There is a common refrain in policy debates that our budget deficit is the cause of the trade defict. The NYT is at the forefront of those arguing this position. Last week (while I was away), they again made the case in attacking a Senate proposal to deliberately lower the value of the dollar against the Chinese currency and other countries in which currency misalignments have led to large trade deficits. While this argument can be a convenient weapon against the Bush administration deficits, it doesn't make a great deal of sense. First, the numbers don't add up. We're looking at budget deficits of around $250 billion and trade deficits of close to $800 billion. There is no economic theory that will explain how a $250 billion budget deficit can cause an $800 billion trade deficit. (You're welcome to add in the $200 billion borrowed from Social Security, and it still does not come close to adding up.) Then we need a mechanism. High budget deficits are supposed to cause high interest rates. But U.S. interest rates are low by historical standards. With inflation around 3.0 percent, we should expect to see an interest rate on the ten-year treasury bill of close to 6.0 percent. Instead, it is just over 5.0 percent. Of course, the high interest rate is supposed to be what attracts foreign investors to put money in the U.S., which in turn drives up the value of the dollar. This is always the immediate cause of the trade deficit. People buy foreign produced goods at Wal-Mart because they are cheap, not because the U.S. is running a budget deficit. Anyhow, the NYT should find more legitimate grounds for bashing Bush's budget policy. The trade deficit is a first and foremost a dollar problem, requiring a dollar solution (which will not be pretty). It is not a budget deficit problem. The Senate bill addressed the reaal issue.
--Dean Baker
