Recession Solution: Balancing Trade

Martin Feldstein is the most highly esteemed Republican Party economist in America today. His analyzes are clear and understandable. In a recent commentary he breaks with other Republicans and urges passage of a large stimulus plan, similar to the one proposed by President Obama. He attributes America's short-term problems to a $600 billion fall in demand for U.S. products:

The 40% decline in the U.S. stock market and the dramatic fall in house prices have reduced American households’ wealth by more than $10 trillion, which is likely to reduce annual consumer spending by more than $400 billion. And the collapse of housing starts has lowered construction spending by another $200 billion. This $600 billion fall in demand is more than 3% of GDP. If not reversed, it will cause further cuts in production, employment, and earnings, leading to further reductions in consumer spending.

He then points out that the Federal Reserve cannot solve the recession by lowering interest rates:

The usual monetary-policy response of lowering interest rates is unable to reverse this sharp drop in demand. The dysfunctional credit markets caused by the uncertain value of asset-backed securities means that banks and other financial institutions are unable to raise funds and are unwilling to lend. As a result, the central bank’s lower interest rates do not translate into increased spending on interest-sensitive investment and consumption.

Then he shows a blind spot. He concludes that the only alternative is fiscal policy (i.e., larger government budget deficits):

So there is no alternative to fiscal policy if we want to reverse the current downturn....

Feldstein is missing the third alternative: solving the trade deficit. If the recession is indeed caused by a loss of $600 billion of demand, as he argues, then eliminating the $665 billion U.S. trade deficit through Import Certificates would completely solve it. In other words, there would be plenty of demand for American products if foreigners purchased as much from us as we purchase from them.

Martin Feldstein's calculations show that the stimulus package would be entirely unnecessary if we solve our trade deficit. Instead of racking up more and more government debt and more and more foreign debt, we can get out of the recession by balancing trade.

Comments

[Steven Hansen:]

Howard, i agree with you. you can also consider barter instead of trade certificates. Barter actually takes currency value out of the equation also.

in the old soviet days, this is how we traded with eastern europe. the austrians were the masters of barter.

Feb 09 02:05 AM

[Howard Richman:]

The hand,

Indeed barter is just like balanced trade in that we get goods of equal value from our trading partners. Barter assists both sides while imbalanced trade often only assists the side that is keeping trade out of balance in order to steal its trading partner's industries.

Howard Richman
tradeandtaxes.blogspot...

Feb 09 09:01 AM

[kelm:]

I agree that trade is the issue that needs to be solved for the nation to ultimately get out of this crisis. Whether it can completely solve it I don't know. What I am sure of is that if they are going to insist on a stimulus then every dollar needs to go to improving our competitiveness, productivity, and products to spur trade and export. Otherwise we are just treading water.

Feb 09 12:17 PM

[Howard Richman:]

Kelm,

I agree. Are there any dollars, whatsoever, in the current stimulus package that would improve our competitiveness, productivity, or products to spur trade and export?

Howard Richman
tradeandtaxes.blogspot...

Feb 09 12:27 PM

[Pete Murphy:]

Our trade deficit actually has little to do with competitiveness, productivity, currency valuations or low wages in foreign countries. The U.S. is the most competitive, productive nation on earth. And our per capita trade deficit in manufactured goods is worst with some rather wealthy nations, including Japan, Germany, Korea, Denmark, Switzerland, Ireland and Israel, among others, debunking the "low wages" myth. A much more dominant factor is the disparity in population density between the U.S. and badly overpopulated nations, like most of those mentioned above and others as well, like China. Attempting to trade freely with nations with low per capita consumption and a huge glut of labor is a sure-fire loser. In such instances, measures must be taken to assure a balance of trade in such situations, whether it's done with trade certificates, through barter, or with tariffs.

Pete Murphy
Author, "Five Short Blasts"

Feb 10 04:54 PM