To the trade ramparts once more, NPR edition

April 6th, 2017 at 10:44 am

What with our president chilling in FL with China’s president, I am again obliged to quickly complain about a growing misunderstanding of trade deficits. This time, I got set off by an NPR piece, one that made an important, fundamental point, but missed the bigger picture.

The piece made another in a series of logical leaps that should not be made, specifically: because the trade deficit is not always a problem, it is never a problem. (Alert readers will recognize this as a close cousin of “because China does not now suppress the value of its currency, neither they nor any other country will ever do so.”)

As I wrote here, let us not forget our balance-of-payments serenity prayer: “Keynes, give us the wisdom to understand when the trade deficit is problematic and when it’s not.” But the NPR piece cited two economists (and only these two) who argued that a) trade is always win-win, and b) a growing trade deficit “…means we’re growing, and we’re growing faster than the rest of the world.”

That’s way too dismissive (to be fair, the piece included the admission that at some periods in the past, trade deficits hurt some communities, but claimed that’s not a problem with trade deficits; it’s a problem with inadequate redistribution to those hurt by trade).

There are two, related reasons why this meme of trade deficits as always benign are wrong. First, as Dean Baker stresses in his pushback on this story, the dismissive view assumes full employment, such that any drag from trade is assumed to be made up elsewhere.

It’s true that if we’re not at full employment, any drag from imbalanced trade can be offset by monetary or fiscal policy (though the industry composition effects Baker stresses–the fact that are trade deficit is exclusively in manufactured goods–are germane even if these cases). But what if the interest rate is too close to zero and the fiscal authorities can’t find the lightswitch, much less implement complementary macro policies? The connection between those ‘ifs’ and any advanced economies is left as an exercise for the reader.

But the other part of the problem of the trade deficit–the one completely left out of the NPR story–is the macro and financial market imbalances part, that I and many others are increasingly writing and worrying about (see links here but also read Wolf and Setser for interesting takes).

The view from this perspective recognizes that while economists generally bow at the altar of savings, just like there’s such a thing as excessive debt, excessive savings is also a thing. In fact, in the global economy, they’re flip sides of the trade accounts, and the financial flows generated by countries with high levels of savings (and thus, high trade surpluses) drive trade deficits in countries to which those savings are exported.

This can create investment bubbles (the dismissive team implicitly assumes capital flows are always put to good, productive use; they assume away credit bubbles) as in our housing bubble, a problem recognized by Ben Bernanke in 2005, or, as in the case of Germany’s 8% of GDP trade surplus, weaker demand, as they “beggar their European neighbors” while neither the monetary nor the fiscal policy authorities step up to make up the difference (Bernanke has also critically noted the German surpluses).

It simply does not make economic sense to ignore such potentially and actually destabilizing imbalances as China’s or Germany’s excess savings and their implications for global stability. As Setser puts it: “…at some point China’s savers could lose confidence in China’s increasingly wild financial system. The resulting outflow of private funds would push China’s exchange rate down, and give rise to a big current account surplus—even if the vector moving China’s savings onto global markets wasn’t China’s state. History rhymes rather than repeating.”

Brad goes on to argue that China has time to bring down its savings rate in ways that can stave off a crash, but he’s anything but dismissive of the potential threat.

Look, I’ve read my Minsky. I get that economic amnesia besets everyone as economic expansions get long in the tooth. But the credit implosion of the Great Recession isn’t that far behind us, tales of “secular stagnation” abound (where weak demand, part of which is tied to our trade deficit, is not offset by countervailing policies), and eight years into the recovery, we’re still not quite at full employment nor have we fully closed our output gaps.

So please, let’s take a much more nuanced view of trade deficits than they’re always fine or always awful.

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14 comments in reply to "To the trade ramparts once more, NPR edition"

  1. AngloSaxon says:

    Trade deficits are nothing more than foreign capital inflows. Nothing more or less. You completely miss that. Without that kind of flows, US debt would contract and the economy would shrink more down to its real size. Amazing you or Baker don’t understand that and why “trade” is irrelevant onto itself.


    • JudeoAtheist says:

      No, flows of savings (“In fact, in the global economy, they’re flip sides of the trade accounts”) are directly addressed in the piece.

      Funny how you missed that and then decided to tell Jared HE missed that.


    • Serene says:

      I disagree with the “nothing more than” characterization and the association with US debt, but agree with the general idea on a long-term correlation between capital inflows and trade deficits.

      You have to remember that a lot of the context of existing trade literature is based upon an imperialistic idea of a central power with lots of resources (today the US, yesteryear the UK and Europe). Trade deficits of the past (for the US and the UK) were generally based upon natural resources like oil, fertile soil, etc… The exploitation of foreign labor was a small part of the picture, and so it was never part of the economic theory.

      Current trade theory doesn’t really account for the fact that the economy is driven by employees earning a wage. It never did. It didn’t have to. There was not a major leak of money as there is today.

      Getting back to the capital flow issue, when a huge country like the US trades with very small economies, capital flows are not very relevant. There are a lot of loans, there is a buildup of foreign currency reserves, and other things that are a part of equalizing trade. However, when it trades with huge countries like China and India with huge labor resources and an underdeveloped capital market, capital flows dominate the issues. This is where I agree to some extent.

      Jared understand this. Most of these economist understand this. The biggest problem I’ve identified with this group is a lack of creativity and adaptation to new problems.

      It is fine to quote Keynes on issues past, but we deserve more today. Keynes would want that.


      • Serene says:

        “Current trade theory doesn’t really account for the fact that the economy is driven by employees earning a wage. It never did. It didn’t have to. There was not a major leak of money as there is today.”

        I know I’ll get pushback saying that this is what Keynes was all about. Yes, this is the basis of Keynes’ ideas. However, Keynes didn’t expect the globalization that exists today. A lot of Republicans point to this as refutation of Keynes, and they’re wrong in that context. Nobody expected it to be so easy for a company to operate its accounting base from country A, employing employees from country B and selling its output to country C. Economic theory as it exists today fails in this respect. But one thing is clear, that the more we gravitate towards such a system, the more we give up basic human rights from democratic powers to pure evil greed.


      • Procopius says:

        I am angered by the smug assumption of so many right-wing economists that people cannot be hurt by trade, “because we can always compensate the losers.” In practice we never do compensate the losers, because the rich don’t lose and nobody cares about the poor. That should be an axiom in any model of international trade — the losers are going to be hurt, not compensated.


  2. Smith says:

    I thought trade deficits, especially the 3% to 5% of GDP that we commonly carry, are bad, even with full employment. Unlike a budget deficit, financed nearly all with money we owe to ourselves, a trade deficit is money leaving the country. Eventually another country (or countries) owns you. They don’t have to invade, they just invest. Your property, your factories, your businesses large and small. What would it mean to the U.S. if 1 out of every 10 businesses was owned by a Chinese company. Let’s do the math. World bank lists Market capitalization of listed domestic companies (current US$) of the US at $25 trillion. Trade deficit with China 2016? $347. A $2.5 billion investment takes only 8 years to accumulate.
    Even without this problem, how exactly can the U.S. afford to pay 3% of it’s income with money it doesn’t have each year? Explain me that. It’s not a budget deficit that we can just inflate away, print money, raise taxes or just keep owing to ourselves. I mean we actually can pay with cheaper dollars, but then the trade deficit (thankfully) drops, which is not the same as paying out the 3% ad infinitum.


    • Smith says:

      Sorry, I did the math and then wrote it all down wrong.
      $25 trillion market capitalization from World Bank website.
      $347 billion annual trade deficit with China 2016
      $2.5 trillion is 10% of the $25 trillion.
      $347 * 8 = $2.7 trillion.
      8 years for the Chinese to be able to buy 10% of American business. (ok, maybe only large publicly traded companies)
      Of course this in only publicly traded companies, but still…
      (hard to get data on what would be the valuation of all businesses in the U.S.)


      • Smith says:

        I found this blog post that contradicts my assertion, it says:
        “the measured U.S. trade deficit can (and likely will) go on indefinitely. ”
        http://econlog.econlib.org/archives/2017/03/a_dangerous_myt.html
        But then it highlights this fact which completely validates my point:
        “It is one of the most profound consequences of China’s growing wealth: Chinese investment in U.S. real estate has exploded, particularly in California and New York. Chinese nationals are now the biggest foreign buyers of American homes, purchasing at least $93 billion worth of home in the past five years, including $28.6 billion in 2015 alone. Commercial property purchases have surged as well, to $8.5 billion last year, a 15-fold increase from 2010. And, at nearly $208 billion, China is the biggest foreign holder of U.S.-government-backed residential mortgage bonds.”


    • Smith says:

      https://www.nytimes.com/2017/04/07/business/china-defense-start-ups-pentagon-technology.html
      This is more about technology transfer than buying up industry, but still…(another article discussed steel dumping, and protecting Westinghouse bankruptcy from China buyer)


    • JudeoAtheist says:

      The view that “trade deficits are always bad” (because “money goes out of the economy” or “foreign companies will own you”) is as unhelpful and inaccurate as the sunny view Jared is criticising that they’re always benign.

      You could start with this book, written in the context of the Australian foreign debt debate in the 1980s.
      https://www.amazon.com/Australias-Foreign-Debt-Myths-Realities/dp/0044422733


  3. Serene says:

    I’m not sure where Keynes described this nuance because I don’t like reading Keynes. I find his writing to make total sense but I find it to be a self-indulgent style of writing that demands total devotion and leaves a lot of people with unheard objections. It reads like philosophy rather than economics.

    Nevertheless, your view of trade (and Dean’s) is the most accurate I’ve seen anywhere.

    I’m sure that NPR is just covneying the general attitude of the Democratic party, which seems deeply confused by course discussions, political strategy and downright counterproductive tactics at present.

    If you can point to the pages in Keynes’ writing where he nuances trade deficits I’d like to read it. I’m pretty sure it matches what I believe.

    I’m not going to get into the non-economic ramifications of our persistent trade deficits right now. I also won’t go into the deep misunderstanding that our politicians and economists have regarding the psychology of supply and demand in job markets. Does anyone get it yet?


  4. William Miller says:

    Trade deficit is damaging America in numerous ways. But the trade deficit is larger than it seems because the measurement of the trade deficit ignores the flow of intangible capital (IC) which has two parts: public and private. Private IC includes things like intellectual property. But public IC also has intellectual property that is the result of public investments in education, federal and nonprofit university R&D, national defense, and infrastructure. Offshoring is a massive theft of public IC. And China operates trade with mercantilism that extracts both public and private IC from America and other countries. IC is the main driver of economic growth not tangible capital. Integrated Reporting is a change in financial accounting that measures parts of IC. Economics in the 21st Century should consider IC not just tangible capital. Public policy should consider IC.


    • William Miller says:

      For a reference, see
      https://www.conference-board.org/pdf_free/IntangibleCapital_USEconomy.pdf
      Table 4 attributes growth to the components of tangible capital (TC) and intangible capital (IC) and shows that the growth in labor productivity in the period 1973-95 was driven more by TC than IC, but that in the period 1995 – 2003, both TC and IC contributed equally. Since 2003 and certainly in 2017, IC is the main driver or productivity and economic growth. Considerations of IC change the argument, impact (and validity) of policies such as “trickle down economics” that attribute growth mainly to flows of TC generated by lower taxes and less government spending and ignore IC. Trump’s “skinny budget” largely cuts R&D and other federally funded sources of IC.


    • Serene says:

      I’m glad somebody gets it.

      I wish that Keynes were alive today to give us a new version of his theories in light of modern globalization. Modern globalization is fundamentally different than that of his time. Most economists just don’t want to believe it for some reason.

      I’m the only person that I’ve ever read that seems to understand the offshoring paradox, which is that the more we offshore the more we have to offshore. The effects upon labor markets are profound and destructive.

      I read an article a while back describing the US labor shortages as a problem of perception. The claim is that there are manufacturing jobs here but because of the perception that there aren’t, nobody is investing in attaining skills for those jobs. Well, of course this is correct, but it doesn’t recognize cause and effect. The cause of the perception problem is offshoring, and we can’t just tell people to change their perception. Their perception is correct. People like security, and nobody is going to invest in education and attaining skills for a job that exists only because the companies can’t find the labor overseas.

      We’ve destroyed our social cohesion in addition to our economic health. No matter how many times we say it, most economists just don’t get it. Jared and Dean seem to get it, but Delong, Summers and Krugman don’t.

      The party will continue to lose until it reexamines its incorrect premises rather than blaming Russia and every other phantom force for their incompetence.


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