2006 November 12 Sunday
US Imports To Exceed Federal Taxes Collected

Another sign of globalization for the US economy is about to be reached.

Sometime next year—perhaps around Christmas 2007, if current trends continue—the U.S. will hit a milestone. For the first time in recent memory, the cost of imported goods and services will exceed federal revenues. In other words, Americans will soon pay more to foreigners than they do to their national government.

We're almost there now. Imports cost us about $2.2 trillion a year; the federal government collects $2.4 trillion in revenues. Why is that important? Because for the past 70 years, Washington has been the 800-pound gorilla, more powerful by far than any other force in the U.S. economy. That's not true anymore. The federal government remains plenty influential, but the global economy is more so.

This will come as a rude shock to Representative Nancy Pelosi (D-Calif.), the presumptive Speaker of the House, Charles B. Rangel (D-N.Y.), the likely chairman of the House Ways & Means Committee, and other newly enfranchised leaders in the Democratic Party.

The tone of the article is that the power of the US government to influence the US national economy is going down. High taxes can drive businesses abroad for example. But that does not hold for all industries or all levers of policy. Even the argument that the article makes about the Federal Reserve losing power to control longer term interest rates seems wrong to me. The Fed has huge levers. For example, it could buy up all the debt in the market if it so chose. In other words it can print money. It could also change bank reserve requirements and make other changes to expand or contract the money supply.

That rapid acceleration of imports is made possible by currency exchange rate fixing by East Asian governments. They do this by purchasing US financial instruments in the form of corporate bonds, mortgage bonds, and government bonds. As a result we are going into hock to the world and becoming what Warren Buffett calls "Squanderville". This folly deserves far more attention than it gets from either major US political party.

The argument in the article is that the US government is losing control of the US national economy as the economy becomes driven more by global economic forces.

Since 1995 imports have risen from 12% of gross domestic product to about 17%. And foreign money finances about 32% of U.S. domestic investment, up from 7% in 1995. In other words, the U.S. is more open to the global economy than ever before, and the links run in both directions. Now many of the levers affecting the U.S. economy are located not in Washington but in Beijing, London, and even Mexico City.

Mexico City? I don't think so. Tokyo certainly. Seoul even. Frankfurt and Paris too.

The massive US government funding of medical research has not translated into a trade surplus in medical products. Companies do product development and production abroad for research funded in the US.

But in the brave new world of the global economy, where companies move factories and facilities around the world like game pieces, it's no longer a given that U.S. workers benefit directly from U.S.-funded research. One worrisome example: Despite federal outlays of over $125 billion for medical research over the past five years, the U.S. has a large and growing trade deficit in advanced biotech and medical goods. "The era in which we could assume that increased U.S. public investment in R&D automatically generates domestic growth is over," says Jeff Faux of the liberal Economic Policy Institute.

This is especially troubling to me because a decrease in political support for research seems plausible as a result of this trend. How to make more of the results of research translated into products developed and produced in the United States?

One commenter on that article on the Businessweek web site argues that surely we can still benefit from increased spending on education. I do not believe it. In fact, I think education needs to be modernized by recorded lectures and web courses to reduce the amount of labor in schools. Most of the teachers and professors should be automated out of jobs and shifted into more wealth-generating work.

Between 2001 and today, imports rose by three percentage points as a share of GDP, one of the main reasons that job growth was so slow. By comparison, the import share rose by only one percentage point or so in the recoveries of the early 1980s and the early 1990s.

What is billed as a greater integration of the US economy in the world economy is in fact a huge increase in imports coupled to a much smaller growth in exports. The US trade deficit with China has grown from $17.9 billion in January 2006 to $23 billion in September 2006. It has doubled since the January 2004 deficit of $11.5 billion. Going back even further it has quadrupled since 1998. This is what some nutty economists call "free trade". But I'm with Warren Buffett. This nonsense is squanderville. The US is on track to hit another record yearly trade deficit in spite of the drop in oil prices.

The shortfall declined 6.8 percent, to $64.3 billion, from an all-time high of $69 billion in August, the Commerce Department said Thursday. The drop of $4.7 billion was the biggest one-month decline since February 2001.

Even with the improvement, the deficit is on track to set a record for the fifth consecutive year. Through September the deficit is running at an annual rate of $781.6 billion, surpassing last year's all-time high of $716.7 billion.

One advantage of the Democrats taking over Congress is that they will apply some political pressure to cut back the size of the US trade deficit. That advantage does not make up for their Open Borders approach to immigration though.

Share |      By Randall Parker at 2006 November 12 08:50 PM  Economics Globalization

paul said at November 12, 2006 9:39 PM:

This will probably go on until the dollar crashes.

It probably will crash, then all these industries and jobs that moved to China or India or wherever will have to move back. Either that or go bankrupt and let new firms in the US take their customers.

As with Britain, the dollar crash will likely mean the end of the empire.

Although, the US was never designed to be an empire. I don't know why so many in the US favor being an empire.

The Iraq project is what empires do. It was never a good idea.

Wolf-Dog said at November 12, 2006 11:07 PM:

Warren Buffet is betting on the long term depreciation of the dollar.

Dollar crash may mean the end of the "empire", but it will not mean the end of the United States, provided that we make investments in nanotechnological manufacturing. Nanotechnology will make self-sustaining intelligent manufacturing a reality, and it will solve the need for cheap labor. Nanotechnology can make the foreign trade deficit problem go away, since all manufacturing would be domestic.

John S Bolton said at November 13, 2006 2:35 AM:

Foreign central bank dollar support is an entirely political operation,
therefore analogies to business cycles of the past, when political control
of economic affairs was much weaker, are unwarranted perhaps.
The reciprocating effects on a dictatorship like China, mean that they almost have to go for a gradual backing-off from dollar support.
Our politics can even command that this be done.

Chris M said at November 13, 2006 1:18 PM:

The New York Times weighed in today:


Don't worry, currency manipulation is apparently only a small problem. The real solution for fixing the trade deficit is health care reform!

Randall Parker said at November 13, 2006 7:20 PM:

Chris M,

We can count on the Gray Lady for that sort of, um, er, insight.

Kenelm Digby said at November 14, 2006 3:26 AM:

You really are fighting for a lost cause.
I'm not talking here about the legitimacy of the theory of free-trade and comparative advantage being 'proved' as optimizing global economic potential and thus general income levels, although many people talk as though the rather dry theories of Adam Smith and David Ricardo are 'gospel truth', the reality is a lot more contentious and far from clear-cut.Personally, I favor 'racial' theories to 'explain' economics.
No, my point is that there is today simply too much money and extremely powerful vested interests tied-up in keeping the present staus quo going, here I'm talking about *real* political power, not the farce of putting a slip of paper through a ballot-box, but the enormous wealth, uninmaginable to most people, that is concentrated in the hands of a small vested interest, and which literally buys and controls politicians and the 'movers-and-shakers' of the World.
Simply because of this reason, your efforts and arguments are vainglorious and futile.

Ivan said at November 14, 2006 4:09 PM:

The dollar value of what is paid the the government is not the limit of the government's power.

Tarrifs, embargo, regulation, subsidy are all very powerful and certainly affect trade.

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