Concerning the Trade Deficit: Reagan v. Trump

This would be President Reagan from a press conference on September 17th, 1985.

Q. For the first time in 70 years, we have become a deficit nation—since 1914. Does this disturb you? Throughout your political life, you have decried deficit spending and our secondary posture in the world of trade. Do you have a solution for this?

The President. You used the word “deficit”; you mean our trade imbalance?

Q. Yes, the fact that we have become a debtor nation for the first time since 1914.

The President. Are we? I think this false impression that’s being given that a trade imbalance means debtor nation. This isn’t our government that is expending more than it is for imports than it is getting back in exports. These are the people of our country and the businesses and the corporations and the individual entrepreneurs.

On one hand, the American people are buying more than the American people are selling. Incidentally, those figures of export and import have some failings in them, some weak spots. They don’t include on exports anything that we’re getting back for services. There’s a lot of technical things I won’t get into, because they get too complicated here, about the difference in the two figures.

But let me point something out about this. The deficit that I’m concerned about, that is the most important, and that can be the biggest problem for us and that must be solved, is the deficit in Federal spending-here, our domestic spending. This is the threat to everything that we hold dear.

But the trade imbalance—from 1890—or 1790 to 1875, this country, all that 85 years, ran a trade imbalance. And in those years, we were becoming the great economic power that we are in the world today. Now, we come up to the present. And in the last 33 months, we have seen more than 8 million new jobs created.

Yes, we’ve lost since 1979 1.6 million jobs in manufacturing, but we’ve added 9 million new jobs in travel and service industries. We’ve had this great recovery; we’ve brought inflation down; the interest rate is coming down—all of these things that we want.

This recovery, the greatest one we’ve known in decades, has been done with this same trade imbalance. Now, in the 1930’s, in that depression that I mentioned earlier in my remarks, in that depression, 25-percent unemployment—the worst depression the world has ever known—we had a trade surplus every one of those 10 years until World War II ended the depression.

So, I think this has been exaggerated, and it isn’t a case of us being a debtor nation.

Another thing we don’t count is that from abroad, that is not counted in our export figures are the billions of dollars of foreign capital that has been invested in the United States, invested in our private industries, invested in our government bonds, if you will, things of this kind, because we are the best and safest investment in the world today.

That would be the polar opposite to the position of President Trump. They can’t both be correct. One of them is right and one of them is wrong. Which is it?

This is from Trump’s speech on 1/28/2017:

Tonight, as I outline the next steps we must take as country, we must honestly acknowledge the circumstances we inherited.

Ninety-four million Americans are out of the labor force.

Over 43 million people are now living in poverty, and over 43 million Americans are on food stamps.

More than one in five people in their prime-working years are not working.

We have the worst financial recovery in 65 years.

In the last 8 years, the past Administration has put on more new debt than nearly all other Presidents combined.

We’ve lost more than one-fourth of our manufacturing jobs since NAFTA was approved, and we’ve lost 60,000 factories since China joined the World Trade Organization in 2001.

Our trade deficit in goods with the world last year was nearly $800 billion dollars.

In my opinion, they are both right considering the circumstances of their administrations. Reagan’s dragon was Stagflation, “as a political matter, the inflation hawks attribute the drop in inflation from 12.5 percent in 1980 to 3.8 percent in 1982 to Reagan’s courage in backing Volcker.

Background

Since the 1970s, inflation was a major problem. In 1980, Consumer Price Inflation was over 14%. The new president, Ronald Reagan, had to put into place policies that stimulate an inflation/recession – or stagflation – economy, something never before occurring in US economic history. In 1981, he asked Congress for a 10% tax cut so that people and businesses could put more money into the market. He wanted people to spend discretionary income to stimulate the economy so that new jobs and businesses would be needed. In the end of 1981, he saw a quickly improving market.The problem, however, was inflation. As stated by economist William Butcher: “In order to cure inflation, some recession is needed.” In 1983, Reagan allowed the second largest tax increase in history to counteract the inflation. Then, through the magic of the Laffer Curve, the recession of 1982 curbed inflation dramatically after a slight tax increase just strong enough to break the recession.

By 1984, inflation was under 4%; investments were higher; US families had higher take home pay; and, the income of the elderly rose. In 1984, Ronald Reagan won re-election by sweeping the electoral college – losing only Minnesota (his opponent’s home state) and the District of Columbia.

Reagan did not have to confront the fact that American companies were leaving America, taking their jobs with them, while still selling their products in America. If the American worker is working and making a good living by his labor then Reagan is right when he says, “On one hand, the American people are buying more than the American people are selling. Incidentally, those figures of export and import have some failings in them, some weak spots. They don’t include on exports anything that we’re getting back for services.” However, the dynamics change when all those jobs leave America for offshore locations. Now you have the government supporting American purchases with welfare payments, and while Reagan said, “Yes, we’ve lost since 1979 1.6 million jobs in manufacturing, but we’ve added 9 million new jobs in travel and service industries.” there is a large pay differential between a manufacturing job and being a travel agent or a waiter. How do those loses compare to what Trump pointed out, “We’ve lost more than one-fourth of our manufacturing jobs since NAFTA was approved, and we’ve lost 60,000 factories since China joined the World Trade Organization in 2001”?

Reagan’s Labor Force Participation Rate was 78.7% in 1980, and it climbed to 83.6% in 1988 when he left office. Today it is 81.5% the same as it was in 2012 down from the 83.3 it was when Obama took office.

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