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Example research essay topic: Deficits In The United States - 1,418 words

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Perhaps no aspect of American trade is discussed more and, at the same time, understood less than the trade deficit. The U. S. trade deficit appears in the result of a net inflow of capital to the United States from abroad. Because of the stable and free domestic market, the USA remain the most attractive for foreign investments.

Basically, the U. S. became a net importer of capital. It happens in the result of the fact that Americans do not save enough money to finance all the investment opportunities in American economy. The inflow of capital from abroad allows to pay for imports over what is exported.

The trade deficit represents a mirror reflection of the macroeconomic situation that investment in the United States exceeds domestic savings. The Cato Institute published an article about four myths of the U. S. trade deficit. Two of them relate to causes, two to consequences. The first myth is that the whole U.

S. trade deficit is caused by unfair trade barriers abroad. But this is not the true. Trade restrictions do not determine the overall U.

S. trade deficit. They also do not account for the differences in bilateral trade balances. For example, the United States run a large trade surplus with Brazil, a country with relatively high trade barriers. At the same, the USA run deficits with Mexico and Canada, two countries open to U. S.

exports. The rest of the world is more open to U. S. exports today. Partially, it happened thanks to GATT negotiations and trade liberalization abroad. The second myth is that trade deficits are caused by a lack of U.

S. industrial competitiveness. But this is also untrue. We will see it if we look at the stellar performance of the American economy. Today, it is the envy of the world. Since 1992, the U.

S. trade deficit has tripled. The U. S. industrial production has surged 24 percent and manufacturing output 27 percent.

The American people sell more goods and services in the global marketplace than people of any other country. It makes no sense in theory or in practice why a nations trade deficit should shrink as the overall productivity of its workers rises. The USA run a far bigger deficit with Japan today than 30 years ago, even though Japans economy is much more open today. And U. S. exports to member states of the European Community face a common external tariff.

It is also true that the U. S. run the largest bilateral surplus with the Netherlands and third largest bilateral deficit with Germany. But it is clear that trade barriers or some measure of competitiveness cannot account for these differences. (www.

levy. org). The third myth is that trade deficits destroy jobs. But again, if we look at the performance of the U. S. economy in the last decade, we will see a meaningless nature of such notion.

While the trade deficit has expanded, so have American payrolls. There is a correlation between trade deficits and rates of unemployment. The reason is that the same expanding economy that stimulates demand for labor also raises demand for imported goods and capital. The last myth is that trade deficits are a drag on the U. S. economy.

But the drag is not the trade deficit itself, but falling demand for the exports in some regions abroad. A trade deficit that reflects both rising exports and even more fast rising imports is a sign of health. Anyway, if trade deficits are not good for growth, why does the economy grow more than 50 percent faster when the trade deficit? Frankly, we would have more reason to worry if the U. S. were running a trade surplus.

In Mexico in 1995 and more recently in South Korea and other East Asian countries, trade balances flipped overnight from deficit to surplus because of plunging domestic demand and the flight of foreign capital. In Japan today, a soaring trade surplus has been accompanied by record high unemployment. The United States has a balance of payments deficit worth nearly 4 percent of GDP and negative net foreign assets worth nearly 20 percent of GDP. The US government posted a deficit of $ 159 billion ($ 288. 3 billion) in the just-ended 2002 fiscal year. It is the first deficit since 1997 and the largest since 1995. The figure for the fiscal year ended September 30 compared with a surplus of $ 127 billion in the prior fiscal year.

Total federal receipts were $ 1. 853 trillion for the fiscal year, while outlays totaled $ 2. 012 trillion. The deficit is consistent with the administration's July projections, said Treasury Secretary Paul O'Neill in a statement. In July, the White House forecasts a full-year budget deficit of $ 165 billion. (Reuters. Deficit updates). There are some commentaries about the future budgets. Congressional Democrats say President Bush's $ 2. 2 trillion budget for 2004 is "breathtaking in its lack of fiscal responsibility." But Republicans say he was puzzled by the Democrats' new interest in reducing deficits.

Sen. Kent Conrad, North Dakota Democrat and ranking member of the Senate Budget Committee, said Mr. Bush's budget, which projects $ 300 billion deficits in each of the next two years, "is a policy of bankruptcy. " Mr. Conrad said that proposed $ 647 billion tax cut within the following decade is "a profound mistake." Such actions can drain funds from Social Security as the baby-boom generation is about to retire. Sen. Don Nickles, Oklahoma Republican and chairman of the Senate Budget Committee, said that Democrats haven't ever been too concerned about budget deficits.

He pointed to $ 500 million in additional spending that Democrats tried to add to the still-unresolved fiscal 2003 spending bills. "They " re only concerned about deficits when it comes to tax cuts, " Mr. Nickles said. Mr. Bush's budget greatly increased spending for the military and homeland security. But to keep the increase in discretionary spending at just 4 percent, he had to scale back in other areas. (www. levy.

org). Overall discretionary spending for the Justice Department was cut by 3 percent, with the savings almost entirely attributed to some $ 1 billion in the crime-victims' fund. The discretionary budget of the Labor Department was cut by $ 60 million, and the Centers for Disease Control and Prevention was cut by $ 13 million. Mr. Bush said that any new Medicare program would not force seniors out of the current plan.

He wanted to offer new alternatives to the government-run system that covers all Americans from age 65 and several million disabled people. Sen. Edward M. Kennedy, Massachusetts Democrat, complained that Mr. Bush has not yet detailed his plan. (Reuters. Deficit updates).

If we take another country for examining deficits and look from inside, we can see a different picture. Japan, for instance, has had a service trade deficit not only with the U. S. but also with the world except in the first half of 1994.

Japan is in the midst of a "balance-sheet recession." Japan's customs-cleared trade deficit widened by 90 percent to 210. 749 billion yen ($ 1. 76 billion) in the first 20 days of January from 110. 930 billion yen a year earlier. The government floats more and more bonds and continues to borrow money. These bonds can't be absorbed, no matter how much excess savings there are. This policy can end in failure. The balance sheets of the companies have to recover in order to change the situation. (Finance Ministry data, Reuters). As to the summary about the trade deficits of the United States, their existence does not indicate about economic blessings.

What it does indicate is that rising trade deficits are often caused by the same factors, rising domestic investment, that drives a number of other economic indicators, such as employment and production, in a positive direction. Without a trade deficit, Americans could not import the capital needed to finance the U. S. rising level of investment in plants and the latest computer technology. The same appreciating dollar that expands the trade deficit helps keep a lid on inflation while lower import prices raise the real wages of the vast majority of American workers. (www.

ca topol. org). When the underlying causes of the trade deficit and deficit spending are understood, it should become clear that the biggest threat to the U. S.

economy is not the deficit itself, but what politicians might do in their mission to shrink it.


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