One point seems largely to have been missed in recent weeks, amid all the excitement over the Federal budget and the sovereign-debt crises in Europe: free trade is largely the root cause of all these problems. So let's trace the causation for a minute.
Start with the Federal budget. Federal revenues are derived from the underlying economy, and therefore, if the underlying economy were larger, revenues would be, too -- even without any tax increases. As a result, anything that causes the U.S. economy to be smaller, tends to widen any gap between expenditures and revenues.
Enter free trade.
For it is thanks to America's embrace of free trade (whether genuinely free or not; that's another issue) that we have been running giant trade deficits for years. And these have been costing us economic growth.
The Economic Strategy Institute, a Washington think tank, estimated in 2001 that the trade deficit was shaving at least one percent per year off our economic growth. (See the 2006 report "China's Financial System and Monetary Policies: The Impact on U.S. Exchange Rates, Capital Markets, and Interest Rates" of the U.S.-China Economic and Security Review Commission for the details.) This may not sound like much, but because GDP growth is cumulative, it compounds over time. Economist William Bahr has thus estimated that America's trade deficits since 1991 alone -- they stretch back unbroken to 1976 -- have caused our economy to be 13 percent smaller than it otherwise would be.
That's an economic hole larger than the entire Canadian economy.
Other economists have reached similar conclusions. William A. Lovett estimated in 2004 that, "With stronger, reciprocity-based trade policy, U.S. GDP could have been 10 to 20 percent higher." Another estimate, by Charles McMillion, notes that in the 25 years up to 1980, our real GDP grew at an average of 3.8 per year. But in the 25 years afterwards, as our trade deficit ballooned, it averaged only 3.1 percent.
This is why we're being forced into budget cuts and/or tax increases. We just don't have a big enough economy to pay for the spending we've voted for at the tax rates we've voted for.
The above is usually treated as a conservative insight, because the implication is that economic growth is the real answer to our problem, not higher taxes. The Wall Street Journal crowd loves this stuff. Unfortunately, that school of opinion also loves free trade, which is driving our growth down, not up. So the free-marketeers have painted themselves into a corner here, and it's no accident they don't have a solution.
Now for the debt part of the equation. As I have noted before, a nation's accumulation of debt is closely linked to its running of trade deficits, because when we import more than we export, we must pay for it by either selling off existing assets or accumulating debt. (This is a simple matter of accounting, not even economics, so it shouldn't be that controversial, no matter how controversial other aspect of the issue are.)
Over the past 35 years or so that we have been running trade deficits, we have mostly paid for this by assuming debt, and especially in recent years, a huge part of that debt has been public debt. One consequence has been that in order to manipulate the dollar price of its currency downward and boost exports, China has been buying huge amounts of U.S. Treasury securities. Thus the same mechanism that caused our trade deficits also increased our governmental debt.
If the United States had enforced balanced trade (i.e. no trade deficit) during this period, China would not have bothered manipulating its currency, as it would not thereby have been able to obtain a trade surplus with the U.S. Therefore it would not have accumulated its present huge holdings of U.S. debt and we would not be so indebted today.
It was, indeed, this artificially-induced flood of cheap foreign cash that enabled us to borrow so much money in the first place. So much money, at such low interest rates, would not have been available if we had confined ourselves to domestic sources of funds; the upwards pressure on domestic interest rates would have choked off government borrowing at some point.
The decision to raise so large a part of the government's budget from foreign borrowing dates back to Ronald Reagan's presidency, most explicitly to the 1984 decision by Treasury Secretary Donald Regan to effectively exempt foreign holders of our bonds from taxation. All subsequent administrations (with the limited exception of the latter part of Bill Clinton's presidency, when the U.S. was running budget surpluses) have welcomed the resulting availability of cheap foreign capital.
In the short run, it was a great deal, holding down interest rates and taxes alike. In the long run...
The above analysis holds, in slightly different form, in Europe. Nations like Greece, Portugal, Italy, and Spain have also run chronic trade deficits for years. As in our own case, their deficits were bridged by foreign credit -- largely from Greater Germany (Germany, Austria, Switzerland, Denmark, Finland, Sweden, and Holland.)
As in our own case, the willingness of foreigners to lend them money was politically inflated -- in their case by the replacement of national currencies by the euro, which enabled un-creditworthy governments like Greece to borrow on terms similar to those of creditworthy governments like Germany.
Because these European nations have smaller and weaker economies than the U.S., and because they borrowed in a currency which (unlike our own situation with the dollar) they cannot print, the inevitable long-term consequences hit them first. But we are not going to be exempt forever.
The underlying lesson is the same in our case and theirs: free trade causes trade deficits and therefore debt. The free market, on its own, will neither limit the accumulation of excessive debt nor redress the excess once it has been created. Government is eventually forced to step in, to solve a crisis it could have largely avoided if it had not embraced free trade in the first place.
Follow Ian Fletcher on Twitter: www.twitter.com/IanFletcher
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Roemer has just launched in New Hampshire and has Roemer for President website. He wants to raise one million $100 maximum contributions and be free of all corporate and other lobbying influence that comes with big donations. Essential if anyone is to do anything about our trade policies. Roemer was a reform governor of Louisiana, and served few terms in Congress.
Like to add, there's what I call a "dirty little secret" about our so-called "free" trade agreement (NAFTA, WTO)--they were never passed as trade treaties (as they should have been), Couldn't get the 2/3 vote in Congress. This created a loophole giving president power to WITHDRAW USA without going to Congress!!
Makes one wonder--having this kind of clout all these years, how come no president (Democrat or Republican) has said quietly to China "If you don't lower YOUR tariffs to match OURS, I'm going to send that 6-month notice we're getting out of the WTO."
Do you suppose it's because corporate contributions OWN both parties and they love "free" trade with China? Whatever happened to Republican horror of Godless communism? Money trumps religious scruples I guess.
Read all about the constitutionally questionable way "Free" trade was foisted upon us in Pat Choate's Dangerous Business.
"In the short run, it was a great deal, holding down interest rates and taxes alike. In the long run..."
In fact, I'm going to have to mull this one over for a while and investigate further. I'm not saying I agree with every belief in it for now, but it is quite bold these days to speak of so-called "free" trade. It's not "free", nothing is. Somebody, somewhere manipulated the entire shitstem in their favor which diminished the capability of every American to make a decent living.
I am truly in awe of this article.
I agree with it 100% and I am totally surprised ANYBODY has mentioned that "free-trade" policies are what's degrading our economy. I really thought this was one of those issues that people just weren't going to talk about in the mainstream discourse. Politically, we're almost not allowed to take on this issue.
"Free trade" policies, to be sure, are really about investors' rights rather than truly free trade- if we're going to be honest about the academic definitions of free trade as outlined in the Chicago School of economics.
Since the End of the Bretton Woods system in the early 1970s, Bretton Woods restrictions on finance were dismantled, finance was freed, speculation boomed, huge amounts of capital started going into speculation against currencies and other paper manipulations, and the entire economy became financialized. This is where you get an out-of-control Wall Street! The power of the economy shifted to the financial institutions, away from manufacturing. And since then, the majority of the population has had a very tough time; in fact it may be a unique period in American history. There's no other period where real wages have more or less stagnated for so long for a majority of the population and where living standards have stagnated or declined.
Robert Reich is fond of stating that "real wages stagnated over the last 10 years". He conveniently ignores that non-wage benefits have become an ever growing proportion of total income.
He also conveniently omits the real improvement in qulaity and cost of consumer products over time, which adds tremendously to our quality of life.
Living standards have stagnated or declined? Not in the US judging by the number of "poor" who have cell phones, logo clothing, shelter, cars and enough food to become enormous.
The US is the largest manufacturing country (by value) in the world. There are less people in manufacturing today primarily due to increases in productivity. Engaging in any economic activity with declining amounts of labor is generally considered beneficial progress. Otherwise, instead of the 2% of Americans now engaged in agriculture, we'd have 98% as in the 1700's.
As would be expected, you take hard facts, such as definitions of "poor," "real wages" and "living standards" and you've created this false sense of ambiguity about what would otherwise be tangible facts to the non-deluded.
Th increased productivity is rather irrelevant to why there are less people in manufacturing today. You've totally ignored the main cause of manufacturing's decline to support some flawed and sociopathic philosophical narrative. The main cause of manufacturing's decline is the end of the Bretton Woods restrictions on the world's financial systems. You're reference to agriculture is also irrelevant as it's part of this red herring you've posed about increased productivity leading to the decline of manufacturing.
The gap between rich and poor is the widest it's ever been in this country and, of course, all you can provide is a pathetic attempt at creating a false sense of ambiguity about what constitutes the "poor" by saying that some kid in the inner city with an iPod is way more rich than a poor person in India. That iPod doesn't make that kid equivalent to the next CEO of Goldman Sachs does it? NO!
Economic disparity between reach and poor has real life negative outcomes for the ENTIRE economy!
Our economic problems stem from profligate government spending, Fed reserve policy which has destroyed the value of the dollar ($1 in 1913 when the Fed was established is now worth $.045+/-) horrendous over-regulation, crony-capitalism and protectionism.
Free-trade has been occuring since we were swinging by our tails, exchanging bananas for sex!
It's "less than" free trade which occurs now, and is getting less free by the day.
China (and other countries) engage in the so called currency war. They print money to buy dollars and make the dollar more expensive while the labor of their people becomes cheaper and their lives are strained. There is absolutely no free market in this game - it's all central bank manipulation. The US politicians allow the fraud to continue, largely because of corruption and the loans granted to them by China. The loans pay interest that comes from the taxpayers pockets but you don't expect 21st century American politicians to care about it.
- Buy large amounts of Chinese currency in the same way China buys dollars. It's not clear why the US refuses to do it, it's everyday occurrence in China. The only explanation is corruption or something worse.
- Introduce import certificates, issued for the total amount of US exports and sold by the US Treasury to importers. Then those who acquire certificates can import as much as the amount of the certificates they own. This was proposed by the Balanced Trade Restoration Act of 2006 by Dorgan and Feingold - it's time to put it to vote..
- Equalize the tariff levels with other countries and keep higher tariffs for countries like China which manipulate the dollar, cause relocation of industry, keep their people underplayed and working in poor conditions or lack environmental protections.
It's common sense, something that has been completely lost in the US on political level.
Moreover, there are no Chinese factories being built in the US - your example assumed there were, typical for pseudo-economics. On the contrary - a lot more US factories are being built in China and elsewhere making the BALANCE OF PAYMENTS even worse than the TRADE DEFICIT. But that would be nitpicking, as I demonstrated above, balance in TD would imply balance in BOP in some reasonable time frame.
It's not a coincidence that data on BOP is hard to find - the full picture is a lot worse than the trade deficit alone.
Interesting, the economists employed in politics seem to be as corrupt as their masters. It is clear that policy-making economists are nothing but concealed Chinese WMDs deployed om US soil.
The source of our problems is the large trade deficit caused by unbalanced unbalanced trade. It feeds the corruption in Washington. A China-financed government is good for China but bad for America - that's what we have now.
There are many ways to achieve balance of trade:
Import Certificates - issued to importers or sold by the Treasury. Warren Buffett proposed it way back when he was with the good guys.
Scaled Tariffs: The higher the trade deficit with a country, the higher the tariffs. Zero deficit = zero tariffs. There are other variations but let stop here.
Check The Balanced Trade Restoration Act of 2006 by Dorgan and Feingold... many solutions but only TWO responsible and honest politicians. That was in back 2006, today the count is ZERO.
When people realize that Ross Perot was right about jobs going overseas, it will be too late for America to keep the advantages gained from the struggle of the working class. The benefits of free trade are not broadly shared in America. A few CEOs and shoppers at Wal Mart have advantages. The rest have no jobs. Soon, these shoppers are at Pic 'n Save.
The race to the bottom is so evident in America that only a fool can not see the evidence everywhere. We see the same problem in England where youths are unemployed and probably unemployable. The latter is a social problem as much as an economic one.
Young people see no future in America. I talk to young people every day. Labor unions were a necessary evil. The gains of technology are not broadly shared either. Between automation and free trade, your children will be working for peanuts. They will directly compete against Chinese and Indians who can work in really bad conditions and for low wages.
The question is why America ever had an advantage over other countries. The only answer is that we won two world wars. Since then, we have lost the tarrifs that protected our manufacturing base and entered into the era of derivatives and credit default swaps while we financialized our economy. The real economy died.
Not much hope. Dollars leave the country, leaving small change.
Trickle down doesn't work when wealth is concentrated in such a small number of potential spenders. Lots of people employed in modest paying manufacturing jobs are the ones who spread the money that circulates through communities.
follow the money:
1st - private individuals and businesses purchase, with their own money, Chinese products. Its a fair and even exchange of one commodity (US dollars) for another (goods & services) = which means No 'trade deficit'.
2nd - The Chinese folks receiving US dollars need to exchange the dollars for their own currency, so they sell the dollars to the Chinese central bank in return for Yuan.
3rd - The Chinese Central Bank doesn't want dollars so the government either uses them to purchase other commodities (oil, natural resources, etc) or US Treasuries.
4th - BUT, it is OUR government who is in control of how many securities/treasury bonds to create and sell, with each one representing additional government liability (debt). So, government debt is NOT created by free trade or so-called 'trade deficits'... the source and responsibility lies ENTIRELY with governmental decisions to debt finance its spending.
Once again, a 'pseudo-economist' tries to bamboozle the choir by supposedly 'proving' what they what to hear in the first place....
Ian has had these fallacies of his theories pointed out to him in the past, so the fact that he continues to spew this stuff is just basically bold-faced lying to further his political agenda.
The dollar is most definitely NOT a commodity - it's a centrally produced and priced debt note without inherent value whatsoever. The rest of your other points are based on that profoundly erroneous assumption. Talk about a "pseudo-ecÂonomist"...
The dollar, and all fiat currencies, are not 'true' commodities - they are state enforced fictions which assume the role of an actual market-based commodity money. The 'inherent value' of any such fiction lies in the belief that the issuer will maintain its control over its populous and be able to continue to extract resources from the economy in order to support its own existence.
As far as economics is concerned, a fiat currency functions just like a commodity, despite its true fiction.
http://www.flightglobal.com/articles/2010/11/05/349329/china-special-c919-update.html
CHINA SPECIAL: C919 update
"...CFM InternatioÂnal Providing the Leap-X1C engine that will power the aircraft. Has signed agreement with AVIC's Commercial Aircraft Engine to study the feasibilitÂy of an assembly line and engine test facility in China.
GE Aviation Supplying the core processing system, cockpit display systems, on-board maintenancÂe systems and flight recorders with partner AVIC Systems.
Rockwell Collins Supplying the communicatÂion, navigation and surveillanÂce systems on the C919, as well as the in-flight entertainmÂent system and cabin core system. It is doing the work with Chinese partners China ElectronicÂs Technology Avionics (part of state-owneÂd China ElectronicÂs Technology group), AVIC's China Leihua Electronic Technology Research Institute and AVIC's Shanghai Aero MeasuremenÂt-ControllÂing Research Institute.
Honeywell Providing fly-by-wirÂe flight control system, inertial reference and air data systems, auxiliary power unit, wheels and brakes. It is partnering China's Flight Automatic Control Research Institute, Hunan Boyun New Materials and Changsha Xinhang Wheel and Brake.
Parker Aerospace Supplying the aircraft's hydraulics system, flight control actuation and fuel tank systems in partnershiÂp with AVIC Systems.
Liebherr-AÂerospace Providing the landing gear and air management systems through partnershiÂps with AVIC's landing gear manufacturÂing subsidiary in Changsha and Nanjing EngineerinÂg Institute of Aircraft Systems.
Eaton Supplying the fuel and hydraulic conveyance systems, cockpit panel assemblies and dimming control system..."
There is also this:
"Capital must protect itself in every way... Debts must be collected and loans and mortgages foreclosed as soon as possible. When through a process of law the common people have lost their homes, they will be more tractable and more easily... governed by the strong arm of the law applied by the central power of leading financiers . People without homes will not quarrel with their leaders. This is well known among our principle men now engaged in forming an imperialisÂÂm of capitalism to govern the world. By dividing the people we can get them to expend their energies in fighting over questions of no importance to us except as teachers of the common herd. " ...JP Morgan 1902”
Banks are supposed to have underwriting standards to protect themselves. They abandoned underwritng standards thinking the could offload the toxic securities to others for big profit but got caught in their own fraudy business model.
As to the the slowdown in foreclosures, lenders have to prove they own the note and actually have the right to foreclose. Is that asking too much? Remember Farkas selling the same mortgage/loan three times to three different entities?
Banksters vandalized the land title system that worked for hundreds of years, taking formerly public recording that gave "constructive notice" to all and made a MERS secret of it. MERS clouds titles and confuses. One of the more recent complaints comes from a surveyor who reminds that real estate is geography and that to find a boundary, he must read deeds not only on the subject property but on those that share the boundaries. Can't do that with MERS secrets.
Banks and mortgage originators created barriers to prompt foreclosures as well as creating loans that were doomed to fail within an irresponsible system not accountable to borrowers, investors and neighbors of borrowers.