Wednesday, December 25, 2013

Don't Worry About Think Tanks - They're Meaningless!

By Jeff Simpson

I just had the unfortunate experience of stumbling upon this article by VeraSage Institute - "revolutionary" Think Tank Found Ron Baker:

Don't Worry About the Trade Deficit––It's Meaningless

This is what Adam Smith meant when he wrote, “Nothing can be more absurd than this whole doctrine of the balance of trade.”
The gains from trade are what we import, not export. The purpose of production, in the final analysis, is consumption. The more imports we can acquire for fewer exports, the wealthier we are, either as individuals or as a country.
Other countries face the same realities, and we are no more likely to obtain the goods and services we desire by trading pieces of green paper with other nations than we are to send letters to the North Pole and get gifts from Santa Claus.
Being a creditor or debtor nation simply has no correlation with a country’s standard of living.
First, let's take a look at the "trade deficit":

1. What exactly is the trade deficit?
The U.S. trade deficit we read about most often is only one of several different trade balances reported in official statistics. It’s the merchandise trade deficit, which is actually the narrowest overall measure of America’s transactions with other countries. Thus, it can’t tell the whole story of our trade position with the rest of the world.
The merchandise trade balance, also called the bal­ance on goods trade, is the difference between the total dollar value of U.S. exports of tangible goods (like wheat and turbines) and the total dollar value of U.S. imports of tangi­ble goods (like t-shirts and auto parts) over a specific month, quarter, or year. When imports of tangibles are greater than exports of tangibles, then the trade balance is negative, and there’s a deficit.
How are we doing? Not so well:

Components of the Current-Account (300)   

What does that mean to the US

There are roughly 5.1 million fewer American manufacturing jobs now than at the start of 2001. And China is to blame for more than one-third of that loss, says a new report.
[See why temp workers are making big job gains.]
The Economic Policy Institute, a left-leaning economic think tank in Washington, D.C., estimates that America. lost 2.7 million jobs as a result of the U.S.-China trade deficit between 2001 and 2011, 2.1 million of them in manufacturing. Wages of American workers have also suffered due to the competition with cheap Chinese labor, EPI says. A typical two-earner household loses around $2,500 per year from this dynamic.
So when someone ties to tell us that the trade deficit has no "correlation with a country’s standard of living" - 2,700,000 unemployed Americans would beg to differ. 

But WAIT, there's more!  Leading economists, Jared Bernstein and (my favorite) Dean Baker teamed up to put this myth to bed recently:

Simply put, lowering the budget deficit right now leads to slower growth. But reducing the trade deficit would have the opposite effect. Not only that, but by increasing growth and getting more people back to work in higher-than-average value-added jobs, a lower trade deficit would itself help to reduce the budget deficit.
Running a trade deficit means that income generated in the United States is being spent elsewhere. In that situation, labor demand — jobs to produce imported goods — shifts from here to there.
When we run a trade deficit, as we have since 1976, we are spending more than we are producing. When that happens, the national savings rate goes into the red. Either private savings (by households and businesses) or government savings, or both, must be negative.
Private savings are usually near zero, with companies net borrowers and households net lenders. The exceptions came during the stock and housing bubbles, when bubble-generated wealth caused household consumption to soar and savings to drop. The housing bubble also led to a surge in home building.
That rise in investment, coupled with the fall in savings, filled the gap in demand created by the trade deficit. But after the housing bubble burst, consumption fell back to more normal levels and construction tanked as a result of overbuilding. The government stepped up and at least partially filled the gap in demand, leading to large negative savings in the public sector, or budget deficits.
In other words, we’ve been bouncing from investment bubble to deficit spending to offset the income that is being drained out of the economy by trade deficits. And now, with the bubble behind us and politicians obsessively focused on lowering the budget deficit, we’ve lost our offsets. Meanwhile, the trade deficit remains a hefty 3 percent of gross domestic product, about $500 billion a year.

How do we fix it?  Bernstein/Baker offer these suggestions:

 First, we could pass legislation that gave the government the right to treat currency management as a violation of international trading rules, leading to offsetting tariffs.
We could also tax foreign holdings of United States Treasuries, making the usual tactic of currency managers more expensive. And we could institute reciprocity into the process of currency management: If a country wants to buy our Treasuries, we must be able to buy theirs (which is not always the case now).
The Obama administration, however, has not taken such measures, preferring instead to try to meet its goal of doubling exports by 2015. But there’s a key word missing from that formulation: “net.”
If you asked me how my basketball team did last night, and I told you, “Great — they scored 92 points!” you’d presumably want to know how many points the other team scored. Unless we’re targeting net exports, or exports minus imports, we’re not in the game.
The administration has other helpful measures in play, including tax credits to incentivize domestic production. But unless we’re willing to go after exchange rates — the value of our currency relative to that of our trading partners — we will not be able to significantly lower the trade deficit.
The impact of doing so would be striking. Suppose the reduction in the value of the dollar cut the trade deficit by two percentage points of G.D.P. This would directly create close to 2.8 million jobs, a disproportionate number of which would be relatively high-paying manufacturing jobs. And that’s not counting the fact that a factory job has a high multiplier effect, creating more work in other sectors to support it.

I would offer another suggestion.  Ship leading free market "think tank" founders(like Ron Baker), over to China and make sure they have a hand in setting THEIR Foreign trade policy.  We could reduce our trade deficit and get people working again immediately!  

As Bernstein and Baker said, Scott Paul also points out "currency manipulation" has to end!   ASAP!  


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