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Will 'buy American' make a comeback?
By Donald Stotts
Oklahoma
Imagine cashing in an IRA, taking a second mortgage on the house and spending all the money on a Swiss vacation. The money is ultimately going to somebody else, somewhere far away.
That is one way agricultural economists at Oklahoma State University and Auburn University describe the U.S. trade deficit and its negative effect on the national economy.
"For most of us, the dollar seems to float down from the government and just be there," said Larry Sanders, OSU professor of agricultural economics. "However, something real and tangible needs to be in back of the money in order for it to mean anything. That 'thing' is the wealth of a nation."
Sanders said the United States has been collectively spending its wealth like there is no tomorrow since slipping into a trade deficit in 1976, finally reaching a point over the past decade or so where there is real concern about what is going to be left for America's next generation of citizens.
"There has been a startling climb in the balance of imports versus exports since 1991," Sanders said. "Simply put, the United States is buying far more goods from other countries than it is selling to other nations."
Crack open the nation's wallet and the numbers tell the tale. The United States owed foreign countries a little more than $31 billion in 1991. That figure was up to $363 billion by 2001 and more than $496 billion by 2003.
"The good news is that the trade deficit decreased from August to September of 2004," Sanders said. "The bad news is that the trade deficit is still about $50 billion per month. A lot more money is going out than is coming in."
Nor does the bad news end there. USDA data indicate that agricultural commodities ran a trade deficit in June and August, the first time since 1986 that this has happened.
"How can we afford to keep on giving $50 billion per month to foreign countries?" said James L. Novak, Auburn University Extension economist and professor of agricultural economics. "Countries, just like individuals, have to balance their checkbooks."
Checkbook balancing 101 requires more than simply calculating the value of American goods and services sold beyond the nation's borders and comparing that figure with the goods and services the United States purchases from other countries.
Income received on foreign investments and payments made to foreign investors in our country; government grants and give-away programs; private transactions such as Americans taking a vacation in the Bahamas or German tourists traveling to Florida to go to Disney World; pensions, such as those of American retirees living in other countries; and borrowing between countries must be accounted for as well.
"How much of our nation's wealth we send overseas depends on the size of the deficit and the exchange rates between the U.S. dollar and foreign currencies," Novak said. "The exchange rate is supposed to be a balancing mechanism that evens out the price of goods."
For example, if Japan is owed too many U.S. dollars then the value of the dollar will get cheaper relative to the value of the Japanese Yen. In theory, that should make American goods and services more attractive to Japanese consumers because it will be less expensive to buy goods from the United States than to buy the same product in Japan.
"It really doesn't work that way, though," Novak said. "If there is a country that sells the desired goods and services more cheaply than the United States, then they, in effect, end up being the beneficiaries of all those dollars we have sent to Japan. Like most of us, countries look for the best buy, and that's not automatically U.S. goods and services."
Making the situation even more worrisome is the widespread American concern that too many jobs are relocating to foreign countries.
"When a company permanently moves offshore there is no way to claim tax revenues or add to the national wealth," Novak said. "Stockholder dividends and holdings in that company may or may not continue to be a good deal, depending on risk and return."
As reported by Paul Samuelson in the summer 2004 issue of Journal of Economic Perspectives, the current loss of American jobs "can induce for the United States permanent loss of real income." Nor, Samuelson said, would this be a short-term effect.
"What's left when the wealth is gone along with the companies, when an individual is without a job and without wealth?" Novak said. "We see them on the streets in all our cities."
Many economists recommend that Americans purposely reduce the amount of foreign goods purchased, put more income into savings and examine labels to make sure they are buying goods manufactured in the United States.
"Domestic goods might cost a few cents more but buying them will help keep people employed in this country and adds to the stability and wealth of the U.S. economy," Novak said.
Furthermore, the United States will need to increase taxes and cut spending to balance the federal budget, which has gone from a surplus of 2.5 percent of gross domestic product (GDP) in 2000 to a deficit of slightly less than 4 percent in 2003, according to International Monetary Fund economists.
"A deficit of 5 percent of GDP puts a nation in serious financial difficulty," Sanders said. "Sustainability measures are available to examine the long-term effects of U.S. programs and policies, both of which must be coordinated to make sure they don't work at cross-purposes. The current situation simply is not sustainable."
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