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| The Economic Consequences of Mr. Griswold |
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Monday, July 30th, 2001
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Washington is full of think-tank operatives who argue that the trade deficits �don�t matter.� Few are so tireless in promoting this canard as Daniel T. Griswold of the Cato Institute. Eamonn Fingleton takes a look at Griswold�s signature idea that the deficits are a sign of America�s �economic strength.�
It�s that man again. Every time I check the Internet search engines for the phrase �trade deficits,� out tumbles a cascade of stuff from Daniel T. Griswold. The word �stuff� is used advisedly here. As we at Unsustainable.org pride ourselves on providing a website fit for all the family, I will forbear from using any more graphic language.
As associate director of the right-wing Cato Institute�s Center for Policy Studies, Griswold has for years been tirelessly telling us that the trade deficits don�t matter. In fact in testimony to a Congressional committee in 1999, he came close to suggesting that the bigger the U.S. deficits grew, the better it would be for everyone. The title on his testimony said it all: �The U.S. Trade Deficit: A Sign of Good Times.�
That was then. This is now. Since the Internet bubble burst last year, the economic news has turned decidedly against Griswold. We have seen massive layoffs at Corning, Dell, Amazon, Cisco, and dozens of other once high-flying Internet-related companies. The latest disaster � and this one is destined to earn a mention in the economic history books � is that Lucent is selling its crucial optical fiber business to the Japanese. Lucent, remember, is heir to the legacy of the fabled Bell Labs � and optical fibers are the crown jewels in the Bell Labs treasure-house of commercial technologies. To cap it all, the price the Japanese are paying is just half what Lucent thought the business was worth a few months.
Deficits as �a reflection of economic strength�
All the economic disasters of the last year notwithstanding, Griswold has been pressing on regardless with his don�t-worry-be-happy approach to the trade crisis. This is clear in a recent article he published in the New York-based magazine USA Today (which is an educational journal that has no connection with the newspaper of the same name). As the trade deficits have risen fully 30 percent since 1999, should we assume that the U.S. economy is now doing 30 percent better than it was then? Even Griswold hasn�t the gall to try to argue this. But in this new analysis, which I have just had the misfortune to stumble upon in surfing the Internet, he is utterly unrepentant about his basic case. The heading alone is enough: �America's record trade deficit: A reflection of economic strength.�
His main point is that the U.S. in recent decades has a tendency to grow faster in in years when the deficits rise than in years when they fall. Thus those who insist that the chronic trade deficits are a bad thing are expected to feel duly confounded.
Actually Griswold�s argument is the sheerest chop logic. First of all, it is simply not true as a general proposition that strong economic growth and trade deficits go together. The only evidence Griswold offers is the experience of the United States in recent decades. But the experience of other periods in U.S. economic history tell an entirely different story. Does Griswold need reminding that the United States consistently ran strong trade surpluses, not deficits, in the blissfully prosperous 1950s? The 1950s after all were a decade when wage levels in the United States were four to eight times higher than in countries like Japan and Germany. For additional contrary evidence, I refer him to the experiences of countless other nations at other times, not least the present. Take present-day China, for instance. China consistently produces large trade surpluses. Yet for years it has been growing at rates higher than the United States has ever enjoyed. Try telling China�s top leaders that their nation would enjoy even faster growth if it ran trade deficits.
Now let�s look at America�s experience in recent years. On Griswold�s numbers, the U.S. trade deficits have increased in sixteen years and shrunk in eleven years in the period since 1973. In the years when deficits rose, the economy grew on average at an annual rate of 3.5 percent and during those years when the deficits fell the average growth was a mere 2.6 percent. I will take Griswold�s word for these numbers. But he is completely mistaken in concluding that �the contention that trade deficits somehow damage the U.S. economy is directly challenged by its superior performance during times when they are rising.� Actually Griswold�s numbers prove nothing. Why? Because there is no suggestion that the rising trade deficits cause higher growth. Quite the reverse. As even Griswold himself admits, the direction of causality is precisely the opposite: high growth leads to booming consumer demand, which in turn causes imports to be sucked in from all over the world.
A simple metaphor will bring out the full absurdity of Griswold�s argument. The American economy is a bit like a troubled stage actor who tends to go on a bender whenever he has money in his pocket. His most boisterous drinking sessions therefore inevitably coincide with periods when he is in work. On Griswold�s chop logic, because being in work is a good thing, going on a bender must also be a good thing. In reality just as the unfortunate actor I this metaphor should frankly acknowledge that his excessive drinking is a problem, the United States should recognize that its trade deficits are a problem. The fact that the problem is at its worst when things are otherwise going well is no excuse for not addressing the fundamental causes of what is obviously dysfunctional � not to mention self-destructive � behavior.
Eamonn Fingleton is the author most recently of In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity (Houghton Mifflin, 1999).
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Contact Eamonn Fingleton |
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