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 Richmans' Trade and Taxes Blog

We are in the persistent depression predicted by Keynes
Howard Richman, 8/3/2010

U. of Maryland economist Peter Morici's analysis of Friday's 2nd Quarter GDP report is just about identical to mine. He calculates that demand for American products only grew by 1.3% in the second quarter, while I calculate 1.4%. He calculates that the trade deficit sapped 2.8% from growth, while I calculate 2.7%. According to both of us, the trade deficit is causing the economic recovery to stall.

Morici is more precise than me in his predictions. He expects a double-dip recession starting in November. He writes:

Unless spending picks up (and indicators are that is not happening), once businesses stop piling up unsold goods, layoffs will outnumber hires, unemployment will rise with a vengeance, and the economy will head into a second dip. That will not likely happen until after the election. It will show up in fourth-quarter data.

Neither Morici nor I deserve all that much credit. We are simply reading the current statistics in order to determine what is happening today. John Maynard Keynes predicted this persistent depression back in 1936 in the chapter about mercantilism and its victims from his book The General Theory of Employment Interest and Money, writing:

(A) favorable [trade] balance, provided it is not too large, will prove extremely stimulating; whilst an unfavorable balance may soon produce a state of persistent depression. (p. 338)

Morici's solution includes developing domestic gas and oil and making loans available to small businesses, but the primary step would be to tackle mercantilism:

We get out by dealing with China on the trade deficit -- either it revalues the yuan or we revalue it by taxing or licensing dollar yuan conversions. Create a Savings and Loan Crisis era Resolution Trust.

My primary solution is to tackle mercantilism:

There is a simple way that Congress could get the economy going: PATCH THE LEAK, such as by enacting the scaled tariff.

Keynes solution was also to balance trade. Let me quote from what I wrote in an earlier commentary (Keynes Prescription for the U.S.: Balanced Trade):

Volume 25 of his collected writings is full of his plans for the institution that would regulate the world economy after World War II. Both the IMF and the WTO were founded based upon Keynes' advice. But the institution that Keynes would have created would have enshrined balanced trade as its primary mechanism, not free trade. Trade surplus countries would be required to take down their trade barriers. Trade deficit countries would be allowed to use export subsidies, import restrictions, and tariff barriers to bring trade into balance.

Unfortunately, moving trade toward balance makes much too much sense to be even considered by America's elected leaders. They prefer implementing Keynes prescription for countries whose trade is balanced.

Comment by Pete Gow, 8/6/2010:

It's the TRADE DEFICIT, stupid!!  I say this to Bill Clinton, who allowed this humongous China TRADE DEFICIT.

Comment by Chris, 8/7/2010:

The success of Asian countries is very simple. As long as they are able to engineer a trade surplus, they will have a thriving economy. The more successful ones will ensure they have budget surplus. These are very simple macro strategy. The way of Reaganomics is a conman tactic that had succeeded that required US to borrow massively to fund deficits. This continuously increasing deficits can be funded because the world economy expanded tremendously to provide the capital that US need to borrow. It is like a Ponzi scheme and this exponential increase has to continue to support US borrowing. I believe the bond sales and derivatives are corelated from now onwards. It appears it may blow up soon.