The Trade Deficit Causes and Solutions
There is a strong tendency among American politicians and economiststo attempt to deal with issues and problems in isolation. Politicians takethis approach because they apparent have difficulty dealing withcomplexity. Economists take this approach so that they can factortroublesome variables out of their equations. One result of the approachof treating issues and problems in isolation is the development ofsolutions that are ineffective when they are implemented in the real worldwhere isolation from other factors is no longer an option. The tendency to deal with the issue of international trade inisolation has led to policies that tend to make the situation worse ratherthan better. The United States government (it makes little differencewhich administration is in control of the White House) likes to play therole of the world's policeman (and it likes to be involved in alldisputes). This role is very expensive, but the United States governmentand United States taxpayers do not like to ask Americans to pay the bill inthe form of a balanced budget. A balanced budget would require an increasein taxes, as there is just so much the Congress can squeeze out of services
One very important reason for thisoutcome is that the major American trade deficits are with countriesoutside of the Western Hemisphere. The same thing was said of the Free Trade Agreement betweenCanada and the United States in 1990 and of the North American Free TradeAgreement in 1995. Thus, the effects on the American tradedeficit of the Free Trade of the Americas Agreement likely will be similarto the effects of the earlier agreements. It would appear that the only good solution to the trade deficit wouldbe for the United States government to renounce its role as the world'spoliceman. The United States could pull inits horns and stop playing the role of the world's policeman. The answer for theFederal Reserve, thus, is to attract more money into the United States fromother countries. The outcome of areduction in disposable would be reduced consumption (a loss in economicoutput). Printing money will lead to price inflation followed by an economiccrash. If the value ofthe dollar is lowered, the cycle will reverse itself. The Federal Reserve could just print more money (aeuphemism for various policies that increase the supply of money in theeconomy beyond the point where the strength of the economy can support theadditional money). In the normal course ofevents, however, there is not enough capital to satisfy all of these needswhen the federal government is a massive borrower (Kandil, 2002). Second, price inflation in the economy would increase. Then, the federal government will have to decide whether to (a)print money or (b) participate in borrowing in the capital markets to thepoint that interest rates reach levels that stifle both business investmentand consumer purchasing of big-ticket items. The best solution to the trade deficit problem, therefore, is for theUnited States to stop funding the policing of the world.
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