The actual numbers can be seen at http://home.att.net/~rdavis2/tradeall.html. In just seven years, the current account deficit has more than tripled, going from 1.637% of GDP to 5.676% of GDP.
Posted on 04/05/2005 9:05:42 AM PDT by baseball_fan
The record-breaking US current-account deficit has prompted calls from protectionists to slow the flood of imports. This response may be understandable, but it is still misguided, given that a large and growing share of the deficit simply reflects the international reach—and success—of the strongest US companies.
Research by the McKinsey Global Institute (MGI) shows that roughly one-third of today's current-account deficit results from trade with US-owned subsidiaries abroad…snip...These activities may add to the nation's trade imbalance, but they also create significant value for US customers, companies, and shareholders.
Trade between foreign affiliates (as offshore subsidiaries are called) and US companies and customers can, in fact, increase or decrease the current-account balance. …snip
This intricate web of global trade demonstrates why traditional interpretations of the current-account deficit are outdated. Any negative net impact that corporate activities abroad have on the US trade balance must be weighed against the overall economic value they create. Today, foreign subsidiaries account for nearly 25 percent of the profits of US multinational corporations and add roughly $2.7 trillion in market capitalization for their parent companies. These revenues promote investment in technologies and business opportunities that will eventually create new jobs, both at home and abroad. Far from reflecting the weakness of the US economy, at least a third of the current-account deficit is actually evidence of its strength.
Instead of adopting protectionist legislation to "correct" trade imbalances, it would make more sense for the government to update the way it calculates the trade balance. This is not to say that the rest of the current-account deficit shouldn't be addressed…snip… The openness and flexibility of the US economy are two of its greatest strengths; policies that compromise these qualities are the real danger.
…snip…
(Excerpt) Read more at mckinseyquarterly.com ...
US policy makers should also tackle..."
- Excellent article
BOHICA. Where are all the great jobs our exports were to create here?
"Where are all the great jobs our exports were to create here?"
I think their point is that it is in the other 2/3rds of the current account deficit that we need to look for making up lost jobs. I imagine jobs within multinational organizations probably pay above average. We need to just create more of them.
Wouldn't the "actual" indicator of fiscal prosperity be national debt reduction?
"Wouldn't the "actual" indicator of fiscal prosperity be national debt reduction?"
As I understand it, increasingly the savings we import from overseas to fund our current account deficit is not going for new investment but for current consumption, a very worrisome trend. If, however, it was for increasing our productive capability, then the debt would be a net plus. In fact the wealth the new investment creates would help pay down the other debt. (A caveat here, this is not my area of expertise.)
Back in the 1950's when going through grade school we were taught that a country MUST balance its trade. Has anything changed since then?
You are correct.
Dubya's ballyhooed tax cuts are NOT "trickling down" to stimulate productive domestic investment which would expand the tax base. Instead, they are hemorrhaging overseas as increased offshore investment and the Trade Deficit. Foreign Direct Investment in the United States (in productive industries) has also plunged by 80% since Dubya took office.) Instead, foreigners purchase the Treasury securities that are issued to finance Congress's deficit spending. That means that an increasing proportion of your taxdollars go to making interest payments to those foreign nations rather than paying for the legitimate functions of our own government.
China overtakes United States as top destination for foreign investment
Foreigners own half US debt, tipping point unclear
US drops out of world's 10 freest economies list, says WSJ
Yes, the major corporations have grown into transnational entities that disdain our national sovereignty. To them, the United States is merely a consumer market to be plundered, a workforce to be undermined, and a tax and regulatory burden to avoid.
I guess that answers my question. Quite depressing.
There is also this from the article:
"The newest trend in globalization is not moving manufacturing overseas but, rather, shifting business services to low-wage countries. These are purely efficiency-seeking investments, generating services that will be imported to the company's home market or sent to other countries. Because such investments require very few inputs from the United States, they have an even more negative impact on the current-account balance than the offshoring of production capabilities does. Previous research by MGI estimated that US-produced inputs amounted to just 12 percent of offshore service costs. In contrast, US exports of auto components to Mexico constituted 40 percent of the cost of finished vehicles."
The actual numbers can be seen at http://home.att.net/~rdavis2/tradeall.html. In just seven years, the current account deficit has more than tripled, going from 1.637% of GDP to 5.676% of GDP.
There is understandable urgency and often dismay surrounding our current account deficit. Yet looking at it from a longer term geopolitical and economic perspective, it may well be more amenable to eventual solution than it otherwise would be, minus this larger view.
By way of illustration, the U.S. was willing to run large trade deficits with Japan after WWII in order to bring her into the family of civilized nations and to win her away from the clutches of communism. Might our trade deficit now be seen similarly as drawing China and India, among others, into the family of civilized nations - more than a quarter of the world's population? This is a monumental benefit for mankind and as such, may well justify a significant portion of our current account deficit by way of extending ourselves for an interim period.
When we look at the kind of deficits that were incurred or the wasteful military spending that was necessary in WWII, WWI or from the Cold War, my assumption is that we are vastly better off now comparatively. War is hideously expensive in lives and treasure, but if we through our deficits are able to avoid such tragic developments, that would seem to be money well spent, thereby leading towards greater stability, not away from it. The math has to work ultimately, but it’s not clear whether these factors are always sufficiently included when judging how dire the situation might be.
By no means is this meant to dismiss the heavy lifting that is necessary regarding reforms to bring our trading balance into better alignment. After all, we are still running large trade deficits with Japan these many years later. Rather it is to say that by putting the situation into the largest view possible, confidence may thereby be maintained - thus enabling us to deal positively with the situation in less than crisis circumstances.
President Eisenhower stressed the necessity for balanced sacrifices both home and abroad to maintain what he saw would be a long struggle to bring liberty and prosperity to the Soviet Union. At least this time we have the far happier prospect of significant cooperation from China and India instead of having to deal with a hostile, messianic, reactionary regime.
Let’s not, therefore, talk ourselves out of a possible historic transformational victory by focusing exclusively on the cost - even to the point of alarm - without consideration for the unprecedented opportunity available as well. We recall President Herbert Hoover’s concern over balancing the federal budget, the cost of which ultimately came at the far greater expense of undermining confidence. The tragic effects flowing from the decision of this conscientious and caring President had, through other miscalculations not of his own making, an untold rippling impact across the world and across generations that many still live with today. Hopefully that is a lesson that needs to be paid for only once.
This sounds very commendable. The problem is, it simply is not true. According to Series U 331 and 349 in the Historical Statistics of the United States, Colonial Times to 1970 (online at http://www2.census.gov/prod2/statcomp/documents/CT1970p2-08.pdf), the U.S ran a SURPLUS with Japan in every year from 1946 through 1964. Do you have a source that says otherwise?
In any case, the following graph shows total trade balance since 1940:
As you can see, the U.S ran a trade surplus from at least 1940 through 1970. Since 1976, we have run nothing but deficits.
Might our trade deficit now be seen similarly as drawing China and India, among others, into the family of civilized nations - more than a quarter of the world's population? This is a monumental benefit for mankind and as such, may well justify a significant portion of our current account deficit by way of extending ourselves for an interim period.
Of course the word "similarly" does not apply since this situation did not occur with Japan until the late sixties when they had already joined the family of civilized nations. In any case, this helping of China and India might be commendable if it was our conscious plan. In fact, this is simply a case of businesses seeking to compete and profit according to the rules of current U.S. laws and treaties. In addition, some level of a trade deficit is understandable. The U.S. is relatively wealthy compared to China and India and could afford to spend some portion of its growth in GDP on consumption. The problem is, the trade deficit is close to 6 percent of GDP, well above our growth rate. We should be saving in preparation for the coming Boomers' approaching retirement. Instead, we are spending all of our growth and then some.
Let’s not, therefore, talk ourselves out of a possible historic transformational victory by focusing exclusively on the cost - even to the point of alarm - without consideration for the unprecedented opportunity available as well. We recall President Herbert Hoover’s concern over balancing the federal budget, the cost of which ultimately came at the far greater expense of undermining confidence. The tragic effects flowing from the decision of this conscientious and caring President had, through other miscalculations not of his own making, an untold rippling impact across the world and across generations that many still live with today. Hopefully that is a lesson that needs to be paid for only once.
Hoover undoubtedly did make mistakes but we will have not truly learned our lesson until we learn to avoid the situation in which our leaders may feel compelled to decrease the deficit and may, in retrospect, do so too quickly or in the wrong way. That situation to avoid is the one of a rapidly rising deficit. It's similar to the person who maxes out their credit cards and is forced to go through a painful repayment program. It would be a mistake for him to conclude that the problem was, not the maxing out of the credit cards, but simply the repayment.
"the U.S ran a SURPLUS with Japan in every year from 1946 through 1964."
Thank you for the research pointing out that we did not run a trade deficit with Japan until 1965. I stand corrected.
My overall thesis was that compared to the costs involved with major wars in terms of debt, lives and opportunity costs coming from having to redirect production for military purposes, I proposed that the imbalances we are experiencing now, while worrisome and very much in need of reform, are manageable as we put solutions in place (weren't the percentages during WWII whether involving debt or taxes or falling living standards through lowered or frozen wages just off the charts in terms of percent of GNP?).
It would be quite a statement to make to say that we have not managed our economic relationships even to the standards of that during war in terms of risks to our financial stability. That would be quite an indictment on how well we have been stewards of our liberty if true. I'm still not convinced that part of the thesis has been disproven, but if it could I would think that a profound statement.
"this helping of China and India might be commendable if it was our conscious plan. In fact, this is simply a case of businesses seeking to compete and profit according to the rules of current U.S. laws and treaties."
I'm unconvinced on that point. My thesis is that we have indeed let our trade deficit go unchecked by intentionally not choosing to enforce standards that would remedy it (similar to not enforcing our immigration policies which, though not an explicit policy, has been the unstated one). If this result has come about through neglect (I guess we had our chance with Ross Perot until he took himself out of the Presidential race), that would raise even more alarm and seemingly undermine the odds that the decision-makers have the situation under control. This would go for Russia too. Any insights here would be welcomed.
You're correct that the budget deficit was "off the charts" during WWII. In looking up those figures, I generated the following table:
Budget and Trade of Goods Surplus/Deficit(-) as a percentage of GDP =================================================================== 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -3.0 -4.3 -14.2 -30.3 -22.7 -21.5 -7.2 1.7 4.6 0.2 -1.1 Unified Budget 0.0 -6.0 -15.0 -35.2 -29.4 -25.3 -4.9 5.9 2.0 -0.2 -1.6 Gross Budget 1.4 1.4 3.3 4.8 4.7 2.5 2.2 3.6 2.0 2.0 0.5 Trade of Goods ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -------------- 1.4 -4.6 -11.7 -30.4 -24.7 -22.8 -2.7 9.5 4.0 1.8 -1.1 Total = -81.2 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -2.9 -2.2 -1.4 -0.3 0.8 1.4 2.4 1.3 -1.5 -3.5 -3.6 Unified Budget -4.2 -3.8 -3.4 -2.3 -1.3 -1.4 -0.2 -1.4 -4.1 -5.2 -5.1 Gross Budget -2.3 -2.4 -2.4 -2.4 -2.8 -3.7 -4.6 -4.2 -4.6 -5.0 -5.7 Trade of Goods ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -------------- -6.5 -6.1 -5.8 -4.7 -4.1 -5.1 -4.8 -5.6 -8.7 -10.2 -10.8 Total = -72.6
As you can see, we ran a combined unified deficit of 88.7 percent of GDP in just four years. However, I noticed something else that I found a bit interesting, if not disturbing. If you look at the combined deficit in the trade of goods AND the gross budget (excluding the trust funds), the total comes to 81.2% of GDP for 1940 through 1950. This period included all of WWII. But if you look at the combined deficit for 1994 through 2004, a period that included the tech boom and no war larger than the current one in Iraq, the combined deficit is 72.6% of GDP. That's nearly 90 percent of the combined deficit from 1940 to 1950.
The point is that, after WWII, we paid down the gross federal debt from a high of 121.7% of GDP in 1946 to a low of 32.6% of GDP in 1981. I see no willingness to make such an effort again, either among the electorate or our political leaders. Instead, we have run the debt back up to 63.7% of GDP and the latest U.S. Budget projects that we will run it up to 249% of GDP by 2075. Graphs and table of these numbers can be seen at http://home.att.net/~rdavis2/debt06.html and at http://home.att.net/~rdavis2/pro2006.html.
I'm unconvinced on that point. My thesis is that we have indeed let our trade deficit go unchecked by intentionally not choosing to enforce standards that would remedy it (similar to not enforcing our immigration policies which, though not an explicit policy, has been the unstated one). If this result has come about through neglect (I guess we had our chance with Ross Perot until he took himself out of the Presidential race), that would raise even more alarm and seemingly undermine the odds that the decision-makers have the situation under control. This would go for Russia too. Any insights here would be welcomed.
I have a number of other theses. One is that we have a bad case of "super-power-itis". Whereas our forefathers knew that they could become prosperous only through their own hard work, we have begun to believe that it is our birthright as Americans. Hence, we feel that the economic rules that apply to all ordinary nations do not apply to us.
Something else that I have noticed is that all of our trade decisions seem to be geared toward any obvious gains in the short-term. There seems to be an almost religious belief in "free trade" that assumes that the long-term will always take care of itself. This leads to the belief that we need do nothing about the trade deficit as the market will take care of it in the proper way.
Due to these or other reasons, we seem to have set off into unchartered territory in many areas. As you can see from the graphs above, we set off into the area of large and growing trade deficits in the mid-seventies. This may have been helped by our move to extremely low tariffs as shown in the following graph:
I am not if favor of high tariffs but it may well be that they have moved too low, too quickly. It's when they sank to their current lows in the seventies that we started running these increasing deficits. In any case, I have always found it interesting how many free-traders will condemn all tariffs when, as the above graph shows, the U.S. survived and prospered for most of its history with relatively high tariffs.
One possible alternative to tariffs is the idea of import certificates, suggested by Warren Buffett in a Fortune article at http://www.pbs.org/wsw/news/fortunearticle_20031026_03.html.
Let me complement you on what appears to be some very good research. I want to make sure I'm understanding the numbers correctly from the "Budget and Trade of Goods Surplus/Deficit(-) as a percentage of GDP" table.
The "unified budget" is the entire federal budget including social security revenues and outlays?
The "gross budget" is the entire federal budget excluding social security revenues and outlays?
The "trade of goods" line, is that equivalent to the current account deficit?
Would not any tax revenue or shortfall coming from a surplus or deficit in the trade of goods be only a fraction of the number presented here? For example, in 1943 we had a 4.8% trade of goods surplus. When considering tarrifs as well as additional jobs generated, in what is only a guess I would expect that no more than 25% of the 4.8% number would end up as revenues to the federal government. Why then do we add the entire 4.8% to the -35.2 gross budget deficit to get the net -30.4%?
Also, why does the current account defict as percentage of GNP get added to the federal deficit at all? If you buy a foreign car, it would seem only your ability as an individual to finance it is in question. If we then have to make an assessment of that, we would look at not only your income but your overall increase in wealth. You obviously would buy that foreign car because you received better quality for a lower relative price, so your wealth and your overall amount of personal savings after your purchase is higher than it would be if you had theoretically bought domestically not having these attributes.
So the key would seem to be to create more income generating opportunities here without choking off the savings generating opportunites from buying foreign goods. After all some of those savings generating opportunities will be for capital goods for your business as well and your income producing capabilities increase in being to sell to those markets. Now if because of a fall in education standards or a promiscuous culture or federal deficits we are less able to compete, blaming the vast majority of our current account deficit on not having sufficient tarrifs would seem to place the blame on others instead of looking at ourselves (again a supposition on my part since I'm very early in the economic learning process).
Does it not then follow that, regarding the bottom line, if our -5.7% trade deficit has in a way helped us avoid a 1943 style -35.2% gross budget deficit, we as a nation and a world are far better off? (I realize if continued long enough this way that the reverse concern could be raised, i.e. taht a -5.7% trade deficit makes more likely future international relations disruptions.)
We as a nation have shouldered far greater economic burdens in terms of federal deficits in the past and have come through it okay - not that they weren't painful - so there is no need for panic while admitting there is major effort needed to maintain our competitive position and fiscal financial solvency.
(Can you point me to where you derived your table of trade numbers?)
Cheers!
Yes, it also includes the revenues and outlays for other trust fund accounts such as Medicare, Civil Service retirement, and Military retirement. You can see a list of the major ones at the bottom of http://home.att.net/~rdavis2/def06.html.
The "gross budget" is the entire federal budget excluding social security revenues and outlays?
True. It also excludes the other trust fund accounts.
The "trade of goods" line, is that equivalent to the current account deficit?
Actually, the current account balance equals the trade of goods balance plus the trade in services balance plus the "Income Balance" plus "Unilateral Current Transfers, net". I don't know much about these last two items as I just learned this formula myself recently. However, you can check the first source given at the bottom of http://home.att.net/~rdavis2/tradeall.html for more information.
Would not any tax revenue or shortfall coming from a surplus or deficit in the trade of goods be only a fraction of the number presented here? For example, in 1943 we had a 4.8% trade of goods surplus. When considering tarrifs as well as additional jobs generated, in what is only a guess I would expect that no more than 25% of the 4.8% number would end up as revenues to the federal government. Why then do we add the entire 4.8% to the -35.2 gross budget deficit to get the net -30.4%?
I agree that the trade deficit and budget deficit are not measuring the exact same thing. The trade deficit measures a net flow of funds overseas in exchange for goods and services and the budget deficit measures increased liabilities of the government. In addition, they can overlap as when dollars obtained through the trade deficit are used to buy U.S. Treasuries. However, they do make up the "twin deficits" which many believe have negative consequences so I went ahead and looked at both of them while I was looking at the budget deficits of WWII. I would have to give their relationship a great deal more thought before I would post that table on my site or attempt to draw any precise conclusions. That's why I said that the main point was that, after WWII, we paid down the gross federal debt from a high of 121.7% of GDP in 1946 to a low of 32.6% of GDP in 1981, a feat that I see no willingness to repeat.
(Can you point me to where you derived your table of trade numbers?)
You can see the source for the tariffs at the bottom of the bottom of http://home.att.net/~rdavis2//tariffs.html and the links to all my trade data at http://home.att.net/~rdavis2//atrade.html. Thanks for the comments.
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