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Bob was featured extensively on CNBC's Squawk Box, discussing the economy, the Fed's role in the buyout of Bear Stearns and the continuing role of the Fed in stabilizing the economy. To view some of Bob's segments on the show, click here, here, here and here. Bob also spoke with BBC World Service about the weak U.S. dollar, saying it could provide a shot in the arm to the economy by boosting exports and reducing the trade deficit. To listen, click here. In addition, Bob talked with Jim Blasingame, host of The Small Business Advocate Show, about some of the new tools the Fed is using to deal with current economic challenges. To listen, click here.
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March 21st, 2008 at 7:47 am
Bob, regarding the weakening dollar and its effect on the trade deficit, conventional wisdom is that the weakening dollar will make exports more competitive and will simultaneously weaken the competitive position of imports, thus improving our trade balance. But this presumes that our trade partners will simply sit idly by and watch their market share deteriorate. I don’t believe that will happen. There may be some transitory improvement in the trade balance, but it won’t last. Foreign competitors will soon respond by cutting prices and costs to remain competitive. I’d like to inject some unconventional thinking into this discussion.
There is another factor at work in the trade equation that economists have failed to recognize – the role of population density. As population density rises beyond some optimum level and people are forced to crowd together and conserve space, per capita consumption begins to decline. This happens because it becomes ever more impractical to own many products, due simply to a lack of space to use and store them. Per capita consumption data from around the world bears this out. And declining per capita consumption, in the face of rising productivity (which always rises) inevitably yields rising unemployment and poverty.
When a nation of relatively low population density (like the U.S.) attempts to trade freely with a much more densely populated nation, the economies of those two nations combine. The work of manufacturing is spread evenly across their combined labor forces. However, while the more densely populated nation gets access to our healthy market, in return we receive access to a market that is emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs. A virtual host-parasite relationship is established between the U.S. and that more densely populated country.
Proof of this relationship can be found in the U.S. trade data. Of the U.S.’s top twenty per capita trade deficits in manufactured goods in 2006, eighteen were with countries much more densely populated than the U.S. Even more revealing, when our trade partners are divided equally around the median population density, in 2006 we had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median population density we had a trade deficit of $480 billion.
As the dollar’s decline has progressed, we’ve already seen that there’s been no benefit to American manufacturers. Manufacturing is declining even faster than the overall economy. Any improvement in exports has been due to rising grain prices. The falling dollar will do nothing to improve our trade position because it’s unrelated to the root cause – the gross disparity in population density between the U.S. and so many of our trading partners, including such nations as Japan, Malaysia, Germany, Mexico, Korea and China.
For the first century-and-a-half of our nation’s history, protectionist trade policies (tariffs) built the U.S. into the preeminent industrial power in the world – the wealthiest nation on earth. But, since signing the Global Agreement on Tariffs and Trade in 1947, our trade balance has steadily eroded. By 1976 our trade surplus was gone for good. Since then, our cumulative trade deficit exceeds $8.6 trillion. Our nation is being bankrupted by a trade policy based on flawed assumptions about free trade that date back to the principle of comparative advantage, formulated by an economist in 1815. Isn’t it time to consider that there may be another factor at work?
Pete Murphy
Author, Five Short Blasts