THE TRADE DEFICIT: CAUSES AND SOLUTIONS

There is a strong tendency among American politicians and economists to attempt to deal with issues and problems in isolation. Politicians take this approach because they apparent have difficulty dealing with complexity. Economists take this approach so that they can factor troublesome variables out of their equations. One result of the approach of treating issues and problems in isolation is the development of solutions that are ineffective when they are implemented in the real world where isolation from other factors is no longer an option.

The tendency to deal with the issue of international trade in isolation has led to policies that tend to make the situation worse rather than better. The United States government (it makes little difference which administration is in control of the White House) likes to play the role of the world's policeman (and it likes to be involved in all disputes). This role is very expensive, but the United States government and United States taxpayers do not like to ask Americans to pay the bill in the form of a balanced budget. A balanced budget would require an increase in taxes, as there is just so much the Congress can squeeze out of services for the poor and the old without bringing the electorate down on them (Gale & Orszag, 2003).

Therefore, the Congress and the President agree to pay the bill resulting from foreign policy by resorting to deficit spending. Deficit spending on a massive scale

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ered, the cycle will reverse itself. The reversal will go all the way back to increasing the pressures on the American capital markets. Then, the federal government will have to decide whether to (a) print money or (b) participate in borrowing in the capital markets to the point that interest rates reach levels that stifle both business investment and consumer purchasing of big-ticket items. Printing money will lead to price inflation followed by an economic crash. Raising interest rates to astronomical levels in the capital markets would allow the American economy to bypass inflation to go straight to economic depression. Neither option is pleasant to consider. There are, however, other options. The United States could pull in its horns and stop playing the role of the world's policeman. The capital demands of the federal government then would be lowered to levels that are more manageable. Alternatively, Congress could raise taxes, which would allow the President to continue to send the American military to all parts of the world at American expense, and still ease the pressures on the American capital markets. Aside from enraging a large segment of the American public and causing a majority of the members of the United

Category: Economics - T