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 Richmans' Trade and Taxes Blog

Reducing the Trade Deficits Is Essential for Economic Recovery
Raymond Richman, 8/28/2010

There was bad news on Friday, August 27,  with the release of updated figures for economic output in the second quarter of 2010. The Bureau of Economic Analysis correctly presented the data. It reported:

The deceleration in real GDP in the second quarter primarily reflected a sharp acceleration in imports [my emphasis] and a sharp deceleration in private inventory investment that were partly offset by an upturn in resistential fixed investment, an acceleration in nonresidential fixed investment, an upturn in state and local government spending, and an acceleration in federal government spending.

No one. journalist or economist or government official mentioned the sharp acceleration in imports to which the BEA refers and which appears in the first paragraph of the BEA report. The fact appears to be that our leaders, our political and academic elite, are so committed to “free trade” that everyone is afraid to call attention to the disaster in the making, to the deficits that are de-industrializing the U.S. and have cost millions of good-paying jobs.

The reader may be unaware, because it is mentioned so rarely, that exports and imports are part of the Gross Domestic Product.  The formula is

                        GDP = C + I +G + (X-M), where

• C=Consumer goods and services,
• I = Investment goods and services,
• Government = goods and services produced and consumed  by governments,
• (X – M) = goods and services exported abroad minus goods and services  imported from abroad.

The following table shows the data annualized for the first and second quarter of 2010.

Talking to reporters after the data was released, Bernanke admitted the economic recovery had weakened more than expected and the Fed stands ready to act if needed to spur slowing growth. He did not mention the trade deficits. In 2008, the trade deficit amounted to about $800 billion, representing a loss of about 5 - 8 million jobs. Yet he did not think it important enough to mention when it is staring out in the second quarter's data.

He downplayed concerns that the economy might slip back into recession, predicting a modest expansion in the second half of this year, with the pace picking up in 2011. That is possible if private business investment were to escalate. But the Obama administration’s legislation and proposals made so far have been discouraging to private investment. Even the $787 billion Recovery Act, whose spending still continues, did not prevent the decline in GDP growth during the last quarter. He said the Fed has sufficient ammunition left and could support growth by purchasing more government debt or by promising to keep rates exceptionally low for a longer period. That is a promise of more government deficit spending that has accomplished very little, if any, recovery.

If his forecast proves overly optimistic, however, he said the Fed has sufficient ammunition left and could support growth by purchasing more government debt or by promising to keep rates exceptionally low for a longer period.  The stock market rallied. But the Fed has no power over foreign trade.

As we reported in our book, Trading Away Our Future (Ideal Taxes Assn, 2008) p. 75, Bernanke himself said in a speech in March 2006 that reliance on market forces had not and would not solve the trade deficit problem. It is our belief that unless we get trade into reasonable balance, there will be little or no recovery. It is a problem we must solve. So what do we do?

We advocate the following actions inter alia:

1. Impose a tariff on all imports from each country with which we have been experiencing large chronic trade deficits. Such a tariff is authorized under World Trade Organization rules. This would affect the prices of imported products from China, Japan, Germany principally.
2. Terminate the restrictions on drilling for oil on public lands.
3. Abolish the corporate income tax and either integrate it with the personal income tax or replace it with a value-added tax.
4. Convert all large trucks and buses to run on natural gas of which we have a tremendous supply.

The are many other actions that we can take. In previous postings, we've discussed them many times. Search and you will find. We’ll leave those for additional consideration at a later time.

The worship of  “free trade” by our economic advisers to the president is misplaced. Economists in academia and in the media also have got to be re-educated. Those with great power like Summers and Geithner should be replaced by economists who are willing to look at trade without ideoogical bias. Journalists need to be educated. Let’s get on with it or the unemployed American workers will continue to suffer.