Kudlow on the Trade Deficit
March 11, 2005
Today, with the release of
January's $58.3 billion dollar trade deficit (the second worst
monthly result on record), the enormity of the imbalance was
once again overshadowed by the rhetoric immediately following
its release. As he has in the past CNBC's Larry Kudlow extolled
the virtues of the trade deficit as reflecting America's superior
economic growth, while chastising Europe and Japan for not doing
their fair share in moving the world's economy forward.
In essence, Mr. Kudlow criticized Europeans and Japanese as being
economic slackers (because all they do is save money and manufacture
products), while praising Americans, who borrow those savings
and consume those products, for doing all the hard work. Give
me a break.
When asked if he though the fact that Americans were "living
beyond their means was a problem" Kudlow's reply was to
deny that they were. Apparently, he believes that one's means
are merely a function of how much one can borrow. It reminds
me of the old joke about the housewife who was amazed to discover
that her checking account was overdrawn as there were still unused
checks remaining in her book. Further, when asked if he believed
that the debt Americans were accumulating was problematic, he
assured the television audience that it was not, because "Americans
were putting the money to good use." I'm not exactly sure
to what good use he is referring, as American's borrow mainly
to consume. Imagine trying to convince a banker to loan you money
on the grounds that you would put it to good use by buying a
big screen T.V. and taking a vacation.
Mr. Kudlow's rhetoric typifies an ongoing Wall Street, government,
and media propaganda effort that would even amaze George Orwell.
I have addressed these ridiculous arguments many times in the
past, but rather than rehashing them, I offer some of my past
commentaries in response to similar statements on this issue
made by John Snow and Arthur Laffer.
January 13, 2005
John's Snow Job on the Record Trade Deficit
In reaction to yesterday's
release of a record trade deficit, Treasury Secretary John Snow
continued with his Rumpelstiltskin 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
is 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
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, it's the reverse. It's 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
January 4, 2005
Laffer on the Trade Deficit
In the 1980's Arthur Laffer
gained fame by sketching his controversial "Laffer Curve"
on a cocktail napkin. In an interview today on CNBC Mr. Laffer
lead me to believe that the same napkin could probably provide
enough surface area to hold the sum total of his economic wisdom.
In a stunning display of economic ignorance and media propaganda,
Laffer not only explained why the gargantuan U.S. trade deficit
was not a problem, but argued that an even bigger one would be
even better. Come again?
In an attempt to explain why such deficits can exist indefinitely,
Laffer compared today's current account deficits to those seen
during America's first two hundred as a developing nation. This
flawed comparison over looks the fact that as a developing nation,
America borrowed to invest, resulting in current account deficits
that funded the construction of vast infrastructure, such as
roads, bridges, ports, and rail roads, as well the formation
of capital equipment, farms, and factories, all of which fueled
American productivity. Such investments enabled the production
of vast quantities of consumer goods, which America sold back
to its creditors, to both pay interest and retire principle.
In the end, America's creditors got consumer goods, and America
became the wealthiest industrial nation the world had ever seen,
in the process turning its current account deficits into enormous
In a "night and day" contrast, today's current account
deficit has the much more limited role of solely financing consumer
spending. By squandering borrowed money on consumption, America
has no way to repay the principal of its debts, let alone the
interest. Borrowing to build a factory is not the economic equivalent
of borrowing to buy a television set, and it's amazing that Laffer
can't see the difference.
Second, Laffer defends the trade deficits as resulting from the
vastly superior investment returns available in America. His
argument is that a capital account surplus necessitated a current
account deficit. Talk about putting the cart before the horse.
According to Lafferese, foreigners sell products to Americans
to earn dollars, so that they can "invest" in America
to achieve superior returns. This ridiculous logic overlooks
the fact that much of these earrings are simply invested in low
yielding government and corporate bonds, with a significant portion
being purchased by foreign governments. If as Laffer maintains,
investment returns in the U.S. really are far superior to those
available else where, why are foreign central banks doing so
much of the "investing?" Where is all the private capital
seeking those alleged superior returns?
Lastly, when asked if a six hundred billion dollar trade deficit
was a good thing, wouldn't a one trillion dollar deficit be even
better, Laffer's round about response was basically, yes, the
bigger the better.
March 11, 2005
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