The Truth About Trade Deficits.

The dreaded "trade deficit" is shrinking...let's celebrate! Wait a minute, this is happening in the context of the worst unemployment in a quarter of a century, a jump in inflation, and a period of protracted economic decline.

The balance of trade -- the amount of goods imported versus goods exported -- has been a tool used by those who are shallow in their economic knowledge and deep in their fear of competition. We are told by many politicians that trade deficits (importing more than we export) is a "terrible" thing and demonstrates an economy in decline. As a result of decades of trade deficits, the US is a "debtor" nation, we are told.

So the recent news stories should be good news: "Trade Gap Continues to Narrow." This narrowing is because the amount of goods we are importing each year is actually shrinking. There are few, if any, who would argue that this economy is anything but weak and has been in a downward spiral. This reality should not be a surprise to any student of history. When the economy is weak, we can't afford to buy. Our trade deficit shrinks with our spending power.

In 1928 Republican Herbert Hoover was running for President of the United States against Democrat Al Smith of New York. Hoover, the Secretary of Commerce under one of the most successful Presidents in US history, was running against a very popular governor. It was easy for Hoover to defend the record of the President he served, Calvin Coolidge, as virtually every indicator pointed to an administration noted for its prosperity. "A chicken in every pot and a car in every garage" was a message that rang true to most voters.

During the 20s, Coolidge and his allies took a tax rate that was as high as 70 percent under their predecessor and lowered the top rate to a low of 5 percent. Coolidge opened economic trade with countries and unleashed a level of prosperity we had not seen in generations. The number of people who made six digits (a very high income in the 1920s) increased four fold. Inflation was less than 2 percent and unemployment was at a comparable amount. They called it the "Roaring Twenties" for a reason.

In spite all the glitter, there were signs of "rust" for those who cannot look beyond the surface. That was the trade deficit that grew rapidly during his administration. This area fell under the Secretary of Commerce and Hoover was taunted by his opponent through out the race as the man who over saw this area of "decline." Finally Hoover got on the protectionist bandwagon and told voters that if Smith or he were elected, there would be quotas and tariffs placed on trade. Hoover won and by the Fall of 1929, he was sticking to his guns and pursuing protectionism in the form of the Smoot-Hawley Tariff Act.

That law did exactly what it intended to do -- slash the import of goods. Within a few years, the US had its first trade surplus in decades and also one of the highest unemployment rates in history. The Stock Market crash that proceeded the Depression was fueled by this trade protectionism. Wall Street knew that, if we penalized imports, foreign countries would retaliate. That led to the Market crash because investors knew that the value of goods would decline as the trade markets would shrink.

The high unemployment rate was associated with the trade surplus for a very simple reason. We imported more goods than we exported because our buying power had declined dramatically. Through out our nation's history over the last century, our periods of highest prosperity were accompanied by eras of trade deficits. Meanwhile, trade surpluses accompanied economic decline. In our prosperity we were buying more, from everywhere.

Today, the trade deficit is shrinking because the economy is weak. Our national buying power is in decline. Trade deficits continue to do what they have done for centuries -- indicate strength and not weakness.

Kevin Price is Host of the Price of Business, the longest running show on AM 650 (M-F at 11 am) in Houston, Texas and on AOL Radio. His articles often appear in Chicago Sun Times, Reuters, USA Today, and other national media. Steve Moore of the Wall Street Journal calls Price the “best business talk show host in the country.” Find out why and visit his blog at www.BizPlusBlog.com and his show site at www.PriceofBusiness.com. You can also find Price on Strategy Room at FoxNews.com.

Trade Deficit Shrinks, but no Parades?

The balance of trade -- the amount of goods imported versus goods exported -- has been a tool used by those who are shallow in their economic knowledge and deep in their isolationism. We are told by many politicians that trade deficits (importing more than we export) is a "terrible" thing and an indicator of an economy in decline. As a result of decades of trade deficits, the US is a "debtor" nation, we are told.

So the headlines at CNNMoney this morning should be good news: "Trade Gap Narrows for 2nd Straight Year." This narrowing is because the amount of goods we are importing each year is declining. Yet, this "good news" accompanies headlines of the fastest and largest increase in unemployment in decades (500,000 just since the elections). There are few, if any, who would argue that this economy is anything but weak and has been in a downward spiral for about two years (about the same period for which the gap has decreased). This reality should not be a surprise to any student of history.

In 1928 Republican Herbert Hoover was running for President of the United States against Democrat Al Smith of New York. Hoover, the Secretary of Commerce under one of the most successful Presidents in US history, was running against a very popular governor. It was easy for Hoover to defend the record of the President he served, Calvin Coolidge, as virtually every indicator pointed to an administration of success.

During the 20s Republicans took a tax rate that was as high as 70 percent under their predecessor and lowered the top rate to a low of 5 percent. Coolidge opened economic trade with countries and unleashed a level of prosperity we had not seen in generations. The number of people who made six digits (a very high income in the 1920s, and still is today) quadrupled. Inflation was less than 2 percent and unemployment was at a comparable amount. They called it the "Roaring Twenties" for a reason. There was, however, one area of "weakness" following Coolidge and that was the trade deficit that exploded during his administration. This area feel under the Secretary of Commerce and Hoover was taunted by his opponent through out the race. Finally Hoover assured voters that if Smith or he were elected, there would be quotas and tariffs placed on trade. Hoover won and by the Fall of 1929, he was sticking to his guns and pursuing protectionism in the form of the Smoot-Hawley Tariff Act.

That law did exactly what it intended to do -- dramatically reduce the importation of goods. Within a few years, the US had its first trade surplus in decades and also one of the highest unemployment rates in history. The Stock Market crash that proceeded the Depression was fueled by this trade protectionism. Wall Street knew that, if we penalized imports, foreign countries would retaliate. That led to the Market crash because investors knew that the value of goods would decline as the trade markets would shrink.

The high unemployment rate was associated with the trade surplus for a very simple reason. We imported more goods than we exported because our buying power had declined dramatically. Through out our nation's history over the last century, our periods of highest prosperity were accompanied by eras of trade deficits. Meanwhile, trade surpluses accompanied economic decline. In our prosperity we were buying more.

Today, the trade deficit is shrinking because the economy is shrinking. Our national buying power is in decline. Trade deficits continue to indicate a sign of economic strength, rather than weakness.

Kevin Price is a syndicated columnist whose articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

Developing Countries Need Free Trade and So Do We

I am tired of the hypocrisy. I'm tired of the pleas by bleeding heart liberals about the need to send aid to developing countries on the one hand, but have vehement opposition to providing free trade, which is by far the most effective means of creating worldwide prosperity. The great thing about free trade, is that it also benefits our consumers too.

International aid often cripples developing countries by providing cheap agriculture products that makes it impossible for poorer countries to develop agriculture of their own. Often such aid never gets past the hands of corrupt governments who oversee the distribution of goods. The bottom line, traditional aid in its best implementation and intention always fosters long term dependence.

Free trade, on the other hand, fosters interdependence. The United States, which is the most prosperous country on the face of the earth, desires affordable goods. We want every economic group to be able to afford items that in the past was only afforded the most wealthy. This is achieved through "cheap labor." Meanwhile, poor countries want to improve their economic situation and see the jobs Americans won't do as a means towards that end.

Fundamentally, everything comes back to supply and demand. Developing countries have the supply of people, we have a demand for goods. Our disdain for "exporting jobs" to these developing companies goes back decades. I recall the song by Paul Revere and the Raiders, Cherokee Nation, which states:

"They took away our native tongue
And taught their English to our young
And all the beads we made by hand
Are nowadays made in Japan"

Cheap goods made in Japan? Not anymore and it is no longer a developing country, but one of the richest in the world that has to export jobs to Malaysia in order to satisfy Japan's consumer demand. We pulled Japan out of Post World War II poverty and devastation voluntarily while enjoying an improvement in our own quality of life. It is difficult to find the down side.

The jobs we are discussing as "exported" through cheap labor are largely mythical. I guess if we lived in a pure free market and applied the "quick as hell" employment theory (if we got rid of every government program, people would get a job....I think you get it), these jobs would be filled by fellow Americans. That is certainly a noble goal and one I could support, but don't see happening. So in the interim, Americans are able to enjoy a higher quality of life at a lower cost and foreign countries are becoming more prosperous, advanced, and free without a single taxpayer dollar. In essence, we can have our cake and eat it too.

The myth of trade deficits being damaging continues to persist in the context of this discussion. We are told that the silver lining to our declining economy is the fact the trade deficit is shrinking. That is because the US can't afford to buy as many goods as it did in the past. Where is the upside to that? Free trade benefits everyone by making rich countries richer and poor countries richer too.

Kevin Price is a syndicated columnist whose articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.