On Friday morning, the Bureau of Economic Analysis released its monthly report of the U.S. balance of trade for the month of October. The October trade deficit marked a very significant, sad milestone that went completely unnoticed by the media, perhaps because I’m the only one tracking this data. In October, the cumulative U.S. trade deficit since our last trade surplus in 1975 reached $11.01 trillion (expressed in current dollars).
It’s no mere coincidence that the growth in the cumulative trade deficit tracks closely with the growth in our national debt over the same time frame. Deficit spending is used by the federal government to offset the economic drain caused by the trade deficit. Dollars spent on imports return to the U.S. in the form of purchases of treasury bonds – bonds used to fund deficit spending. The following is a chart of the growth in the cumulative trade deficit vs. growth in the national debt. (Note that the trade deficit figure for 2011 is through October, while the national debt figure is current.)
Now, imagine the effect on our economy if we had that $11 trillion back – real money invested in the economy instead of bonds held by China, Germany and Japan. No one would be talking about the solvency of Social Security and Medicare. There would be no unemployment problem. There woud be no debt problem.
In fact, the effect would be doubled, since the effect of the trade deficit upon GDP (gross domestic product) is understated by half. Why? Because the trade deficit is merely a subtraction from GDP. As an example, suppose someone buys a Japanese car for $20,000. That reduces our GDP by $20,000. So, if that person forgoes the purchase of that car and buys nothing at all, our GDP rises by $20,000. However, if that person then buys a domestic vehicle for $20,000, then another $20,000 is added to GDP. That’s a $40,000 swing in GDP. So if $11 trillion in imports were replaced with domestically-made prodcuts, our GDP would grow by $22 trillion. Compare that to the economic stimulus programs the Obama administration has pushed to jump-start the economy, programs of a few hundred billion. Now it should be clear just how damaging our trade deficit has been. Simply changing our trade policy to assure a balance of trade would have the same effect as a $22 trillion economic stimulus plan, but would cost absolutely nothing.
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By the way, notice that the growth in the national debt has raced ahead of the growth in the trade deficit before, back in the early 90’s, when the economy was also mired in a recession. It appears that we’re repeating the same pattern. The growth in the debt is likely to be slowed in the next few years, given the pressure to rein in our spending. But it’s unlikely that there will be any let-up in the growth in the cumulative trade deficit, barring a radical change in trade policy. So I expect these lines to converge again.