Paulson Supports Large Trade Deficit

That's what the headlines should have read after Treasury Secretary Henry Paulson's speech in New York on Tuesday. While the fact apparently escaped the attention of the reporters covering the testimony, Mr. Paulson effectively endorsed continued large trade deficits when he announced his support for a strong dollar. In the non-voodoo economics world, a strong dollar means a large trade deficit. The logic here is straightforward. A higher dollar makes imports cheaper for people in the United States. That means we buy more imports. It also makes U.S. exports more expensive for people living in other countries. That means that they buy fewer U.S. exports. If we import more and export less, then we get a larger trade deficit � pretty simple stuff. The press has printed a lot of nonsense on this issue, in which people blame the trade deficit on the budget deficit. There can be a connection between the two, but only insofar as the budget deficit is responsible for higher U.S. interest rates. High U.S. interest rates can then lead to a higher dollar, or in Mr. Paulson's words, a "strong dollar." But it is important to remember that it is only because the budget deficit can raise the value of the dollar that it can lead to a trade deficit. No one goes to a store and buys the import rather than the U.S. made good because Washington is running a budget deficit. They buy the imported good because it is cheaper, end of story. Apparently Treasury secretaries think that it is macho to say that they support a strong dollar. Maybe they also think it is macho to say that they support a large trade deficit and massive borrowing from abroad. In any case, the press should be sure to tell the public about the meaning of Mr. Paulson's position so it can decide how macho it wants its treasury secretaries to be.