What About the Trade Deficit?

The much-feared federal budget deficit is back in the news; the latest projections show it could be twice as high in the coming year as previously thought. Should anyone be worried?

One way to put this borrowing in perspective is to compare it to a much more glaring example of spending beyond our means, the U.S. trade deficit, which is piling up debt at more than three times the rate of our federal government's deficit spending. This orgy of borrowing has been breaking records for several years now, but it hasn't gotten a tenth of the attention that the federal budget deficits have received.

Of course, most people don't know the difference between our federal government budget deficit and the trade deficit, so let's get that straight first. The federal government runs a deficit when it spends more than it collects in revenue (mostly taxes). When this happens, it adds to our national debt.

The trade deficit is another story. When we (mostly the private sector) import more than we export, we run a trade deficit. When that happens, it adds to our foreign debt. (Think of a household that is spending more than it earns; it must borrow or sell assets to pay for the difference).

Which is the bigger problem? While many a politician has bolstered his conservative credentials by railing against the federal government for "mortgaging the future of our children and grandchildren," this slogan is more meaningful as a description of the foreign debt.

Here's why: Future generations of Americans may inherit the debt that our government is accumulating, but they will also be holding the interest paying bonds. So it is somewhat misleading to make the national debt look like a huge transfer of income from the innocent generations of the future to the profligate present.

On the other hand, our foreign borrowing really does place a burden on future generations. As they make payments on the debt we are now accumulating at a record pace, their standard of living will be reduced from what it otherwise would be.

Now let's do the numbers: the worst projections show a federal budget deficit of about $140 billion -- about 1.4 percent of our GDP (or national income). Coming out of a recession, even a mild one, this is not bad: in 1992, following the last recession, we ran a deficit of 4.7 percent of GDP.

The present rate of federal borrowing is still small enough to be sustained indefinitely, without increasing our national debt as a share of the economy. This is the number that matters; just as Bill Gates can afford to borrow more than the rest of us, a bigger economy can afford more debt than a smaller one.

On the other hand, our foreign borrowing is running at more than $420 billion a year (4.2 percent of GDP), including a $342 billion trade deficit. This is clearly not sustainable for very long.

So why is the federal budget deficit front page news while you have to dig deep in the business section to find the latest numbers on the trade deficit? This is a matter of political power and ideology, for which -- as usual -- economics and arithmetic are no match. The big financial interests are always looking to cut government spending, since that is good for the bond markets. They have developed a conservative (and sadly, even liberal) following among politicians who find it demagogically useful to stoke public fears about our very modest and harmless national debt.

As for the ballooning trade deficit, to even raise the issue is to risk being called a "protectionist." In the post-Seattle climate of pro-globalist McCarthyism, most pundits and politicians would rather be seen as "economically correct."

At the same time, powerful financial and multinational corporations have an interest in keeping the U.S. dollar overvalued. (It is the overvalued dollar that causes our trade deficit, since it makes our exports more expensive and our imports artificially cheap). The strong dollar makes foreign investment -- and overseas sweatshop labor -- a bargain. And the cheaper imports help keep inflation down, which is always a plus for the big bondholders.

Those hurt by the trade deficit -- the majority of workers whose wages are pushed downward, or even worse, those who lose their jobs -- have little voice in the American political system. So the next time you hear a politician ranting about how the federal budget deficit is stealing from our children's future, just ask him: What about the trade deficit?

Mark Weisbrot is Co-Director of the Center for Economic and Policy Research, in Washington D.C.

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