Does Trade Deficit Drive Inequality?

Dave Johnson

In the earlier post, ANOTHER Report On Jobs Lost To China “Trade” I wrote about a new report titled, The Surprisingly Swift Decline of U.S. Manufacturing Employment. This report showed that manufacturing employment would have been higher by over 4 million employees in 2007 without the effect of permanent normal trade relations (PNTR) to China. Previously the Economic Policy Institute (EPI) released their own study that found more than 2.1 million manufacturing jobs have been lost or eliminated since 2001, also due to our trade deficit with China.

So I have been looking at some numbers on the effect of our trade deficit, and will be writing about what I find. But in the meantime I made a chart out of some of those numbers and thought I would put it up today. This chart looks at the overall US trade deficit (not just with China) and the share of income that goes to working people.

The blue line is the trade deficit, or “U.S. Trade in Goods and Services – Balance of Payments.” Down is up, meaning the line dropping further below zero is an increasing deficit. The red line is “Nonfarm Business Sector: Labor Share.” This is basically a measure of how much regular working people share in the gains made by our economy. As labor’s share drops, more and more goes to the 1% types instead. Or, as a Cleveland Fed paper by Paul Gomme and Peter Rupert puts it, “the recent strength in productivity growth has largely accrued to capital, not to labor.”

Remember, correlation is not causation, but … just sayin’. And it makes sense that this would drive wages down while increasing the already-huge fortunes of those at the top, because setting low-wage workers in China against workers in the US obviously creates tremendous pressure on working people’s wages — and not just in manufacturing. When you release millions of people into the job market everyone will accept less just to keep their job. Meanwhile as the cost of labor drops the owners of companies are able to grab a bigger share of the pie for themselves, which is exactly what happened.

PS look at how much money that trade deficit is sending out of our economy! Hundreds of billions every single year!

PPS The reason I put that big “1981” on that chart is so I could refer to Reagan Revolution Home To Roost — In Charts. From that post:

It seems that you can look at a chart of almost anything and right around 1981 or soon after you’ll see the chart make a sharp change in direction, and probably not in a good way.