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Home Publications Blogs Beat the Press The Falling Dollar, Not the Falling Economy, Reduced the 80s Trade Deficit

The Falling Dollar, Not the Falling Economy, Reduced the 80s Trade Deficit

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Tuesday, 05 October 2010 14:36

What do conservatives have against reality? That is undoubtedly the question that readers of David Leonhardt's Economix blogpost on the revaluation of China's currency will be asking. Leonhardt turned the post over to Derek Scissors of the Heritage Foundation.

Mr. Scissors argues that the rise in the value of the Japanese yen in the 80s had little to do with the decline in the U.S. trade deficit with Japan. Scissors argued that the trade deficit just shifted to China. He claims that the main reason that the deficit fell in the 80s was the slowdown in growth and the onset of the recession.

There is a small problem with that argument. The trade deficit dropped while the economy was still growing rapidly. It fell from a peak of 3.1 percent of GDP in the 2nd quarter of 1987 to less than 2.0 percent of GDP in the 2nd quarter of 1988, as shown in the graph below. This quarter was sandwiched between two quarters of growth above 5.0 percent. The deficit declined further to less than 1.4 percent of GDP by the 3rd quarter of 1989, when the economy grew 3.2 percent. 

quarterly-gdp

 

In short, the recession cannot explain the decline in the size of the trade deficit because the deficit declined while the economy was still growing rapidly. The more obvious explanation is the decline in the value of the dollar that was negotiated at the Plaza Accords in 1986. This is yet another example of the facts being biased against conservatives.

Comments (5)Add Comment
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written by izzatzo, October 05, 2010 5:53
Scissors argued that the trade deficit just shifted to China.


Never, ever try to interfere with a free market. It's a waste of time, like squeezing a balloon, push in one place, it pops out in another.

Same with relative prices, including international currency exchange rates. Try to offset a market price or trade deficit and it'll just pop up somewhere else.

Stop masking the true problem - insufficient internal productivity and growth caused by high taxes and huge deficits - by trying to manipulate market prices and currency exchange rates or restrict imports in other ways.

Stupid liberals.
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written by zinc, October 05, 2010 9:44
Has the Japanese mercantilist been subdued ? Not so much as I would notice. It almost seems that they are smarter, moving their shadow off camera. Surely they couldn't be culpable in the collapse of Motown with their non-union labor force in Bama, taking it to the old, gas guzzling Detroit auto-workers. No retiree crap going on here in the red state.

Dean, a man sees what he wants to see.
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written by zinc, October 05, 2010 10:09
The US should hold on to the strong dollar policy. The race to the bottom of currency evaluation has become a game of "my whore is not as bad as your whore." Currency deval by the US means inflation for the greatest wave of fixed income folks in, well, world history. The strong dollar policy means that the US consumer harvests the benefit of the promiscuous.


Somewher along the line, someone suggested that the infrastructure of the US market is equivalent to the cost of the infrasture in Asia, therefore we should not be taxing the bejeesus out of them, rather than us, for access.

I know that Arizona is charging me 11 % to buy any goods, making no distinction between foreign or domestic produced goods. Maybe it makes sense to economists educated in our "finest" schools. Or maybe it only makes sense to people who have been riding the efforts of the American everyman.
Jeff Hoffman
written by Jeff Hoffman, October 05, 2010 11:32
"Stupid liberals": try growing up, a part of which would require you to educate yourself. First start with understanding the term EFFECTIVE CORPORATE TAX RATE and where the US stands among OECD nations in that realm. There's no excuse for being this ignorant. Second consider for a moment the enormous drain that the private health care system so beloved by Republicans places on corporate profits. Their seriousness about reigning in costs is exemplified by their most recent poster boy for health care reform- Paul Ryan- who, incidentally, voted voted for medicare part D. Nice.
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written by R _A_P, October 13, 2010 12:59
"Never, ever try to interfere with a free market. It's a waste of time, like squeezing a balloon, push in one place, it pops out in another."

So, when did you say the markets were free? Oh right, when financial deregulation gave us liberty.

If you really believe we have "free markets" you're not in a position to call anyone stupid.


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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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