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Politics : Politics for Pros- moderated
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From: LindyBill3/12/2007 4:44:01 PM
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TRADE DEFICITS BY THE NUMBERS

By Donald L. Luskin

It's all so simple if you just look at the numbers (instead of the union-driven politics). A new paper by Dan Griswold:

An almost universal consensus prevails that the record U.S. trade deficit for 2006 was a drag on U.S. economic growth. The consensus reflects a basic assumption that growing imports to the United States displace domestic production, reducing growth of real gross domestic product. But the consensus on trade deficits and growth ignores the actual record of the U.S. economy in recent decades and the positive correlation of imports to domestic production.

...economic growth has been more than twice as fast, on average, in years in which the current account deficit grew sharply compared to those years in which it actually declined. If trade deficits drag down growth, somebody forgot to tell the economy.

In reality, trade deficits tend to be pro-cyclical, growing when the economy expands and contracting when the economy slows or slips into recession. The trade deficit "improved" during each of the three recessions the nation has suffered in the past quarter century — in 1981-82, 1991, and 2001. With the help of payments from Gulf War allies, the current account actually moved briefly into surplus in 1991. Thus, U.S. Treasury Secretary Henry Paulson stood on solid empirical ground when he noted in a March 1 speech on trade, "Critics often ask: If trade is so good for America, why do we run a trade deficit? These critics might be interested to know that the last time we ran a trade surplus [1991] our economy was in recession." poorandstupid.com
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