The U.S. Trade Deficit Caused the Recession and the Financial Crisis
I came across this essay and reproduce it here for your comments.
THE U.S. TRADE DEFICIT CAUSED THE RECESSION AND THE FINANCIAL CRISIS
Even the most optimistic among us must now realize that the United States is in a recession, but if we all had good paying jobs we would not be in a recession.
We have lost 4 million manufacturing jobs since October 2002. There are now over 10 million Americans out of work.
The recession and financial crisis has been caused by the transfer of jobs and our wealth to foreign countries. First we lost our jobs, and then our wealth.
Trade deficits kill domestic jobs. Our trade deficit is now 2 billion dollars a day. Two billion dollars a day in imports is 700 billion dollars a year.
Today, one billion dollars of manufactured imports equals 13,000 jobs lost. Therefore 9 million jobs lost.
Over the past 20 years, our trade deficit totals about 5 trillion dollars. Not coincidentally, our government also owes foreign countries 5 trillion dollars.
And behind all of these numbers, the percentages and statistics, there are real people. Americans are struggling to pay their bills, keep their homes, and secure their retirement. We now buy products from overseas that we used to manufacture here, and we wonder what happened to our jobs?
It doesn't have to be this way. If we all had good paying jobs, we could pay our mortgages. If we paid our mortgages the banks would not have a liquidity problem and we would not have the financial crisis on Wall Street. Rather than more of the same, we must start manufacturing and selling more than we are borrowing and buying.
We didn't get here all at once. There have been many mistakes made by many smart people. But we are not going to tax our way out of this recession, or borrow our way out of this recession, or even bail our way out of this recession. We are going to have to work our way out of this recession to become a wealthy country again.
Federal, state and local elected officials still don't understand the cause of the recession and financial crisis. The current federal solution is just more of the same - spend more of our tax dollars. We were given a high price tag without much of a plan and now we learn that not only is there no oversight of the rushed bailout package, but the lobbyists are already working the system and bending the rules to get their clients our tax dollars.
Our tax dollars are used to bail out banks, insurance companies, and now, the auto industry, but nothing is done to change the policies that got us here in the first place. It would be cheaper, smarter, and in the long run, more profitable to create jobs and put Americans back to work.
The past two Presidents have experimented with so called free trade deals that have been anything but free. They opened our market to foreign producers without protecting our jobs and industries from predatory trade.
Free trade is just another economist theory that has been a failure in practice: the NAFTA, CAFTA and WTO agreements have destroyed mining, farming, and manufacturing and have transferred our wealth-producing capacity to foreign countries.
Robert Cassidy, the chief U.S. trade negotiator who negotiated China's entry into the World Trade Organization, now says the deal has not worked to the benefit of the U.S. economy and its workers.
Warren Buffet believes that over the long term, running large and persistent trade imbalances will be problematic for the United States.
Both Buffet and Cassidy are right. And the cold, hard facts now make it plain to see for everyone.
The job losses are now no longer just in manufacturing. Managers, bankers, stock brokers, insurance agents, all types of jobs in retail and wholesale are gone. Over 10 million workers are out of jobs, more are under employed, and it will get worse.
The U.S. housing market has lost 5 trillion dollars in value. Millions of Americans have lost their homes, millions are behind in payments and others are paying mortgages that are higher than the present value of their home.
Americans with savings, pensions or retirement plans in stocks and interest paying investments, have lost over 10 trillion dollars in value.
The financial crisis has destroyed several of the largest investment banks and insurance companies. The Federal Reserve has loaned 2 trillion dollars of your tax money and has not been disclosed how it was spent.
The big three auto companies are bleeding cash, heading for bankruptcy, and are now begging for a bailout.
Locally, tax revenues to city, county, state and federal governments have all decreased.
These governments have record deficits from loss of tax revenue on wages, social security, medicare and medicaid, sales taxes, real estate taxes, capital gains and others.
Cuts in government employment, health care, education, social security, etc. will be next, unless we pursue a path of balanced trade and put Americans back to work.
We are borrowing 2 billion dollars a day from foreign countries to buy their exports. Within a year, another 700 billion dollars, the size of the bailout package, will be in foreign countries.
Bailouts are necessary because of these bad policies, but as large as they are, they are only a band-aid on a cancer.
We have become a nation of consumers of foreign products and borrowers of foreign money. That's the bad news - but the good news is that we can fix it ourselves.
For a nation to be strong and wealthy it must grow, dig and manufacture. This is all we have to do. These are the only activities that produce wealth.
Borrowing money, printing money, buying companies or products or services, does not create wealth, it only delays the day of reckoning that now approaches.
The federal government's free trade policies in the NAFTA, CAFTA and WTO agreements has destroyed jobs and transferred our wealth (money) to foreign countries. This has caused the recession and the financial crisis.
These trade agreements left our industries and farms helpless. Foreign countries attacked them with predatory trade policies.
Predatory trade promotes exports and discourages imports. They keep wages low, rebate value added taxes on their exports, and charge value added taxes on imports. They provide domestic industries with local tax incentives and offer special financing and charge tariffs on imports. They target specific industries to monopolize.
But most importantly - they keep the value of their currency low in comparison to the U.S. dollar.
No. No. No U.S. company manufacturing in the U.S. can compete and this is why we have lost jobs and complete industries to foreign competition and why we are in a recession.
It is not hopeless. This is what we must do: We must continue to trade, but it must be balanced trade.
Balanced trade means if a country desires to sell products to the U.S. they are required by agreement to buy an equal dollar amount of products or services from the United States.
If they don't buy an equal amount of products, a trade balancing tariff (tax) will be applied to their products that we import.
Owners and managers at U.S. companies and factories will then recognize the possibility of domestic growth in business and profits. They will then hire and invest in plants and equipment in America.
For too long, the American worker has been competing on an unfair and uneven playing field. The U.S. government's free trade policies have caused the recession and financial crisis by sapping our wealth, killing our jobs, and shrinking our markets.
I am passionate about protecting our workers, our families and our children's future but I cannot talk to enough people, give enough speeches or get articles printed in enough papers.
What we need is a movement. Do you see or feel a threat to your future and your children's future?
Will you help? Will you convince others to convince others to convince others that our government's free trade policies have caused the recession and the financial crisis?
We need a main street, grass roots movement to change Washington's free trade policies.
THE U.S. TRADE DEFICIT CAUSED THE RECESSION AND THE FINANCIAL CRISIS
Even the most optimistic among us must now realize that the United States is in a recession, but if we all had good paying jobs we would not be in a recession.
We have lost 4 million manufacturing jobs since October 2002. There are now over 10 million Americans out of work.
The recession and financial crisis has been caused by the transfer of jobs and our wealth to foreign countries. First we lost our jobs, and then our wealth.
Trade deficits kill domestic jobs. Our trade deficit is now 2 billion dollars a day. Two billion dollars a day in imports is 700 billion dollars a year.
Today, one billion dollars of manufactured imports equals 13,000 jobs lost. Therefore 9 million jobs lost.
Over the past 20 years, our trade deficit totals about 5 trillion dollars. Not coincidentally, our government also owes foreign countries 5 trillion dollars.
And behind all of these numbers, the percentages and statistics, there are real people. Americans are struggling to pay their bills, keep their homes, and secure their retirement. We now buy products from overseas that we used to manufacture here, and we wonder what happened to our jobs?
It doesn't have to be this way. If we all had good paying jobs, we could pay our mortgages. If we paid our mortgages the banks would not have a liquidity problem and we would not have the financial crisis on Wall Street. Rather than more of the same, we must start manufacturing and selling more than we are borrowing and buying.
We didn't get here all at once. There have been many mistakes made by many smart people. But we are not going to tax our way out of this recession, or borrow our way out of this recession, or even bail our way out of this recession. We are going to have to work our way out of this recession to become a wealthy country again.
Federal, state and local elected officials still don't understand the cause of the recession and financial crisis. The current federal solution is just more of the same - spend more of our tax dollars. We were given a high price tag without much of a plan and now we learn that not only is there no oversight of the rushed bailout package, but the lobbyists are already working the system and bending the rules to get their clients our tax dollars.
Our tax dollars are used to bail out banks, insurance companies, and now, the auto industry, but nothing is done to change the policies that got us here in the first place. It would be cheaper, smarter, and in the long run, more profitable to create jobs and put Americans back to work.
The past two Presidents have experimented with so called free trade deals that have been anything but free. They opened our market to foreign producers without protecting our jobs and industries from predatory trade.
Free trade is just another economist theory that has been a failure in practice: the NAFTA, CAFTA and WTO agreements have destroyed mining, farming, and manufacturing and have transferred our wealth-producing capacity to foreign countries.
Robert Cassidy, the chief U.S. trade negotiator who negotiated China's entry into the World Trade Organization, now says the deal has not worked to the benefit of the U.S. economy and its workers.
Warren Buffet believes that over the long term, running large and persistent trade imbalances will be problematic for the United States.
Both Buffet and Cassidy are right. And the cold, hard facts now make it plain to see for everyone.
The job losses are now no longer just in manufacturing. Managers, bankers, stock brokers, insurance agents, all types of jobs in retail and wholesale are gone. Over 10 million workers are out of jobs, more are under employed, and it will get worse.
The U.S. housing market has lost 5 trillion dollars in value. Millions of Americans have lost their homes, millions are behind in payments and others are paying mortgages that are higher than the present value of their home.
Americans with savings, pensions or retirement plans in stocks and interest paying investments, have lost over 10 trillion dollars in value.
The financial crisis has destroyed several of the largest investment banks and insurance companies. The Federal Reserve has loaned 2 trillion dollars of your tax money and has not been disclosed how it was spent.
The big three auto companies are bleeding cash, heading for bankruptcy, and are now begging for a bailout.
Locally, tax revenues to city, county, state and federal governments have all decreased.
These governments have record deficits from loss of tax revenue on wages, social security, medicare and medicaid, sales taxes, real estate taxes, capital gains and others.
Cuts in government employment, health care, education, social security, etc. will be next, unless we pursue a path of balanced trade and put Americans back to work.
We are borrowing 2 billion dollars a day from foreign countries to buy their exports. Within a year, another 700 billion dollars, the size of the bailout package, will be in foreign countries.
Bailouts are necessary because of these bad policies, but as large as they are, they are only a band-aid on a cancer.
We have become a nation of consumers of foreign products and borrowers of foreign money. That's the bad news - but the good news is that we can fix it ourselves.
For a nation to be strong and wealthy it must grow, dig and manufacture. This is all we have to do. These are the only activities that produce wealth.
Borrowing money, printing money, buying companies or products or services, does not create wealth, it only delays the day of reckoning that now approaches.
The federal government's free trade policies in the NAFTA, CAFTA and WTO agreements has destroyed jobs and transferred our wealth (money) to foreign countries. This has caused the recession and the financial crisis.
These trade agreements left our industries and farms helpless. Foreign countries attacked them with predatory trade policies.
Predatory trade promotes exports and discourages imports. They keep wages low, rebate value added taxes on their exports, and charge value added taxes on imports. They provide domestic industries with local tax incentives and offer special financing and charge tariffs on imports. They target specific industries to monopolize.
But most importantly - they keep the value of their currency low in comparison to the U.S. dollar.
No. No. No U.S. company manufacturing in the U.S. can compete and this is why we have lost jobs and complete industries to foreign competition and why we are in a recession.
It is not hopeless. This is what we must do: We must continue to trade, but it must be balanced trade.
Balanced trade means if a country desires to sell products to the U.S. they are required by agreement to buy an equal dollar amount of products or services from the United States.
If they don't buy an equal amount of products, a trade balancing tariff (tax) will be applied to their products that we import.
Owners and managers at U.S. companies and factories will then recognize the possibility of domestic growth in business and profits. They will then hire and invest in plants and equipment in America.
For too long, the American worker has been competing on an unfair and uneven playing field. The U.S. government's free trade policies have caused the recession and financial crisis by sapping our wealth, killing our jobs, and shrinking our markets.
I am passionate about protecting our workers, our families and our children's future but I cannot talk to enough people, give enough speeches or get articles printed in enough papers.
What we need is a movement. Do you see or feel a threat to your future and your children's future?
Will you help? Will you convince others to convince others to convince others that our government's free trade policies have caused the recession and the financial crisis?
We need a main street, grass roots movement to change Washington's free trade policies.
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Agreed with this. We can't afford to bring the entire world into the middle class. Unless we have some barriers to entry (maybe circling not just the U.S., but all the "rich" countries) we're going to look more and more like Thailand and Mexico City. Free trade makes a few people very very rich in the short term, but in the long term it's the tarnished golden hand that drags everyone down.
January 7, 2009 11:41 AM | Reply | Permalink
While I'm not in agreement with some of the proposed ways forward here, I DO agree that the trade deficit has played a greater role in creating the bubble & the bursting, than we often recognize. Yes, we got cheaper stuff... but also yes, they got dollars... and then, a lot of that came home, looking for places to be invested... and a lot of it ended up being "guided" into the "secure" housing sector. Whoops.
So yes, a lower dollar, and yes, that'll mean the price of many things goes up, but it'll help some. Beyond that, I won't argue the particulars - as I just think this factor is underplayed at present.
Cheers, Curtis.
January 7, 2009 3:03 PM | Reply | Permalink
Not directly. Trade deficits export wealth. We are literally "spreading the wealth".
Globalization moves jobs from high wage locales to lower wage locales. Also, even given comparable net labor rates (allowing for perks, safety nets, etc.) there may be other competitive factors which drive jobs out of one locale. You could say that overpriced domestic labor drives trade deficits.
Hoover tried tariffs. Why would we think tariffs would do any better now?
Wages and investment income drive/allow real spending, borrowing allows imaginary spending.
I don't see the connection between trade deficit and housing bubble. But I agree that the trade deficit is worthy of analysis.
The Fed doesn't spend taxpayer money, it "prints" money which then dilutes extant money, taxpayer's money or not.
January 7, 2009 7:03 PM | Reply | Permalink
I would suggest looking at Fareed Zakaria's writings on the post-American world.
"Balancing" trade like you suggest (1 to 1 per country) would simply BREAK the international system of trade beyond recognition and massively reduce everyone's standards of living [in my more radical ecological moments, I'm not sure that's a bad thing]. Imposing restrictions like you suggest would only be met with restrictions by other countries and increased trade barriers everywhere.
I've an intuition that the problem is we (the US) ,and to a lesser extent the other OECD citizens, have been living rich off the backs of the rest of the world.
Now, with the 'rise of the rest' (Zakaria), I honestly don't see how those who have been living high on the hog since WWII (or before) won't see their standards of living fall in an unavoidable trend toward convergence with the rising lifestyles of those 'poor' countries that are rising [ignoring the others who are still mired in misery like Africa].
The mid to late 20th century prosperity in the US was a historical fluke and is simply not a place to which we can return.
I'm pessimistic as hell often - and would prefer to be convinced otherwise.
January 7, 2009 9:52 PM | Reply | Permalink
Jofga,
I’m a proponent of the Warren Buffett’s concept published in 2003. The market (rather than government) driven proposal’s task based upon his concept is simply the significant decrease of USA’s trade deficit of goods. It is absolutely self-funding and not a tax or a tariff.
The proposal eliminates any deficit of goods applicable to the proposal. No other existing or proposed trade policy would accomplish this with less government intervention and less price increases of imported goods.
Buffett’s proposal is certainly not the “1 to 1 per country” concept that you find fault with. His proposal would certainly not, “BREAK the international system of trade”. It is not very susceptible to contra-tariffs or other foreign mischief.
Within this proposal net exporters of goods into the USA would do much more harm to themselves if they attempted to use trade as an offensive weapon. Since the proposal’s of significant financial advantage to any USA or foreign exporters of goods from the USA, it promotes lower prices to foreign purchasers and increasing the aggregate sum of USA's imports plus exports.
This proposal is not “pure” free trade but it is absolutely pure free enterprise. Although it is completely compatible to any existing economic system, it is certainly not a tool to undermine free enterprise.
I hope you read of and consider Buffett’s concept. I look forward to your opinion of this after you’ve read
www.USA-Trade-Deficit.Blogspot.com
Respectfully, Supposn
February 25, 2009 1:22 PM | Reply | Permalink
This article is spot on. The reason for our economic crisis now is because the tax base was exported with the jobs. DUH!
Eds... one of biggest lies ever told was that Smoot Hawley tariffs caused - or extended the Depression. The fact is that prior to 1913, U.S. government revenue was all tariffs. In 1913 when the legislation for the federal reserve was passed into law, other treason legislation was passed - one of them was cutting tariffs in half and putting an income on American businesses and the American people obviously to make up the lost revenue. The income tax in the 1913 law was determined to be unconstitutional which was why the 16th amendment was required.
So... when you consider the real history of the lead up to the Depression, we followed exactly the same pattern... lower the tariffs, flood the markets with cheap imports putting domestic businesses out of business... and the economy crashes. Same pattern.
jofga... we do need trade and we do need to export some things to the rest of the world. I would suggest we export people like Fareed Zakaria and Thomas Friedman. I assume Zakaria is from the middle east so no problem there. We don't really know what planet Thomas Friedman came from. Maybe we could just put him in a space ship like the Hubble telescope and shoot him off into space.
January 8, 2009 12:25 AM | Reply | Permalink
eyes -- I think you're missing the point. It's not about whether tariffs caused the crash in 1929 while they were being debated. It's about whether they helped or not, later on. If a tariff generates retaliation, it's certainly not as effective as if it's accepted. But it should be crystal clear that a tariff is not production of goods. It IS a matter of using private trade to generate public income.
January 8, 2009 6:11 AM | Reply | Permalink
This essay is in total agreement with what we wrote in our book Trading Away Our Future and what we have been posting in our blog.
Howard Richman
www.tradeandtaxes.blogspot.com
January 9, 2009 1:49 AM | Reply | Permalink
As a Canadian let me offer, perhaps, a different perspective. I find myself in agreement with the main thrust of the article, namely that the BOP was and is the fundamental driver of the current crisis. That being said, there is nothing wrong with some degree of imbalances, provided that they are a result of natural offences. The current imbalance is certainly not. It is the result of calculating manipulations on behalf of trading partners (mainly China), that engaged in mercantilist practices in order to grow. Therein lies the problem. In order for China to control the value of its currency, it had to purchase huge sums of US treasuries. The result was excess liquidity and distorted interest rates.
While I do regularly read Howard Richman's blog (www.tradeandtaxes.blogspot.com) and find it very good. I find myself, as yet, unconvinced that trade certificates are the answer. At least not without some tinkering.
For example, Canada exports a tremendous amount of energy to the US, in the form of oil and gas. Under a trade certificate program Canada would consume (and more) its trad-ables in this area alone. This would have the effect regionalising employment opportunities in Canada. It also may distort total employment levels. Trade certificates implemented in a simple 1:1 fashion would further distort the job market by not accounting for equivalent labour content per dollar exported. If Canada sends 20 billion of energy exports to the US, created with 20,000 jobs. It would be obligated to purchase an equivalent amount of goods or services from the US (or other country). The 20 billion of imports that Canada would need to balance its trade would comprise of much higher labour content. Canada's 20 billion of exports creates 20 thousand Canadian Jobs while its 20 billion of imports might create 80,000 out of country jobs. All the while it would be limiting, by means of exhausting demand for certificates, on other Canadian industries.
Also, using the above example, If Canada/US trade was done under certificates, we would be obligated to purchase only one third as much from the US today compared July, now that oil is 1/3rd the price.
It is easy to see how a simple 1:1 trade certificate program might fail. That being said, if the unit value was hours of labour equivalent instead on monetary units, I could see it working.
January 9, 2009 1:05 PM | Reply | Permalink