The Next Steps for the U.S.

Do not forget that we have $54 Billion trade deficit (2008) with Saudi Arabia on oil, out of which we managed to whittle that down to $42 Billion total deficit. One would think that with all the massive construction and refineries being built over there, we would be selling a lot of stuff. Looks like we do not manufacture much, so their industrial growth needs could be supported by Japan, Germany, Korea and now China! If that is not Sad, what is!

Mr. Murphy. Many accidental correlations exist in this world. Those you cite are accidental. They should be ignored. Density has nothing to do with our trade problem.

Our trade problem has its roots in failed U.S. policy - the desire to increase the size of world trade by opening the U.S. to imports without requiring something in return. What we should have required, but didn't, is equal access to the markets of our trading partners.

China consumers could not pay for U.S. exports. But the Chinese government sure can. If we restricted imports from the nations that are creating the large U.S. trade deficits, we would encourage them to rethink the source of the raw materials and semi-finished goods they buy to create their exports. They could also buy more military goods from us.

China is responsible for 1/3rd of our trade deficit. China is far and away our biggest contributor to our trade deficit - because they buy so little from us.

But 2/3rds of our trade deficit is created by nations other than China. Each of them purchases less from us than they sell to us.

We have a system wide failure, due to U.S trade policy. The only solution avaiable to the U.S. is to discourage or restrict access to the U.S. market by those nations who have shown an unwillingness to purchase our exports (along with selling much to us).

Can you tell me is the currently projected budget deficit for FY 2009?

Pete Murphy: " My theory is that, as population density rises beyond a critical level, per capita consumption begins to decline."

I think that is wrong, simply because per capita income should not be based on population density, otherwise Californians and New Yorkers would have very low income and hence the cost of living would be the lowest in the nation. Just an observation.

Pete Murphy: "Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable"

Bad statistics, like the non-swimmer statistician who tried to cross the river walking through by averaging the depth of the river and drowned!

Our enormous trade deficit is rightly of growing concern to Americans. Since leading the global drive toward trade liberalization by signing the Global Agreement on Tariffs and Trade in 1947, America has been transformed from the wealthiest nation on earth - its preeminent industrial power - into a skid row bum, literally begging the rest of the world for cash to keep us afloat. It's a disgusting spectacle. Our cumulative trade deficit since 1976, financed by a sell-off of American assets, exceeds $9.6 trillion. What will happen when those assets are depleted? Today's recession is the answer.

Why? The American work force is the most productive on earth. Our product quality, though it may have fallen short at one time, is now on a par with the Japanese. Our workers have labored tirelessly to improve our competitiveness. Yet our deficit continues to grow. Our median wages and net worth have declined for decades. Our debt has soared.

Clearly, there is something amiss with "free trade." The concept of free trade is rooted in Ricardo's principle of comparative advantage. In 1817 Ricardo hypothesized that every nation benefits when it trades what it makes best for products made best by other nations. On the surface, it seems to make sense. But is it possible that this theory is flawed in some way? Is there something that Ricardo didn't consider?

I am author of a book titled "Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America." My theory is that, as population density rises beyond a critical level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.

This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It's because these effects of an excessive population density - rising unemployment and poverty - are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.

One need look no further than the U.S.'s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!

Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable - nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. My point is not that our deficit with China isn't a problem, but rather that it's exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one fifth of the world's population.

Ricardo's principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.

If you‘re interested in learning more about this important new economic theory, then I invite you to visit my web site at http://PeteMurphy.wordpress.com.

Pete Murphy
Author, "Five Short Blasts"