The United States has for decades bought more from foreigners than it has sold to foreigners. This year alone our trade deficit — the gap between what we buy and what we sell — will exceed $500 billion: 4% of our Gross Domestic Product. The rest of the world new owns claims on $2.5 trillion worth of U.S. wealth. We are selling off our national wealth to fund our current consumption, at an alarming rate. Our persistent, large trade deficits represent an enormous problem for the country down the road. We are eating our seed corn.
Taken together, the trade deficit, our huge government debt, and our huge unfunded liabilities for Social Security and Medicare, form an Economic Axis of Evil. These three problems represent enormous threats to our future wealth and welfare. Unfortunately, for these problems we have at root only ourselves. Fortunately, we also have to look only to ourselves and our own grit to craft a solution.
To combat America’s large and persistent trade deficits, Art Small endorses a plan authored by the investor Warren Buffet, which Buffet outlined in a recent article. Under this plan, U.S. firms that export goods and services abroad will receive tradable import permits that can be used to import goods and services from foreigners, of equal value. Exporters would be issued 1 import permit for each $1 worth of goods and services they sell abroad. These permits would trade freely in a large and liquid market. They would have value, because importers would need to surrender 1 permit for each $1 worth of goods and services they bring in to the U.S.
The value of the permits would adjust smoothly with market conditions. Their price would rise as the demand for imports grows, and decline smoothly as exporters succeed in selling goods and services to the rest of the world.
Persistent trade deficits pose a grave peril to the future wealth and welfare of the U.S.:
- This year we will buy from foreigners $500 billion more in goods and services than we will sell to the rest of the world. This figure is over 4% of our Gross Domestic Product.
- These large trade deficits have been going on for decades. Foreigners now own $2.5 trillion of the wealth of the U.S. We are selling off our national wealth to finance a consumption binge.
- As economist Herbert Stein once said, “If something cannot go on forever, it will stop.” We have the power to decide when and how this will stop. Right now, we are effectively deciding that it will stop when we have nothing left to sell.
Art Small has a plan to reduce the trade deficit.
- The plan is in fact very simple: it is based on the concept oftradable permits that has already been used successfully to address problems of air pollution. (The most prominent case: sulfur dioxide emissions from coal-fired power plants.)
- This system would be market-based. It would not rely on government interference on behalf of politically-favored industries.
- The value of the permits would act as a floating tariff rate, one that adjusts smoothly with market conditions. If our imports started to rise faster than our exports, the price of these permits would adjust smoothly to bring imports and exports back into balance.
- Under this plan, we – Americans – will control how large a trade deficit we are willing to run. We will let market forces do their appropriate job of allocating resources, while allowing the American people to decide over the long run whether our trade deficits are acceptable, and if not, to do something about it.