THE BLOG
05/19/2010 03:06 pm ET Updated May 25, 2011

Fixing The Forgotten Deficit Can Fix The Scary Deficit

The deficit spending of our government is page one in the financial news. Lots of innocent electrons have been force marched around on the internet and on cable in a multitude of rants. Electrons are arguably just as happy remaining where they are. If you are interested in saving the electrons an ordeal, as well as the country, it might be time to refocus on the forgotten deficit, trade. It might also be time for President Obama and Congress to take notice of a fundamental populist fact. Americans don't like losing their jobs.

Trade is the lost argument. Not lost in terms of the argument, but lost in terms of government, media and public attention. Somehow the several deceptions that justify free trade are growing quiescent, unchallenged, assumed. Except for the political back burners in union halls and the precious few economists and tiny cadre of lobbyists on the issue of trade, it has dropped out of the public dialog at a time when it should more properly be as prominent as the budget deficit. It is more properly prominent because it is less politically difficult to address than is the budget deficit. What's more compelling is that addressing the trade deficit can materially or even completely retire the deficit about which we rend our garments and wail.

One thing is certain, ideology is not realistic trade policy. The ideology of free trade puts us at a trade disadvantage with countries, literally everyone else on the planet, that do not care about Ayn Rand or Milton Friedman. Free trade has a momentum derived more from short sighted business fantasies and academic foibles among economists (they work to build an intellectual ivory tower rather than husband a nation/state) than from any real world consequences that can or will likely result. The economic theory on trade has been wholesale appropriated to serve a few multinationals and a multitude of re-importers over the interest of this country and its people.

Trade exists to obtain what you do not yourself have or can't effectively make. American companies have found one thing that foreign countries have in abundance that can't be made here, cheap labor. The reason cheap labor can't be made here is our standard of living. More precisely, there are no laborer ghettos in this country that are as deeply impoverished as there are in foreign nations. U.S. homes and rents, utility and transportation costs are high, and mostly not mitigated by poverty. Whole populations abroad live in effective national labor ghettos. One of the rationales for global free trade was to change that disparity. Ironically, it seems to be working, but in reverse.

The rationale that free trade with labor ghetto nations would open up markets to a billion new customers in China has been proved a deception. We would not have trade deficits if it was working. For access to those billion consumers, the Chinese exacted a higher price themselves. They demanded and demand that we manufacture there and hand over the manufacturing and engineering technology required to manufacture there. To hand over our technology for making things to other countries for what unfolds as an empty promise of access to their markets is a fool's errand.

Trade was supposed to increase our GDP. It has been a net loss for thirty years. Maxing out at about a $700 billion deficit in the last few years before the economy crashed, one must speculate as to how much this is costing our government's bottom line in light of the other deficit about which all of Washington is wringing its hands. This leads one to wonder how much more could our own economy have grown had we not pursued free trade as ardently as a sailor in a port of call pursues a hooker?

Tax revenue is certainly affected by free trade. It's impossible to prove a negative, but at least reasonable projections of domestic growth, compounded absent trade the deficit, might show the actual losses from free trade to our GDP to be more than the $6 trillion recorded by the BEA over the last decade. Because of lost growth, and many other variables, there's no simple way to figure absolute lost tax revenue, as can be seen in the paper from CitizensForEqualTrade.Org .

A useful simplification might be to figure tax revenues as percent of sales. It's estimated that domestically produced goods are taxed at about 30% of sales when state, federal and payroll taxes are summed up. Sales of imported goods are taxed at about 3%. So a 27% difference in revenues on sales yields a tax revenue loss of $1.62 trillion dollars over the last decade. With a current trade deficit of $500 billion, the revenue losses would be $135 billion a year. A hefty sum, but still not the full picture.

A job has a multiplier effect. One job creates opportunity for some multiple of other jobs. If our economy was still producing things as it did as late as the nineties, it would have been larger, compounded year over year. With trade in balance, we might have had as much as a 5% larger economy compounded year over year since 2000. So instead of a $14 trillion economy, we might have had a $20 trillion economy by now. Take just 10% of the $7 trillion difference and you'd get about $700 billion in taxes generated every year. Not chump change, but not achievable overnight.

Will bringing the balance of trade down to parity be enough to balance the budget and retire the debt over time? Yes, given that the war boondoggles are winding down and the twin Republican Medicare fiascos of Medicare Advantage and Medicare Part D are being revised to the advantage of the public instead of the industries.

Trade is a tricky issue in policy, but not politically.

In the minds of individual workers, losing a job to an offshore competitor is a clear and simple injustice. You work hard and play by the rules and lose your job to a person that knows less and produces less than you, for the simple fact that they will work for less than you. The work force, left and right leaning, see a personal loss in profligate job flight to foreign labor markets. Instead of working by the rules of your own country you are working by the rules of a country in which you do not live. We are letting countries with ghetto gulag labor policies dictate the rules. Trade balancing policy is a shoo in politically.

Trade policy implementation is much more tricky. Here are just two issues at the fifty thousand foot level (an exhaustive examination of all the issues would take a book to encompass, but there's not room for that here).

First, all economies and global economies devolve to individual acts. A businessman assumes he will make more money if he can cut wages. He's right, to a point. If he does and so does everyone else, then all wage earners make less money and the market for every individual businessman's product shrinks. This is the logical outcome of Libertarian economics, smaller incomes and economies. Your individual rational self interests aggregate to produce unintended results for yourself. Governments are required to make sure businessmen don't save themselves to death. The Dept. of Agriculture was formed to address just such a thing, to dissuade all farmers from planting the crop producing the highest return in a previous cycle, thus potentially destroying the food supply of the nation if they all, individually, decided to grow artichokes. Trade policy may need to be conducted down to the individual level as is agriculture policy.

Second, exporters may be materially affected by trade policy favoring domestic business over foreign business. Those individuals that benefit from free trade will feel threatened by balancing trade. Exports are still 10% of our economy and we can't sacrifice 10% of our economy to gain 5% back. So sound trade can't be decided by vested interests. It must be decided by government in the best interest of the nation. As trust in government to decide impartially for the good of the nation is at an epic low because of influence from special interests, no sweeping remedy is likely to get political traction without strong public support, as we are seeing at work in finance reform.

There are winners and losers in free trade that have a legitimate stake in how trade policy might be revised. But, if the economic well being of the public as a whole is diminished by the advantages proffered to a minority, those capitalizing on the status quo in trade, it is time to examine how much better off the majority might be if we balance trade and so help balance the budget.