Knight-Ridder/Tribune Media Services, October 20, 1999
The trade deficit declined only slightly last month, and is well on its way to making 1999 a record year for this measure of the nation's economic performance. So far it is up a whopping 58% from the same period last year. For the year, it is headed for about $250 billion-- or about 2.8% of our economy. Yet there is much disagreement and confusion over the causes and significance of this deficit.
It is common among economic analysts, especially in the business press, to blame America's gluttonous consumption habits. The theory is that we as a nation are not saving enough, and so we end up borrowing from the rest of the world in order to finance our insatiable appetite for foreign goods.
The problem with the "low savings" theory is that it doesn't explain the persistence and growth of the trade deficit. After all, the trade deficit should cause the dollar to decline in value. When the dollar falls, it makes our imports more expensive and our exports cheaper. This would tend to reduce the trade deficit.
So why doesn't the dollar fall? Well, one reason is that our major policy makers don't want it to fall. That includes people like Treasury Secretary Larry Summers, who has taken great pains to assure the financial markets that he is truly a clone of his predecessor Robert Rubin. Rubin was known to be committed to a strong dollar.
A more powerful supporter of the "high dollar" policy is the Federal Reserve Chairman Alan Greenspan, who can actually raise interest rates in order to keep the dollar up. (Higher interest rates attract more capital to the U.S., driving up the value of the dollar). The dollar can stay at an overvalued rate for quite some time if the international markets believe that these officials are committed to maintaining it.
The innocent observer might ask, why would our appointed officials want to maintain an overvalued dollar, if it means prolonging and widening our trade deficit? After all, the trade deficit we are now running has cost us about a million manufacturing jobs.
Like most policy conflicts between Wall Street and Main Street, the explanation is readily available if you "follow the money." Big multinational corporations like a strong dollar because it makes it less expensive for them to acquire new assets-- as well as hire already cheap labor-- in other countries.
The big bondholders, whose interests dominate the Federal Reserve, also want a strong dollar because it means cheaper imports, and therefore a lower overall inflation rate. The interests that suffer from this policy are mainly domestic industries, and some exporters. These are no match for the big financial and global behemoths. And then of course there are the millions of workers who have an interest in saving their jobs, bargaining power, and our industrial base generally-- but they hardly have a vote in elite policy-making circles.
The dollar has also been driven up by a huge influx of foreign money buying US stocks, in the biggest stock market run-up in American history.
This leads to a rather sticky and dangerous situation. If the dollar starts skidding, and the financial markets believe it has further to fall, this could lead to a sell-off in the U.S. stock market. The stock market is currently priced at about twice its historic level relative to corporate earnings, and it would not necessarily take very much to burst this bubble. These facts could explain a good deal of the market's recent skittishness.
What are we to learn from all this? First, it's a little too convenient to blame the American consumer for the trade deficit. Certainly there is a portion of the population that has gone on a consumption binge, but these big spenders are to be found mainly among the richest 10% of households, who have reaped 86% of the stock market gains over the last decade.
Most importantly, our leading policy-makers have acted irresponsibly on two fronts: First, there is no excuse for trying to maintain an overvalued dollar in the face of record and unsustainable trade deficits. And they have ignored-- and at times even encouraged-- the run-up in stock prices (with the exception of Alan Greenspan's occasional, and generally too elliptical comments to the contrary).
We can only hope that they are held accountable for these decisions when the party comes to an end.