Everyone Worries About Deficits

THE FEDERAL deficit is terrible. The trade deficit is worse. How long can it go on? That is what we have been worrying about at least since 1970. And The Washington Times rehearses the experts’ worries about them.

We know where the federal deficit comes from. Politicians spending taxpayers’ money in response to the demands of taxpayers. And, of course, beyond the formal budget deficit and its accumulated national debt there is the unfunded debt, the promises made, principally for Medicare and Social Security, that are not reflected in the federal government’s headline budget numbers.

But what about the trade deficit? It has gone up when the dollar was high in the late 1990s and it has gone up when the dollar was low in the early Noughties. What is going on?

Maybe Arnold Kling has the answer. Productivity. Here are the productivity numbers for the last half century.

Period	Average Productivity Growth
1955-1960	2.03
1960-1965	2.79
1965-1970	2.09
1970-1975	2.31
1975-1980	1.55
1980-1985	1.38
1985-1990	1.65
1990-1995	1.59
1995-2000	2.28
2000-2005	3.39

The table shows a pretty staggering increase in productivity over the past ten years. What caused it? Who knows, for sure, and Kling insists that we refrain from giving credit or blame for any particular president or economic policy.

William W. Lewis in his book The Power of Productivity thinks he does have an answer. He credits the relatively free economy of the United States that allows intense, fair competition over most product markets. And he emphasizes the importance of retail. Retail, sparked by Wal-Mart accounted for half the gain in productivity in the 1990s. Has that continued into the Noughties?

Maybe the productivity numbers help us understand the continuing saga of the twin deficits. Maybe a nation that is increasing the productivity of its workers (or whose workers are increasing their productivity) at 3.39 percent per year can afford deficits as far as the eye can see. Maybe the way we should look at the deficits is that foreign investors can’t get their hands on U.S. financial assets fast enough.

Or maybe it is a two-way street. Maybe the productive workers of the United States want to buy cheap goods, from wherever they are made, and the rest of the world wants the stability and security of US financial instruments as a store of value.

Sphere: Related Content |

Christopher Chantrill blogs at www.roadtothemiddleclass.com. His Road to the Middle Class is forthcoming.