We left off last week talking about how we’re on the precipice of a global economic reordering. That’s what all this talk about tariffs and trade wars is about. The current administration seeks to change the entire dynamic of global trade.
Treasury Secretary Scott Bessent – who strikes me as a deadly serious person – believes in this initiative wholeheartedly. He sees it as an effort to reshore American manufacturing and reflate the once-great American middle class. Here’s what he said in a recent interview:
“The American Dream is not ‘let them eat flat screens’… It’s more than that… The bottom 50 percent of working Americans have gotten killed. We are trying to address that.”
I hadn’t thought about it from this perspective before, but I think Bessent has a point worth considering.
The United States has been a consumer-driven economy ever since President Nixon closed the international gold window and cut the dollar’s final link to gold in 1971. The numbers show this very clearly.
In 1970, the US recorded a trade surplus of $2.6 billion. Meaning, American companies sold $2.6 billion more goods into global markets than they imported.
That flipped to a $2.3 billion trade deficit in 1971… and it ballooned fast. The trade deficit hit $25.5 billion in 1976. Then it hit $100 billion by 1984 and surpassed $150 billion by 1987 as American companies offshored their manufacturing to Asia. Today, the trade deficit hovers around $950 billion a year.
As the great Austrian economists point out, there’s nothing inherently wrong about running trade deficits. Doing so can be a benefit to American consumers. We’ve been able to buy foreign goods on the cheap for decades now. That’s Walmart’s entire business model.
So trade deficits are fine from a purely utilitarian standpoint. But as with everything in economics, there are trade-offs. The first is supply chain complexity.
When we depend on foreign manufacturing for critical goods, we rely on complex global supply chains to get those goods from their point of origin to American ports… and then to American warehouses… and then to store shelves or our front porches.
This is a rather magical process when everything is working as it should. But as we saw during the Covid hysteria, we can face shortages very quickly if there’s a hitch in the supply chain somewhere.
And there’s another angle to this that’s worth discussing…
This effort to change the dynamic of global trade would shift America from a consumption-first to a production-first economy. The administration may not see it this way, but there’s something decidedly Austrian in that approach.
After all, classical economist Jean-Baptiste Say pointed out that economic growth must start with production. Production creates its own demand – that’s Say’s law.
The modern Austrian school understands this well. But Say’s Law is a stark contrast to the Keynesian model, which obsesses over aggregate demand and seeks to stimulate consumption at all costs.
That’s why the US economy is addicted to cheap money and government spending – as Bessent has pointed out on numerous occasions.
There is a major roadblock to this global economic reordering, however… and it’s not China or Vietnam. It’s something called Triffin’s dilemma.
More on that tomorrow.
-Joe Withrow
P.S. For more on real economic history, I highly recommend Tom Woods’ Liberty Classroom.
Tom’s program offers a world-class education on both economics and history, and it does so in a compelling and entertaining way. This is the college education I wish I received – instead of the boring textbook version of economics and history that I had to unlearn after I entered the working world and wised up.
If you would like to review Liberty Classroom’s course listings, just go right here: Tom Woods Liberty Classroom Course Listing