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  • Growing Trade Deficit Good News for U.S. Economy

    New U.S. Commerce Department statistics on America’s economy highlight growth in the U.S. trade deficit of $3.2 billion dollars between October and November 2009. That’s good news for Americans. The statistics also show real GDP rising 2.2 percent in the third quarter of 2009, as well as growth in personal income and consumption in November 2009. It is no surprise that rising economic activity and a growing U.S. trade deficit go hand in hand. As the economy and incomes grow, business and consumer demand for all goods, including imports, rises. Thus, a growing trade deficit is generally a sign of a healthy, expanding economy – or in this case, a welcome sign of economic recovery. Rising economic momentum hasn’t just translated into higher imports from abroad, U.S. exports are up $1.2 billion in November from October levels too – a reflection of the recovery being felt around the world.

    The attention and concern paid by many to the trade deficit reflects a fundamental misunderstanding of the U.S. economy. Some see a deficit as a harbinger of jobs lost. That’s just not true. Since the 1970s, America’s economic performance, including job growth, has been better in years where the trade deficit has grown than in years where the deficit shrank. Fundamentally, America runs a high trade deficit because the supply of domestic savings consistently falls short of the demand for domestic investment. Up until the recent financial crisis, America had a healthy, productive, and growing economy that demanded more investment than was supplied by domestic sources – the government and U.S. households. As long as that shortfall exists and the U.S. wishes to grow, America must import surplus savings from other countries – such as China – by running trade deficits. U.S. policymakers can best provide a long-term solution to the trade deficit not by introducing barriers to trade, but by addressing the tax and spending policies that keep savings too low.

    Posted in Economics [slideshow_deploy]

    16 Responses to Growing Trade Deficit Good News for U.S. Economy

    1. D R, DC says:

      How does a domestic savings shortage lead to a trade deficit? Does anyone buy a Toyota instead of a Ford because the domestic savings rate is low? I seriously doubt that enters into the thinking of consumers.

      The causation is the other way around. Because of the high dollar, imports are cheap and our exports are expensive. Thus, we have a large trade deficit. Because of the large trade deficit, we must have some combination of a large federal budget deficit and low public savings.

    2. jonathan, san jose c says:

      I'm sorry, but how does this square with real income declining in the US? While I agree that an misunderstanding of the trade deficit is due to a "fundamental misunderstanding of the U.S. economy," I just don't think you're the one understanding it.

      Let's be honest about who our trade deficit is with. It's China, who has artificially kept the RMB low pegged at 6.8 yuan to $1. In a true free market, the demand for RMB would cause the value to rise relative to the dollar, no doubt to a trading at a rate closer to a dollar. (Maybe 3 to 1, I don't know.)

      Call me ignorant if you want, but I fail to see how reducing the capital gains tax rate and the income tax rate on the upper 1% of earners will lead to the CCP addressing this flagrant manipulation of the international markets.

      But hey, a tax cut for all seasons right?

    3. Pingback: Tweets that mention The Foundry: Conservative Policy News. -- Topsy.com

    4. Tom, Okinawa, Japan says:

      Is this a joke? You mean the bigger the deficit the better it is for us? You sound like Barney Frank. It's time we got serious about the deficit.

    5. Drew Page, IL says:

      I think this article is off base. I believe that a growing trade deficit shows a serious problem in the U.S. and that's the loss of our manufacturing capacity and the jobs it creates. A nation that relies on other nations for the production of the goods we consume is not healthy. Are we to be a nation of dry cleaners, burger flippers, dog walkers and baby sitters?

      When we rely on other countries for our structural steel, oil, automobiles, trucks, aircraft, heavy earth moving equipment, locomotive equipment, ships, appliances, clothing, computer technology, etc., not only are we losing jobs for our citizens, we are creating new welfare problems for the remaining taxpayers in this country and becoming weaker as a nation. What happens when these other countries on whom we depend for these things decides to double the cost? How do we bring wealth back into this country?

    6. Robert, Quincy, CA says:

      If I own a business that is buying more than selling, eventually I will go bankrupt. Trade deficits can only be bad. We need to create better goods and services for the price. And we need to limit our spending. Balancing our trade, is like balancing our check book. We need to buy wisely. Too many imports from China are less expensive, but are of very poor quality. We need to stop trading our wealth for junk. China is using communist slave labor to underprice us, and at the same time they are building a high tech military space program and milling out nuclear subs. Not good.

    7. Brad, Detroit, MI says:

      Drew is right. At what point in Economics 101 did we learn that a country that continually imports more than they export have a robust and healthy economy ? Once all of our middle-class manufacturing jobs have successfully been shipped to other countries, we will have the world that the Democrats envisioned – the haves and the have nots. (Please refer to the United Kingdom for a historic lesson in this practice.) Unfortunately, the have nots will out-number the haves about 100 to 1 and the socialist dream of generation upon generation of Democratic party voters will be realized.

    8. Ben C. Ann Arbor, MI says:

      I don't buy the spin on the trade imbalance. We are no longer a producing nation but rather a consuming nation. At some point we will run out of funds when we buy goods from other countries and have nothing to exchange other than a worthless currency. I agree with the previous postings. For the first time in a long time The Foundry needs to rethink its postion on this matter.

    9. Jim, Connecticut says:

      There is nothing wrong with running a trade deficit until the government gets involved. It just means a country has excess savings and prefers an immediate, high standard of living.

      It doesn't matter how much money a country has, what makes a country wealthy is its standard of living. In order to raise the standard of living, more goods have to be available at a cheaper price.

      Strip trade down to the bare basics of imports and exports. Essentially, a country’s exports are used to pay for its imports. So if a country imports a lot, and only has to export a little in order to get a lot, it is basically buying its goods at a bargain price. A country with a trade surplus has to buy its imported goods at an expensive price. A country with a trade deficit ends up with a higher standard of living than one with a trade surplus.

      It’s hard to get a bargain like that. Most of the time you have to pay the balance with a medium of exchange that is seen as a store of value (dollars). A country that runs a trade deficit then pays for its deficit with its savings. The thing is, foreigners don’t use dollars. They use yen or euro’s, or something else. Dollars are just an IOU to them. Dollars are a promise that some day in the future, we will make something that they want and they will be able to give the dollars back to us for goods that will raise their standard of living. On a gold standard, this would make the exchange neutral. First one country would accumulate goods and reduce its savings, then when it ran out of savings it would have to stop importing and start exporting, accumulating savings again.

      There is nothing inherently wrong with running a trade deficit or surplus in that scenario. It’s just a matter of time preference. Nations that run a trade deficit prefer a higher standard of living now, while nations that run a surplus prefer a higher standard of living sometime in the future. On a gold standard, it all balances out in the long run. With a fiat currency, nations that run a trade deficit come out winners. The nation with the trade deficit gets stuff, and the nation with the trade surplus gets a piece of paper that continuously loses value. When they try to redeem dollars for goods, they will not be able to purchase as many goods as they sold. Running a trade deficit is still ok at this point for us. But, as Peter Schiff is always saying, eventually the world is going to catch on and then we’re screwed. We’ll have to produce all of our goods ourselves, plus what the world buys from us as it redeems its dollars, and that will be tremendously expensive. Nations have a comparative advantage in producing some things that is a net benefit to both them and their trading partners. When we no longer run trade deficits, our standard of living will decline.

      There are basically two things that foreigner companies can do with dollars that they accumulate from us to keep from getting shafted by inflation.

      The first thing they can do is invest their dollars in the US, building manufacturing plants and such and creating employment. They put their dollars to work, trying to accumulate more so that they can purchase an equal or greater value of goods in the future. There’s nothing wrong with that; it helps the economy.

      Enter: the government.

      What if foreigners don’t want to sit on a pile of cash that continuously loses value, and they don’t see any good investment opportunities in the US? They buy government debt. And foreigners buy a LOT of government debt. Every dollar from the trade deficit that Congress uses to fund its deficits is a dollar that is stolen right out of productive use in the economy. If Congress had balanced its budget years ago, it would have forced a tremendous amount of job creation in the US from foreign companies. This is one way that budget deficits are a tax on the American people.

    10. Drew Page, IL says:

      Jim in Connecticut — What do we do when the nations supplying all the cheap goods decide to raise their prices? This will undoubtedly happen as the value of the dollar decreases.

      You say it doesn't matter how much money you have, only your standard of living? How does one go about obtaining that higher standard of living without money? Credit cards? As our jobs continue to disappear, so too does the money they generated.

      People who bought expensive new homes with no money down, at 'adjustable' interest rates and mortgage payments they couldn't afford had a nice standard of living – for awhile. Those same people who reasoned that "even if we can't make the mortgage payments down the road, we can always just walk away from the house" are the same people shown on TV dabbing at their eyes, weeping over their eviction notices. And of course, there was no shortage of liberals waiting to blame everyone else for the problem and demanding that government "do something".

    11. alec feinberg says:

      Please visit http://www.CitizensForEqualTrade.org
      and learn why trade deficits are unconstitutional and unethical

      learn the actual statistics of what it really costs.

    12. Mark, Pittsburgh says:

      It just does not add up. How can anyone say it is better to buy more than you sell. On any level: Nation, Company, Your household. It is impossible to keep on buying when you are not bringing as much in. When we as a country stop taking a raw material, adding value to it by various ways and means, then sell it to a different nation, we will be in serious trouble and our lifestyle and wages will be dramatically changed. We can't all work at McDonalds and Wal-Mart and people who work there can not afford other people to service them. There will be a few large company owners, government workers ( of course ) and everyone else will make minimum wage. If trade deficits are so wonderful then why does China and Germany try so hard to be leading exporters? Why does China try to block so many of our exports to them? This should be a major topic on the news but it is overlooked. How bad will it get before we wake up.

    13. Abi says:

      Jim from Connecticut, your explanation is fantastic and accurate if I may add. I don't see why should we stop foreign governments (China mostly) from subsidizing our consumption. From a foreign exporters' perspective, they have two options with their piled-up dollars, either buy US Govt bond or buy American goods & services. The latter is the only option left if the US Govt is disciplined and balances its spending through revenues. We will then see a deluge of job creation through foreign investment in USA.

    14. Los Alamos Joe says:

      This is nonsense. The U.S. economy now lacks several economic sectors that have become essential. This include clothing, consumer electronics, tools, small household appliances and, even, large kitchen appliances. The only way Americans can stop buying these products from abroad is if they are absolutely broke. If we do nothing, most Americans -except those that depend on foreign investments – will go broke.

      Do you actually get paid to think of this?

    15. Kimball from Utah says:

      I'm glad you posted this. Everyone seems to misunderstand the deficit. Obama's new federal pay freeze plan is a great plan for trying to kill the economy. Why in the world would you decrease government spending during the start of an economic recovery? He will inevitably decrease aggregate demand and increase unemployment. People need to understand that running a deficit has only helped the economy. We get to consume so much more than if we restricted trade and tried to produce more domestically. We do not need government intervention with a trade balance. They naturally balance themselves with the foreign exchange market. The only reason our deficit keeps growing is because foreign producers (china) don't use the dollars they recieve to buy, but instead buy T-bills from the U.S, keeping the dollar from depreciating and allowing us to keep buying lots of goods.

    16. Sean says:

      Dont fight trying to explain the U.S. economy to the uneducated. If they want to understand rather than hurl insults they can pick up an economics book rather than teen magazine.

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