Does Henry Paulson Advocate a Large Trade Deficit?

According to press accounts, Mr. Paulson is an ardent believer in a strong dollar. Regardless of what you think of the budget deficit, the strong dollar IS the reason for the trade deficit.

This is not really a contestable point. No one opts to buy imported goods rather than domestically produced goods because of the budget deficit. They buy imported goods because the strong dollar makes them cheaper. It really is that simple.

Of course, the United States cannot continue to run large trade deficits indefinitely. And the trade deficit is more than twice as large as unified budget deficit (it's more than 50 percent larger than the on-budget deficit). It might be cause for concern that our new Treasury secretary is a big advocate for enlarging the country's most unsustainable deficit, but you wouldn't get this from any of the reporting.

The high dollar policy is also redistributive since it puts downward pressure on prices and wages in the sectors of the economy exposed to international competition (e.g. manufacturing). This hits less skilled workers to the benefit of the highly educated workers in protected sectors of the economy (e.g. doctors, lawyers, accountants and economists).

It would have been worth including comments from representatives of the industrial sector about Mr. Paulson's selection. Incredibly, none of the reporting I saw even raised this set of issues.

--Dean Baker

You may also like