In reaction to yesterday’s release of a record trade deficit, Treasury Secretary John Snow continued with his Rumpelstilsken routine of characterizing disastrous economic news as if it were just the opposite. Here’s a quick look at yesterday’s zingers:
Snow attributed the unexpected import surge to wealthy foreigners refusing to buy American products. However, the problem is not that foreigners shun American products, but simply that America are not producing any that are worth buying. After all, if Americans themselves aren’t buying American products, how can we expect foreigners to do so. And if wealthy Europeans decided to consumer more, as the Secretary alleges they should, they would most likely do their shopping in China, just like Americans. How would that improve America’s trade imbalance?
Furthermore, Snow claims that the growing deficit results in part from the American economy growing faster than that of its trading partners. To anyone even remotely familiar with economic statistics, this assertion is absurd on its face. America’s largest and fastest growing trade deficit is with China, a nation experiencing economic growth at a rate nearly three times than that of the U.S.!
Further, Snow confuses consumption with growth. It is not that the American economy is growing faster than many others, it’s just that its citizens are accumulating more consumer debt then are their less irresponsible foreign counterparts. Those “slow growth” economies are simply living within their means. Snow also stated that the faster growing U.S. economy creates greater disposable income, enabling Americans to buy imports. However, this misses the point that it is debt, not income, that is growing. What really allows Americans to buy imports is foreign lending, not domestic income.
White House spokesman Scott McClellan said President George W. Bush sees the record trade deficit as evidence that “the United States economy is the economic engine for world growth” and that “American prosperity enables us to shop in the global marketplace, buying more goods than citizens of slower growing economies.” Talk about putting the cart before the horse. Rather than being the engine for world growth, the U.S. economy is the caboose. American consumption doesn’t drive global production, its the reverse. Its not American prosperity that allows them to shop, but foreign generosity.
Many other Wall Street economists have also weighed in on this subject, with few exhibiting any real understand of the problem, or the ramifications surrounding its ultimate resolution. One economist remarked “U.S. consumers have a huge demand for imported goods and the means to pay for them.” The reality is they lack the means to pay for them, (the means being exports) which is why there is a trade deficit in the first place. Foreigners are supplying the means… by lending the money.
Another popular explanation of the record deficit is that it is evidence of the “J-curve,??? an economic model that holds that currency led trade adjustments initially produce larger deficits before the situation ultimately improves. The problem with this explanation is that the dollar has been falling for three years, and the trade deficit just made a new record high. Just how elongated is the “J” supposed to be before it swerves up? If a 30% decline over three years hasn’t made a difference, why should we expect anything different in the future?