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The Election and The Economy

Ignore the trade deficit. That's one way a smart candidate can win the 2008 election in terms of the economy. I will come back to explain that statement, but the disparity between that advisory and the behavior of the front-running politicians demonstrates just how poorly most understand the economy and how a nation's chief executive should run it.

Bill Clinton ran in 1992 on the theme, 'it's the economy, stupid'. And in that time, it was true. Regardless of whatever else we want to say about President Clinton's performance, the economy hummed along while he was in the White House, which if nothing else shows he knew when to not mess with it. Of course, ol' Bill deviated from the customary accounting methods used by the government to claim his "surplus", which never existed in any material sense, but since the United States government has not used anything much like GAAP in my lifetime, I can't really say too much against Bubba, except to observe that his Administration's bookkeeping was more creative than most.

-- continued --

No matter whether the party in power is Republican or Democrat, the plain fact is that they plan on spending your money. Lots of it. Sometimes a President gets to feeling a mite guilty about how much they grab from the taxpayer, and they give just a little of it back. Of course, when this sort of thing happens, the other party gets nasty and tries to claim that the tax cuts will lead to terrible consequences. This claim is generally a lie. And when we talk about lies and the government and the economy, this leads us to talk about the trade deficit.

"Nothing is more absurd than this doctrine of the balance of trade." Those words come to us from Adam Smith, the author of The Wealth of Nations, and he wrote this in summation of his great experience and a long-considered debate back in 1776. Trade, when it began, was just what the name suggests, a person trading something they are willing to give up, for something they want to get, with each party pleased with the agreed terms. For all the fancy talk, that is what trade is now. Just because we use cash instead of barter, and in many cases buy on credit, does not change the fact that trade is always a transaction where both sides are satisfied with the deal. No one, despite the protestors, is forcing you to buy a certain brand or from a certain country. And despite the politicians trying to say otherwise, no nation in history has been undone because of a trade deficit. Look, for example, at Japan. During the 1970s Japan was going great guns, and all sorts of people were worried about the "inbalance" of trade. By the late 1980s and early 1990s, Japanese investors were buying up American real estate and companies. Everyone was crying gloom and doom, surely we'd end up no longer the United States, but some dismal possession of Japan. Yet, within a decade, everything was largely back to where it was. This is because the Japanese were no more immune to bad business decisions than Americans were, and the market corrected itself in a number of ways, leading to some startling reversals. No, that does not mean that stupidity gets a 'reset' button, but it does mean that panicking because one nation happens to have more cash than other nations at one point or another is just silly. If you've ever played 'Monopoly', you know that just because one player has a lot of cash does not mean that the player is going to win; a lot of things can and do happen. And that board game is a very simplified environment; it is essentially impossible to buy an entire country, especially in a global economy.

That global economy is another reason not to sweat a deficit. If we are back in the barter days, there's not going to ba a lot of trade. Why? Because the guy you are dealing with will only have a few things you may want, and it is not easy to find a point where both sides agree on a trade. Is that sweater worth a whole cow? What do mean, he won't take eggs ... you get the idea. Now, a look around your town and what do you see? Yes indeed, some folks do better financially than others, but that doesn't mean the rich guys own the town, does it? Money can't buy happiness and all that, the point is that there's more to even financial success than a flash of cash. Also, these weasels who go on about a trade deficit are forgetting that this is not the United States making deals with other countries, this is individual consumers buying things and individual companies and sellers supplying the products. They are, it may surprise you to learn, happy to accept our money at the agreed price, and none of them have any real intention of desctroying our economy, since doing so would ruin the value of the money they worked so hard to get from us.

So, in the end the "trade deficit" is largely a myth, so far as the government is concerned. Oh sure, the statistic is real, and to a limited extant it is a quality which should be watched, but in the political sense it's a non-starter. This is because there is not much, at all, that the government can do to help things. They can, and often do, make things worse, with such tactics as tariffs and quotas and the like; all this does in actual effect is anger the country from which the products are coming, while making our own citizens pay more for products they want or might even need. The government does its job to make sure that certain strategic products are not sent overseas (we should be careful not to let China have the technology to make ICBMs or Stealth Bombers), but China is simply not going to take over America by making inexpensive plasma television sets or novelty items. And before anyone gets the idea that China is some deviously brilliant nation which will outwit the United States, I may need to remind you that all that contaminated food and unsafe tires and so on that we got so angry about, is still being sold to China's citizens, who lack the means to protest in the way that the American media can. Also, the regime in charge of China has been importing wheat and other basic foodstuffs for a generation, because they thought the "Great Leap Forward" was a winning plan.

Should the United States government track what comes in and goes out of our country? Absolutely. Should we play gatekeeper on certain dangerous items and consider the intentions of foreign governments? Of course. But using scare tactics to create a boogey man so that citizens will grant even more control over their lives to the government? That should disqualify any candidate for federal office.


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Comments (14)

I agree with most of what y... (Below threshold)
nogo war:

I agree with most of what you say...
The bogeyman is not outside but within..
I hope one lesson future administrations will realize is we cannot fund a war and cut taxes at the same time.
When war is necessary it must be funded. Our nation must be willing to pay higher taxes to support our National Defense in a time of war.
If we are not capable of this sacrifice, well then we should not conduct war.
Does it bother anyone that we depend Communist China to float loans for our National Defense?

Excellent point DJ, and by ... (Below threshold)

Excellent point DJ, and by that measure (GAAP) the budget deficit needs to be scrutinized more. Why? Because when the federal government builds a tank, a bridge or an interstate highway it expenses that item in the current year instead of capitalizing it over many years the why all private sector businesses (the ones, BTW, that create all the wealth the federal government spends) do according to Generally Accepted Accounting Principles.

nogoThere is a reaso... (Below threshold)

nogo
There is a reason why Communist China buys U S Treasury Notes instead of debt issued by, say, Russia, most of the EU countries, or Southern Hemisphere countries. Do you know what it is?

They want to get their money back and the US is the only borrower they believe can repay. And the US is the only borrower with an economy large enough to absorb their investments.

Think about that for a while.

Does it bother anyone th... (Below threshold)
SPQR:

Does it bother anyone that we depend Communist China to float loans for our National Defense? A silly statement really, since the US debt goes to a lot of things, only a small fraction of which is actually "national defense". Somehow this meaningless sputtering makes nogo feel good.

But the concern about communist china holding the obligations is misplaced, while they could dump it on the market in an attempt to devalue it, such would devastate their own economy more than ours.

The whole concept of a "tra... (Below threshold)

The whole concept of a "trade balance" stems from the mercantile economies of Europe, where the sovereigns wanted a balance of trade so they wouldn't have to cough up any of their gold reserves. In a modern economy, it's almost meaningless. Suppose I buy a $10 widget from Germany. It's well worth the $10 to me, and I have the widget while the German company gets the ten bucks. It's an even exchange, but listed on our "trade deficit" as a loss of $10 - as if I got nothing at all for the money.

We can safely add economics to long list of topics nogo knows nothing about. As Hugh points out, the reason the Chinese and other foreigners buy US Treasuries is because it is the safest investment in the world. Buying a Treasury note doesn't give you a "mortgage" on the US, as some idiots love to claim. They are backed solely by the good name and intentions of the US government, and nothing else.

Even if the Chinese were foolish enough to "dump" their US government bonds, it wouldn't affect the US. Those bonds will pay out the same amount with the same interest at the same time, no matter how many times they are resold, or for what price, on the secondary market.

Agaiain i ask....Who among ... (Below threshold)
nogo war:

Agaiain i ask....Who among you are willling to pay higher taxes to pay for Bush's war?
Do any of of you know know any KIA WIA..
at what point in time is your sacrifice?

by the way...more troops were KIA in 2007 than any other year on this war based on lies...

None of us do not have innocent blood on our hands...

Why does the Bush govt refuse to honor our brave troop dead by refusing to picture flag draped coffins arriving home?
depp=true


I'm the conductor here, nog... (Below threshold)
DJ Drummond:

I'm the conductor here, nogo, and trying to derail my thread will cost you.

Thanks, DJ.I get p... (Below threshold)

Thanks, DJ.

I get pretty tired of folks derailing threads. If you've got something you want to say that's not on topic, get your own blog! It's not hard, and it doesn't cost a dime.

About China - whenever I see them work on their military, I must admit to being a bit worried. At least some of their leadership is hot to drag Taiwan back into the fold, and that would seriously mess with the world economy for a while. Certainly we'd step in, and just as certainly our purchases from China would drop to a small fraction of what we buy today. Their cash flow would dry up.

And then I think - would they DELIBERATELY and seriously screw over their own economy for national pride? It wouldn't be inconcieveable... but I think it unlikely. So they will posture, and threaten, and in the end do little. (I hope!)

But faced with what they think is a 'weak' US, things could be significantly different. It'll be interesting to see how things play out. We don't need another Carteresque President, so afraid of offending anyone that he wouldn't do anything - we need a President who understands our economic strengths as well as our military strength, and how to use it to the world's benefit.

I would like to humbly remi... (Below threshold)
Ray:

I would like to humbly remind many of your globalists here that the US President is president of the US - not the world and he/she answers to the American people first and foremost.

Today, our nation is heavily dependent on foreign nations for energy and products (Arab oil and Chinese goods and now food). Therefore, we are losing our independence, our sovereignty.

The Wall Street boys, the cable news business shows, Jorge Bush, Larry Kudlow and the "free trade uber alles" crowd only care about economic growth and damn the laws, the morals and the consequences long term to our nation (see illegal immigration; there's a reason why it's illegal you know). But Bush doesn't enforce the law because his first priority is profit.

Losing our independence...and for what? Cheap electronic gadgets and clothes that last about a year before the material fades and rips?

"No manufacturing = no independent country"

Wrong, Ray.You are... (Below threshold)
DJ Drummond:

Wrong, Ray.

You are making the faulty assumption that services are worth less than material products. This is very wrong.

As an example, you may recall the panic when US companies stopped making DVD players and TV sets. But the intellectual product, the movies and shows, these come in the most part, and the heaviest portion by far of the financial revenue from shows and movies, from America. India, for example, makes a lot of movies relative to the average nation, but still less than half as much as Hollywood, and American films gross around ten times as much as the next highest country's offerings. So, which is better, to make a one-time profit of 20-50 bucks on a DVD player or 100-200 bucks on a TV set, or a continuing profit flow of thousands of dollars from DVD movies and shows? The answer lies in the GDP growth, and it's not Japan and India, Ray.

You claim we are "dependant" on Arab oil. Not really. You forget that ALL Arab countries drill and refine oil using AMERICAN technology, which means they need us or at least our equipment (ever wonder why Chavez backpedaled after nationalizing his oil fields and now is trying to bring US engineers back to the plants?), and if we stopped buying Arab oil today, we could return to several promising fields close to the US, like Alaska and the Gulf, and then there's shale oil. The Arabs, putting it bluntly, will run out of oil before we do.

I should also mention that History shows we adapt to the needs of the time. We used to burn wood, then we found coal, then we found oil. A century ago, most factories used coal and were inefficient, precisely because they believed theories similar to yours. Globalization allows for specialization of skills and work to create products tailored to suit existing and emerging markets, and everyone - EVERYONE - who participates in those markets sees their GDP and standard-of-living rise.

As to food, you are simply wrong. The United States continues to led the world in agricuiltural technology and efficiency; a hectacre of arable land in the United States feeds four times the number of people it did in 1970, and need I remind you that in 1970 the United States produced 40 percent of the ENTIRE world supply of grain?

Your claims are false, based on panic and long-disproven assumptions. You're right to the degree that the President of the United States had primary duty to the American people, but that means seeing isolationism and closing markets for the foolish, backward concepts they are, and noting that Globalization improves living conditions and market effectiveness for all participants.

DJ - like those who critici... (Below threshold)
Ray:

DJ - like those who criticize anyone who forwards the "radical" idea of enforcing immigration laws lest markets decide whether or not to enforce them, you create the straw-man of isolationism.

No one seriously advocates isolationism. That being said, can tell me with a straight look on your face that since we Americans produce less automobiles, less steel, fewer aircraft, fewer boats/ships and import more and more food from around the world, (sometimes of the poisonous variety), we are better off, so we have more "choices" of cheap gadgets and clothes?

Fight terrorism (not calling it what it truly is, fundamentalist Islam)....go shopping!

Sorry, I'm not trying to engage you in some silly, hot-headed debate via the web, I'm just telling you my gut feel. I live here in the mid-West, we don't have the same economy that Kudlow, Cramer and the Fox News financial babes rejoice about. Ohio, Michigan, Indiana - we're the real USA and while the economy isn't terrible here, it isn't good either.

But my main point is not a personal economic report, my concern mainly is to the country, our nation, our sovereignty.

We need to invest in some PRODUCTION here in this country - that doesn't mean we shouldn't trade or import anything, that's ridiculous. But we do need to produce more steel, automobiles, trucks, tractors, airplanes, etc.

Totally relying on others is not what the Founding Fathers surely wanted.

Ray: "That being said, can ... (Below threshold)
DJ Drummond:

Ray: "That being said, can tell me with a straight look on your face that since we Americans produce less automobiles, less steel, fewer aircraft, fewer boats/ships and import more and more food from around the world, (sometimes of the poisonous variety), we are better off, so we have more "choices" of cheap gadgets and clothes?"

YES RAY I CAN. Or at least I can say that your claims are untrue, and the general gist of your argument is based on a false logic.

To begin, it is a lie to say we are growing less food, that we import most of our necessary items, or that we manufacture less than we did. Those claims come from lazy Gorites and the like, who do not bother to check out the facts. What has happened is known as the Information Revolution, also called the Third Wave. The essentials of the trend are radical improvements in productiity, ESPECIALLY in manufacturing. As a result, the day of the huge factory hiring thousands of low-skilled employees for 40 years at a time is well passed. What is replacing it, is a First-World economy which uses robotics and cellular technology practices in Just-in-Time manufacturing processes which have eliminated many manufacturing constraints and significantly lowered holding inventories. It means that the old 1940s-style factory is dying out, and yes that's bad for dinosaurs like the UAW and old Steel workers' unions, but this has happened before in America. What do you think happened to stagecoach makers when cars and trucks started to be used? What do you think happened to the telegraph industry when the telephone became popular? The economy of the nation is DYNAMIC, not static. Your assumptions are based on old lies, nothing more.

And let's look at those claims. I already pointed out that per-acre, farms in the U.S. produce more food than ever before. Same for auto plants; you say we produce "less automobilles", which tells me you don't read BusinessWeek; more cars were made in the U.S. than in any year since 1999. As for fewer aircraft, I guess you missed all the press about Boeing's "Dreamliner", which beat out Airbus hands down in Asian, European, and North American markets. In short, your claims don't stand up to inspection.

As for being better off, our GDP continues to rise, so does standard-of-living, and despite the subprime crunch, home ownership in the U.S. remains higher than at anytime prior to Bush. So again, the evidence proves you wrong, well out of bounds.

Panic is no substitute for sound consideration of the facts, Ray. You just play with Lemmings when you do that!

DJ - all I can say, is here... (Below threshold)
Ray:

DJ - all I can say, is here where I live (don't know where you live), Michigan is the 50th economy in the nation. Jorge Bush says "retain, go to communtiy college"...what a frickin joke.

You say we grow more food than ever before, you're probably right but what do we do with that food? Export it, that's what we do with it. Ask anyone who goes grocery shopping? Why are there more and more food products grown/processed outside the US?

Aircraft? Boeing is doing well but where is the majority of the Dreamliner manufactured? Outside the US. Japanese automakers do manufacture here but it's a small percentage of all the vehicles they sell here, i.e., most Japanese cars are built in Japan.

Information Revolution? Ah, I am and have been a software developer since 1990. Fewer and fewer Americans are found in my field; more and more H-1B'ers from India and China. Salaries have gone down a little and even more importantly, fewer young Americans even study the field in college since they know inherently, jobs are being sent to Asia and Asians are being brought here in high numbers.

You don't seem to get my underlining point (as well as throwing around the accusation that I'm "lying", which is rude to say the least). You're stuck on ideology. Just saying "the economy is dynamic" is tripe. My main point is just because the economy changes doesn't justify the changing. Changing into what? Is it worth it? Is it better? Our nation is a leader in robotics and advanced manufacturing? Where? Please tell? I would guess Japan leads the world in those areas.

I guess that depends is you're part of the moneyed elite inside the Beltway, or on Wall Street or in Hollywood. You've bored me with your statistics as you surely know, one can prove just about anything by citing statistics. Enough said.

Geez, Ray, you sound more S... (Below threshold)
DJ Drummond:

Geez, Ray, you sound more Socialist with every comment!

First, I answered your point, completely refuted it, and all you can do is duck the salient facts.

G-D-P, for instance. Or Real GDP if Inflation bothers you. Either one is one of the classic, impossible-to-fake numbers which ID economic conditions. And the US has been rock-solid there more than any nation, even those ooh-ahh nations that get attention as the next "they will own America" up-&-comers, which never happens because the noise is ALL HYPE.


Why does it bother you that we expost a lot of grain and import a variety of foods? Does the phrase "cost effective" scare you? Apparently it does.

Your problem seems to be that you cannot adapt to a changing environment. Tough tookies, pal, we all have to change. I'm going through my MBA studies right now, because my Bachelor's isn't getting it done. What are YOU doing to improve your marketability? Oh that's right, you think someone OWES you a job!

And dude, take a class in Economics before you spout off again, or at least look at History. You don't sound very smart by mixing Marxist rhetoric with petulant whining.




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