Posted on 04/19/2006 12:56:38 PM PDT by 1rudeboy
One year ago, the chorus of the consensus told America that the dollar’s exchange rate was due to fall in 2005. Under relentless assault from cheap Chinese imports and facing a record trade deficit, the dollar had nowhere to go but down. The influential Economist magazine went so far as to say, “[t]he deficit is unsustainable: sooner or later it will need to shrink, and that will involve a cheaper dollar.” Politicians and pundits predicted economic trauma at the hands of outsourcing. Time has proven them wrong. What the U.S. needed then and needs now is to stick to the reliable keys to growth: low tax rates, deregulation, limited government, and especially free trade.
A Dollar – Deficit Link?
The U.S. economy did set two records last year. First, 2005 saw a new record trade gap. Imports to the U.S. exceeded exports by $724 billion, or 5.8 percent of GDP. Second, more Americans were employed than ever before in history, arguing against those who preached doom and gloom.
The data continue to support our contention of last May that the trade deficit is not the signal to watch: “This is all wrong... Many economists and the weight of history suggest that the trade deficit, a symptom of investment capital inflows, is a sign of national economic strength.”[1] Additionally, two papers published last spring pointed out the lack of a historical relationship between currency values and trade deficits.[2] Indeed, despite the widening trade gap, the dollar gained value against other currencies.
The January 5, 2006, Economist admits that the dollar pessimists “were all wrong.” Yet the conventional wisdom of “trade hawks” is again resurgent, arguing that trade deficits are unsustainable and the dollar cannot hold. Last week, the government reported the third deepest trade gap on record, with imports outweighing exports by $65.7 billion. Current exchange rates, however, appear normal compared with exchange rates over the last few decades.
Unless Congress moves from protectionist rhetoric to protectionist legislation, there is no reason to expect the dollar to slide significantly. Trade flows are the “tail of the dog,” as Fed Chairman Ben Bernanke once explained. From time to time the dollar does fall when the world’s investors lose confidence in the superiority of America’s institutions and markets. Sadly, congressional hostility to the U.A.E. port deal was a bipartisan embarrassment and isn’t likely to reassure the world that America is as free and fair as it proclaims. Equally troubling is the Schumer-Graham proposal in the U.S. Senate to place trade barriers on imports from China.
The Chinese Invasion
According to the last week’s data from the Department of Commerce, the U.S. trade deficit with China was $13.8 billion in February. In 2005, the U.S. trade deficit with China grew by 25 percent to $202 billion. That amounts to nearly twice the $103 billion bilateral deficit in 2002. The ratio of imports to exports with China is now 5 to 1, perfect for the “Chinese invasion” storyline. The U.S.-China deficit’s growth probably won’t continue, but not because it can’t. Consider these points:
We should cheer the triumph of capitalism and its alleviation of poverty within China, as well as its benefits for American consumers and shareholders. The only point of debate is whether American workers’ wages are suffering due to trade with China, but there is no clear evidence of wages “racing to the bottom.” Instead, China is experiencing a severe labor shortage that is driving wages up rapidly in a “race to the top”—the level of free-market workers.
The real dangers to America are not free trade or China’s currency. That’s not to say there aren’t smart policies that should be taken to curb abuses of fair trade, rather that protectionism and currency haggling aren’t part of the smart mix. The real danger is that Congress will try to fix what is not broken and adopt a mercantilist policy of import limitation. Congress would do well to stick to the reliable keys to growth spelled out in The Heritage Foundation’s Index of Economic Freedom: strong property rights, low tax rates, low regulation, limited government, and especially free trade.
Tim Kane, Ph.D., is Director of, Marc Miles, Ph.D., is Senior Fellow in, and Anthony Kim is Research Associate in, the Center for International Trade and Economics at The Heritage Foundation.
[1] Tim Kane, “The Brutal Price of a Dollar,” Heritage Foundation Backgrounder No. 1855, May 31, 2005, at http://www.heritage.org/Research/TradeandForeignAid/bg1855.cfm.
[2] See Ibid. and Tim Kane and Marc Miles, “Trade Deficits, Dollars, and China: Wrong Lessons Make Dangerous Policy,” Heritage Foundation WebMemo No. 743, May 12, 2005, at http://www.heritage.org/Research/Economy/wm743.cfm.
[3] A.B. Bernard, J.B. Jensen, and P.K. Schott, "Importers, Exporters and Multinationals: A Portrait of the Firms in the U.S. that Trade Goods," NBER Working Paper No. 11404, June 2005.
Help me out here. Is Thomas Friedman the guy whom He Who Should Not Be Named was fond of quoting, or was that some other guy?
I think he works for the New York Times. If He Who Should Not Be Named quoted him, I never saw it. I was too busy laughing at his quoting of Marx and his misquoting of Jefferson.
Now I remember. Paul Krugman is the guy.
That part I knew but what I've been figuring out here is that he doesn't seem to want to understand. I thought maybe he'd click a few links and read up a bit. Our side doesn't mind learning a new trick once in a while, but apparently not their side. Sometimes they seem to put in so much effort avoiding new info that I worry about them hurting themselves or something.
Hardly what I believe.
Hayek, the self-described Bunkean Whig, didn't fully know or comprehend American history, economic or political. But he knew Germany's.
Writing in England in Spring of 1944, trying to influence a phalanx of intellectual leftists in the universities...Hayek was reacting to NAZI-ism. Describing how their universal planning was essentially leading to totalitarian. But here is where you misunderstand Hayek, and mistate him:
By “planning” Hayek did not mean any kind of preparation by individuals or governments for the future; he meant only “central direction of all economic activity according to a single plan.”
I like Dr. George Nash's essay on Hayek the best, Hayek and the American Conservative Movement. Pretty fair and sympathetic summation, I commend it to you.
I suspect his pea-brain is full. If he learned a real fact, it'd push several of his "facts" out of his ear.
Skimmed through both of the main recent ones to be conversant with what the White House staff is currently reading. Check 'em out from the library. DON'T Feed the Beast, for heavan's sake.
They don't buy raw materials from us with their export earnings. If we sold them lots of say, lumber and iron ore, then there wouldn't be as much of a trade deficit. They buy US assets --stocks and bonds. This worsens the trade deficit.
Then again, if you don't care then I won't worry about it.
You need to care less about what's good for our pocketbooks and more about the what's good for America.
If I buy a Chinese company and it doubles in value by the time I sell it, I will have sold twice as dollar valued assets as I'd originally purchased. I'll be getting rich but the trade deficit will be made worse.
OK, we all know that this is what everyone's been doing, but starting right now we have to decide if this really is the right thing to do.
lol!
Do you always answer a question with another question?
The PC name for your post is "Agenda 21"
We may be few in numbers but I think we'll give them something to remember us by.
Let me know if you find anyone like that on these threads --I hate those guys!.
So we're selling assets and buying goods and foreigners own more of America than vice versa. It's a trade deficit. The only thing that can reduce a trade deficit just happens to also be the only thing that can reduce foreign control of America; namely, buying foreign companies. Of course, we question the motives of anyone who'd ever think of doing that.
Wait a second --how come it's OK for the Chinese to own American companies, but we don't want Americans to control Chinese companies? Who's side are you on anyway?
Well make up your mind, which is it --do we want more Americans owning Chinese companies, or do we want more Chinese owning American ones?
Unless maybe you want some kind of huge monster federal bureaucracy/police state that keeps all foreign investment out and all American investment in --now that's what I'd call really big government!
Who is 'we'?
The un-PC name for your post is "worthless."
Everything must be reduced to the absurd. If a thread runs long enough, one's use of pronouns is susceptible to challenge. I congratulate you on making it to this point faster than I.
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