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.