Is the Trade Deficit Important?

Print Friendly, PDF & Email

From the 1940’s to 1980 America’s trade with other nations was always in balance.  Reagan came to office and opened up trade with Japan.  Japan immediately devalued their currency and the U.S began accumulating a trade deficit.  Reagan forced Japan to re-value their currency to market forces and when he left office international trade was again in balance.  Reagan demanded balanced trade with Japan and Japan relented.

The U.S. has dropped Reagan’s reciprocal trade policy and adopted a libertarian/laissez-faire trade policy.  As a result, the U.S. accumulated a trade deficit of $12,435,120,000,000 between 1989 and 2015. Some argue that the trade deficit doesn’t matter since we receive goods for our dollars.  This strikes me as naïve since it amounts to buying on credit when one is broke.

These same folks bought into the now discredited social sciences concept of “Post-Industrialism” which states it is natural for industrial economies to evolve into service/financial economies as they mature and manufacturing is no longer needed to sustain a viable economy.

Asian nations and Germany must not have learned about post-industrialism as they were only too happy to pick up the production and jobs that America shed during this time.  Greece and Scotland, among others, adopted post-industrialism and have suffered like the U.S.

We won’t go into why federal politicians won’t/can’t address this problem.  Both parties call for growth, which is good, if only they knew how.  Democrats believe we can have growth by spending more internally (Keynesian) and Republicans call for austerity (Austrian) by cutting federal outlays.  Neither, on its own, will provide growth.  The solution can best be seen by looking at how an economy sustains itself.

In any economy, whether local, state or national, money is passed from one to another inside that economy as we purchase goods and services from each other.  However, the only way to expand an economy is to produce more (export) more than we consume (import), bringing new money into the economy.

Mesquite, for example, relies on gaming and tourism similar to Las Vegas, Reno and other Nevada cities as does the state of Nevada.  One could argue whether or not this is a wise or sound method of sustaining an economy.  Many states rely more on farming, ranching, mining and manufacturing to bring new money into their economies.  Those states have thriving and growing economies.  Those that can’t bring new money into their economies/communities are shrinking as they have lost what little manufacturing they had.

And so it goes with our national economy.  Since 1989, we have been consuming (importing) more than we produce (export).  It is important to grow one’s economy by about 3% to accommodate graduates entering the workforce.  At the national level, we have been losing jobs at an alarming rate since 1989.  This is due to the $12.5 trillion accumulated trade debt.

As to whether or not this is wise and/or important, it is analogous to our children running up debt with little prospect for additional income.  In a business, it is the same as operating with not enough income (sales) to cover all of one’s expenses.  We all know where either scenario leads.

If we hadn’t run up $12.5 trillion in trade debt (loss of national income), considering the accumulating interest on this debt, we may not have a federal budget debt of $18+ trillion.  Or, at least the federal debt would be much more manageable.

Also impacting our federal budget deficit is replacing payroll taxes (revenues to government) with unemployment payments and food stamps (outlays for government) for the 12.5 million workers who lost their jobs (every $100,000 in trade deficit = 1 lost job).

I will leave it to you to decide whether or not the trade deficit is important.

Frank Shannon served in the U.S. Army, was an engineering/operations manager for AT&T for 27 years, was the owner of a small manufacturing business for 23 years, served as Colorado Chair of the Coalition for a Prosperous America and moved to Mesquite in 2013.

Comments

  1. Charles Harris says:

    Your second paragraph of the July 22nd article was particularly interesting with an analogy to the use of credit cards. I have been away from discussing such interesting economic features since my graduation, (with a degree in agricultural economics). It’s refreshing to see someone approach the deficit subject with such attention to detail.

Speak Your Mind

*