A post by Maynard
Some Americans have sounded the warning about our long-term trade deficit, as well as the broader current accounts deficit. The bottom line is we’ve been buying a lot more goods and services from foreigners than they buy from us. At this point, we’re leaking something like a trillion dollars a year into the world, which amounts to 6 or 7 percent of our GDP. That’s a big number!
Is this a problem? Some say it’s not. Here, for example, are articles by Walter Williams and John Stossel telling us not to worry. You run a deficit with your grocer, don’t you? Money flows to America not because we’re debtors, but because everyone in the world wants to invest in us. This shows how much the world believes in us. That’s the way free-market capitalism works, isn’t it? If you object to that, you must be a socialist!
These people make a point, but I can’t be so sanguine about it. Foreign ownership of America limits our independence. (Although on the flip side, it may be that the more foreigners own us, the more hesitant they will be to blow us up.)
I sense an unhealthy attitude forming in the minds of many Americans that the old ideals of saving and producing are obsolete. Modern wisdom would have it that all you need to do is buy a house. The real estate market will rise endlessly, so you refinance whenever you run low on cash. The borrowed money pays for imported baubles, thus going back to foreigners who in turn recycle it back into America for another round of refinancing. That’s all well and good for the short haul. But at the end of the day, people who behave this way will eventually find themselves with no savings and no equity. They’ll be broke and dependent upon Social Security and Medicare, both of which will also be broke.
Political solutions are not forthcoming. Neither politicians nor the electorate really understand the economic issues at play, and correcting the situation would be painful. Who wants to vote for a politician who tells us we’re living beyond our means and we need to consume less and produce more and save more? So the Republicans do nothing, and the Democrats lean towards protectionism. With the new Democrat majority, we can expect to be hearing more protectionist plans.
Protectionism has grassroots appeal, but it’s a bad long-term solution in that it causes the nation to fall out of step with the rest of the world. The local consumers are forced to buy whatever the local manufacturers choose to sell at whatever price they choose to sell it. Coddled by a captive market and a guaranteed profit, the manufacturer’s quality falls and the prices rise. Nobody else in the world buys the local goods, so exports stagnate. This is the situation that Russia put itself in through its years of government controls, and now the Russians are at the bottom of the economic pile and can export nothing except raw materials and weapons. There are specific circumstances under which it makes sense to protect a domestic industry, but protectionism is mostly a tool that serves the special interests at the cost of the rest of us.
There is much more to be said on the subject, but that’s enough for the moment. The situation has been building for a long time and there’s no easy blame or quick fix. The bottom line is this is a matter of legitimate national concern, and it’s worthy of intelligent national discussion.
Despite your pessimism, Maynard, the only people “threatened” by the “trade deficit” are the unions, who can’t keep jacking up their demands on US industry without driving business overseas. The fact is that this “debt” is economic debt, and for every dollar of foreign goods we buy, we get a money-earning asset. It’s double-entry bookkeeping.
The part about the grocer is very good logic; we buy a lot of stuff from others because we are wealthy enough to do so. We generate prosperity from what we buy.
I agree with Robert108. World wide free markets are violent, self purging and energizing. Americans understand this dynamic as well as any culture on the planet. I’m betting on the U.S.
Another problem with worrying about the trade deficit is that it’s not a real number, it’s a guess. It’s not like the national debt, which is an actual accounting number. Moreover, if we were really leaking that kind of money, it would show up in the currency rates. Since it doesn’t, it’s getting compensated for somewhere. It may through foreign ownership, but in that case you should go directly to that and not worry about the trade deficit. If they’re buying government debt, that’s great! That means they are effectively putting part of their national treasury in Washington DC. If they attack us, we can expropriate it all with the stroke of pen, in effect making all that money our hostage for their good behavior.
We are becoming a nation of consumers and not producers. The problem with that is that we are dependant on foreign countries for some very important items, such as oil, cars, clothes, electronics, and just about anything you can think of. This dependency is not healthy for our national security and the more dependent we become on foreign countries the less powerful we become. It’s a simple mathematical equation, the more dependent you become on one side the less powerful you become on the other. We could produce any of these products that we import from overseas but we would have to pay more for the labor and therefore the products would be more expensive. The trade off is that we have cheaper junk (I mean products) at Walmart and our Superpower status goes down as we become more and more dependent on foreign countries to supply us with manufactured products and resources.
SteveOK: We are becoming a nation of investors. As long as we get a good return on our investments, it doesn’t matter where they are. We buy a lot of stuff from other countries, which makes them dependent on us as a market for their goods. It is foolish to pay more for anything than is absolutely necessary, and especially for emotional reasons.
Maynard makes a good point about entitlements. Past efforts to make them work have just forestalled the inevitable: they’re going to go belly up unless some part of their equations are changed. I used to believe that Bush’s idea of partial privatization would help, but I’ve since heard some notes of caution from some economic experts about that. You could end up with the problem that fund managers have to deal with: too much money chasing too few deals, leading to falling investment value.
It seems the only real answer is either to raise taxes back to 1950s levels or cut the benefits. Someday we’ll have to make that decision. I’ll make a bet that the feds will decide to raise income taxes, and create new taxes, to exhorbitant levels. Why? The only major tax bill most retirees have is property taxes, which are locally collected. The people who are going to eat it are the people who are still working for a living. Retirees vote. Younger folks don’t so much. It’ll be a cold day in hell before benefits are cut.
One sneaky thing government could do is raise the retirement age at a faster rate than it does now. Maybe someday we’ll get it to a level so that it actually matches the effectiveness of the original retirement age when Soc. Sec. got started. It used to be 62. Most people died before then. That was one reason Soc. Sec. was solvent. Most never collected on their benefits. To create that effect now I think they’d have to raise the retirement age to 90 or 95.
Robert108 I agree with you that foreign economies are dependent on us also as we become more dependent on them, that is the essence of the internationalist (one world order) people. They want an interdependent world with the UN being more powerful and free trade everywhere with open borders. It’s a kind of utopia scenario that people like Jimmy Carter dreams about, but the problem with that as we become more dependent (or interdependent however you want to phrase it) the playing field is leveled and we lose our status as the only Superpower. We become just another third world country importing most of our requirements and exporting our manufacturing jobs to cheaper labor. There will always be cheaper labor markets somewhere in the world and the open borders/free trade crowd will push us to a dependent economy. I don’t know where the proper balance is but as we become more dependent on foreign countries for natural resources (oil) and manufactured products we slowly lose our status as the only world’s superpower.
SteveOK: I don’t agree with your black or white characterization here. I certainly am not in agreement with Carter on anything. Since we are the buyer, they are dependent on us. As the poorer countries sell what they have: cheap labor, they will accumulate more capital and eventually become wealthy. Example: Japan. Your doomsday scenario just doesn’t hold water. Free trade is our ally, and I favor very strict border enforcement. Without it, everything else is a joke. We are dependent on foreign oil because we have allowed environmental extremists way too much political power. We are not “dependent” on foreign sources for manufactured goods; at the present, they are a better deal. When that changes, we will move our capital elsewhere, and it might be back to the US. If we could eliminate the anti-competitive unions and excessive taxation/regulation, that would happen much more quickly.
Robert108, I’m not predicting doomsday (not yet anyway) but I am saying that we are becoming a nation of Walmart workers because of these free trade, open borders people. Do you know anyone in the manufacturing business? I’m not sure I do, and if I do you can count them on one hand. Ask Ford and GM how close “doomsday” is on the horizon. It looks pretty bleak over there. You can blame it on the unions if you want but as I said before, you can always find cheaper labor somewhere in the world. I suppose some countries still have slave labor, we had slave labor at one time and it was argued by the South that taking away there cheap labor would cause the Southern economy to collapse. Well, the economy didn’t collapse because slaves were freed, it mostly collapsed because of General Sherman and the fact that a whole generation of males were killed. You can compare it to the dumbing down in our Public Schools, the free traders are causing a leveling down of our economy with the people that are dependent on us. As our jobs are being outsourced and manufacturing is moving to other countries we will dumbdown from a Superpower to just another third world country.
SteveOK: Those of us who support free trade(and the rest of free enterprise economics) are not the same as the open borders people(who are in search of new voters). In fact, we are on opposite sides of the political spectrum. Businesses are leaving the country because of taxation and regulation. It has nothing to do with free trade. We are in absolutely no danger of becoming a third world country, your fears notwithstanding.