Its The Trade Deficit

Dave Johnson

A huge part of the reason we can’t get out of this unemployment slump is the trade deficit. We don’t buy American and neither do our “trade partners.” We buy from them, they sell to us — that’s not “trade.” Stimulus means we buy from them. Cutting taxes means the extra cash buys from them. Nothing we try brings jobs here because we don’t buy enough here that’s made here and they don’t either. If we want to fix employment we have to fix trade.

The current unemployment crisis results, at least in large part, from the trade deficit. This has been masked by bubbles like the tech bubble and the housing bubble. Economist Paul Krugman explains, in a blog post, The Return Of Secular Stagnation,

But then the question is, why do we find it so hard to achieve full employment even with saving somewhat low by historical standards. And the answer seems clear: it’s the trade deficit. America in the 70s and 80s could have high savings, not hugely strong investment, but still have full employment because trade deficits weren’t as large compared with the economy as they are now.

And this in turn means that the savings glut possibly making the natural real rate negative is actually originating abroad, not at home.

Krugman is taking issue with the economist argument that we have a problem of too much savings without investment, using a chart showing savings declining. (Note that the inflection point is right as Reagan’s policies start to hit.) He explains how this demonstrates that the problem is really our trade deficit.

Easier to understand: We have to fix trade if we are going to fix the economy.

China has accumulated more than a trillion dollars by selling to us and not buying from us. Think about what would happen to our economy if China used that money to place orders for US-made goods. Factories would be opening up, people would be hired, stores would be humming… When you think about how much good that would do, you are understanding the harm their sell-only trade policy has done. They were supposed to buy from us, too, because that is what trade is. But they didn’t, and here we are.

Now, think about how much good it would do for China’s economy, if our economy was humming from all those orders for our goods! When you think about that, and realize that China is not doing that, you might start to think that this is not an economic game China is playing. If it was about economics, they would use that money to place those orders, to revive our economy, which would mean we would be placing even more orders from them.

But they aren’t. Why is that?