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The U.S. Spreads the Pain

At first glance, the latest U.S. trade numbers appear to be good news, especially for those who worry about America's huge and chronic trade deficit. The monthly trade gap shrank sharply in February by 19%, as imports tumbled 4.4% after slipping for several months, and exports rose by 1%.

Significantly, the import drop was broad based, encompassing both consumer and capital goods, especially high-tech items. The surprisingly sharp improvement in the trade numbers is expected to add at least a percentage point to the first quarter's growth rate. "The import declines imply that some of the drag from inventory reductions in the U.S. was diverted overseas," says Maury Harris of UBS Warburg.

The problem is that the world economy seems in no shape to absorb a pronounced slowdown in U.S. demand. As economist Joseph Quinlan of Morgan Stanley notes, during the recessionary early 1990s, developing nations acted as a global buffer to weakening demand in advanced nations. As their growth accelerated, their trade deficit with the industrialized nations soared from $6.1 billion in 1990 to more than $100 billion in 1993 and $138 billion in 1995.

But this time around, developing nations are in no position to act as a buffer to economic weakness elsewhere. Indeed, until recently, the mammoth U.S. economy assumed that role--pulling crisis-stricken Asia and others out of recession by sucking in enough imports to help developing nations transform their trade deficit into an estimated $170 billion surplus by last year.

Thus, any improvement in the U.S. trade balance caused by slowing import demand needs to be weighed in light of its impact on sluggish economies overseas. And with the U.S. teetering on the edge of recession, Japan still mired in weakness, and growth in Europe slowing, that impact could be considerable.

The nations most at risk are those whose exports to the U.S. weigh heavily in their domestic economies. These include not only Canada and Mexico, but many nations in East Asia that are already grappling with falling industrial output and weak domestic demand.

An analysis by UBS Warburg economists indicates that U.S. import growth in recent years has been largely driven by America's investment and consumption binge on high-tech goods. That implies that the current information-technology slump spells especially bad news for such large IT exporters as Singapore, Taiwan, South Korea, the Philippines, and Malaysia. While Congress wrangles over how much of the coming decade's projected budget surplus to convert into tax cuts, the surplus itself is looking a bit peaked. The usual March deficit actually was $15 billion, or 25%, larger this year than last--the second straight month in which the year-to-year budget numbers deteriorated.

The latest numbers underscore how uncertain budget projections are. Indeed, based on its average errors in past projections, the Congressional Budget Office calculates that its recent projection of a $313 billion surplus next year and a $505 billion surplus in fiscal 2006 could be off by $120 billion and $412 billion, respectively.

The CBO reports that a mild recession this year would only reduce its cumulative ten-year projected surplus of $5.61 trillion by fiscal 2011 to $5.48 trillion if its other assumptions prove accurate. But that's a big if. After analyzing the CBO's track record, economists at the Federal Reserve Bank of St. Louis recently concluded that such cumulative projections are hardly reliable. "The government," they write, "is as likely to experience a deficit as it is to experience a surplus." In the rarefied world of economic theory, wages are ultimately determined by the workers' productivity. In the real world, of course, discrepancies are common--a notable one being the gap between men's and women's pay.

In an intriguing study in Economic Inquiry, Sara J. Solnick of the University of Vermont describes an experiment that may throw light on the reasons for this gender gap's persistence. The experiment involves the so-called ultimatum game, in which one player is given some cash, say $10, which he must then offer to share with another player. The size of the one-time offer is decided by the first player. If the second player accepts, the money is divided. If he or she balks at the size of the offer and refuses, neither gets a dime.

Past studies using the game indicate that offers tend to be close to 50-50--perhaps because players are motivated by considerations of fairness. Solnick's twist was to add the element of gender. Using a mixed group of men and women students, she designed the experiment so that neither the players making offers nor those receiving them could see the other player. In half the games, however, each player was given the other player's first name, which was obviously male or female.

The results were revealing. When the players' sex was known, men and especially women made lower offers to women. And on the receiving end, both men and women insisted on a higher amount when they knew the offer came from a woman.

Applied to salary negotiations in the real world, the implications are clear. The results suggest that despite significant increases in women's relative wages in recent decades, both sexes may still feel that women will accept lower pay than men and that women are more malleable in a bargaining situation.

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