Newsflash: Higher Trade Deficit Drag On Growth

September 5th, 2013 at 11:32 am

Upon reading my morning Wonkbook, I rarely say to myself, “hey, that’s not right!”  I typically say, “that’s interesting” or “just as I thought” or “neat graphic” or “hmmm…I’ll borrow that point and use it later.”

So it was with surprise that I read this headline from their morning e-missive:

Trade deficit widens as imports rebound, driven by rising domestic consumption. So, on balance, good news. “The Commerce Department said on Wednesday the trade gap increased 13.3 percent to $39.1 billion, partially unwinding a plunge in June that had pushed the deficit to a 3-1/2 year low. Adjusted for inflation, the shortfall grew to $47.7 billion from $43.8 billion in June. It is this so-called real deficit that goes into the calculation of gross domestic product…Analysts said, however, that trade should begin adding to U.S. GDP later in the year given signs global demand is picking up.” Reuters.  (my italics)

So, if GDP=C+I+G+NX, which it does, and NX (exports-imports) is a growing negative, then we have less growth and less employment.  Sure, people buying more imports (“driven by domestic consumption…”) and thus they’re getting things they want, often at lower prices due to global price arbitrage.  But price arbitrage also implies job and wage arbitrage and thus there are costs to the persistent trade deficits we’ve run in this country for years on end (the figure below shows that net exports as a share of GDP have been negative for 30 years).  Simply put, we export too much labor demand, which is decidedly not, on balance, good news.



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4 comments in reply to "Newsflash: Higher Trade Deficit Drag On Growth"

  1. Dave says:

    Shouldn’t we strongly suspect those trade deficits came out of employee’s paychecks almost directly?

  2. momwritesjelly says:

    I had the exact same thought when I read it two hours ago. Does that mean Bernstein is giving us a real education in economics? Some of Krugman’s more wonkish posts are even starting to make sense.

  3. Jill SH says:

    Speaking of drags on growth and a different version of exporting labor demand, would you care to comment on the potential for an American brain drain, as the sequester cuts scientific research dollars and US scientists may start looking for work abroad? (Sam Stein reported last week at HuffPo.)

    • mitakeet says:

      The US has already been experiencing a massive brain drain, though not so much with brains born in the USofA. When I went to grad school in the early ’90s the vast majority of foreign graduate students stayed in the US for at least several years (generally a post-doc at a minimum), many for decades and a lot for life. Some even started their own businesses (a graduate student I worked with started his own biotech company, clearly he has more motivation than I do). Post 9/11, however, that dramatically changed. First, the US became incredibly unwelcoming to the best and brightest of the rest of the world (HUGE mistake in my mind!), then the US made many efforts to make life here unwelcoming for those who graduated (eg., not offering work visas once graduated). THEN, the parent country often started a recruiting drive to lure the established people back home, offering huge labs, lots of staff, autonomy (or as much as can be expected), etc. I suspect, now that many of these countries have built up their systems with English speaking natives who went to the same schools as our home-grown people (often taught at the same schools and certainly went to the same conferences and seminars) will start cherry picking our native best and brightest. It might take a century to recover from this sort of activity (once another country becomes the defacto leader in an area, they have to screw it up (Go USA!) to lose it). The most critical thing to realize, and one most often (willfully, in my mind) overlooked, is that the cherry picking is for the _very_ best and brightest. Recall the brain drain that happened in Germany prior to WWII. We will be left with the second (or third (or even the bench warmers)) string while they get the very best. That, of course, has a feedback effect where the up-and-coming best-and-brightest now seek them out, stay in that country after graduating and start their companies there.

      Some of these trends become impossible to reverse after a rather short period of time; I fear we are nearing that tipping point and what has saved us so far is that most of the rest of the world is attempting to become the next greatest place to be and that is diluting the overall effort. I don’t think, though, that it will be much longer before it will become irreversible.