Calling
a Spade a Spade
Spin-proof snapshots of America
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Calling
a Spade a Spade
Spin-proof snapshots of America
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The Myth of the Trade Deficit and The Weak Dollar Why the Trade Deficit doesn't hurt us* And the Weak Dollar does.
This is wonk-ish. If you don't get excited discussing things like the current account and the Marginal Propensity to Consume, you may have more fun reading the other articles on this site.
There's an amusing photo of Donald Rumsfeld greeting Saddam Hussein, and a terrific quote by Don "I stuffed it like a turkey" Young (R-AK) in our other sections.
But if you like to think about trade and its impact on our economy, step inside.
The Trade Deficit is supposed to be bad. Bad, bad, bad. It keeps growing, and that's bad, too.
Exactly why it's bad isn't quite clear. Our biggest trade imbalance is with China, and we keep trying to make the Chinese raise the value of their currency, so their products won't be so cheap.
That's a bit like going to your favorite store and
begging them to raise prices. If China wants to provide us with
inexpensive consumer goods, why shouldn't we let them?
Two reasons, say conservatives. First, they argue, Americans spend too much and need to save more. Those cheap Chinese goods tempt us.
But whether or not Americans really should save more (article on this topic coming soon), it's nearly impossible to reduce the trade deficit through saving. Why? Because 85% of our purchases are on domestic goods and services. A reduction in consumption is far more likely to shrink the economy more than reduce the trade deficit.
Second, conservatives insist, China might decide that to stop putting its dollars into our bonds and securities, and then interest rates would have to rise to encourage them. Full article on this topic forthcoming, but for now, let's just ask... what else can they do with their dollars?
Stuffing them under a pillow makes no sense, since they might as well earn interest, no matter how little. Putting it in a bank means reinvestment in American financial instruments. (Banks are remarkably efficient at this. Money deposited is put into interest-earning instruments by the end of the same day.) They could buy American goods, but that's what we're trying to encourage anyway.
American dollars just aren't good for anything other than buying products (or financial instruments) sold in American dollars. The Chinese must send those dollars home. There's no other place for them to go. Whoever gets American dollars through trade will end up holding dollar assets by the end of the day (more on this in the Wall Street Journal, 3/14/05, p.A17).
There's a also third reason, but it's controversial even among conservatives, since it advises working against the free market: trade protectionism.
People fear American jobs being lost to Chinese producers -- this is currently a very hot topic in the textile industry -- so they want to prohibit many imports. But protectionism hurts domestic industries as well as helping them; if the current textile quotas are adopted, clothing prices will rise by $6 billion a year. Many clothing retailers say this will reduce their sales and profits, and they, too, will lose jobs. The administration recently backtracked from its disastrous protection of the steel industry for just these reasons.
The Once Mighty Dollar won't help the trade deficit by getting any weaker, but it will hurt America.
The dollar has fallen by more than a 100% against the Japanese yen over the past fifteen years, and yet our trade deficit with Japan is no smaller. The dollar has also fallen by more than 30% against most world currencies since President Bush took office, yet our trade deficit keeps growing.
One reason for this is that a weak dollar does not help American exporters as clearly as conservatives claim. The cost of production may actually increase if American products include foreign parts or materials. This was an issue for American automobile parts manufacturers, who recently lobbied against the weak dollar. Parts in Asian may cost 50% less than anyplace else, so if the dollar falls by 20%, they cost America more, with no cheaper alternative. The American products using them then also cost more.
* Full Disclosure Dr. Spade admits there is a future problem with the Trade Deficit, just not not one often discussed: by holding American dollars, the Chinese are saving for future purchases against our productive capacity. America, like other nations (including China), is getting older. We're going to have fewer active workers, and the more dollars that are out there to purchase their goods, the less those future workers will have for themselves. Of course, this is true when Americans save their dollars, too. The more saved by our future retirees, the less our future workers will keep of the products they make. Another problem with the weak dollar is that it doesn't improve the trade deficit if Americans reduce their purchases of imports by the same amount that the dollar falls. If the dollar drops by 20%, and Americans buy 20% fewer imports, the trade deficit remains unchanged: Americans buy fewer imported goods but spend more dollars on the ones they do buy.
A weak dollar also hurts American individuals and businesses purchasing any foreign goods, to say nothing of its impact on the world economy. America does best when the world as a whole is healthy.
But, says the White House, what can we do? The dollar is just finding its natural level.
Baloney. If this argument ever made sense, it was before the Clinton administration proved it wrong. Robert Rubin, Secretary of the Treasury, was particularly adept at keeping the dollar strong... continuing the policy of Bush, Sr. and Ronald Reagan. Currency values are now affected primarily through speculative trading. The value of dollars exchanged through such arbitrage vastly exceeds the amount traded over actual goods and services. This means psychology has a significant impact -- if traders think the dollar will fall, it falls. It also means the White House has a number of tools at its disposal.
Rubin was notorious for his aggressive moves to hurt traders who bet against the dollar. Every now and then he would have the Treasury buy dollars to flatten the traders who had bet against it that day. He didn't need to do that very often, since traders became wary of potential losses, and the total amount of dollar purchases by the Treasury never became that great. It was just enough, in combination with a clear, unequivocal stance by the rest of the administration, to support belief in a strong dollar.
The Wall Street Journal, The Economist, and numerous other conservative financial papers fault the administration for failing to support a strong dollar policy.
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