Free Trade Agreement?

Since times are rather slow with Congress in recess, I figured I would hit another one of my favorite targets, pundits (And don't get cute, I'm not a pundit, I'm a critic, or enlightened guide if you will). As a quick caveat, I get that when you have to put on a show every day, or show and radio, or show and radio and book like Stalin fav Bill O'Reilly (another quick aside - try to keep up. His book title and cover is the all time best on the unintentional comedy scale. I love it. How does anyone have the guts to go to the counter and buy "Culture Warrior?" I'd rather be caught buying the latest copy of Juggs, than show up at the counter with that ridiculous picture and title in hand) your going to have to stretch now and again, make up an enemy, take a side on a silly point, create a controversy, etc, especially now with all the news and radio options, so most of what these guys do is acting and I mostly play along. But like I said, slow day.

So Lou Dobbs draws the unlucky short straw. He's been on an anti-free trade rant for a while now, but this column at CNN is just too much. Stalin, here's your bias alert - I'm a big fan of free trade agreements, particularly the multi-lateral kind, I hope no liberals throw a Startbucks Coffee mug through my window.

So let's start with the title, "New Congress must show courage." Yes, yes, I hope the new Democratically controlled Congress will have the courage to listen the anti-free trade Unions. What a magnificent display of backbone that would be.

But on to the meat as they say (And by "they" I mean Muscles for Justice). Mr. Dobbs' article is basically one long piece on the US economy and how cheap imports are killing it. I think he has it exactly wrong, cheap imports are helping hold our economy up. Not only that, but the fix to our economy isn't in fewer trade agreements, it's a whole lot more complicated than that.

Highlights, from the top.

The Dollar.

The dollar is falling and China and Europe are growing concerned at holding onto the dollar (he also misses that more nations are holding and doing business in Euro's). He's right the dollar is falling. He's wrong to blame the trade deficit. The dollar is falling because the US is running a massive budget deficit and asking them to finance it. With no indication that the spending will stop they are understandably getting both tired and concerned. The budget deficit is also pushing down the dollar on its own. Investors are wondering where all the money will come from to finance not only the immediate debt, but all the funding mandates that are in our future. Also, oil has always affected the dollar. And I'm trying to think, is there something else I'm missing that could be putting pressure on the dollar? Oh yes the war. Not only the actual war, which always depresses a currency, but the cost of the war (see above), and the damage its done in creating potential new enemies. Markets like stability and right now, the US is about the most unstable industrialized nation going. The dollar should be weak. [The following is not a political statement about the war.] If you want to increase the strength of the dollar, decrease the budget deficit, get out of Iraq, make nice with Iran, N. Korea, and quit using terrorism to scare up votes. Create stability, the international market looks at these things, and when some idiot potential President says that we'll lose a city in the next decade, it spooks the market. The mirror also helps. Household debt stands at a record 134% of disposable income. Currency traders definitely price that little nugget into their formulas (more on this later). Finally, Dobb's is right, the trade deficit is something that's priced in, but it's minor on an economy our size, and is probably affecting the dollar at the basis point level. To say that fixing the trade deficit will strengthen the dollar is like saying "I'll stop that tidal wave this this pebble."

The Trade Deficit.

What is the impact of the trade deficit? Dobbs sites the 3 million lost jobs and that new jobs created pay less. Because I want to keep this at both the macro and philosophical levels, which keeps me from having to endlessly cite from boring economic journals, I'm not going to quibble over his numbers. Suffice to say, we both agree that jobs have been lost, and jobs have been created. I'm going to focus on the benefits of the trade deficit as it relates to jobs and US economic strength. Dobbs says the new jobs pay less, couple this with the data on real wage stagnation and he has a point. The counter is that cheap imports mean that people enjoy a higher standard of living than they did 20 years ago, regardless of wages. The internal buying power of the dollar has kept wage pressures down, taking out one of the big causes of inflation, helping the economy grow and yes, making US goods more competitive abroad. Taking away cheap goods kills all of this, and doesn't help it. If you took away cheap foreign goods, wage pressures would increase (keep in mind the long period of low unemployment, theoretically this should lead to higher wages, but the fact that you can buy a cheap big screen TV or computer has taken away the stimulus to fight for higher wages - and lead to more debt - again, more on this later), driving up expenses, driving up prices, hurting the value of our exports on the global market, and finally, negatively affecting our trade deficit. Taking away free trade will not help American industry. As a general rule, higher prices mean less sales. People won't buy expensive goods, they'll do without until they can command a higher salary, which they won't be able to do because no one's buying anything and the economy is tanking. The good news is that higher wages and higher cost of goods do lead to inflation, another economy killer. For all of Mr. Dobbs rhetoric, trade barriers will not rebuild Big Auto. American's already don't buy cheap poorly designed cars, does he really think they'll buy expensive poorly designed cars? (As a side note, economists often credit "increased productivity" for this longish period of low inflation. I think a large chunk of the credit goes to cheap imports, mostly for the reasons stated above.)

Furthermore, the trade deficit is expected. Does America manufacture anything the average Indonesian or Chinese citizen wants or can afford? The deficit with Europe is much narrower, or even a surplus depending. However, as Indonesia and China move up the economic ladder, they will be more willing and able to buy our goods. We want that.

The simple fact is that cheap imports work to our advantage. Even if they did not, our economy is far too reliant on them to take them away.

Household Debt.

Now we're talking, and thanks for waiting. Unfortunately, Mr. Dobbs never even hits on it, but the main driver for the trade deficit is not any negotiation at the Federal level, rather it lies in the American Consumer. From Mr. Dobbs' perspective, he has seen the enemy and it is us. At 134% leverage, the US consumer is buying a ton of stuff they cannot afford, and my guess is that its mostly imports (big screen TV, video games, lots and lots of clothes/shoes, cheap jewelry, toys, a new car every couple of years, etc). Now I'm not saying clothes, for example, aren't a necessity, but rather talking to the amount. Excess spending is what drives the trade deficit. Back to the deficit expectation. No one spends like Americans. To expect a surplus with Japan with their extremely high household savings rate is sheer folly. You have to know going in that they won't spend like we do, even if they want/need our products. Take the leverage out of the US consumer, and get spending to a more sustainable level and my bet is that the trade deficit decreases. However, does a decrease in debt lead to a decrease in quality of life, leading to an increase in wage pressures? Probably. Economics is a big tangled web folks. If Mr. Dobbs were serious about the trade deficit he would be telling people to buy less, much less, a lot less. But that doesn't play well with his populist oratory, nor would it sit will with CNN's advertisers. So it's all the fault of the wealthy and/or powerful. I guess he could also try for some kind of mandate on how much each American can spend. Bottom line, the people control one side of the trade deficit (in this case the larger side). Want to fix it, start there.

At the end of it all, not only is Mr. Dobbs solution is far to simple to address his concerns, its wrong, and potentially harmful to the very people he's trying to protect.