Surely You Jest

In the words of the late, great Ronald Wilson Reagan, "There you go again." Leighton is up to his mischief again, trying to get a rise out of someone, but no one's biting by the looks of the comments section at the moment. OK, Leighton, I'll bite.

For those of you out there who think that the U.S. economy is vulnerable to this kind of nonsense, by all means, buy your wine and cheese from France instead of the Napa Valley and Wisconsin. This from Daniel T. Griswold, associate director of the Cato Institute's Center for Trade Policy Studies:

There is no connection between trade deficits and industrial decline. From 1992 and 1997, the U.S. trade deficit almost tripled, while at the same time U.S. industrial production increased by 24 percent and manufacturing output by 27 percent. Trade deficits do not cost jobs. In fact rising trade deficits correlate with falling unemployment rates. Far from being a drag on economic growth, the U.S. economy has actually grown faster in years in which the trade deficit has been rising than in years in which the deficit has shrunk. Trade deficits may even be good news for the economy because they signal global investor confidence in the United States and rising purchasing power among domestic consumers.

What matters to the economy is not the difference between imports and exports but the extent to which Americans are free to benefit from the efficiencies, opportunities and consumer choice created in an economy open to world trade.

In other words, the trade deficit exists because the "international community," which likes to make money just as much as the greedy gringos, continues to finance our capital markets. That's because 1) we're a good investment, and 2) we're out spending our money on stuff instead of saving it for things like, oh, decent health care.

And what to make of the dire warning from Alan Greenspan last week?

Marc Pado, U.S. market strategist for investment firm Cantor Fitzgerald, said the growing deficit could "deter future investments," though he does not expect overseas investors to dump their current assets.

The slide in the dollar has unnerved investors recently because it raises the cost of foreign goods, from Japanese cars to Canadian lumber to German pharmaceuticals.

Gita Gopinath, assistant professor of economics at the University of Chicago Graduate School of Business, said a continuing rapid decline in the dollar's value "will have an inflationary effect on the economy."

That's because more expensive imports allow domestic producers to raise prices, something that has been impossible for years because of competition at home and abroad.

A cheaper dollar does have some benefits. It has been good for U.S. manufacturers because it makes their products less expensive in foreign markets. That can help exports and narrow the trade gap.

I'll be the first to say that I am an economic ignoramus. Nonetheless, I appear to have lots of company.

Posted by Mike at November 21, 2004 04:00 AM | TrackBack