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Monday, February 14, 2005

New York Times Editorialists Wrong As Usual

Are they so focused on socialist propaganda that they can’t be bothered to check the facts?

Today’s New York Times editorial The Importance of Being Earnest is a piece of nonsense.

Let’s take the following quotation, which expresses the core of the editorial argument:

“Each day, the United States must borrow billions of dollars from abroad to finance its enormous budget and trade deficits. Without a steady stream of huge loans, the country would face rising interest rates, higher inflation, a dropping dollar and slower economic growth. The lenders want to see less of a gap between what the government collects in taxes and what it spends, because a lower budget deficit always eases a trade deficit. A lower trade deficit also implies a stronger dollar. And a stronger dollar would reassure foreign investors that dollar-based assets remain their best choice.”

FIRST, “A lower trade deficit also implies a stronger dollar” is an assertion for which the Times can adduce no supporting evidence.  Look at the facts.

Over the past twenty years, the U.S. dollar exchange rate with European, Japanese, and other currencies has gone up and down, with no correlation to budget deficits or surpluses.

There is, however, an unvarying correlation between the rate of economic growth and trade deficits.  Whenever our economy is growing, imports rise at a faster rate than exports, creating a growing trade deficit.  The trade deficit declines when the U.S. economic growth rate begins to decline.  Do the Times’s editorialists really advocate throwing the country into a recession?

Liberal economists like Paul Krugman have a poor record for predictions, because they use the Keynesian, socialist model of the economy, which says that recessions are caused by people saving instead of spending on consumption.  Hence the unvarying answer of Democrats to every problem: more Federal spending.  Paradoxically, the Times is in effect complaining about excess consumption of imported goods by American consumers, who are saving almost nothing these days.

Alan Reynolds in Dollars and deficits, a December 19, 2004, opinion article in the Washington Times provides several examples of wrong predictions by liberal economists.

For example, in December 1983, Stephen Marris, an economist with the Institute for International Economics, predicted that, because the dollar exchange rate was declining, foreign banks would refuse to hold the dollar, capital would flow out of the U.S., interest rates would rise here, and inflation would accelerate.

What, in fact happened?  Just the opposite.  The dollar soared. Inflation fell below 2 percent by 1986, down from 13 percent in 1979-80. Interest rates on 10-year bonds fell to 7.7 percent in 1986 from 13.9 percent in 1981.

A year later, Mr. Marris sharply reversed field, predicting that, because of continuing large budget deficits, the dollar would remain strong against other currencies, which would kill the economic recovery.  In fact, while the dollar remained strong, the U.S. economy continued in its longest and strongest economic recovery in history, with steadily declining inflation (under President Reagan, I might add).

In 1986, 1987, and 1988, liberal economists’ predictions each year were wrong.  There was no correlation at all between budget and trade deficits and the dollar exchange rates or interest rates for borrowers in the U.S.  One notably wrong prediction was by Laura D’Andrea Tyson, then at Cal-Berkeley, later President Clinton’s Chairman of the Council of Economic Advisors.

SECOND, let’s examine the editorial’s assertion, “Each day, the United States must borrow billions of dollars from abroad to finance its enormous budget and trade deficits. Without a steady stream of huge loans, the country would face rising interest rates, higher inflation, a dropping dollar and slower economic growth.”

As noted above, there is no correlation between interest rates and inflation, on the one hand, and budget and trade deficits.

More importantly, the United States does not each day “borrow billions of dollars from abroad to finance its enormous budget and trade deficits.”  Nobody compels foreign central banks to hold dollars as their main reserve currency.  Why do they hold dollars?  First, because no other currency, including the Euro, is strong enough and available in large enough amounts to handle the volume of dollars flowing each day in international money markets.  Second, the United States has the highest credit rating and the lowest political risks in the world.  Third, our economy is, with the exception of China’s, the strongest in the world.  Our economic growth rate is almost twice that of Europe or Japan.  Other nations, not being able to grow at home, have to export to the United States to avoid economic recession.

The total of budget and trade deficits is slightly over a trillion dollars.  Of that, more than 60 percent, $618 billion, is the trade deficit.  The Times leads you to believe that the Treasury sends somebody overseas, hat in hand, to borrow money.  What actually happens is that foreign countries export goods and services to the United States and are paid $618 billion.  If they decide not to accept payment in dollars, they can’t export to the United States.  Even France and Germany aren’t stupid enough to stop exporting to the U.S.  They aren’t lending money to the United States, they are financing their own exports.

The largest single component of the trade deficit - $177 billion, or 29% - is China’s exports to the U.S.  Those exports are the main engine driving the Chinese economy.  Moreover, the Chinese currency is pegged to the dollar (i.e., the ratio of yuan to the dollar is fixed by regulation), with the result that the dollar exchange rate with the yuan won’t go up or down, no matter what levels our budget or trade deficits hit.  The Times’s call to reduce budget deficits and trade deficits would have zero effect on the dollar-yuan exchange rate, but it would severely cripple the Chinese economy, for which the U.S. is the main market.

If we followed the prescription of the Times’s editorialists, we would have to erect huge tariffs or employ some other device to stop American consumers from buying imported goods.  Doing that would violate all existing trade agreements.  Note also that precisely that policy, in the form of the notorious Smoot-Hawley tariffs in 1930, hugely exacerbated the Depression and precipitated an international trade war, as other nations began raising their tariffs against U.S. exports.

Posted by Thomas E. Brewton on 02/14 at 11:44 PM
Economics • (0) Comments
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