tools (e.g., tariffs, quotas, and subsidies) do not work. Macroeconomic policy
tools can work, but recent and prospective government budget deficits will reduce
domestic saving and most likely tend to increase the trade deficit. ...
Standard economic analysis indicates that a trade deficit does not cause a net loss
of output or jobs in the overall economy. Trade deficits will, however, likely change
the composition of output and employment"
Stop spending more than you earn. Just like magic the trade deficit will disappear. Start with the $1.5tr budget deficit.
"Originally, the only tax allowed by the constitution was the tariff. We needed this to compete with slave labor countries.
Therefore we need to raise tariffs today and provide national health care.
This would make our exporters competitive, even though other countries would raise tariffs on our products".
That´s quite compelling logic, I must say.
3b) is when we sell foreigners American office buildings.
3c) is when we go into debt to foreigners."
Which is it when foreigners hire us to build office buildings in America?
That's what the trade-deficits-are-ok crowd really claims is happening. The reason we have a trade deficit, they claim, is that we're a good place to invest and we're not saving enough to fund all the worthwhile investments here. If that's really what's going on, it creates jobs today building the office buildings, and jobs tomorrow working in them.
So which do you call it?
It's kind of like 3a), because we did the work today. If it's 3a), the trade deficit really is an accounting fiction. The foreigners got stuff we made today in exchange for stuff they made today, but it didn't get counted that way because the stuff they got didn't physically cross any borders.
It's kind of like 3b), because an office building is basically an office building. We're building some all the time, and selling a new one isn't much different from selling an old one. But would we have built it if the foreigners hadn't hired us to? If we're not saving enough to pay for it, we wouldn't have.
It's kind of like 3c), because the transaction may have been mediated by an American who borrowed to finance the building. Again, would we have saved to finance it ourselves?
where they're almost completely independent of fossil based fuels. The price of corn (raw material for ethanol) is beginning to skyrocket which will mean overall higher food prices. This is bad
economic policy. We're clueless.
Lets see:
A consumption mandate
A punishing tariff on Brazilian imports
A 45 cent per gallon subsidy.
A recent CBO study concluded that
The costs to taxpayers of using a biofuel to reduce gasoline consumption by one gallon are $1.78 for ethanol and $3.00 for cellulosic ethanol
http://cboblog.cbo.gov/?p=1161
This is the modern equivalent of the phisiocrats argument that only agriculture can lead to wealth and engaging in the manufacturing of goods was a road to ruin.
People trade, not nations. Nations may impose penalties upon their own citizenry in order to support politically connected businesses, but it is the individuals who engage in trade.
In the case of the USA the IOU is the US dollar and we can call it the "USOU"
The USOU is worth a lot when the country is going well and less,when good things are overshadowed by an enormous debt, combined with the aftermath of the Wall St debacle and a dysfunctional efforts to clean up the mess.We all know the solution : we see it daily on TV : find out how much you spend,make a plan and quit spending more than you earn. Or "make a client proposal to make one payment (free trade with China) to get rid of your credit card debt and have lower payments (unemployment) forever after" ( with China in control.)
Interesting, as I got to wondering what the cost would be if tires sold in America were only made in America? I feel that part of the trend started when we moved into a service economy from a manufacturing base. Service wages by nature are mostly lower, hence for many companies to stay in business they had to find lower wage countries in which to manufacture their goods for the American consumer. That could be a solid reason as to all the goods imported from outside our nation.
Has anyone made a study of the Washington firms that do direct lobbying into Congress to see the industries represented? My guess is that those very same companies that have moved off shore are the ones with a good amount of representation in Congress. Just food for thought.
More abstractly though, it is clear that Griswold's assertion is forulated from the perspective of globalism. In the globalist view, the fortunes of nations don't matter, therefore trade deficits don;t matter. Only the profit of multinational corporations matter, the only sense in which what Griswold says can be true. It is therefore a certainty that what underlies his statement is essentially a total lack of allegiance to any nation.
We only collected about $2.2 Trillion this year, and within five years we will be paying a quarter of that out to our creditors (many overseas) in debt service.
We need to dramatically cut the cost of government or this ship is going to sink.
You do realize that the trade deficit is a different thing to the budget deficit ...
If we didn't have a budget deficit we'd have a smaller trade deficit.