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“It is a general popular error to suppose the loudest complainers for the public to be the most anxious for its welfare.”     Edmund Burke

November 12, 2006

American Economy As A Family

by Brad Warbiany

Over at Control Congress, there’s a post about How Bad Trade Deals are Destroying the Middle Class. It was a call for greater protectionism, because the authors believe that we are not negotiating trade deals that are free:

These days comparable numbers are imports are 16.22% of GDP and exports are 10.46% of GDP. Per se, there is nothing wrong with trade growing as a percent of GDP. However, the brutal reality is that our nation can no longer pay its bills. Imports of goods are almost double exports of goods. We enjoy a small (and shrinking) surplus on services and are now in deficit for payments (profits received from overseas US investments versus profit earned by foreign investment in the US).

If you could only pay half of your bills, your debts would be soaring. Guess what? So are the debts of the United States. Of course, the national debt is growing and more than 50% owned by foreigners. However, the debts of ordinary Americans are rising as well and a growing percentage are owned by foreigners as well.

The trade debate is usually depicted in terms of “cramped, narrow minded, locally oriented protectionists” versus “visionary, open minded, free trading globalists”. This caricature is largely correct. However, that doesn’t mean the protectionists are wrong. With America going broke, they are at least on the right side of the issue..

Now, I’m reflexively against protectionism. I could point to just about every post at the Eidelblog, as Perry is very strong on this subject, but a very recent post at Coyote Blog makes the point even better. Even without the trade deals being ideal, we’re likely to be getting the better end of the deal than the Chinese people.

But I decided to go a different route. I drew an analogy in the comments section over there, and I thought it was a pretty good one:

Is America going broke, or is the US Government going broke?

Think of it like a household. You’ve got two working parents who own a small business, paying their bills, getting increases to their income every year, etc. Overall, they’re doing fine. Then you’ve got a spoiled brat of a child, who wants to spend, spend, and spend some more, but the parents have put on an allowance.

The US Government is the spoiled child. That’s not a problem so far.

The problem is when you give the spoiled child a credit card. Now the child can get themselves into trouble and require the parents to bail them out. And if the child spends too much, it can overwhelm the parent’s ability to pay the bill. At the very least, it forces the parents to put off capital expenditures that could grow their small business (and thus their income). They want to go to the bank to get a loan for their business, but the bank won’t lend to them (it’s got it’s money lent out through its credit card branch, and their child’s debt make them a bad risk).

The parents are the US economy. The child is the government. The credit card is public debt, and China is the bank/credit card company.

The problem has nothing to do with trade. The problem has to do with a government that is spending more money than it’s taking in, and is getting so far in debt that the people giving it an allowance (the taxpayers) are in danger of being overwhelmed paying off its debt.

A trade deficit isn’t a bad thing, if China were spending its money investing in US equities/etc, that could be fueling economic growth. Instead they’re investing their money in T-bills, fueling government spending that is little more than a sink-hole, affecting economic growth little (if at all). Then, when the bill comes due, the government will have to take money out of the economy (further damaging economic growth) to finance their burden.

If we had a trade deficit with China, and they were using their excess dollars to invest in American business, we’d be in good shape. We can use that investment to make more jobs here than what we outsource to “over there”. Unfortunately, we’ve got a spoiled child spending our money, giving us back nothing useful for it, and sucking up the money we need to build our economy.

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8 Comments

  1. Should we bring back slave labor to compete with the salves in China? Would that not be fair trade by your definition?

    Should we turn a blind eye to Mexico and China violating all environmental standards and sticking us with the clean up bill?

    Should have no laws at all to protect intellectual property rights? If so why would any Company ever do any research and development?

    Do you think we have a free trade deal today with China today and why?

    Why would you call a protectionist one who enforces laws? You sound like the open border supports of cheap unregulated illegal immigration.

    I have a few more questions, if you have any answers to my questions. My bet is change the topic and subject, if you answer at all.

    Comment by John Konop — November 12, 2006 @ 2:33 pm
  2. Should we bring back slave labor to compete with the salves in China? Would that not be fair trade by your definition?

    There’s a big difference between low-wage workers and slaves. If you care about the “slaves” in China, you would support trade, because it’s the best way to increase their standard of living. But as to the point, we shouldn’t compete with them. We should let them build cheap products, freeing up Americans for more productive tasks. This isn’t a zero-sum game.

    Should we turn a blind eye to Mexico and China violating all environmental standards and sticking us with the clean up bill?

    Because if we don’t trade with them, they’ll reform their ways? Again, trading with them is the best way to improve their standard of living, which is the most realistic way to get them to start paying attention to these environmental standards.

    Should have no laws at all to protect intellectual property rights? If so why would any Company ever do any research and development?

    Does that mean we shouldn’t engage in any trade with them at all? Or does it mean that you need to take special precautions when trading with someone who might try to steal your ideas?

    As for the incentive to produce, has that stopped the open-source movement?

    Do you think we have a free trade deal today with China today and why?

    No, it’s not completely free. And I think we should do what we can to engage them and improve the situation. I just think that protectionism hurts us more than it hurts them. It’s better for us to keep with the status quo of a semi-free trade than it is to break off our trading relationship, hoping to force them into compliance.

    Why would you call a protectionist one who enforces laws? You sound like the open border supports of cheap unregulated illegal immigration.

    Yeah, I’m a pretty open-border guy. I like the Bush idea of a guest worker program, because I think the more people we have in this country working, the better. I’m not a complete open-border guy for security reasons, but I don’t see a problem with letting far greater numbers in than our official immigration policy allows.

    And yes, I completely support breaking laws, if they’re stupid laws. For example, when we have to get information for social events to the members of our neighborhood (my wife is the social director), I put those fliers directly into their mailboxes, despite the fact that I’m breaking federal law. I enjoy it. It’s a nice added thrill. And believe me, if anyone tried to enforce that law, I’d have more scathing words than calling them protectionist, despite the fact that protectionism of an inefficient government monopoly is exactly what they’d be engaging in.

    I have a few more questions, if you have any answers to my questions. My bet is change the topic and subject, if you answer at all.

    I’ve got a question… What’s with the attitude?

    Comment by Brad Warbiany — November 12, 2006 @ 5:04 pm
  3. America is becoming a consumerist economy at so many levels. The percentage of jobs created to support consumption networks is outbalancing jobs to produce stuff from raw stuff, and increasingly so. This is the hollowing often claimed, and Wal-Mart is the largest indicator of that. The job figures taken together from the opposing categories of consumption vs production, may even be at a wash, allowing the current situation to mask the underlying problem. What happens when the rug is pulled from under the current situation and THINGS become too expensive? That could happen if the Chinese/MNC’s build alternative markets and then feel free to downgrade America’s debtors on a whim. The question is how fast all that could develop.

    Comment by Phil — November 12, 2006 @ 5:27 pm
  4. Brad,
    One niggle with your post.

    “The credit card is public debt, and China is the bank/credit card company.”

    China’s portion of our total national debt is about 4%. China owns about 7% of publicly held debt.

    Why is China the bank in your analogy? It isn’t the largest holder of treasury securities. Americans are (55%). It isn’t even the largest foreign holder of treasury securities.

    Comment by John — November 12, 2006 @ 6:06 pm
  5. John,

    I used China because the original post was related to imports/exports.

    In my opinion, the key is more that hundreds of billions of dollars of foreign and domestic dollars are going to fund government spending that will do little to stimulate the economy, when it could be going into the free market where it might accelerate economic growth.

    It’s probably better public policy to pay for our spending with foreign investment than it is with American tax dollars (as is argued in the Coyote Blog link, as it’s more likely that excess American dollars will stay here than go elsewhere, and it’s likely foreign surpluses will come here). But I think it hurts us to be running these deficits anyway. Every dollar invested in T-bills, whether invested by China or by Grandma, doesn’t do as good to stimulate the economy as that dollar invested in the free market.

    Comment by Brad Warbiany — November 12, 2006 @ 6:15 pm
  6. [...] Brad Warbiany of The Liberty Papers makes the sound assertion that trade deficits are not bad in and of themselves. But our particular trade deficit with China is supporting excessive U.S. government spending. A trade deficit isn’t a bad thing, if China were spending its money investing in US equities/etc, that could be fueling economic growth. Instead they’re investing their money in T-bills, fueling government spending that is little more than a sink-hole, affecting economic growth little (if at all). Then, when the bill comes due, the government will have to take money out of the economy (further damaging economic growth) to finance their burden. [...]

    Pingback by Edutheria » Blog Archive » Trade deficits and government spending — November 13, 2006 @ 3:13 pm
  7. If we had a trade deficit with China, and they were using their excess dollars to invest in American business, we’d be in good shape. We can use that investment to make more jobs here than what we outsource to “over there”. Unfortunately, we’ve got a spoiled child spending our money, giving us back nothing useful for it, and sucking up the money we need to build our economy.

    This is the most accurate and pointed analysis I have seen. There may be a level playing field in open trade and open borders. But there will always be a team who plays to win, and one just dressing out.

    Comment by Larry Stanley — November 22, 2006 @ 12:03 pm
  8. The question is who is the “spoiled child”? Hint, it’s not China and it’s not the American citizen.

    Comment by Adam Selene — November 22, 2006 @ 12:15 pm

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