Economist Peter Morici: The Trade Deficit is An Enormous Drag

The linked article is about Dr. Peter Morici, professor at the University of Maryland and former International Trade Commission economist, who bucks the trend of globalization cheerleading economists and sees our trade deficit for what it is – “… an enormous drag …”

Since Dr. Morici hasn’t read my book yet (as far as I know), he still believes that the deficit is due to currency manipulation, especially by China.  So he hasn’t come around to my theory that the deficit is actually due to disparities in population density between the U.S. and nations like China, but at least he acknowledges that the deficit is a real problem.

The $62.2 billion July deficit reported Thursday by the U.S. Commerce Department amounts to economic opportunity shipped abroad, Morici said in a statement.

“Simply, money spent on Middle East oil, Chinese televisions and coffee markers, Japanese and Korean cars can’t be spent on U.S. made goods and services, unless offset by a comparable amount of exports,” he said.

“Since U.S. imports exceed exports by more than 5 percent of GDP, the trade deficit creates an enormous drag on demand for U.S.-made goods and services. Along with the credit crisis and resulting slowdown in new housing and commercial construction, the trade deficit is driving up unemployment,” he said.

But I draw your attention to this article because of the very last paragraph:

Morici estimated balanced currencies would cut the deficit in half, increase the gross domestic product by $300 billion and restore 2 million U.S. manufacturing jobs.

I find it very interesting that he still believes we’d have a significant deficit (it would only be cut by half) even if there was no currency manipulation.  Whether or not we agree with his estimate of how much it would be cut, if at all, this seems to be a tacit admission that there is still something else at work causing the deficit.  If he sees a huge benefit to be realized by cutting the deficit in half – increasing GDP by $300 billion per year and restoring two million manufacturing jobs – then isn’t it logical that these benefits could be doubled by eliminating the remaining half of the deficit as well?  Obviously!  GDP would increase by $600 billion and four million manufacturing jobs would be restored. 

If Dr. Morici believes that currency manipulation is only half of the problem, then it would clearly be worth our while to figure out what’s causing the other half and to take action to correct it.  Well, if you’ve read Five Short Blasts or if you’ve been following this blog, you already know the cause and know what needs to be done.  The trade deficit will never be eliminated until we extract compensation from overpopulated nations like Japan, Germany and China for their inability to provide access to a market equivalent to ours.  Yes, this means tariffs, indexed to their population densities. 

But, again, at least there’s economists out there who recognize the damage being done by misguided trade policies.  Teach your students well, Dr. Morici.  We need a whole new breed of economists.

4 Responses to Economist Peter Morici: The Trade Deficit is An Enormous Drag

  1. nextgen08 says:

    Amazing article! I was just thinking about this issue the other day. I used to have simile for economics. It goes something like this, and keep in mind that I am not scholar:

    Think of every country as having a big bowl of jelly beans. Some bowls are bigger than others. Every time you sell something, you get another jelly bean. Every time you buy something you give a jelly bean away. The problem with trade imbalances is not the trade in itself, it’s that our bowl of jelly beans is getting depleted. The only way to fill up our bowl again is to either sell something (exports) or make more more jelly beans (print money), if everyone started making more jelly beans then we would all start to get sick of jelly beans and wouldn’t want them as much any more. (Decreasing value of a currency) With China, they aren’t making more jelly beans, they are just telling the world that their jelly beans are better than they really are, and the world is going along with it.

    Now, this is a really crude example, and probably inaccurate, but with my limited knowledge it’s the best I could come up with. You are right, something has to be done about these nations which artificially inflate their currency, and your idea of indexing trade to population is very interesting. I hope to read more about this in the future.

    Jerame Clough
    -Next Gen Politics

  2. Pete Murphy says:

    Jerame, I love the jelly bean example. In fact, I thought of including a similar example in my book, but it got a bit elaborate and I since forgot about it. But it may make an interesting post.

    I have a litte different “take” on your example, though. The problem is not that China fools us into thinking that their jelly beans are better. The problem is that the Chinese are able to consume very few jelly beans because they are so crowded, there’s no place to put them. On the other hand, they are fully capable of producing an enormous supply of jelly beans. So, if we attempt to trade freely with them, we take on their jelly bean-producing labor force, but get very little jelly bean market in return. The result is an automatic deficit. We start importing jelly beans and shut down our jelly bean factories.

    See what I mean? It starts getting complicated!

    The example I was working on involves bowls of jelly beans, representing manufactured products, and bowls of pennies, representing payments for those products. Stay tuned! If I use it, I’ll credit you with the idea.

  3. The trade deficit and the hearings in Washington to bail out the US auto industry both have to be dealt with by improving manufacturing competitiveness in the US. Many would argue that the Big 3 leadership and their Union deserve a kick in the pants. Let’s not forget that our cheap energy and cheap landfill policies also have contributed to poor product positioning by many of our US based manufacturers over the past 20 years as markets have globalized.

    If any of you have spent more than a few days in Japan and outside of Tokyo, you would know that Toyota and all of their suppliers work till 9 – 11 PM every night, to keep up with their self imposed lifestyle and approach to business. I frankly don’t want to see our manufacturers go under to this kind of competition, and leave a country to my children that flips burgers, provides health care, but has no manufacturing base.

    Let’s take this crisis to drive manufacturing competitiveness on a national basis.

  4. Pete Murphy says:

    Chuck, I agree that we should be as competitive and productive as possible, within reason. I don’t believe that we want our society to become the kind of ant-hill society found in Japan however, where people live only to work.

    It’s impossible to “compete” our way out of this trade deficit. For every improvement we make in cost structure and in productivity, the foreign suppliers will simply match us dollar for dollar in a race to the bottom. The problem is that we give away access to our market but get nothing in return. Japan imports one American car for every 27 they export to us. It’s time for countries like Japan to start pulling their weight in the global economy. Otherwise it’s up to us to decide when enough imports are enough.

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