Deficit Hits New Record

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Dean Baker
Truthout, Sep. 13, 2006

Most people didn't see this headline, because the deficit that just soared to a new record was the trade deficit, not the budget deficit. The newly released trade data for July showed the deficit running at an annual rate of almost $820 billion, more than 6 percent of GDP. This is more than three times the size of the $260 billion dollar budget deficit now projected for 2006. Even adding in the money borrowed from Social Security, the budget deficit would only be $437 billion, just over half the size of the trade deficit.

Economic and business reporters, and their editors, have a hard time understanding the trade deficit, and therefore they largely ignore it. Most of the reporting on July's trade deficit was buried in the business pages where few people would notice it.

This is too bad, because the long-run impact of a trade deficit is pretty much the same as the long-run impact of a budget deficit: lower living standards in the future. As the editorialists and pundits continuously warn us, our children and grandchildren will have a higher tax burden because of the budget deficits that we are running at present. Well, our children and grandchildren will in effect face a foreign payments tax because of the trade deficit that we are running today.

The foreign payments tax is essentially the flip side of the trade deficit we face today. The trade deficit means that we import more than we export - in effect, we are consuming goods and services that we are not paying for. This allows us to have a higher standard of living at the moment than if we had balanced trade, just as lowering taxes allows us to enjoy a higher standard of living at the moment.

In the same way that the government is borrowing to finance the budget deficit, the country as a whole is borrowing to finance the trade deficit. We are selling off a wide variety of financial assets, such as stocks and bonds, to foreigners (individuals, corporations, and governments). At some future point, we will lose our ability to borrow, or at least to borrow at the same rate. At that point, the interest and dividends that we will be paying to foreigners will be a net drain on the US economy, which will require that we export more goods and services than we import.

Instead of consuming more goods and services than we produce, we will be producing more goods and services than we consume. The difference will be the foreign payments tax that is the long-term result of our current trade deficit.

Even though the foreign payments tax promises to be much larger than taxes resulting from current budget deficits, it receives almost no attention. There are two reasons for this.

The first has to do with partisan politics. The budget deficit is largely the fault of the Bush administration's tax cuts and the war in Iraq. If President Bush had not cut taxes and gone to war in Iraq, the overall budget would be in surplus. Even adding in the money borrowed from Social Security would still only leave a modest deficit.

By contrast, the record trade deficit is a bi-partisan policy. It had its origins in the high-dollar policy that Robert Rubin put in place as President Clinton's treasury secretary in 1996. The over-valued dollar, which has been advocated, or at least tolerated, by both Clinton and Bush, is the main cause of the trade deficit.

The other reason that the trade deficit draws less attention than the budget deficit is that there is a strong class bias to the short-term gains and pain. In the short-term, the main beneficiaries are the people who work in occupations that are largely protected from international competition, like doctors, lawyers, accountants, and economists. The people who are hurt by the high dollar policy are the people whom US trade policy has subjected to international competition, most importantly manufacturing workers.

Because the short-term winners have much more political power, and own the newspapers and write the news stories, we don't hear much about the trade deficit. So, until we get a better press corps, if you want the news that will really impact your life, you will have to hunt for it.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.