First, let us discuss where we are.  

There is a common perception amongst "low information voters" (which includes the class of people with college degrees, but who are blinded by their own emotions) that free trade has been bad for us.  When confronted with the fact that passage of free trade deals has resulted in massive job creation, they argue that such jobs are not manufactring jobs, but are low paying service sector jobs.  The facts, unfortunately, do not bear this out. (1) First, manufactring jobs have been vanishing for a long time ~ largely because of automation (note: this has nothing to do with trade, and this is a good thing, overall).   (2) Second, a good chunk of the new jobs (even those that are created in the service sector) have been decent jobs ~ the median income of the bottom 50 percentile outpaced inflation under Pres. Clinton, for instance (yes, I know, the "Clintons" are horrible people, and should not be given any credit).  This was not solely due to NAFTA (favorable global economic conditions also played a major role), but NAFTA did play a role.    The evidence is quite clear that globalization and free trade has been a net positive for the US economy, despite the consensus amongst progressive circles.

So if free trade is not responsible for our woes, what is ?

I would ascribe this largely to our own greed, our own laziness, and our own willingness to be misled despite plenty of evidence that we are being misled.

But a short summary of our woes is contained in 3 words: Mortgate Equity Withdrawal.  MEW , for those who prefer acronyms.   MEW is the  borrowing of money against the real value of your house, where the real value is defined as the   perceived market value minus any liabilities (mortgages, loans) associated with that house.  MEW, in lay language, is people pulling money from their homes to do other things ~ such as buying fancy cars, fancy clothes, etc.  

Why is MEW  important, and why should I care about it ?

MEW should not be important, but it is.  
That is because more and more of our disposable income has been coming from MEW lately.

The chart above plots total MEW and MEW as a fraction of total disposable income.  Note how MEW takes off, in about 2001 (coinciding with the Bush years), and accounted for a full 10% of disposable income in 2005.  That means that for every 10 dollars driving consumer spending in 2006, 1 dollar was coming from people borrowing money against their homes.  There are many good reasons why this could not be sustained ~I will not rehash those reasons here.  Suffice it to say that those reasons are not a secret to anyone, and so everyone should have known that the consumer spending driven growth that we had in the Bush years could not have been sustained.

Indeed, it is interesting to compare what the GDP growth patterns would have been like, if MEW were to be removed as a factor.  The blog "Calculated Risk" had been doing this comparison periodically, as they did in Dec 2005, and in Sept 2006 MEW has been contributing to more and more of our disposable income recently, and that in the absence of MEW, our economic situation would have been one of doom and gloom starting in 2001, and continuing on to this day

The chart above plots estimates for GPD without MEW as a factor, and GDP as reported.  Note that in the Bush years, GPD minus MEW is barely keeping pace with population growth, and is certainly below inflation rates.

The growth during the Bush years have been driven largely by MEW, which in turn was facilitated by a housing bubble (MEW works only when the the perceived value of the home is increasing), which in turn was facilitated by extremely low interest rates.  Basically, if you were able to breathe, you were given a loan to buy a house.

Wow, did someone create that bubble on purpose ?

I have a strong suspicion that the interest rates were kept artificially low by Chairman Greenspan in order to prop up the housing market, so as to facilitate MEW, and thereby foster GDP growth.  I have a suspicion that this was done to relect Pres Bush ~ at least the timing looks very suspicious.  Pres. Bush would have lost in a landslide if MEW had not propped up the GDP growth numbers the way it did.  But then again, I have no proof of this ~ it is merely a suspicion.

 Coming back to the point, why is it our fault

It is our fault because the numbers I presented above are not state secrets.  The blog Calculated Risk (yes I know, I am shilling for them...they are very good), and the blogger Paul Krugman (yes I know, he hates Obama...he cannot be trusted) and others have been warning us, and presenting us with these numbers for quite some time.  We chose to be fascinated by nipplegate, and by Chandra Levy/Gary Condit (remember them), by American Idol... and we, collectively, did not listen.

Okay, my bad.  We screwed up.  How do we get out of this situation

This is the tricky part.  The ability to borrow money (which created MEW) was fueled by low interest rates, which in turn was controlled by Alan Greenspan and co., and also by the Chinese (and the Japanese, and the Indians, and the Taiwanese etc.).  Because the Chinese had excess dollars, and they were willing to lend those dollars to the American consumer, the long term interest rates was kept low (Alan Greenspan had more control over the short term rates, he needed the cooperation of the Chinese to keep long term rates low).  Because the Chinese were willing to lend us money, the dollar was strong.

That trend is now reversing.  The dollar is losing value against almost every major currency in the world ~ people who used to happily lend us money are now more suspicious (and I would say, rightfully so) about our ability to repay.  This trend is likely to continue for quite some time, until the dollar reaches a floor where it becomes attractive again.  What happens when the dollar depreciates ?  Goods and services produced in the US becomes more attractive with respect to goods and services produced overseas.  This condition is ripe for rapid exports growth, and a lowering of our astronomical trade deficits.

Indeed, that is exactly what has been happening in the last 18 months or so.  In 2007, for instance, manufacturing exports (yes, the very same sector that creates manufactring jobs associated with an overseas market) rose 10.9 percent, which was double the 4.9 percent growth for manufacturing import (the sector that ships manufactring jobs overseas)  In the era of the falling dollar, increased trade will create new manufactring jobs in the US.   The falling dollar provides us with the opportunity to export our way out of trouble.   Indeed, in the absence of growth in exports, we would already be in a deep recession.

Increased trade is now in the economic interest of the United States.  Oh, the bitter irony of all this:  it is in the "economic interest" of the Chinese, the Indians, the Colombians etc.  (Colombia free trade agreement, anyone) to use labor and environmental standards to stymie free trade deals with the US. By this, I mean free trade helps us more than it helps them, which could be interpreted as meaning that it hurt them ~ specially if they were inclined to be demagogued on the issue. Luckily, those contries are led by people who tend not to demagogue free trade, and they (hopefully) realize that free trade works to their benefit as well.

Oh, the bitter irony of all this....is that the party of Robert Rubin, Al "the champion of NAFTA" Gore and Bill "free trade is a net positive for the US" Clinton, who were such noble stewards of the economy, is now acting like complete fools.

Oh, the bitter irony of all this... Sen. McCain, who "does not understand economics", is the only one who makes any semblance of sense on this issue.

Oh, the bitter irony of all this....