The Reform Party to which you gave birth in 1992, will field a presidential candidate next year in a do-or-die effort. Either the candidate will win, I think, or the electorate will give the ticket so small a turnout and vote that the Party will go the way of Teddy Roosevelt's Bullmoose ticket of 1912. The one thing that really holds it back, I think, is the focus you have always put on the trade deficit and the influence of "cheap foreign labor" as a source of economic weakness here in the U.S. When you invited me to Dallas in 1992 to discuss your candidacy, we spent more than half of the two hours in your office talking about Mexico and the trade issue. I came away thinking I'd made progress in getting you to see that the problem was expensive capital here at home -- not cheap labor South of the Border or in Asia. But your party platform continues to present the "problem" as one that can be cured by a protective tariff here, or lower tariffs abroad. We now have a free-trade zone with Mexico, so the only argument there is the low wages, which could only be kept out of the United States by a higher tariff on the goods they produce, which our agreement will not permit. We come back to the only possible solution: Increase the amount of capital available to our workers, so they will be able to raise their real wages in trade internally and externally. And for the Mexican workers, persuade their government to lower tax rates that are preventing capital formation there. This last idea will produce a rate of growth fast enough in Mexico to draw equity investment for new or maturing enterprises. When this occurs, there is an automatic trade surplus in our exchange with Mexico. Our trade deficit is only high because the rest of the world is investing in our financial and real assets.
One thing I recommend to you is a reading of the relevant passages of Robert L. Bartley's 1991 book, The Seven Fat Years, a book about the supply-side revolution. If the Reform Party is going to concentrate its energies on reform, I think you should not waste them on this non-issue. An amendment to the RP platform would help.
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Excerpt from The Seven Fat Years by Robert L. Bartley, pg. 53
You Become What You Measure
The National Income Accounts, the familiar numbers used in all economic analyses and discussion, were formulated in a Keynesian era and often reflect Keynesian assumptions. It is almost as if they were designed to measure the amount of money the government "injects" into the economy. The heirs of Michael 1 don't necessarily believe.
If you pick a stock that shoots up, for example, you will no doubt feel wealthier and behave accordingly. Knowing of your gain, you may even draw down your savings account and buy a new car. Your net worth is higher, and you have a car that will last five years. But in the national income accounts, you are a naughty dissaver.
The unrealized gain on the stock is not reflected in the accounts. The purchase of the car is counted as consumption, though if a Fortune 500 company buys the same car it counts as investment. So the money you took out of savings will shrink any other additions to savings made out of your salary. If your stock gained enough that you don't need to save more, your "consumption" will exceed your "income." If you worry about the statistics, you will think you have a big problem.
The savings rate, the object of much concern during the 1980s, has to be taken with a grain of salt. So, too, investment. An engineering degree doesn't count as investment, but Octopus Enterprises' 20th Lear Jet does. Gross investment has been strong during the eighties, but net investment weak; in other words, there has been a big jump in depreciation schedules. What does this mean? Does it really mean we were eating the seed corn?
By now concern with the statistics is shared by many professional economists, in particular Robert Eisner, Northwestern University's noted Keynesian. He used his presidential address to the American Economic Association in 1988 to warn that economic statistics often do not measure what economic theory pretends they do. "Somehow, econometricians, theorists, and economic analysts of all stripes have lost essential communication with the compilers and synthesizers of their data," he wrote. "To put matters bluntly, many of us have literally not known what we are talking about, or have confused our listeners -- and ourselves -- into thinking that what we are talking about is directly relevant to the matters with which we are concerned."
Nowhere is this difficulty more pronounced than on the balance of trade. In fact, international transactions are always in balance, by definition. They are an accounting identity, reflecting a great circle of transactions in which for every buyer there is a seller. But different items in the great circle carry different labels. The export of an airliner is called trade. The export of a share of stock is called foreign investment, as is the export of a deed to an office building. A loan between central banks is called official financing. With allowance for errors and omissions, in the end all these items must balance.
For many years the government published a plethora of different balances, reflecting different cross-sections of the circle of transactions. There was the merchandise trade balance, the balance on current account, the "basic" balance, the "net liquidity" balance and the official reserve transaction balance. In 1976, an advisory committee of prominent economists looked at these statistics, and was moved to wonder whether any of them meant anything.
The committee suggested that "the words ‘surplus' and ‘deficit' be avoided insofar as possible." For "these words are frequently taken to mean that the developments are "good' or ‘bad' respectively. Since that interpretation is often incorrect, the terms may be widely misunderstood and used in lieu of analysis."
Following the committee's recommendations, the Commerce Department stopped publishing most of the balances. Because it had to publish something it kept the trade balance, which has been bedeviling us ever since. The "trade deficit" has been enthroned as a kind of economic black hole from which nothing escapes.
In fact, the United States ran a trade deficit in nearly all of its first 100 years, and ran surpluses in the midst of the Great Depression. A trade deficit is typical of rapidly growing economies, which require a disproportionate share of the world's resources, and provide investment opportunities to balance the equation. Indeed, under the accounting identity, investment inflows must be balanced with a deficit on the trade account. The mystery is why we even collect these figures; if we kept similar statistics for Manhattan Island, Park Avenue could lay awake at night worrying about its trade deficit.