Fixing Our Other Deficit 1

America's trade deficit is a fixable problem.

With all the challenges facing America, it's all too easy to slide into negativism and despair.  For sure, there's reason for concern, but there actually are potential solutions to at least some of our problems.  We just need to think outside the box.

So, we are going to attempt to take a look, not just at our problems, but at actual policy proposals that might help fix them.  In this article we'll look at what once was a major matter of concern but now seems to be almost forgotten even though it remains unchanged: America's trade deficit.

Money and Mercantilism

In the early modern post-Renaissance age, nations had a simplistic view of national wealth: it was however much gold, silver, and jewels you had stashed in the basement of your royal palace.  This economic theory came to be known as mercantilism.

The 1600s were the glory years of the pirates because the Spanish Empire was concentrating on stripping the physical wealth of the New World and schlepping it all back home to Spain in giant treasure galleons.  Montezuma had piles of gold; King Philip had a nice empty cellar; what's not to like?

Except that, not long thereafter, Spain ceased to be a world power.  It turns out that piles of gold in the basement don't actually lead to sustainable wealth or economic power - all that money sloshing around just screws up your economy but does not create anything useful.

The Dons of Spain spent all their energy in conquering pre-wheel civilizations, and not enough in investing in technology research or industrial development.  Why get your hands dirty being the "workshop of the world" like England, when there's all that gold you can just steal?

Eventually, Spain simply ran out of stolen gold: it had all been spent on palaces, art, finery, and inconclusive wars with little to show for it.  Meanwhile England was building up the world's greatest navy, both merchant and military, with a highly productive economy that reached all the way down to the lowest classes.

By the Industrial Revolution, England made everything that anybody wanted.  They didn't have to go out and steal gold; the gold came to them in exchange for stuff, and went right out again in investments for making more stuff.

A hundred years later, America followed the same path.  The United States became the great "arsenal of democracy," but we didn't keep the money we made sitting in a bank vault somewhere; we invested in all kinds of productive assets so we could make even more money.

Somewhere along the way, though, we've forgotten the importance of making stuff other people are willing to pay for.  Up through 1976, America's trade was roughly in balance or a little in our favor.  We sold other countries just about as much as we bought from them, or maybe a bit more.

When Jimmy Carter became President, though, our balance of trade took a sudden and abrupt turn for the worse.  We still bought stuff from other countries just as avidly, increasing every year - but other countries bought less from us, relatively speaking.  Thus our trade was no longer in balance: on the international markets, we bought more than we sold, creating a trade deficit.

The trade deficit grew through the years of "stagflation," only turning around in 1986 towards the end of the Reagain recovery.  Our older readers will recall these as times of much hand-wringing, with worries that the Japanese were taking over everything amidst heated statistics claming that the property value of the Imperial Palace alone exceeded all the real estate in California.

The trade balance improved through George H.W. Bush's presidency though it never quite balanced out.  In 1991 it took another turn for the worse, heading deeper into the red throughout the Clinton boom and the entire George W Bush presidency.

We saw a brief improvement right around the 2008 crash because we weren't buying much at all, from anywhere.  Since then the trade deficit has resumed its previous growth.

Each and every year this continues, our national wealth diminishes - because we are spending more than we are earning, buying more than we are selling, and generally consuming the riches it took two hundred years of American hard work to accumulate.

So now we understand what the trade deficit is.  In the next article in this series we'll look at where it matters, before we talk about ways to fix it.

Petrarch is a contributing editor for Scragged.  Read other articles by Petrarch or other articles on Economics.
Reader Comments

It is my view that the current trade deficit has little to do with our actual economy. The trade deficit is simply another way for the government with the Federal reserves assistance to live beyond their(our) means. Basically, the trade deficit is money the government gets to spend and the fed gets to print without the associated local inflation. It is the mechanism by which we export our inflation. While I find this situation quite immoral, stopping it now certainly in any sort of abrupt way would bring the system to its knees. The current system (petro dollar) has become very fragile. This system will fail on its own soon, better to figure out how to prepare for the system reset.

May 14, 2014 10:06 AM
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