The report issued last week by the President’s “National Commission on Fiscal Responsibility and Reform” (link provided above), while laudable for emphasizing the seriousness of the problem of our runaway debt and the urgency of addressing it, the report never identifies the root cause of our economic problems. The commission clearly boxed itself into examining only taxation and spending. It seems that never once did they stop to consider what may have prompted the use of deficit spending to prop up the illusion of economic growth and prosperity in the first place.
If the commission had gone back in time, tracked the growth in deficit spending and made an attempt to correlate it with other things going on in the economy, they could easily have identified trade policy and the erosion in our balance of trade as the root cause of our debt problems. If you’ve read my book and followed my blog, you’ve heard me claim many times that it is no mere coincidence that, since our last trade surplus in 1975, the growth in our national debt almost exactly matches our cumulative trade deficit. If you’re still skeptical, the following chart of the data should erase all doubts:
Notice that 32 years after our last trade surplus in 1975 (in 2007), the growth in the national debt and the cumulative trade deficit were exactly the same!! In the three years since then, a gusher of deficit spending to brake the slide in the economy has the debt racing ahead of the cumulative trade deficit. We can expect another lame attempt to slow the rise in the national debt, just as we saw in the late ’90s. But without a change in trade policy it will be impossible to stop. Deficit spending is the only mechanism available to plow trade deficit dollars back into the economy. Without deficit spending, our banks would soon be drained of their reserves by an arterial bleed of over 500 billion trade deficit dollars per year. Yet, this simple fact has completely eluded the president’s debt commission – probably not surprising, given that the commission was staffed and led by people who have perpetuated this trade regime.
A change in trade policy back to the use of tariffs to assure a balance of trade would easily boost revenues by $500 billion to $1 trillion per year, paid mostly by foreign exporters but also boosting tax revenues through a $1 trillion boost in GDP. This dwarfs anything included in the debt commission’s report, and does so not just painlessly, but by actually improving the economy.
There are two simple truths about the economy: (a) taking money out of the economy, regardless of whether it’s done by taxation or by a trade deficit, is bad news for the economy; and (b) putting money back into the economy, whether done through government spending or through the reversal of a trade deficit, is good news. But regardless of how it’s done, the income must balance the outflow over the long haul. The problem with ignoring trade is that it leaves the taxation/spending side of the equation permanently out of balance, or assures a slide into depression if balance is attempted. By boxing trade policy out of their thinking, the president’s debt commission assures us of only one thing – failure.