Which Direction?

Work your way through this short Post by Greg Mankiw by venue of the links to get to Paul Krugman, Greg’s own estimate, and a Review by Dean Baker. Study the articles carefully, because they are all basically right about the connection between the Savings rate, reduction of Consumption, lower Interest rates, and the cheaper Dollar. Where they might be a shade wrong lay in the translation of this mechanism into an improved Trade deficit picture. This later has a constraint of foreign government action, not necessarily to maintain a surplus Trade pattern with the United States, but more generally to keep a balanced Trade pattern with all of their Trade partners.

These three Economists might ask why such foreign government action is inevitable in my estimation. The first rationale remains in the fact that the United States imports too much of everything, foreign countries knowing that this places too much pressure on all World Consumption Pricing; foreign central bank purchasing of U.S. Dollars not only insures a favorable Price for their own Exports, but also gives them a productive share (Interest) in what they consider an overheated U.S. economy. The second rationale for foreign government action to maintain generalized Trade patterns lay in their realization that the U.S. economy must eventually alter its economic performance pattern because of the over-consumption of Resources, and foreign governments do not want to be captured in an economic dependence upon the American economy as it is. A cheaper Dollar and lower Interest rates will not significantly sell greater American Exports under these conditions.

The real method to eliminate the Trade Deficit is to reduce American consumption. The real way to achieve this reduction is higher Interest rates, higher Taxes, and introduction of a Carbon tax. Letting the Bush Tax Cuts sunset (much sooner than 2010) would be a great way to curb American consumption, without affecting the Sale of American Exports in the slightest. Paul Krugman himself has written on the fact that a Carbon tax (rather than Carbon Credits) would impact Producers to greater degree than Consumers, due to the high variability of Demand associated with Price in the Energy industry. Another great reduction in Consumption would be to sacrifice the Sacred Cow: the Mortgage Tax Credit. Economists will scream that all of these factors would propel an economic Recession; but would it be a Recession of lost Productivity, or simply a Recession of lost Corporate Profits? The Population of this Country and the World is too extensive for it ever to become a Recession of lost Productivity. The final great Tax imposition of great value is the elimination of Corporate Tax credits for foreign investment; assuring a redirection to capital investment to domestic resources. Does all this mean Hard Times for Americans? Yes, but not as hard as it will be when We cannot purchase the foreign Products because of the lost value of the Dollar. lgl