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Geithner backtracks from his call for balanced trade
Howard Richman, 11/8/2010

With the G-20 meeting coming up this weekend, U.S. Treasury Secretary Timothy Geithner is in full retreat from his call for balanced trade in his October 20 letter to his fellow G-20 finance ministers. He now says that he was just talking about a general framework that could possibly, someday, perhaps, maybe, lead to "warning indicators" that countries would not have to pay any attention to. Here's what he said specifically, according to Reuters:

Geithner reaffirmed a G20 plan to limit current account surpluses and deficits does not contain numerical targets, which he called economically unfeasible. Several countries had objected to suggestions that such imbalances be limited to around 4 percent of gross domestic product.

"What we have proposed is a framework which incorporates early warning indicators of large surpluses or deficits which can then be monitored," Geithner said.

Geithner's call for balanced trade was an attempt to redress the mistake that the United States made after World War II when it rejected John Maynard Keynes call for an international organization that would insure balanced trade. Keynes' organization would have required that trade surplus countries take down their trade barriers and would have let trade deficit countries use export subsidies, import restrictions, and tariff barriers to bring trade into balance. Instead we got the IMF, the WTO, and phony free trade.

In his magnum opus, Keynes predicted what would happen to a trade deficit country if it allowed its trade deficits to persist. He wrote:

(A) favorable 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)

During the second quarter of this year, the American economy grew by a miniscule 1.7%, but would have grown by a robust 5.1% had the growing trade deficit not subtracted from aggregate demand. During the third quarter of this year, the American economy grew by a miniscule 2.0% (according to preliminary statistics), but would have grown by a robust 4.0% if the growing trade deficit had not subtracted from aggregate demand.

America is now enmeshed in the economic stagnation that Keynes predicted for trade deficit countries. All Geithner would need to do to get his country out would be to threaten to impose a scaled tariff on our trade-manipulating trading partners. But that would require backbone.