President’s Debt Commission: Thinking Inside the Box

http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentoftruth12_1_2010.pdf

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:

National Debt vs. Cumulative Trade Deficit

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.

Advertisements

13 Responses to President’s Debt Commission: Thinking Inside the Box

  1. Mark Hall says:

    At least the international community can never accuse the U.S. of not being generous.

    U.S. Trade Policy – “The Gift That Keeps On Giving”.

  2. MikeF says:

    Good Morning Pete,

    Certainly I agree that trade imbalance is an issue, but not the only issue, and certainly not the most important issue.

    When we view the economic history that you reported in your article, one must consider that the growing trade deficit that began in 1976 may well have occurred from far broader evolving circumstances than those of rule making or corrupt government that affected trade. In other words, the elements for consideration in our hypothesis should be broad, as we consider the unyielding Law of Cause and Effect.

    The crutch of the macro problem has never changed and never will; exponential growth in a finite world is both physically and mathematically impossible. Can we prolong the collapse, certainly, and we have with a $Trillion + annual deficit, $14 Trillion National Debt, $16 Trillion private debt, and $53 Trillion unfunded Federal Debt. All collecting compounding interest.

    Can we restore debt capitalism to a point of paying these debts, absolutely not.

    As this impossible scenario that we stubbornly embrace as our sole economic platform reaches the once distant milestones on its journey to the predictable end, dire circumstances begin to be met at every turn.

    One of those dire circumstances, and the source of much of our trade imbalance, was the U.S. reaching peak oil in 1970. Since that date, we have reached nearly peak everything, including population. In 1971, the U.S. was forced to abandon the gold standard. In 1973 the OPEC oil embargo created yet one more of these dire circumstances. Our solution; use more oil.

    Our problems are complex and complex systems tend to fail at a magnified rate as compared to basic and simple underpinnings.

    As we watch our banking systems fail, it’s not a mystery as to why; the exponential element of compounding interest has reached peak for a closed environment. It’s that simple.

    While I would be delighted to see America attempt to restore our manufacturing might; should we do so, we would immediately hit multiple supply barriers, oil being the first. Crude hit $90 this week in a down economy!!

    As individuals, there are actions that will help us to weather the storm. As a nation of 310 Million people and growing, we have seen the top of the mountain.

    • Pete Murphy says:

      Mike, while I don’t disagree that exponential growth is unsustainable and, in fact, has already raced ahead of what can be sustained, it can’t be blamed for our current financial mess. There are plenty of nations out there that have grown to ten times our population and to virtually the same standard of living as ours whose economies are rolling in the dough. In nearly every case, the only difference between us and them is that they have huge trade surpluses while we have a corresponding trade deficit. At this moment in time, it’s U.S. trade policy that has our nation in such a financial mess. As I’ve said, it’s no mere coincidence that the growth in our national debt almost exactly matches the growth in our cumulative trade deficit.

      Don’t get me wrong. I’m certainly not advocating any further population-based growth. In fact, as you know, I’ve been advocating a reduction in U.S. population and a more drastic reduction in world population from the outset. And there’s no doubt that the economy of the world as a whole is feeling the effects of exponential growth -most notably in rising global unemployment.

      There is such a thing as real economic growth – growth in our standard of living – that isn’t dependent on population growth (at least not any more) and that’s truly beneficial and should be nurtured and sustained. Were it not for such growth, we’d still be a world of hunter-gatherers ekeing out short, miserable existences in caves. I say “at least not any more” because some population growth was essential to the productivity gains necessary to free up labor to work on new innovations. But we’ve long since passed the point where we have a sufficient supply of labor to research and develop anything we could possibly need.

  3. MikeF says:

    Pete,

    You stated, “There are plenty of nations out there that have grown to ten times our population and to virtually the same standard of living as ours whose economies are rolling in the dough.” Could you elaborate on which countries these are?

    You also replied, “..it’s no mere coincidence that the growth in our national debt almost exactly matches the growth in our cumulative trade deficit.” That is my point exactly, but what are the root causation’s of the trade inclining trade deficit? Our circumstances change each time we hit another peak, such as peak oil, peak water, peak expansion, etc.

    • Pete Murphy says:

      China (representing one fifth of the entire world’s population) is the most obvious example of a trade surplus country rolling in the dough.

      You lost me with the last sentence. Regarding your last question, the root cause of the trade deficit is free trade with nations far more densely populated than our own.

  4. MikeF says:

    Pete,

    Now I’m the one that is not following the conversation. Your answer to which countries enjoy “virtually the same standard of living as we do with 10 times the population,” was China? I hope that you are joking Pete. The majority of Chinese live in abject poverty and earn about 55 cents per hour while working 10 hour days, six days per week.

    As to clarification of my last statement, when any nation exhausts their critical natural resources, such as our oil supply, the trade deficit goes up as those necessary resources MUST be imported. Add to this the fact that American manufactured products are so expensive (due to our average standard of living)that few other nations on earth can afford our products, given that they have an option; which they do.

    Therefore, we have INCREASED imports due to resource shortages and DECREASED exports due to lower cost foreign options. These unfortunate circumstances are a matter of undeniable mathematics and natural physics at play. The law of supply and demand has collided head-on with the law of cause and effect.

    Now imagine returning all of our manufacturing to the U.S. and importing all of the raw goods necessary to sustain a $14 Trillion economy that requires growth each and every year just to stay even. The resource and trade war that would ensue would make WW-II appear as a skirmish.

    Do I wish for jobs to be returned to America? Absolutely. Did the folks on the Titanic wish for lifeboat seats? Absolutely, but they were physically nonexistent. Physics does not yield to human desire.

    At the point of this writing, riots are occurring in England and across many areas of Europe in protest of the dire circumstances brought on by the failure of debt capitalism. We’re next.

    • Pete Murphy says:

      I was using China as an example of a trade surplus country that’s rolling in the dough. Germany and Japan would be examples of even more densely populated countries rolling in trade surplus dollars. Switzerland would be another. How about Denmark? True, they’re only as densely populated as China, but the point is still valid. How about Israel? Taiwan would be another example. So is South Korea. Let’s see, then there’s the Netherlands and Belgium. We don’t have trade surpluses with them, but they’re about ten times as densely populated as the U.S. and are financially sound.

      I agree with you about the imported oil. That’s a big part of the deficit, a part that would go away with population reduction, which I’ve advocated from the beginning.

      What difference does it make if the raw materials required to manufacture products for a $14 trillion economy are used in China or the U.S.? Bringing the manufacturing back to the U.S. would actually reduce overall global consumption of resources as the economies of export-dependent nations would collapse. Which is the bigger problem? The U.S. trying to maintain a high standard of living with a population density of 85, or China trying to do it with a population density of 360? Or Germany with a density of 600? Or Japan with a density of 850? If there’s an overpopulation problem (a rhetorical statement), then wouldn’t it be better for those nations to be forced to face the music? Is it America’s fault that they multiplied themselves into such a fix? Is it our resonsibility to function as a relief valve and an enabler so that they can continue to grow? Obviously not. It’s time for them to stew in their own juice.

  5. MikeF says:

    Wow Pete, you truly have gone off the deep end of the pool with this one. You clearly wrote that the above mentioned nations share a similar quality of life compared to Americans. Please buy a multi-nation ticket and go take a first hand look around.

    I now understand your secretive motive. You use your theory to justify the massive per capita consumption of Americans and clearly state that it is our right to consume the worlds remaining resources due to our relatively sparse population density. What a great theory Pete.

    I see what you mean now, those Chinese shouldn’t even be allowed to live as they are using resources that should rightfully be ours due to our low density population.

    We are 4.8% of the world’s population and utilize 25% of all global oil output and 30% of the worlds materials output and we deserve to use more because our population density is low. WHAT!!

    Your views that were brought out in this last response force me to sign off for the last time.

    • Pete Murphy says:

      Mike, you’re not hearing what I’m saying. I’ve said over and over that the U.S. needs to cut its population to a sustainable level, as do other overpopulated nations. Geez, it’s the whole basis of my theory. EVERY nation and EVERY person has a right to live at as high a standard of living as possible. But no nation has a right to another nation’s market in order to sustain their standard of living at an artificially high level. You now seem to be arguing that we should simply cut our standard of living in order to make room for more and more people. If we do that – cut our per capita consumption – what will everyone do for a living? The only way out of this mess that leaves everyone able to exist at a high standard of living is by cutting our population.

      You see the whole “exponential growth/debt capitalism/national debt” thing as the cause of our trade deficit. I see the cause and effect exactly the opposite. I don’t think I can ever convince you.

  6. ClydeB says:

    Let’s play nice guys. I depend on your level headed guidance in these times.

    The exploding global population numbers has created an unmanagable and unsustainable demand for energy, water and raw materials but not labor. The unneeded labor supply is in excess and growing.

    International financial razzle-dazzle with the likes of “credit-swaps” and puts and calls with straddles thrown in for good measure have destroyed any semblance of honest straight forward business dealings.

    Politicians have a singular goal, that being re-election. They will spend as much as they can to ensure that goal.
    Throw in a large measure of misguided environmentalists and the results is chaos.

    Every newspaper has articles and stories calling for more growth.
    Congress is voting for amnesty for illegal foreign nationals.
    The president’s deficit commission came back with a recommendation to INCREASE spending by 2-3% over the level that got us in to the mess we’re in.

    No matter what the odds against, we must keep the pressure on to reduce the population growth, the trade deficit, budget deficit, excessive spending, foreign product imports and restore asset backed currency.
    Now I’ve had “my” rant.

    • Pete Murphy says:

      Thanks, Clyde. Well said. As I’ve said before, Mike and I approach the whole growth issue from two different angles. I don’t see why one necessarily precludes the other. We both bring a valuable perspective to the table.

      That said, I still feel compelled to defend my position once more. I’ve presented hard data here that closely correlates the cumulative trade deficit with growth in the national debt. Trade dollars are collected at the central bank of the foreign nation in question (let’s say China). The Chinese central bank then uses those dollars to purchase U.S. treasuries. The Treasury issues those bonds to fund the deficit spending that is needed to offset the drag on the economy caused by the trade deficit. To argue that the debt is the cause of the trade deficit is to argue that the Treasury sells bonds to goose the economy and the trade deficit is then used to suck that money back out of the economy. That reverse logic doesn’t make sense. Why would you intentionally suck the money back out of the economy? That defeats the whole purpose of issuing the bonds in the first place. Clearly, deficit spending is used to offset the drag of the trade deficit.

  7. Ken Hoop says:

    China implemented a down-growth birthrate policy but China’s government is not financial capitalist dominated and its elite, unlike that of the US, has a comparatively nationalist long-term outlook of what’s best for the nation. So all this talk of systematic population reduction in the US is a non-starter.

    It would take populist revolution in this country to
    give that a chance. Almost the same for implementing protectionism which is “nativist” (used complimentarily) and organic.

    So some of the friction between Pete and Mike could be itself reduced to the theoretical.

    • Pete Murphy says:

      Ken, population reduction is a non-starter because the field of economics doesn’t recognize the role of population density in ruining the economy. That’s what I’m all about here – trying to introduce new thinking into the field. Throwing up our hands and saying that it can’t be done isn’t an option. It will be done one way or another – either through a conscious effort to rein in immigration and reduce the birth rate slightly, or a higher death rate will do it for us. Most people, if they understood those options, would choose the former and get behind the effort.

      I don’t agree regarding protectionism. That would be far easier to implement and more readily accepted. The world is edging closer to it every day. Protectionism has a long history of proven success. Heck, even the WTO uses it to boost the economies of two thirds of its member states (but not the U.S.). I don’t think it’s such a stretch to imagine that the U.S. will soon grow tired of being on the dirty end of that stick.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: