Deficit Hawk(ins)

Our enormous trade deficit is rightly of growing concern to Americans. Since leading the global drive toward trade liberalization by signing the Global Agreement on Tariffs and Trade in 1947, America has been transformed from the weathiest nation on earth - its preeminent industrial power - into a skid row bum, literally begging the rest of the world for cash to keep us afloat. It's a disgusting spectacle. Our cumulative trade deficit since 1976, financed by a sell-off of American assets, is now approaching $9 trillion. What will happen when those assets are depleted? Today's recession may be just a preview of what's to come.

Why? The American work force is the most productive on earth. Our product quality, though it may have fallen short at one time, is now on a par with the Japanese. Our workers have labored tirelessly to improve our competitiveness. Yet our deficit continues to grow. Our median wages and net worth have declined for decades. Our debt has soared.

Clearly, there is something amiss with "free trade." The concept of free trade is rooted in Ricardo's principle of comparative advantage. In 1817 Ricardo hypothesized that every nation benefits when it trades what it makes best for products made best by other nations. On the surface, it seems to make sense. But is it possible that this theory is flawed in some way? Is there something that Ricardo didn't consider?

At this point, I should introduce myself. I am author of a book titled "Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America." My theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.

This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It's because these effects of an excessive population density - rising unemployment and poverty - are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.

One need look no further than the U.S.'s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!

Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable - nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. My point is not that our deficit with China isn't a problem, but rather that it's exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one fifth of the world's population.

Ricardo's principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.

If you‘re interested in learning more about this important new economic theory, then I invite you to visit my web site at OpenWindowPublishingCo.com where you can read the preface for free, join in the blog discussion and, of course, buy the book if you like. (It's also available at Amazon.com.)

Please forgive me for the somewhat spammish nature of the previous paragraph, but I don't know how else to inject this new theory into the debate about trade without drawing attention to the book that explains the theory.

Pete Murphy

Author, "Five Short Blasts"

Muirgeo, you are being actively confused by your compatriots, who understand econoomics even less than you. Beware them! The trade deficit is simply the name given to the situation where people in one country create goods for use, and people in another country create goods for investment, which they then trade. The reason there is a deficit is because only the goods for use are being counted.

"It seems to me you are claiming that it's OK that we have nothing to give in return for the items we trade for so we'll have give up things we own."

You might need to rethink that sentance. If we have nothing to give in return for the items we trade for, we must not own anything to give up. Or, if we are giving up things we own to trade, then we have things to give in return.

It is probably also worth noting that it is rarely the people who produce material objects that make the most money, but rather those who produce intellectual goods such as production plans, management, etc. Perhaps it is for the best that America is the world's "business class".

Here's a nice source to look at the details of what we are trading.

One question I'm not clear on is this; if an American company relocates over seas does it's manufacturing output count as a part of our total manufacturing output?

If we are indeed trading useless pieces of paper, of which we can print a nearly infinite supply,for tangible goods. We would be fools to stop this trade before the other side does.

Muirgeo,

We still make lots of stuff. Here's a link to a previous column with details.

You are too concerned about political boundaries.

When foreigners hold onto U.S. dollars, they are foregoing consumption of our goods which enables greater investment on our part in productivity improvements and new industry.

You are also too concerned about physical goods. A friend told me yesterday that China has to send their commercial jet planes to the U.S. for servicing, upgrades and equipment replacement because they aren't able to do it themselves.

If we are having financial problems, I'm sure you realize that it is of our own doing. For example, the occupation of Afghanistan and Iraq, and the 750+ bases around the world represent a real waste of our resources.

Also the Keynesian economics you so revere has resulted in policies that encourage consumption rather than savings. This is the specific goal of money and credit expansion.

It seems to me you are claiming that it's OK that we have nothing to give in return for the items we trade for so we'll have give up things we own. And you seem to be saying that's a good thing.

The bottom line is the trade deficit suggest we are not producing as much as we buy.

There are many other experts in economics out there who have been extolling the dangers of the trade deficit that you continue to play down and even encourage. They even logically link the deficit to the problems with our low interest rates and the sub-prime crisis.

Looking at the current disaster that is our state of the economy I'd say they are making a lot more sense then people telling me don't worry about the trade deficit... we can just put the country up for sale and we'll be OK.

The real problem is we don't make anything here anymore. It seems to me you can only keep buying stuff with worthless pieces of paper for so long then you better start bringing some things of value to the trading table.

There's a real economy and there is a paper economy. We've been trading paper for real things and you can only do that for so long before people start realizing your papers mostly good only for use in the bathroom... and even then it's kinda abrasive.

The Subprime - Trade Deficit Connection

Could it ever happen that a corporation's (perhaps international) debt safety rating be higher than the US gov't? In which case, the flight to safety during a crisis would be out of Treasuries and into the corporation's stock? Could the Feds ever put this to the test by incompetence?

Then tell gubment to stop running up debt to buy.

More fundamentally, the trade deficit means that foreigners invest in the U.S. rather than spend all of their dollars on U.S. exports.

Saving and investing is definitely better than borrowing and consuming. From your above statement, one will get the impression that a lot of investment in production is taking place, which should lead to product sales and eventual reduction in trade deficit. That is not what is happening.

While trade deficits are not government debt per se, one also need to evaluate the source of the deficit. It is a lot of consumption. THe deficit money is unproductively getting invested in treasuries and it only helps the leviathan grow, and help it meddle in our private affairs on a grand scale.

Individuals can have their own trade deficit. If you keep buying my IOUs in exchange for your products, I will be running a trade deficit. Now if I am making capital investment with the borrowing, I might one day be able to pay back that IOU. But if I am wasting that credit on cheap doodads produced by you, I am just digging a hole for myself. What is applicable to an individual, is also applicable to groups.

yes ,your debt goes up..

when the dealer gives the 20 grand to the US fed,the gov turns around and spends it as if it were manna from heaven..


the dealer now has a bond... and when the dealer gets his money back, where wil tht money come from?...the car buyer..

Don - it's useless. Wasted on trolls like muirduck who will keep spouting the Daily Kos smearing points.

Surplus, ahhh surplus, such a nice word. If it is a surplus it must be good.