Wow, I think I've found the "anti-Jay"...
The Trade-Deficit Bogeyman
By Mike Norman
Special to TheStreet.com
06/18/2003 02:48 PM EDT
URL: thestreet.com
I've heard so much talk about the trade deficit recently. Some people portray it as a kind of rumbling volcano that's ready to explode and sink the U.S. economy, but nothing could be further from the truth.
The deficit has become the most misunderstood thing in all of economics. Perhaps the main reason for all the worries comes from our perceptions about exports and imports. Most people view exports as positive and beneficial, while imports are viewed as harmful and indicative of weakness and a lack of discipline.
In fact, the exact opposite is true.
Exports vs. Imports
Wealth is measured by how much you can consume, and by that definition, imports are a benefit and exports are a cost. This may seem counterintuitive, but think about it: Exports transfer goods, services and resources to other economies. That forces workers in the exporting economy to work harder and save more in order to consume the same amount, and have money left over to invest and enjoy a rising standard of living. So exports actually lower productivity and living standards in the export economy even while GDP, as defined, rises. This is what Japan, China and Europe do.
On the other hand, imports raise the living standard of workers because they conserve resources and capital in the importing nation, thereby allowing higher levels of productive investment, which raise living standards. This has been the American model.
The U.S. imports cheap goods and labor from the rest of the world, and this gives us a high living standard without the need to maintain high savings. The resources and capital that are saved by using the labor and resources of others means higher domestic productivity and more wealth creation. In fact, the higher our trade deficit goes, the more it can be viewed as an expansion in the "wealth gap" between the U.S. and the rest of the world.
High savings rates in Japan and Europe are a reflection of their embrace of export-driven economies. Workers in those countries transfer goods and resources to other economies, which they will need to consume themselves at some point. Therefore, they must have higher savings rates in order to "reprocure" items necessary to live, and still have enough left over for investment and wealth-creating activities. In this regard, their high savings rates are really an illusion: They must either be spent to raise living standards or be monetized by their governments to keep growth on track.
Moreover, recent economic difficulties show how their models are failing. High savings have done nothing to help them out of their morass, while the U.S. economy is turning around -- even with its debt or, more properly stated, because of its (virtuous) debt.
Changing Tides
Some countries like Japan are working quietly toward the American model. High personal savings are being "spent" by enormous Japanese government deficit spending. Japan's federal debt is 140% of GDP, whereas in the U.S., it's a very manageable 60%.
Europe, however, is dead set against the American model. Countries like Germany are hamstrung by eurozone-mandated deficit limits (although those have been wisely suspended). And the European Central Bank stands by idly watching the euro rise as it chokes off exports. In fact, their exports are killing them.
As a result, European economic activity is stagnating and unemployment is rising, which is politically unacceptable. If European countries are going to save themselves, they'll either have to allow higher deficit spending or intervene in foreign-exchange markets to push the euro down and spark a rebound in exports. Meanwhile, the wealth gap between the U.S. and Europe widens, in favor of the U.S.
Irrational fear of the U.S. trade deficit also has boosted another spurious argument: that Japan, China and Europe may one day stop "financing" U.S. deficits. That would be the equivalent of committing national financial suicide for them. Their economies are sustained by a need to export, and the U.S., as the world's biggest consumer, is also their best customer. They have no other choice than to sell goods to us and receive our dollars in return.
Some countries like Japan are getting the idea. While they're not abandoning their export model, they're transforming it into a deficit spending transmission mechanism. Japan's purchase of dollars and sale of yen to facilitate exports are the functional equivalent of deficit spending. The government buys dollars and holds dollar assets, allowing Japanese companies to export and build up yen assets. That is using public money to stimulate the economy.
It's exactly what the U.S. does, and it works. |
