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:





   

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!  

 

Three Economists!

1. Paul Krugman was on the Colbert Report recently explaining that if you want to see Romney Economics in action - check out Ireland

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2. Dean Baker wrote a column recently stating that he does not understand why the liberals keep stating that all republicans want is to leave the market's alone, when in reality what the right wants is very big government(tilted in their favor).

Pick an issue, any issue, and you will almost invariably find the right actively pushing for a big role for government. However, for conservatives the goal is not ensuring a decent standard of living for the bulk of the population. Rather the goal is ensuring that money is redistributed upward. And, of course, the conservatives are smart enough not to own up to their use of the government.

Just to take a few easy ones, why would any market-oriented opponent of big government support the existence of too-big-to-fail banks (TBTF)? These TBTF banks operate with an implicit subsidy from the government. Lenders expect the government to step in to back up these banks debt if they fail, as happened on a massive basis in 2008. As a result, TBTF banks can borrow money at lower interest rates than would be possible in a free market. The amount of money at stake is substantial, possibly more than $60 billion a year. This is more money than is at issue with the Bush tax cuts to the wealthy. This $60 billion is money that is redistributed from the rest of us to the biggest banks in the country, their top executives and their shareholders, all courtesy of big government.

To take another easy example, drug patents raise the price of prescription drugs by close to $270 billion a year above their free market price. This is roughly five Bush tax cuts to the wealthy. Patents are government-granted monopolies. Since prescription drugs often are necessary for a person's health or even life, people will pay almost anything for a drug if they can afford it or can get their insurance to pick up the tab. Patents imply very big government since the government will imprison anyone who produces a drug without the patent holder's consent.

In recent years the big government has been actively working to extend Pfizer and Merck's patent monopolies to the rest of the world through NAFTA, CAFTA and other recent trade deals. Patents are currently used as a mechanism to finance prescription drug research. But there are other more efficient mechanisms, such as the prize system suggested by Nobel Prize-winning economist Joe Stiglitz. Alternatively, we could simply increase and redirect the $30 billion in public money that goes to support biomedical research each year through the National Institutes of Health.

3. Jared Bernstein asks "What part of Austerity doesn't work do you not understand"?

First, some facts. By austerity I mean attacking recession by cutting spending and raising taxes – the opposite of Keynesianism, which dictates that if the private sector isn't spending enough money to get the economy moving, the government needs to temporarily step in and supply the juice (aka "stimulus").

Europe and the UK are committed to austerity, and – But that doesn’t explain the U.S., the U.K., and most others who continue to blithely go down this bumpy road. For that, I think we need to reflect on what the great economist Joe Stiglitz refers to in his new book on inequality (I recently interviewed Joe for these pages – should be up soon) as deficit fetishism, the prime symptom of which is the inability to distinguish between good and bad deficit spending

• For Republicans, deficit reduction is a cudgel to bash government. They are ideologically opposed to social insurance, stimulus, infrastructure investment, and everything else, but they gussy this up as an economic argument about markets and debt burdens on future generations. Worse, for them it’s mostly rhetoric. Since Reagan, it’s the Republicans who’ve run structural deficits (Obama’s deficits are largely cyclical—very much a function of the recession).

• Drawing the wrong lessons from the Clinton surpluses: The last time the federal budget was in surplus was at the end of the Clinton years. Economic growth was strong, unemployment very low (below 4% for a few months in 2000!), and financial markets were booming (due, in no small part, to the dot.com bubble, but that’s a different story). These were the years of the alleged bond vigilantes, bond traders who would punish governments by dumping their bonds if they thought their fiscal policy was irresponsible. I’m not sure there ever was such a menace—what led to the late 90s surpluses were a reasonable set of tax rates and strong (albeit bubbly) growth. But whatever…the main point is that fiscal policy during the Clinton years made sense: deficits fell as the recovery gained strength. By no measure does that imply that austerity makes sense in recession.