The United States has run negative international trade deficits since 1991. While most politicians have the same litany of simplistic solutions that involve blaming other countries for this mess, the real cause is much closer to home.
Virtually all economists agree a country’s Capital Account and Current Account must always be equal. Before your eyes glaze over, the Capital Account is really a country’s net savings and the Current Account is the difference between a country’s exports and imports, or its trade balance.
The Commerce Department has maintained the Bureau of Economic Analysis (BEA) since 1929. Anyone can access the wealth of data stored there at http://www.bea.gov. After getting to the site, click on “Interactive Data” in the top menu bar. Next click on “GDP & Personal Income. On the next page, select “Begin Using the Data”.
Under Section 5, Select Table 5.1, Saving and Investment by Sector. Scroll down to Line 35 Line 35, “Net lending or net borrowing (-), NIPA’s”, the February 28, 2018 update shows the 2017 third quarter total of -$428.4 billion, which is an annualized number based on the most recent quarter. This is the Capital Account or the US’s net savings.
Go back one screen, select Section 4 and then Table 4.1, Foreign Transactions in the National Income and Product Accounts. Scroll down to Line 33, “Balance on current account, NIPAs”, the third quarter 2017 value is also -$428.4 billion. This is the Current Account or the difference between exports and imports. These two numbers are always equal.
Figure 1
Source: Bureau of Economic Analysis. Table 5.1 Line 35. https://www.bea.gov/iTable/iTable.cfm?reqid=19&step=2#reqid=19&step=3&isuri=1&1910=x&0=-9&1921=survey&1903=137&1904=1991&1905=2018&1906=a&1911=0 March 23, 2018
What causes the differences between exports and imports?
Since a country’s net savings equals the difference between that country’s exports and imports (and vice versa), we can start understanding the causes of our trade deficits. Back to Table 5.1, Line 10, Net Government Saving is -$806.1 billion, with Federal savings making up -$631.3 billion of that total. (Staying consistent, we’re using 3rd Quarter 2017 data in all cases.)
One might ask how the US can possibly expect to have a positive net savings if the federal government’s contribution is a minus $631 billion? Taking this to the next step, one might ask, “What would happen to our trade balance if we could end our federal government’s spending deficit?” Our net national savings would go positive, assuming other factors stayed relatively constant. And, since the Current Account must equal the Capital Account, our trade deficit disappears.
Applying tariffs and renegotiating trade deals are a complete waste of time. If we want to cut our huge trade deficit and equally huge foreign borrowing, elect truly conservative politicians that will end our government spending deficits. (Note: I specify “true conservative politicians”, not fake conservative Republicans who talk the talk and then vote for budget busting tax cuts and out of control spending increases causing ever larger government spending deficits.)
Currency manipulation
Currency manipulations are a favorite whipping boy for US politicians. Currencies do fluctuate on international markets, but don’t mistake these fluctuations for manipulations. We have a -$428.4 billion national savings deficit we cover with foreign borrowing. Somehow, we need to import $428.4 billion more goods and services than we export to make the Capital and Current accounts balance.
To do this, international currency markets adjust what are called the Terms of Trade so we wind up with a trade balance equal to our net savings. Our dollar’s value on international markets increases making US products more expensive in other countries and their products cheaper here.
The best way to get a positive trade balance is having a conservative government that balances its budget, or runs surpluses, combined with a population with a propensity for saving. Some call this currency manipulation; others call it good old-fashioned conservatism.
Trade agreements impact the volume of international trade, not the direction. China is a favorite trade deficit scapegoat. We can put tariffs on Chinese goods or simply cut off all trade with China. We would simply have bigger trade deficits with Indonesia, the Philippines and similar countries. Without changing our net national savings, our Current Account won’t budge.
Not so fast…
Although the present driver of our international accounts is our national savings, this isn’t always the case. During President Bill Clinton’s term, we had positive federal budget balances, yet consistent trade deficits. During those boom years, consumer spending and borrowing were high. Without international trade, that would have been the recipe for high inflation. Instead, importing goods was a pressure valve release for our economy and kept inflation low.
On the other side of the equation (Capital Account), we didn’t have new Treasury bills for foreigners to buy. But, because of our strong economy, the US was a great place for foreigners to invest in real assets (buildings, golf courses, farms). The same rules applied then that apply now. Our national savings must equal our trade balance. In the 1990’s, our spending on consumer goods caused our trade deficit. The Capital Account had to balance and it did.
The important point is that during the Clinton years, trade deficits were market driven. Today, our trade deficits are caused by government actions (huge budget deficits).
Fixing the problem
Moderate trade deficits when a country is at full employment are not a bad thing. Borrowing $8.8 trillion from foreigners between 2001 and 2016 is a problem. Equally huge trade imbalances negatively impact employment and wages.
Tax cuts and out of control government spending increases financed by borrowing offer a temporary false prosperity. Unfortunately, in 2008 we learned the price for this extravagance. The only real solution to our foreign borrowing and trade deficits is a conservative government that balances income and expenses.
Facts and research driven policy making are hallmarks of Barack Obama’s presidency. In contrast, Republicans develop a policy and then make up “facts” to support their proposals. This difference leads to legislative failures and more seriously, divides our country.
While Obama will go down in history as one of our most analytical and cautious presidents, today’s Republicans will be remembered as some of history’s most reckless and irresponsible. Adding fuel to the Republican misinformation juggernaut is Fox News. The Pulitzer winning Pundifact/Politifact rates 58 percent of the statements on Fox News as Mostly False, False or Pants On Fire False. (http://www.politifact.com/punditfact/tv/fox/ ) Even worse, Fox News is a beacon of accuracy compared to Republican entertainers like Rush Limbaugh.
An example of what happens when bad advice is invented and followed is Republican President George W. Bush’s 2003 Iraqi invasion. Bush and company ignored analysis from NATO allies and almost everyone else that Iraq did not have weapons of mass destruction (WMD). As United Nations weapons inspectors were getting ready to certify that Iraq had no WMD, Bush, with lock step, unquestioning support from almost every Republican in Congress, ordered an invasion because they knew they were right and everyone else was wrong. The resulting mayhem and civil war:
Killed a quarter million Iraqis and more than 4,000 US soldiers while destroying the lives of thousands more with physical and psychological injuries.
Displaced hundreds of thousands of Iraqis who previously lived together peacefully before the destruction of the Saddam government.
Democratic elections put the majority Shiites in power in Iraq. The Shiite government established domestic security and military ties with Shiite Iran, making Iraq a satellite of Iran and thereby upsetting the balance of power in the Mideast.
Put the Shiites in control of the Iraqi government, army, police and judicial system.
Consequently pushed Sunnis out of the jobs they held in the government, army, police and judicial system
Brought about the formation of ISIS by displaced Sunni army veterans with support from other now unemployed Sunnis.
Of course, weapons of mass destruction were never found.
In case after case, Republicans ignore research and simply go their own way. And then, when their policies explode in their faces, they refuse to acknowledge data that quantifies their failures.
Facts and a learning curve?
Most of us tend to learn from our mistakes. Not today’s Republicans. After being burned in Iraq, logically one would want to stay out of other wars we have no reason to get involved in. Yet Republicans would risk World War III to teach Russia a lesson about annexing parts of Ukraine and for some reason seem to think that we can solve the thousands of years old war in the Middle East between Sunnis and Shiites. The only thing guaranteed is a large-scale ground operation against ISIS will bringing home far too many body bags filled with U.S. soldiers.
In economics, it is mostly the same story. Republicans are fixated with cutting taxes. In the 1960’s Democrats cut taxes on the highest income bracket from 90 percent to 70 percent. Federal government tax receipts increased at the lower tax rate.
However, when President Ronald Reagan lowered the top rate into the mid 30 percent range, tax receipts went down. Every subsequent Republican tax cut has led to lowered tax receipts, bigger deficits and higher unemployment. What the rest of us can learn from this is that if tax rates are extremely high, cutting them will increase tax receipts. When tax rates paid by the highest income taxpayers are in a more moderate range as they have been over the last 40 years, cutting them only increases the budget deficit. Republicans can’t seem to grasp this reality.
Figure 1
Sources: Bureau of Economic Analysis, Table 1.1.5 Gross Domestic Product, http://www.bea.gov/iTable/iTableHtml.cfm?reqid=9&step=3&isuri=1&904=1980&903=5&906=a&905=2015&910=x&911=0, September 28, 2015; Department of Labor Statistics, Labor Force Statistics from the Current Population Survey, Seasonal Unemployment rate; Bureau of Economic Analysis, Table 3.2 Federal Government Current receipts and Expenditures, http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&904=1980&903=87&906=a&905=2015&910=x&911=0, September 28, 2015
As Figure 1 illustrates, when the federal government’s Spending balance as a percent of Gross Domestic Product (otherwise known as the budget deficit) gets more negative, the percent of the workforce that is employed drops. The trend is unmistakable. Tax cuts increase the budget deficit and employment drops. And yet, in the most recent budget
So why did Republicans push for (and get) an agreement to extend dozens of special tax breaks, totaling some $680 billion in lost revenue as part of the 2015 budget reconciliation? Again, Republicans just plain KNOW the tax cuts will generate much more revenue for the government.
Note: The Spending balance is the difference between the federal government’s receipts and expenses, otherwise known as the government deficit because it is so often negative. To negate the effects of inflation, the Spending balance is shown as a percent of Gross Domestic Product.
Republicans and their alternative reality
Over and over, on issue after issue, Republicans live in a fantasy land they have created. Ignoring research illustrating that access to contraceptives and education are keys to lowering abortion numbers, Republicans slog ahead attempting to outlaw the procedure. They choose to ignore research finding, “If effective contraceptive use is widespread, abortion rates can be very low even in countries where fertility is low and where the rate of sexual activity among unmarried women is high. The lowest documented abortion rates are in Belgium and the Netherlands, countries that rely on contraception to maintain low fertility. In both countries, abortion services are provided without charge to the woman, and abortion is legal under broad conditions.” https://www.guttmacher.org/pubs/journals/25s3099.html
Few things offer more entertainment than white male Republican congressmen or senators trying to give some type of rationale for a policy that makes no sense whatsoever. Republican 2012 US Senate candidate Richard Mourdock tried to justify his stance of outlawing abortion even in cases of rape or incest by stating that a woman who gets pregnant by her rapist is carrying “a gift from God” and must have the child. Rape victims were not amused.
Fellow 2012 Republican senate candidate Todd Akin from Indiana didn’t help the Republican cause stating “legitimate rape” rarely causes pregnancy. Not exactly an outlier among Republicans, former Congressman Akin was elected by Republicans in Congress to serve on the House Science Committee before his ill-fated Senate bid.
While shorter lived and not nearly as controversial was the Republican reaction to the Ebola virus. Without doing any research, and assuming Ebola spread like influenza, many Republican presidential candidates got on the hysteria bandwagon and called for a total embargo on travel to and from affected areas in Africa.
President Obama calmly got the facts on how the disease spreads. Employing the U.S. military to help aid workers reach dangerous areas in Africa, the disease is in regression and never posed a threat to the U.S.
The press’s job is no winnow the truth from the chaff. Obviously, this puts them at odds with Republicans. Always the victims, Republicans demonize the “liberal press”, whose only sin is bringing out the facts Republicans chose to ignore.
Republicans, wrong again
Perhaps the best example of current Republican wrongheadedness is climate change. Determining if governments need to take action to slow the causes of climate change doesn’t need any advanced scientific degrees, just understanding playing the odds and risk analysis.
Over the last twenty years, approximately 97 percent of climatologists that published research papers on climate change and offered an opinion on the cause agree our planet is warming and that the causes are man-made. Only a fool would bet against those odds.
Glaciers, fewer and smaller – and those are the facts.
Risk analysis is even easier. If governments go ahead and regulate pollutants that contribute most dramatically to warming and the three percent of climatologists that claim human caused climate change is a hoax are right, we’ve misallocated some economic resources and contributed short-term to slower economic growth. However, if we take no action and the 97 percent of climatologists are right, we risk a global Armageddon.
No oceans in the Midwest, yet.
It isn’t always that Republican actions are illogical. Prior to Obamacare, relatively young and healthy people were foregoing health insurance because of the high cost. As they dropped out of the insurance pool, health insurance rates went up and more healthy young people took a risk on staying healthy and dropped their insurance. If you weren’t aware of this happening (and didn’t care about the uninsured), it is perfectly logical to oppose the Affordable Care Act and its mandates for all citizens to buy it. What is illogical is the efforts Republicans took to ignore this vicious cycle of increasing health care costs and declining enrollment among the most desired customers.
Almost as a rite of passage, Republicans try to portray the Obama Administration as incompetent socialists that are spending the country into bankruptcy while jeopardizing our safety by decimating our armed forces.
The reality is much different. During the Obama Administration, the US has a higher level of income inequality with wealthier rich and poorer poor than at anytime since the 1920’s. Hardly the desired results of socialists.
As far as defense spending, the US spends more on defense than the next eight biggest defense spending countries combined. The U.S.’s unemployment rate is at record low levels. And for good measure, health care premiums as well as overall health care costs after the enactment of Obamacare are running far behind the annual increase levels of the previous ten years.
The problem and an unpleasant solution
The problem of misinformed Republicans is a real threat to our country. According to researchers, “Recently, a few political scientists have begun to discover a human tendency deeply discouraging to anyone with faith in the power of information. It’s this: Facts don’t necessarily have the power to change our minds. In fact, quite the opposite. In a series of studies in 2005 and 2006, researchers at the University of Michigan found that when misinformed people, particularly political partisans, were exposed to corrected facts in news stories, they rarely changed their minds. In fact, they often became even more strongly set in their beliefs. Facts, they found, were not curing misinformation. Like an underpowered antibiotic, facts could actually make misinformation even stronger. – See more at: http://archive.boston.com/bostonglobe/ideas/articles/2010/07/11/how_facts_backfire/#sthash.ilPM3t9X.dpuf
Republicans cannot be expected to do independent research and to ever question party dogma. If they do, they are no longer Republicans.
What this means to those of us who want to see our country continue moving ahead is very profound and important. Republicans, although misguided, actually vote. The solution is for a far more active voting participation rate among people with common sense.
Frayed, but still flying.
Although the tendency is to focus on the foibles of a Donald Trump or a Ted Cruz, the real danger are the people voting for them. If people of good character and intelligence continue sitting on the sidelines and our country’s voter participation rate continues declining, we have only ourselves to blame for the consequences.
