Don't confuse the national debt and federal deficit with the trade deficit, as they are seperate. The accumulated federal deficits are just the spend-happy government spending more than they are raking in. Something I don't think anyone is happy with if it continues for a prolonged period of time. But bush's "tax cuts for the rich" have actually acted to INCREASE tax revenues.
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The federal budget deficit has declined somewhat, according to new numbers released by the Congressional Budget Office. An increase in tax revenues caused the latest 2005 budget projections to cut the estimated deficit by $88 billion. http://www.npr.org/templates/story/s...toryId=4800924
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But on to the title of the post and what this post is all about - the trade deficit. The trade deficit is the most misunderstood aspect in economics. The most important economic truth to grasp about the U.S. trade deficit is that it has virtually nothing to do with trade policy. A nation's trade deficit is determined by the flow of investment funds into or out of the country. And those flows are determined by how much the people of a nation save and invest - two variables that are only marginally affected by trade policy. An understanding of the trade deficit begins with the balance of payments, the broadest accounting of a nation's international transactions. By definition, the balance of payments always equals zero - that is, what a country buys or gives away in the global market must equal what it sells or receives - because of the exchange nature of trade. People, whether trading across a street or across an ocean, will generally not give up something without receiving something of comparable value in return. The double-entry nature of international bookkeeping means that, for a nation as a whole, the value of what it gives to the rest of the world will be matched by the value of what it receives. There is no "selling out" to other nations.
One of the first things I learned in Macro101 and still remember is:
Savings - Investment = Exports - Imports
If a country runs a capital account surplus of $100 billion, it will run a current account deficit of $100 billion to balance its payments. What the trade deficit represents is that other countries are willing to invest their dollars in our country. It means we are an attractive country in which to invest. There is nothing wrong with running a trade deficit. Trade is good.
But if it was your policy to reduce the trade deficit one would only need to increase the domestic saving rate. Another way would be to reduce investment, but I don't think many people would advocate that, because investment is a good thing too.
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Misunderstanding of the trade deficit threatens to undermine the freedom to trade by encouraging faulty and damaging "solutions" to a problem that does not exist. Any attempt to fix the trade deficit through protectionism, export subsidies, or currency manipulation is bound to fail because none of those tools of intervention addresses the underlying causes of the trade deficit. The trade deficit will respond only to changes in a nation's net flow of foreign investment, which in turn is determined by its underlying rates of savings and investment.
America's $114 billion trade deficit in 1997, and the prospect of a larger deficit in 1998, are not a cause for worry. Our trade deficit reflects the fact that America remains an attractive haven for international investors. The trade deficit allows Americans to maintain a level of investment in our future productivity that would be impossible if we were required to rely solely on our current level of domestic savings.
None of the common concerns about the trade deficit holds up to empirical scrutiny. Trade deficits cannot be blamed for unemployment or slower growth, nor are they a sign of unfair trade practices abroad or declining industrial competitiveness at home. Trade deficits may even signify growing consumer demand and expanding investment opportunities.
What matters to a nation's economic health is not the difference between exports and imports but the degree to which its citizens are free to trade and invest across international borders. When citizens are allowed to buy and sell goods, services, and investment assets freely in the international marketplace, a nation's productive resources will tend to flow to the best and highest use, raising the nation's overall standard of living.
In the final analysis, nations do not trade with each other; people do. Every international transaction that Americans engage in will, by definition, leave both parties to the transaction believing they are better off than before--otherwise the transaction would not occur. By this measure, the "balance of trade" is always positive, benefiting the nation as a whole.
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In summation, the trade deficit is nothing to get worked up about.