A “truth” about trade that’s not a truth at all

April 22nd, 2016 at 11:08 am

I’ve long been a fan of the economist Alan Blinder, he of the hard head, soft heart (a great book, absolutely crying for an update, Alan!). In fact, Alan co-authored an important paper for our Full Employment Project on the policy lessons from the Great Recession.

So I was a bit blind(er)-sided by his WSJ oped this AM, 5 Big Truths About Trade, given that some of his truths are not true at all.

It’s essential to get this right as the populist campaign has elevated this trade debate in ways that can be used or misused. The latter would lead to protectionism, walls, and damaging tariffs like those touted by Trump. Alan’s right, for example, not to conflate trade agreements with trade, a theme I’ve tried to trumpet loudly in these parts.

But it also misuses the moment to argue, as Alan does, that the problem is simply that some workers are displaced and, if we only do more to help them, we’ll otherwise be fine. What this view ignores is the damage done to our and other economies through economically large and persistent trade imbalances. Alan’s “truth” #3 maintains trade imbalances “are inevitable and mostly uninteresting.”

Wait, what?!

First, we should recognize that those directly displaced by trade are not the only workers hurt by this dynamic. As displaced production workers move over to low-end service-sector jobs, the supply effect puts downward pressure on wages in that part of the job market as well. Economist Josh Bivens finds that non-college educated workers have lost around $1,800 in earnings per year through this channel. That’s a lot of money for them, and surely the root of a lot of the populist anger that’s elevating trade in the campaigns.

Persistent deficits of the magnitude we’ve had here in the U.S. have, in fact, been highly problematic, a fact recognized by Ben Bernanke back in 2005, when he recognized the extent to which the “savings glut” was contributing to large trade imbalances as surplus countries (like China then and Germany now) exported large amounts of savings to deficit countries. Far from “uninteresting,” this tactic has long been a strategy of mercantilist countries to over-save, under-consume, and under-invest, causing big problems in lots of other places.

Problems like a housing bubble, which Bernanke had the foresight to note in his 2005 paper (though he hoped it would unwind without causing much damage, which…um…didn’t quite happen); or before that, a dot.com bubble that led to the prior recession of 2001, which, while much milder in GDP terms, was also followed by a jobless and wageless recovery.

Consider these dynamics re Alan’s assertion that “…people who claim that our trade deficit kills jobs need to explain how the U.S. managed to achieve 4% unemployment in 2000, when our trade deficit was larger, as a share of GDP, than it is today.”

He might also point out—he who has written with great insight about the damage of the housing bubble and the innovative finance that inflated it—that unemployment was in the mid-4’s in 2007, right before the worst recession since the Great Recession, one we’re still climbing out of.

No one is saying that trade deficits prevent full employment. What we are saying is that the magnitude of the trade deficits we’ve run—averaging -4% of GDP since 2000 and -2.8% in the most recent quarter—must be offset if we are going to get to full employment. In recent decades, the excess savings flowing in from surplus countries, interacting with under-regulated financial markets, have turned that offsetting process into a bubble machine. (Dean Baker nicely ties these points to secular stagnation; see also this recent academic analysis tying savings glut dynamics to demand shortfalls in deficit countries.)

Alan also makes the mistake of scolding us for not saving enough. “Spendthrift nations like the U.S. have trade deficits because we don’t save much. But these saving decisions are domestic.” Nuh-uh!

When one country runs a trade surplus, another country must run a trade deficit. When Germany runs an 8 percent trade surplus (!), other countries with whom they trade–particularly those in the rest of the Eurozone–must consume that much more than they produce. If somebody’s consuming or investing less than they save somebody else must invest or spend more than they save. It is in this manner that surplus countries not only export goods to deficit countries. They also import labor demand from those countries, some of whom, like peripheral Europe, could really use that demand.

As I wrote recently, the goal here is not balanced trade, nor is it protectionism. “As long as there’s been trade, there’s been imbalanced trade, as countries invariably produce more than they consume, i.e., they’ll run a trade surplus, while others, like us, will do the opposite. To somehow insist on balanced trade for all would be a huge policy mistake, one that would preclude billions of people from the reaping the benefits of trade, both as consumers and producers.”

But to ignore the role of the international dynamics that have led to large, persistent US trade deficits, contributing to stagnant demand offset by lastingly damaging bubbles is to dismiss a force that a lot of people are justifiably pissed off about.

What to do about it is a good question, one for my next post on this topic.

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8 comments in reply to "A “truth” about trade that’s not a truth at all"

  1. Nick Estes says:

    Good post, but you could have made a more fundamental point by explaining that we had 4% unemployment even with a very high trade deficit in the late 90s because we had strong aggregate demand–strong enough to make up for the net loss of demand represented by our trade deficit. That begs the question “is there anything we could do today to have enough aggregate demand to offset our current trade deficit?” The answer, of course, is YES. We could be running larger federal budget deficits to invest in roads and bridges and medical research and education, etc. etc. To those who way “well, that would add to our humongous national debt!” we can say–the government doesn’t have to borrow this money. When the economy has a lot of slack, like it still does today, the Fed can just create this money and transfer it to the government to spend. That is the quickest and most effective thing we can do to restore the jobs lost to foreign trade. Thanks –Nick Estes, Albuquerque

  2. Nick Estes says:

    I should have added that Blinder doesn’t go far enough in saying that we should help workers displaced from their jobs. That is feeding with an empty spoon unless we generate good well-paying jobs for displaced workers to move to. There is only one way to do that–run larger federal budget deficits to stimulate the economy.

    Which leads to a final point. That is just the opposite of increasing our overall national savings rate, which Blinder suggests would help. If our net savings increased, either by higher private savings or a lower federal deficit, our economy would decline and there would be fewer jobs than ever for those displaced by foreign trade.

  3. Robert Aylward says:

    Trade theory assumes that country A and country B are the same, except that they have different (comparative) advantages. Output (and economic well-being) is maximized if A and B do what each does best. But A and B may not be the same; indeed, they may be radically different. Shifting an enormous amount of production and the income it generates from places like the U.S. to places like China and not expecting a shock overlooks radical differences, including a much higher level of inequality in China and a much higher savings rate in China.

  4. Bob Baugh says:

    I too have been a fan of Blinder but assertions that that trade deficits are inevitable and uninteresting is wrong. I’m amazed he would write that since he has made such waves about the outsourcing if all kinds of blue and white collar jobs. Those are trade related and have serious consequences

    What is also missed is the conjection between those losses, innovation and investment in the US manufacturing economy. There is a real price to be paid for the loss of investments in the domestic economy which is another side of a trade deficit. We lose the jobs and the innovation which generates future investments and jobs. That is not uninteresting nor inevitable. These are polucy choices other nations make and strategies they pursue. Shame on us for assuming this is just the way it must be.

  5. Non Idealist says:

    I think Jared rightly points out some of Blinder’s errors. But I’m very skeptical of the argument that protectionism is bad. I suppose when Jared says ‘protectionism’ he really means tariffs or quotas or something similar.

    I believe historically that all methods that were intended as protectionism proved fairly ineffective over the long run. It is just too difficult for a nation to adjust its tariffs and/or quotas to prevent massive market distortions over time.

    I’m very skeptical of the argument that the standard way currency rates are affected through investment can somehow be reversed to correct the problem. I also disagree with the idea that China is doing something wrong. Also, it is easy to blame Germany for running surpluses, but in what way are they supposed to change their behavior to help other nations? Why would they do this?

    I see no reason to believe in the standard idea that the problem is not free trade but rather trade agreements. I just isn’t so. The loss of well-paying jobs from the US to other nations cannot be fixed through currency exchange rates. There are some ideas on the table such as penalizing companies that export well-paying jobs, but this is protectionism. It is a very weak form of protectionism, because it is doubtful that the penalty is going to dissuade them very much. Much more appropriate would simply be a new system that allows other nations to employ their own skilled labor for their own markets. If they don’t need skilled labor, they shouldn’t produce it with the expectation that the US will use it. It really doesn’t help them or us. It results in a loss of good jobs in the US and a false demand for skill in the other country. It pulls labor away from improving the local economic conditions.

    There are a lot of fantasies that I see from economists in this area. I think largely there is just too large a bias in the field towards efficiency. Efficiency should not be the fundamental basis for world trade laws. Self-sufficient growth is a better goal with trade being fair rather than free.

  6. Smith says:

    Three big things ignored:
    “those directly displaced by trade are not the only workers hurt”
    1) Talk about understatements. Yes of course, how is this not recognized? How is it not common sense? The U.S. has the most fluid job market in the world. Even high skills job markets are very fluid in respect to who is hired:
    http://www.frbsf.org/economic-research/files/wp12-09bk.pdf Table 9, page 48
    Other effects in a slow economy include:
    Recent college grads who take minimum wage jobs deprive non-college employees of opportunities.
    Free college internships (admittedly a small factor) lower wages and employment opportunities
    Lack of overtime protections for many office workers, even after Obama’s raising the minimum.
    Special exempt status of highly paid tech workers.
    Pay discrimination against women whose effects are masked by DNWR (downward nominal wage rigidity)
    Pay discrimination and total lack of labor rights by immigrant workers, low and high skills, again effects masked by DNWR.

    This is why slack in the job market or substandard wages anywhere affects wages in the job market everywhere. It’s why the North fought the South, not to free the slaves (except for the noble minority segment of abolitionists), but so as not to have to compete with slave labor.

    2 ) My previous reminder that the US deficit is about cars, oil, and China. US auto companies are too lazy and mismanaged to compete in Japanese and German markets, too happy to rely on SUVs and pickups. Domestic oil companies curtail development of clean renewables, and greedy companies overlook China stealing technology, domestic content laws, shared ownership, and lack of labor rights, to gain small profit advantages and hope for sliver of Chinese market (because 10% is 100 million).

    3) Trade deficits also imply ability to buy assets and more importantly, means of production. Working for foreign owned companies is very different than working U.S. companies.

    • Non Idealist says:

      RE: “3) Trade deficits also imply ability to buy assets and more importantly, means of production. Working for foreign owned companies is very different than working U.S. companies.”

      This is a huge problem and trade deficits are not the only cause, and the problem runs in both directions.

      Imagine if this is taken to extreme: Country A’s companies buys most of the production in country B, and B does the same to A. Now everyone is working for a foreign company, and the argument A has to its workers is that we have to compete with B. B says we have to compete with A.

      Each country no longer has any reason to care about any kind of worker’s rights, civil rights, human rights, environmental side effects, etc… because neither government can control the other country’s companies. The laws of a country then apply only to its workers and not its capitalists. The only option for reasonable governance in this situation is a global government, and while there are some extreme liberals/corporate libertarians that believe this represents a possible utopia, I can guarantee this world is not possible in the foreseeable future. All governments would fall before this utopian vision would ever be realized, and they’ll be nothing left.

      And for what? The efficiencies are pretty low compared to the dehumanizing and anti-democratic outcomes. Think North Korea is bad to live in? This utopian vision is worse than anything that has ever come before.

  7. Procopius says:

    You know, trade theory says that a trade deficit is not supposed to last long. The currency of the nation with the deficit is supposed to depreciate and the currency of the surplus nation is supposed to appreciate, so that over time the free market is supposed to buy more from the deficit nation and buy less from the surplus nation. Economists should be asking why that isn’t happening. The dollar should be quite cheap now compared to other currencies, especially the yuan, the mark, and the yen. It’s not. We all know why. What can be done about it?