Huge trade deficits and loss of manufacturing jobs go hand in hand

DallasBlog.com | Tom Pauken:

“Here is what [Dallas Federal Reserve President Richard] Fisher had to say about our trade deficit: ‘What the numbers tell you is that we are far richer as individuals and as a nation than when we last ran a trade surplus. We are hardly ….. becoming weaker as we have incurred trade deficits.’ If you believe those words from Fisher, then I have a bridge to sell you. ... Our huge trade deficits ($726 billion last year) are unsustainable no matter what pretty face Richard Fisher tries to paint on that pig.”

Ed Cognoski responds:

Mr Pauken uses Mr Fisher's speech in order to lobby for a border-adjusted business tax. From the speech, it's not clear what might be Mr Fisher's opinion of such a change in our tax laws. He understands that globalization heightens tax competition among nations. If a border-adjusted tax is part of that open, free market competition, Mr Fisher may welcome it. But if it is an instinctive protectionist reaction to disruptions caused by a changing economy, Mr Fisher may likely oppose it.

Mr Fisher's point is that we shouldn't allow the trade deficits to rush us into the false remedies of protectionism. The American economy is strong, even after thirty years of trade deficits. Globalization is ushering in a new period of "creative destruction." Our country has experienced such discontinuities before and has emerged from each more prosperous than before. Government attempts at protectionism usually made things worse in the meantime and delayed the recoveries. Mr Fisher's speech explains it better:

In his book, Business Cycles, [Joseph Schumpeter] wrote: “A railroad through new country, i.e., country not yet served by railroads, as soon as it gets into working order upsets all conditions of location, all cost calculations, all production functions within its radius of influence; and hardly any ‘ways of doing things’ which have been optimal before remain so afterward.”

Here is where China and India and all the bristling new economic entrants come in. They are today’s equivalent of Schumpeter’s railroads. They and the phenomenon of globalization are agents of creative destruction writ large. From now on, hardly any way of doing things which used to be optimal will ever be the same.
...
As long as the Federal Reserve does its job of holding inflation at bay, and as long as our political leaders resist protectionism and other forms of interference with creative destruction and let the private sector get on with its work, we will remain the world’s predominant economic machine.

Even if border adjusted taxes do not lead to escalating protectionism, there is not a consensus on their impact on trade deficits. An article in MarketWatch reports this less than optimistic view:

Economist Glenn Hubbard, dean of the Columbia University Graduate School of Business and former chairman of President Bush's Council of Economic Advisers, agreed that border adjustments would be unlikely to significantly alter the trade gap. When it comes to causes of the trade deficit, "the tax code is probably not the biggest feature," Hubbard told the committee. "I don't think you should expect a border-adjusted tax, per se, to [close] huge deficits."