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Politicians need to know...

by John Kusumi Thursday, Jun. 24, 2004 at 11:27 PM

What every politician ought to know before taking office

Does Kusumi know something
that Washington doesn't?

America's 18-year-old for President:

Why does Washington "just not get it" about
what's really the matter with free trade?

John Kusumi has been advocating policy and critiquing Washington for 24 years. The former 18-year-old for U.S. President (he was an independent candidate in 1984) is now 37 years old, and out with a book, Activate This!.

Through his book, through speeches, interviews, and publishing, and through his work at the China Support Network, Kusumi has been critical of globalized free trade as promulgated by Washington.

He says, "Everyone carries around a mental model -- a conception of how things work. In Washington, the conventional wisdom about trade deficits has been flat wrong. If my book were promoted, caught on, or simply picked up and read by the likes of President Bush, John Kerry, and the staffers around them -- then, it might dawn on them. In the globalization of free trade, the trouble is that a faulty paradigm became conventional wisdom."

What might really dawn upon these people? That they have followed flawed logic? --The question is answered explicitly in the excerpt below, taken from Kusumi's book, Activate This!. To understand the problem of free trade, Kusumi says that it is first necessary to understand trade deficits.

Washington types should care to understand trade deficits, and now Kusumi is trying to make the debate accessible for laymen. "Sometimes, people say, 'Slow down and explain this to me like I'm an 8-year-old.' This is my attempt to introduce trade deficits for readers from 8 to 80," he said.

He asks your indulgence to follow the explanation, that he renders like a school teacher in this 'primer on trade deficits,' from his book.

This chapter is an occasion when I can convey a clear understanding of trade deficits to my readers, with material that may be new to many. Trade deficits ought to be less obscure and esoteric than they have been heretofore. When we wake up to them, we find many other political issues and problems linked to misunderstanding of trade deficits. Included here, is a better view of trade deficits for Washington, which has been too foggy for too long on this topic.

Above, I said I believe that Clinton was working with faulty arithmetic. If true, that can be ascribed to a conventional misunderstanding of trade deficits on the part of the U.S. establishment. It is in this area of trade deficits where our entire polity needs to upgrade its understanding.

To ease understanding, in writing here, I may use the less stilted of two terms, where they are interchangeable. For example, I may speak of buying, rather than “importing.” For present purposes, they are interchangeable terms. Likewise, I may speak of selling, rather than “exporting.”

The stilted word, “bilateral,” describes trade as it actually takes place. By this, I mean that two parties make a transaction, or exchange. Generally, money changes hands. At the end of day, trade is buying and selling. Trade certainly adds up, but when it is understood through this “atomic theory,” we see that its simplest, most necessary element is a transaction.

Two parties in any transaction have an economic relationship. We can speak of China; America; a popsicle stand; or, a lemonade stand. Economic parties share essential things in common. In all cases, they have things they buy; things they sell; and, they have their money.

For this view of trade deficits, I suggest you identify with one party, at one end of a relationship as described. E.g., you run “your popsicle stand.” In the discussion, America substitutes for your popsicle stand, but the same principles apply, and the conceptual play is meant to help with learning our material.

For its literal definition, a “trade deficit” is the amount you buy, minus the amount you sell, when that calculation comes out to a positive number. For that calculation to return a positive number, buying must be more than selling. Then, the value of the result expresses the amount of your trade deficit. (The result answers two questions. “How much is the trade deficit?” And, “How much is the difference, of buying in excess of selling?”)

Thinking about the money comes next. Buying entails money going out, or going away. Selling entails money coming in. Within the meaning of “trade deficit,” to have one requires that your level of buying is in excess of your level of selling. More money is going out than is coming in. The amount of the trade deficit is a loss of money.

To a popsicle stand, that means operating at a loss. For the American economy, it means likewise, and worse.

The bad news does not stop at the American economy. The money that flows out goes somewhere – it arrives at the other end of the trade. In China, the money comes in. At their lemonade stand, they make a profit. America’s loss is China’s gain.

The definition is scarcely my point, but it is my beginning. Going into usage; implications; economic upshots; and, policy upshots must develop the clear understanding and better view as promised. I may have something to say about America’s loss; later, the Chinese democracy movement may have something to say about China’s gain. Here, we must look at each side of that coin, starting with the American side.

For the American exposition, we must consider two lines of inquiry. First, are trade deficits a good thing, or a bad thing? Second, what may happen in the future of trade with China? Will trade deficits get larger, smaller, or cut off? These are three political scenarios. What are the implications in each case?

The first question, above, has found American politicians on both sides of the issue. On one side, trade deficits are a problem (bad thing), and they are roundly decried. Alternately, on the other side, trade deficits are a non-issue (good thing), and they are excused and dismissed.

I will stand firmly in saying that trade deficits are a bad thing. With having introduced trade deficits as a bad thing, above, readers who are with me may be saying, “Duh – losing money is a bad thing.” True enough; and, the more I looked into it, the more I found that trade deficits hurt the economy in alarming ways. I want to answer my readers who may ask, “Why don’t politicians ‘get it,’ or do the right thing?” We will return to discovering “bads” in the reality of trade deficits; but to understand their place in Washington’s political situation, we must look at the perception of trade deficits. The answer is a matter within perception, apart from reality.

The U.S. establishment has been humming along with persuasive arguments that trade deficits are a ‘non-issue.’ Some have stock answers, to explain away trade deficits. Some politicians may genuinely, and in good faith, believe these same explanations. Such arguments are persuasive – but wrong. I must digress, and perhaps excuse politicians from full culpability.

We should know that politicians themselves get an education. They, too, hear these same faulty explanations. If we seek one, the culprit could be the politician – or, the culprit could be the argument, where it has become conventional wisdom and the line of the day in the U.S. establishment. Maybe the politician wasn’t born bad, but the argument certainly was; and then, it became what “everybody thinks” in the establishment.

I personally confess to having taken the learning curve on this issue, and this may be why I am going easy on politicians. I, myself, originally fell for the standard explanations – and later, had my own epiphany about trade deficits. My vignette may be instructive, for being rare.

In normal America, nobody thinks about trade deficits, because the whole matter is “above their pay grade.” It is nobody’s job to worry about trade deficits, unless they are an occupant of the White House, or a presidential candidate. That’s where I come in; who else was the 18-year-old candidate for U.S. President? From 1984, the answer is, “no one else was.”

With this book being my life’s story, we see I hadn’t tried to be a politician in many years, but study of presidential issues remained my interest, into college. At age 18, I certainly did not know everything, and I still had much to learn. I was frankly curious about trade deficits, and I picked up the Atlantic monthly.

I was happy to find an Atlantic article, which expounded about them at some length. Here, in the second half of the 1980s, I read the standard explanation, where trade deficits can be discounted for purposes of policy making. The explanation essentially says that money re-circulates; what goes around, comes around; it all comes out in the wash; and, “it’s all good.”

I respected the Atlantic as a source of information, and I was convinced. It appeared that trade deficits were a smoke screen issue, and that at macro-economic levels, there was no ultimate downside to trade deficits. I will dub myself of those days to be “College Kusumi.” College Kusumi put down the magazine, shrugged, and said, “Great – I can blow off trade deficits [as a factor in any future policy development]!”

For many years, this caused me to stop paying attention to the issue of trade deficits. At the start of his term, I believe that Bill Clinton operated under similar assumptions. Near the start of his term, his Secretary of Labor, Robert Reich, published a book, The Work of Nations. Since Reich was Clinton’s advisor, the book may be indicative of Clinton’s thinking in the day. This book again excused trade deficits, and conveyed the underpinnings of what would later become the globalization of free trade.

The book forecast the decline of manufacturing in America. Manufacturing would move offshore, inexorably, as corporations seek lower costs. The book offered no hope for that sector of our economy, and did not advocate any moves to stem the erosion. With this grim prognosis, the book suggested we roll with the inevitable decline, accept it, and move on to free trade, seeking to make the best of this scenario.

In the day, I agreed that trade deficits were a non-issue, and my issue with the book was simply that “no hope for the manufacturing sector” didn’t sit well. As a society, we went to all the trouble of having an industrial revolution. Now, it would go away, to not even a whimper or a response on our part? Even were we resigned to manufacturing’s erosion, principles from microeconomics would have us minimizing the losses. The trend may be for loss of manufacturing, but why would we give in and hurry the erosion along? The book was a green light for buzzards and vultures to contemplate the carcass of American industry.

If one is oblivious to trade deficits, what can happen is the globalization of free trade. That proceeded to happen in the 1990s; and, I will also return to globalization. But, my vignette leads to my own epiphany about trade deficits.

I cannot tie my epiphany to an event or a specific day. Unique conditions form a soup of precursors in my environment. The soup base recipe might appear as follows.

  • Begin by being founder of the China Support Network. Gain thereby, the China issue to contemplate for many years.
  • Add years of business experience.
  • Add the mindset of a software developer.
  • Add accounting knowledge, being engrossed in developing accounting software.

Into this fertile environment fell the Chinese trade deal, which prompted me to think furiously about China trade. I had long been aware that China was getting a good deal; but now, I began to analyze America’s bad deal. Pieces of the puzzle, which had long been on my desk, began coming together. That was an epiphany.

Among the toughest actions for people to take is to admit mistakes. Politicians in particular, care very much to appear infallible. In fact, software CEOs would like to appear infallible. I can’t predict that we will hear from many politicians, saying, “All those years – I was wrong about trade deficits!” But for my part, I admit that all those years – I was wrong about trade deficits!

My digression was to express that politicians can have a misconception about trade deficits, and this can be quite a natural condition. Our environment holds it as conventional wisdom. The faulty reasoning is widely shared, and effectively educates many. Anchors, pundits, and commentators are not accustomed to tearing into trade deficits, like they once did with budget deficits.

Even college classes of introductory economics have, on occasion, missed this bad news about trade deficits. For most people, all that is learned of economics is two widely given courses—

  • Economics 101: Macroeconomics
  • Economics 102: Microeconomics

Consider the question, “How macro is macro?” In the old days, we may have equated the national economy with being macro. A low volume of trade encouraged the thought of it as an island. In the new days, we may consider three “levels” of macro – national; the free world; and, the globe.

These early courses go for theory and keep a top line orientation. They remove other considerations and assume “ceteris paribus,” meaning that variables in the environment do not change. Macro and micro are simplified academic models.

For the uninitiated, microeconomics is about individual players in the economy – firms and businesses. Microeconomics is focused on a small scale, not the international level where trade deficits occur. Micro will not tell you about trade deficits.

Macroeconomics is focused at the level containing all. At that level, trade outside the system makes no sense to introduce. Again, you could completely miss trade deficits, which occur between nations.

Perhaps worse, professors will sometimes repeat the line, that to the macro economy, trade deficits are a non-issue. In one sense, they are right. –Because the globe has no trading partner, it also has no trade deficits. In this academic way, trade deficits disappear. To get there, one must consider the globe as one accounting unit, and not consider any other. Smaller units, like nations, do live among company, trade, trading partners, and trade deficits.

We can see that our environment is ripe for misunderstanding of trade deficits.

Make no mistake; trade deficits are a bad thing. But, countervailing ideas have gained currency. Politicians have been working with the perception of trade deficits, not the reality. In answer to the question, “Why don’t politicians ‘get it,’ or do the right thing,” they truly may not know any better.

Turning away from perception, let’s turn back to reality. Upon review, the reality of trade deficits only gets uglier, and yet it is news to many politicians. Let’s look at related issues where trade deficits hurt the economy.

  • Jobs
  • Wages
  • Strength of the dollar
  • Inflation
  • Cost of living
  • Industrial base

—Each, a hefty issue. I will condense my discussion to one paragraph for each of these six issues.

On jobs, a trade deficit represents jobs which are not here. A widening trade deficit often represents American jobs going overseas. Politicians can, should, and must favor more jobs in their districts, not fewer. Progress in the right direction is hampered or hindered by trade deficits.

On wages, any loss of American jobs, as accompanies a widening trade deficit, represents downward wage pressure in America. As more people compete for fewer jobs, wages are pushed down, based on the laws of supply and demand. Politicians should not favor income erosion, but trade deficits challenge us in this department.

On strength of the dollar, trade deficits represent a hemorrhage of liquidity from the American economy. This can lead to weakness in the value of the dollar on the currency markets. Trade deficits are bad for the strength of the dollar.

On inflation, should there be erosion in the value of the dollar as above, that means something in America – higher prices for imported goods. This mentioned condition would contribute to rising inflation. Trade deficits are bad for prospective inflation.

On cost of living, trade deficits can hurt in two ways. Falling wages, which as noted may accompany a widening trade deficit, lead to a higher relative cost of living. Should the inflation scenario materialize as above, that would contribute to a higher absolute cost of living. The cost of living can move on a relative basis, or an absolute basis, and in each way, trade deficits pressure the cost of living higher, not lower.

On the industrial base, we are allowing China an unfair advantage – slave labor. On this tilted playing field, more than our money goes to China. China will get more than its share of the free world’s industrial base. Harry Wu, a leading Chinese dissident, has said: “Forced labor of any kind upsets the balance of trade, by giving one economy an advantage.”

Trade deficits are when "we are getting poorer, and somebody else is getting richer." Trade deficits can be thought of as a hole in our pockets. I have said there is a 0 billion hole in our economy.

Trade deficits can also be thought of as economic activity that is “over there” instead of “over here.” The 0 billion is spending. Instead of being “over there,” it could be economic activity at home. Once the destination economy is known, that economy, alone, benefits from a multiplier effect as money is spent. Our economic loss includes the multiplier effect on 0 billion spent abroad.

Making the point of the discussion, trade deficits do hurt our economy – and that’s a bad thing. I may divide politicians into two categories: “trade deficit aware,” and “trade deficit agnostic.” In Washington, the agnostics have been running the show, and they should “get religion.”

Thank you for reading my excerpt, taken from Chapter 14 of my book. Once we are clear about trade deficits, then the problem of free trade is more evident: Free trade encourages trade deficits. It also encourages misbehavior from communists, dictators, tyrants, and thugs, who are beating us at our own game. (The 'trade deficit agnostic' people have also been 'values agnostic,' and globalized free trade requires the assumption that there are no bad guys; no bad trading partners; and no bad business practices.) It challenges freedom and democracy by buttressing tyranny, and it is ultimately against America's own self interest.

The book is available at www.kusumi.com.

John Kusumi was Ronald Reagan's youngest political opponent, and the first Generation X politician. As 1984's 18-year-old in the race for the White House, his was the first appearance of any 'GenXer' in U.S. federal elections. Kusumi founded the China Support Network (CSN) in 1989. Standing with the Tiananmen Square pro-democracy dissidents, CSN continues to urge anti-communist Americans to join this battle-with-communism, in progress to this day. See www.chinasupport.net

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