In Defense of "Trade Deficits"

Washington Times via Capitalism Magazine ^ | March 22, 2003 | Daniel J. Mitchell

[1rudeboy]

I remain Willie Green's evil twin brother.

[lelio]

But America isn't in a battle.

America isn't, but China sure is. In the PLA's own words:

In the seminal Chinese treatise on modern strategy "Unrestricted War" by People's Liberation Army Cols. Qiao Liang and Wang Xiangsui published in 1999, the unfolding financial crisis is compared to military conflict: "Economic prosperity that once excited the constant admiration of the Western world changed to a depression, like the leaves of a tree that are blown away in a single night by the autumn wind. After just one round of fighting, the economies of a number of countries had fallen back 10 years. What is more, such a defeat on the economic front precipitates a near collapse of the social and political order. The casualties resulting from the constant chaos are no less than those resulting from a regional war."

[1rudeboy]

Gosh, I wonder if they had the ping-pong ball industry in mind when they wrote their treatise.

[RLK]

What I am coming inexorably to conclude is that everyone involved in the so-called radical capitalism and allied movements is just plain nuts.

[lelio]

The 1930 Smoot-Hawley legislation was supposed to protect American jobs, but instead it helped cause record unemployment and the Great Depression.

I wish Capitalism Magazine wouldn't keep on digging up this old canard. Smoot-Hawley is now causing the Depression? Give me a break.

I have trade deficits with my local supermarket, movie theater and gas station: I buy lots of things from them and they never buy anything from me.

That's straight out of RLK's paper Econ 543:

The point is, my immediate so-called trade deficit with the supermarket is an economic transaction that reaches far beyond the artificial rhetorical confines of that statement. It is an initial step that enters the money I spend into supporting a larger swirling monetary economic pool where the money is combined and mixed with further series of complex economic interactions which result in a return of money into my business through an indirect course. It can be called indirect reciprocation. The buying of goods from foreign nations and the permanent transfer of funds of payment to those nations under continuing deficit conditions does not result in the transferred funds returning to me through my business. This is where a serious and competent analysis should lead.

[1rudeboy]

I don't buy it [pun intended]. This article mentions that a good number of our dollars sent "overseas" are re-invested here. Furthermore, foreign companies that set-up shop here tend to re-invest their profits here in order to avoid taxes in their home countries and to minimize exchange-rate risk.

[Jorge]

Cato Institute has some interesting infomation about trade deficits;

"Economic theory and experience demonstrate that trade deficits are driven primarily by macroeconomic factors, in particular investment flows, and not by allegedly unfair trade barriers or declining industrial competitiveness.

Because of the link between trade deficits and rising investment, larger trade deficits are typically accompanied by improving economic conditions. A survey of the U.S. economy since 1973 confirms that, by almost any measure-economic growth, employment, industrial production, poverty reduction-the economy has per-formed better in years in which the trade deficit rose than in years in which it shrank."

[genghis]

as the great ucla economist Armen Alcian once said
"the trade deficit has as much to do with economic health as my golf score."

[1rudeboy]

I think you're on the wrong thread. This thread is about Americans spending money on imported goods.

[liberallarry]

I buy lots of things from them and they never buy anything from me

They buy money from this moron. Which is why his argument is so stupid.

[1rudeboy]

They buy paper. Which needs to be re-invested in plant and equipment, invested elsewhere, or distributed to shareholders. Where do you think it goes?

[underbyte]

"buy lots of things from them and they never buy anything from me
They buy money from this moron. Which is why his argument is so stupid. ""

You beat me to it, I was going to say idiot

[1rudeboy]

You might want to reconsider your credit-card analogy. If I buy a foreign-made juice-squeezer, I'm not paying interest.

[RLK]

Once again, typically useless corporate execs make out on increased stock valuation (which just got an additional boost thanks to his decision to offshore half his workforce) while Joe American doesn't see a dime.

--------------

I'm glad you noticed.

[Jorge]

"A survey of the U.S. economy since 1973 confirms that, by almost any measure-economic growth, employment, industrial production, poverty reduction-the economy has per-formed better in years in which the trade deficit rose than in years in which it shrank."

Yeah, and my standard of living is a lot higher in the years in which I am charging up my credit card, than the years in which I am paying it off.

Poor comparison.

Read the above statement again.
The trade deficit is the result of prosperous times...and people having the extra cash on hand to buy more.

It is NOT the result of living high by going into debt.

You've got it backwards.

[Willie Green]

TRADE DEFICIT: Formally termed a balance of trade deficit, a condition in which a nation's imports are greater than exports. In other words, a country is buying more stuff for foreigners than foreigners are buying from domestic producers. A trade deficit is usually thought to be bad for a country. For this reason, some countries seek to reduce their trade deficit by--

1. establishing trade barriers on imports,
   
2. reducing the exchange rate (termed devaluation) such that exports are less expensive and imports more expensive, or
   
3. invading foreign countries with sizable armies.

Here are the facts:

Gross Domestic Product (GDP), the measure of the USA's output of goods and services, is calculated by the Commerce Department's Bureau of Economic Analysis using the following items:

• Personal consumption expenditures: Personal consumption expenditures are far and away the largest and tends to be the most stable of the four expenditures, averaging about 65-70% of gross domestic product.
• Gross private domestic investment: Expenditures on capital goods to be used for productive activities in the domestic economy that are undertaken by the business sector during a given time period. Gross private domestic investment tends to be the least stable of the four expenditures, averaging between 12-18% of gross domestic product.
• NET EXPORTS OF GOODS AND SERVICES Net exports of goods and services is the smallest of the four expenditures, averaging around 2% of gross domestic product. Unlike the other expenditures, net exports of goods and services can be either positive or negative. They are positive when exports are greater than imports (Trade Surplus) and negative when exports are less than imports (Trade Deficit). In recent years, net exports of goods and services have been negative.
• Government consumption expenditures and gross investment measures government purchases undertaken by the government sector. Government consumption expenditures and gross investment averages between 15-20% of gross domestic product. This percentage tends to be ebb and flow a little with the political winds.

The BEA News Release for FIRST QUARTER 2003 provides us with the following current data for these items. (Seasonally adjusted at annual rates)

Gross domestic product (GDP)............................. $10,697.7 billion
Personal consumption expenditures.......................... 7,502.8 (70.13% of GDP)
Gross private domestic investment.......................... 1,626.9 (15.21% of GDP)
Net exports of goods and services........................... -485.7 (-4.54% of GDP)
Government consumption expenditures and gross investment... 2,053.6 (19.20% of GDP)

The current BALANCE OF TRADE is in deficit, which is considered unfavorable.
That is why it is SUBTRACTED from those items that comprise GDP.

And at historic highs, it diminishes our domestic economy by about 4½% - more than twice the normal variation. This is NOT insignificant.

[Willie Green]

I wish Capitalism Magazine wouldn't keep on digging up this old canard. Smoot-Hawley is now causing the Depression?

It's amazing that these idiots keep repeating this tripe. The stock market crashed in October, 1929, but Hoover did not sign the tariff into law until June 17, 1930. There's no way that Smoot-Hawley could have caused the Great Depression.