Monday, February 15, 2010

Trade Deficits

Update - fixed the readability of my quotes

Pretty regularly, folks lament that the U.S. is hemorrhaging jobs, as evidenced by the ballooning trade deficit. For example, this is from a Chicago Tribune article last week:
The U.S. trade deficit took an unexpectedly large turn for the worse in December, loading more foreign debt onto Americans...

While trade balance reports attract relatively little public attention -- and the country has run deficits every year since 1976 -- the long-term effect of buying more goods from other countries than those countries buy from the United States is having a significant effect on Main Street. And for most Americans, the effect is not positive.
The negative effect the article goes on to describe involves Americans buying cheap goods from abroad, so tons of capital flows out of America and there is not enough to start new or expand old business in the U.S. We finance these purchases by borrowing right back from these foreign countries, which supposedly puts us in an even worse position.

Let's consider two alternate scenarios.

In scenario 1, Don lives in an Oregon town where everybody buys all of their manufactured goods from a neighboring city. They buy domestic TVs, shoes, cars, toasters, everything they can to support Oregonian workers, all from the local merchant. When citizens need to expand businesses or buy a home, they visit the local bank for a loan. Things are pretty good.

In scenario 2, Don lives in the same town, but everyone buys goods from Target or Wal-Mart, which imports a lot of items from California. Because many of these things are cheaper, residents of this town can now afford to go out to dinner once a week. Soon, more restaurants are opening, financed by loans from the Bank of California. The manufacturers in the neighboring city may go out of business, or they may improve their products or design completely new products. Life may be less comfortable for the manufactures for a while, but for the Oregonians, things are really good.

Would anybody get upset that Oregon imports a lot of goods from California? Replace "California" in the preceding paragraph with "Japan" and the conclusions are exactly the same.

Trade is mutually beneficial; it makes everybody more rich. By buying things that can be made more cheaply abroad, we free up resources for other endeavors.

And really, can you even trust the reasoning of someone who lauds the recession for lowering the deficit, helping all Americans? This is the craziest argument ever:
Experts see some promising signs. For all of 2009, the Commerce Department said, the U.S. deficit in goods and services totaled $381 billion -- down dramatically from the $696-billion deficit in 2008 and half of the record $760-billion gap in 2006.

The sharply lower deficit last year mirrored the depth of the global recession and plunging demand in the U.S. American exports last year fell 15% from 2008 levels, but imports sank at a faster rate of 23%.


Chick in the Czech said...

Interesting point and I would like to see more about this topic because I don't really understand it very well and would like to understand the more libertarian side.

Mom said...

Davey, whenever you write posts like this, I think they make sense, but wonder if they can really be true, because if they are, why doesn't our country do things this way!

David said...

The reason our country runs inefficiently is because politicians are elected to represent people in their districts (or people (unions) who donate a lot to them), and people in their districts are scared that they will lose jobs if somewhere else does things better. So there are a lot of resources wasted on propping up workers in various areas.