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Growing Trade Deficit continues U.S. Depression
Howard Richman, 10/31/2010

A depression continues until real GDP surpasses pre-depression levels and keeps rising. The United States did not climb out of the Great Depression until 1939, though it almost climbed out in 1937 as shown in the graph below:


Similarly, the United States is still locked in the Great Recession and will not be out of it until it surpasses the level Real GDP reached in the fourth quarter of 2007, as shown in the graph below:


The preliminary results for Real GDP for the third quarter of 2010, just released on October 29, show why the American economy is staying in the Great Recession. The growth in real GDP was just 2.0% due to the growing trade deficit subtracting a full 2.0% from GDP growth. The components of GDP growth were the following:

Component Contribution to Growth
Consumption 1.8%
Fixed Investment 0.1%
Government Purchases 0.6%
Inventories 1.4%
Foreign Trade -2.0%
Total 2.0%

As can be seen from the table, consumption spending contributed 1.8% to GDP growth and inventories, perhaps due to businesses stocking up on commodities, contributed 1.4% to growth, while the trade deficit subtracted 2.0% from U.S. economic growth. If not for the growing trade deficit, U.S. economic growth would have been 4.0%.

The results for the second quarter were quite similar. Total growth in GDP was 1.7% with the growing trade deficit subtracting 3.4% from economic growth. If not for the growing trade deficit, U.S. economic growth would have been 5.1%, and President Obama would have had the "recovery summer" that he needed in order to preserve his party's majorities in the House and Senate.

The current Congress's decision to tolerate growing trade deficits has kept the United States in a depression since the fourth quarter of 2007. If polls are correct, the electorate is about to throw enough incumbents out to greatly change the congressional makeup in 2011. Hopefully, the new Congress will pass a scaled tariff to balance trade (by increasing exports and reducing imports) and get us out of this depression. If not, then they will deserve to be thrown out of office in 2012.

But it would be wrong to just blame Congress. The President has the authority to impose tariffs without even being required to consult with Congress. And the Federal Reserve is busy producing inflation to reduce American savings, when it should be advising Congress and the President to reduce the foreign savings that pour into this country with our trade deficits. The scaled tariff would increase American exports and reduce American imports. But they prefer budget deficits and inflation. Our economic leadership is overflowing with incompetence.

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Comment by Phil, 11/2/2010:

China would not be happy I guess! Including other countries would say it is protectionism. I believe that this means global trading partners will see their economies balance out. Americans' standard of living will fall, the same will happen in many other countries, while the standard of living will rise among trading "partners" where it is currently lower, until an equilibrium is reached. The trade deficits will balance themselves out globally over time (salaries will continue to fall which will make the US more competitive, while it will rise in China), but at what cost to our standard of living?

Response to this comment by Howard Richman, 11/4/2010:
You are correct that reducing the trade deficit will temporarily reduce American consumption because we wouldn't be borrowing from abroad to buy imports. But doing so would also increase American income. The key is that Americans would be saving now instead of buying on credit now. The recipe is simple, the mercantilists sacrifice consumption today so that they will get more in the future. Their victims get more consumption today in return for less in the future.

Comment by shit, 7/14/2011:


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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]