"One point seems largely to have been missed in recent weeks, amid all the excitement over the Federal budget and the sovereign-debt crises in Europe: free trade is largely the root cause of all these problems. So let's trace the causation for a minute.
Start with the Federal budget. Federal revenues are derived from the underlying economy, and therefore, if the underlying economy were larger, revenues would be, too -- even without any tax increases. As a result, anything that causes the U.S. economy to be smaller, tends to widen any gap between expenditures and revenues.
Enter free trade.
For it is thanks to America's embrace of free trade (whether genuinely free or not; that's another issue) that we have been running giant trade deficits for years. And these have been costing us economic growth.
The Economic Strategy Institute, a Washington think tank, estimated in 2001 that the trade deficit was shaving at least one percent per year off our economic growth. (See the 2006 report "China's Financial System and Monetary Policies: The Impact on U.S. Exchange Rates, Capital Markets, and Interest Rates" of the U.S.-China Economic and Security Review Commission for the details.) This may not sound like much, but because GDP growth is cumulative, it compounds over time. Economist William Bahr has thus estimated that America's trade deficits since 1991 alone -- they stretch back unbroken to 1976 -- have caused our economy to be 13 percent smaller than it otherwise would be.
That's an economic hole larger than the entire Canadian economy".............READ MORE
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