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 Richmans' Trade and Taxes Blog

U.S. Growth Slows Due to Trade Deficit -- we were published in the American Thinker this morning
Howard Richman, 8/7/2010

Here's how we begin:

No private sector tire repairman would keep pumping up a flat tire again and again without patching the leak, but that is exactly what our governing class keeps trying. The Obama administration and the Democratic Congress have been pumping the economic tire without patching the trade deficit leak for a year and a half now.

The preliminary data for second quarter GDP, released on Friday (July 30) by the Bureau of Economic Analysis (BEA), show U.S. economic growth slowing from a 3.7% rate in the first quarter to a 2.4% rate in the second quarter. But the details were even worse. A full 1.0% of that 2.4% was due to produced goods that went unsold due to lack of demand. In fact, demand for American products rose at a paltry annual rate of just 1.4%!

The U.S. economy has now been depressed for a full two and a half years, ever since the fourth quarter of 2007. And with the current growth rate amounting to a paltry 1.4%, the near term prospects do not look good at all. The United States is clearly locked in a persistent recession with little prospect for recovery at any time soon.

We then discuss the Obama administration's mistakes and present our Scaled Tariff plan. We conclude:

This plan would be opposed by misinformed progressives who have been claiming that that the Smoot-Hawley tariff made the Great Depression deeper than it would have been. But those who have studied the Great Depression know that this is not true. For example, in her Encyclopedia Britannica entry about the Great Depression, Council of Economic Advisors Chair Christina Romer wrote: "Scholars now believe that these [protectionist] policies may have reduced trade somewhat, but were not a significant cause of the Depression in the large industrial producers."

Despite their bad reputation, tariffs are actually as traditional as apple pie. They were the main source of federal government revenue from our country's founding until Woodrow Wilson enacted the progressive income tax. Their main drawback is that they can be used to protect one or another politically-powerful industry, at the expense of other industries. But the scaled tariff would be an across-the-board tariff. It would not pick winners and losers. It would not only boost production by those Americans who compete with imports, but it would also increase American exports.

Its only drawback is that it would reduce the loans we are receiving from the currency-manipulation governments, resulting in higher U.S. interest rates, making it more expensive for the federal government to borrow. The higher interest rates would encourage Americans to save. And the federal government could reduce interest rates by moving toward a tax system that leaves household savings and undistributed business profits untaxed.

The greatly increased investment opportunities would increase business investment, despite the higher interest rates. The result would be a rapidly expanding private sector and an expanding GDP.

You can read our commentary if you click on the following link: http://www.americanthinker.com/2010/08/us_growth_slows_due_to_trade_d.html