Western Decline Caused by Trade, Budget Deficits: The Solution Is Simple

by: Howard Richman

In a December 1, 2010, commentary (The Danger of a Global Double Dip Recession Is Real), Mort Zuckerman, editor in chief of U.S. News and World Report, comments on the decline of the west in general and the United States in particular. He largely attributes the decline to the combination of trade deficits (i.e., "current account deficits") and budget deficits. Specifically:

The prognosis for America is especially discouraging. We have relied too heavily on surplus savings from abroad on top of running massive current account deficits. Until recent times, we ran deficits of this order only when we were engaged in a titanic war; otherwise we sought to achieve budget balances over a complete business cycle. But now we are running annual deficits of $1.4 trillion, about 10 percent of the total economy....

And, as he notes, U.S. policy makers have no solutions:

In the United States, gloom has spread to our policymakers on how to deal with our economic dilemmas. Monetary policy is relatively ineffective because we are in, or near, liquidity trap conditions. Our economy is so weak that lower interest rates and other monetary tools are not working. In the liquidity trap, no matter how much money is thrown into the system, people have so little confidence that they tend to hoard it. Similarly, fiscal policy is beginning to reach its limits. High debt levels can raise concerns about the creditworthiness of our government. This in turn could lead to higher long-term interest rates that would aggravate the economic contraction.

Actually the solution is simple, BALANCE TRADE and BALANCE BUDGETS. Trade can be balanced simply by adopting the WTO-legal scaled tariff or Warren Buffett's even more effective Import Certificates plan. Budgets would quickly get balanced through serious negotiations in Washington if House Republicans simply refuse to raise the debt limit.

Balancing budgets reduces aggregate demand for American products, but balancing trade increases it. Balancing trade increases American real long-term interest rates, but balancing budgets reduces them. The two policies, taken together, cancel the negative effects of either taken alone, while reigniting American manufacturing investment.

Disclosure: No positions