Malpass Takes Aim at Trade Grumblers

The US has a powerful, growing economy, yet we project the "wrong path" of an aging society drowning in debt and burdening the world with risk. This gloomy fiction distorts our domestic and international economic policy-making. We should reject it and launch a more energetic vision of global prosperity built on economic freedom and dynamism.

Thus David Malpass, chief economist at Bear Stearns & Co, opened his FORBES column "The Triple Deficit Paralyzes Policy Vision" last month. Being a big fan of Steve Forbes (I wish he'd landed the White House if he could have been remotely electable), this is very similar rhetoric.

The trade deficit is a terribly convenient avenue to take pot shots at free trade. Wavering support creates a notably hostile climate for free traders, as was evident in the last election. Along with other issues of baiting economic ignorance--such as previously addressed tax cuts, "negative savings rates," and "skyrocketing deficits," protectionism baits the fears of American blue-collar workers, and quickly gains clout.

While protectionism certainly wasn't a hot-button issue, there are more than a couple of disturbing signs. The Wall Street Journal reports, "Pew Research data show the sense of vulnerability among workers. A recent poll shows low-skilled U.S. workers are over 40% more likely to believe their jobs could be sent offshore."

Malprass continues:

The US is the world's biggest producer, exporter, seller, saver and innovator. On average it adds 30% more to global GDP each year than does all of Asia (45% more in 2006), with one-tenth the population. US employment, wages and profits are at record levels. We're the biggest source of foreign aid, and the only major source of its most effective component: private donations.

Despite dire fiscal predictions the federal budget is on a trend that could bring it into balance at the end of the decade, with a debt-to-GDP ratio well below the Clinton Administration's average. Talk of our recklessly low "savings rate" circles the globe yet arbitrarily excludes the economy's trillions of dollars of compound gains. Calculated properly, US households have more financial savings--and in mos years add more-- than the rest of the world combined.

The loudest hue and cry is over our trade deficit, which is blamed for dragging down our economy, as well as everyone else's. Yet the view that our trade deficit costs jobs and adds to global financial risk can't be reconciled with our 4.5% unemployment rate and the eager flow of long term, low-cost foreign capital into US investments.

Fear of fiscal, trade and savings deficits as crippled domestic policy-making..."

(emphasis added)

Steve Forbes also explains:

Anti-free-trade sentiment is being fueled by our record trade deficits. Congress is full of destructive proposals... While most economists know well the virtues of free trade, they are still tied to the notion that trade deficits or surpluses matter. A surplus is equated to a country's turning a profit and a deficit to a nation's running at a loss. But nations don't trade with each other; individual sand entities do.

FORBES has had a deficit with its paper supplier for more than 89 years. Yet this 'imbalance" persists because each side thinks the transaction is beneficial... CNN has a deficit with Lou Dobbs, it pays him far more than anything he actually buys from the network General Motors similarly has a deficit with CEO Rick Wagoner Yet the red ink continues because the parties find it advantageous for it to continue. CNN and GM each get the services of the individual employed, and each individual gets cash and other forms of compensation in return...

While preaching free trade, the economics profession helps undermine it with this zero-sum mentality focusing on so-called balance of trade. Remember, this year marks the 400th anniversary of the settlement in Jamestown, Va. Since that time, America has run trade deficits for all but some 50-odd years. Just look at what all that economic sinning has done.

Simplistic? Perhaps. True? Let me know.