Trade Deficit Reduction -- America's Only Way Out

Alan Tonelson, American Economic Alert This morning’s dismaying report from the government on gross domestic product confirms that economic growth is virtually dead in the water. It also reveals that none of the recovery strategies dominating the headlines, and none of the issues being debated during the current budget crisis, by themselves can generate desperately needed output and hiring without boosting America’s already dangerous levels of debt. Literally trillions of dollars of stimulus from the Fed and the last two administrations obviously have flunked this test since the crisis began. And major tax cuts plus more Fed stimulus flunked it in the pre-crisis years, producing the weakest U.S. expansion until the present. The message to the President and Congress, and Republicans, Democrats, and Tea Partyers alike couldn’t be clearer: America’s damaged economy will never be healed unless recovery programs emphasize slashing the nation’s still-massive and chronic trade deficits. Greatly narrowing the gap between exports and imports represents the only realistic way to foster growth without artificially boosting anemic domestic demand further – whether through more government spending or more tax cuts. As a result, it’s the realistic way to promote output and job-creation without plunging the economy even deeper into the red financially. The new government report revised the economy’s growth figures going back to 2003, and thus included an update on U.S. performance from the last recession’s official onset at the end of 2007. Its verdict: the downturn, which officially ended in mid-2009, was considerably worse than originally estimated. Rather than growing at an average annual rate of 0.1 percent between 2007 and 2010 (after inflation), the government now says the economy shrunk by an average annual rate of 0.3 percent in real terms. This year’s “soft patch” in growth, moreover, is looking more worrisome, too, as a result of the revisions. Rather than expanding at a 1.9 percent annualized rate in real terms during the first quarter of 2011, growth was only 0.4 percent – barely measurable. Preliminary figures for second-quarter annualized growth were better, but still sickly at 1.3 percent. Real growth for 2010 was revised upward slightly, from 2.9 to 3 percent. But the new data also showed that the second half of last year saw a sharper-than-reported slowdown in real growth, with the fourth quarter number being slashed from 3.1 percent to 2.3 percent. As this morning’s report showed, a greater worsening of the trade deficit than originally estimated dragged down first quarter growth this year much more than either weaker consumption, business investment, or government spending. Although the new data peg export growth during the quarter at an annualized 7.9 percent rather than 7.3 percent, they also show a much greater rise in imports – from an annualized 5.1 percent increase to 8.3 percent According to preliminary figures, moreover, the trade deficit’s shrinkage made the private sector‘s biggest contribution to the modest growth speed-up in the second quarter. But these new government numbers also demonstrate that the way the trade deficit is narrowed matters greatly. Since the economic crisis broke out in the summer of 2007, the only significant progress on this front has come when domestic demand has nosedived, and sharply depressed imports. Trade deficit reduction strategies must emphasize replacing imports with domestically produced goods and services on a massive scale. Only this way can growth be accelerated without inflating current levels of demand – and indebtedness. In fact, trade deficit reduction can boost growth even if domestic demand falls. Increasing U.S. exports, as President Obama has proposed, can help of course. But as the U.S. Business and Industry Council keeps reminding him, export expansion per se can only increase growth and job-creation on net if it’s great enough to reduce the trade deficit. And given today’s world of still-formidable foreign trade barriers and slowing growth, that’s clearly a pipe dream. These conditions, of course, also further undermine the weak case for the Colombia, Korea, and Panama trade agreements as American growth and employment bonanzas. Bottom line: Without tight curbs on imports, such as those the Council has long urged, the U.S. economy will be stuck in a slow-growth/high-unemployment mode for years. And that’s the most optimistic scenario. Read original post here.