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Being Deaf, Dumb, and Blind on Our Huge Trade Deficits!
Raymond Richman, 10/8/2010

The employment data continue to be poor. New claims for unemployment compensation continue high, amounting to 445,000 for the week ending Sept. 25, 2010.  Similarly, the unemployment news released October 8, 2010 reported that nonfarm payroll employment edged down (-95,000) in September, and the unemployment rate was unchanged at 9.6 percent. Government employment declined (-159,000), reflecting both a drop in the number of temporary jobs for Census 2010 and job losses in local government. Private-sector payroll employment continued to trend up modestly (+64,000). There was a lot of wailing on CNBC about the poor unemployment data. Nevertheless one hour after the release of the data, the stock markets opened -- UP!

None of the analysts on CNBC mentioned the fact that balancing the trade deficits would immediately change the employment prospects from negative to positive. Although estimates vary, at least five million well-paid manufacturing jobs have been lost over the past two decades to China, Germany, and other countries as the trade deficits worsened and the government-created housing boom burst. And under the rules of the World Trade Organization, countries suffering from chronic trade deficits are legally entitled to impose tariffs and other barriers to imports from specific countries with which trade is unbalanced. So why have both Republican and Democratic administrations done nothing to prevent million workers from losing their jobs? 

The definition of the Gross Domestic Product has four elements as the following equation shows:

GDP  =  Consumption + Investment + Government Purchases of Goods and Services + EXPORTS MINUS IMPORTS.  The following are the data for 2008 in billions of dollars:

          GDP           14,369

          C                 10,104

          I                   2,097

          G                  2,878

          X – M           -  710

Economists of both parties talk about the possible ways we can increase C, how to get households to spend more on consumer goods and services. Both the Bush and Obama administrations tried to stimulate consumption with such things as tax rebates, rebates on “klunkers”, rebates on energy-saving appliances and home improvements, et al. But they had only a temporary effect; nothing lasting.

Neither did much about stimulating investment. Investment takes place only when there are profit opportunities. So the government tried subsidizing investments in  alternative energy sources like windmills and sun panels with little effect but discouraged investments in oil and gas drilling like the latest moratorium on drilling in the Gulf and the continuing opposition to drilling on public lands and offshore.   American companies continue to find producing overseas to be profitable or more profitable than producing in the U.S.  

As to G (government spending),  hoping it would have a Keynesian multiplier effect, Obama’s chose to spend $787 billion  on the 2009 Recovery Act. No one has seen any multiplier effects yet although most of the funds have been allocated. If economists were not deaf and blind in their ivory towers, they would declare the multiplier a mistaken theory.

That economists tend to be deaf, dumb, and blind is clearly evident in their ideological commitment to free trade. In 2008, the first year of our current recession, the trade deficit in goods was about $800 billion. Each worker in manufacturing produces on the average about $100,000 of GDP. Dividing $800 billion by $100,000, if my calculation is correct, one may conclude that 8 million manufacturing and other industrial jobs (oil and gas drilling?) have disappeared overseas. Andy Groves, former CEO of Intel, says that Apple, HP, Dell, and other hi-tech firms support about 10 jobs overseas for every one they have retained in the U.S. Not only are economists deaf, dumb, and blind, so are the President,  Senators, and Congressmen. Worse, they are ideologues, free traders, globalists, and energy fanatics.

Global free trade has no economic theory to back it up. To the contrary, Adam Smith called attention to the widespread existence of mercantilist practices (the antithesis of free trade) in the 18th century. Everyone who is not deaf, dumb, and blind, knows that China, Japan, Germany, and dozens of other countries have been employing mercantilist practices to export more to the U.S. than they import. So why is the U.S. elite willing to engage in free trade unilaterally?  We already have the answer; it is ideology over science.

Economic theory does show that balanced trade is always beneficial to trading partners. Each gives up a bundle of goods it value less for a bundle of goods it values more.

What do we need to do right away? Impose a scaled tariff on imports from China, Japan, Germany and several others. The scaled tariff is our invention. It rises and falls with the trade deficit. It is the tariff which we estimate would bring trade into balance. Many economists have recommended a tariff on imports from China to force China to revalue the Yuan. Paul Krugman suggested 25 percent. We believe we ought not to threaten countries when the WTO provides us with a remedy that is almost equivalent to a revaluation, a tariff. Our scaled tariff would work much like a revaluation. The difference is we would collect a huge amount of tariff revenues while countries act to bring their trade into balance – importing more from us by reducing their barriers to our products while we buy less from them because of the higher cost of importing from them.

Wake up. America. Being deaf, dumb, and blind in your case is a product of not thinking rationally or just being lazy or unwillingness to face reality.

   

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    Wikipedia:

  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]