The Big(gest) Thing Missing From Secretary Lew’s Big Economy Speech

Dave Johnson

Last week Treasury Secretary Jack Lew (D-CITI) gave a major address on the economy. (Transcript here, video here.) But the biggest fixable factor affecting jobs and the economy wasn’t mentioned at all: the trade deficit. In fact, a Google search of “Jack Lew” and “Trade deficit” finds very little to show that the Treasury Secretary is particularly concerned about the trade deficit.

“I post this because it is worth reviewing what Treasury is saying about its economic thinking. No mention of the trade deficit or how foreign mercantilism causes de-industrialization here, of course.” – Michael Stumo at CPA Trade Reform, commenting on Secretary Lew’s speech.

One of the few reports this Google search for both “Jack Lew” and “trade deficit” turns up is from March, 2013: “Trade, economy top agenda as China’s Xi meets U.S.’s Lew“:

Washington is eager for China to move toward a more consumer-oriented economy and away from investment and export-driven growth, which has contributed to a record-high $315 billion U.S. trade deficit with China last year.

Washington wants China to reduce barriers to trade and investment and to let the yuan currency float freely in markets.

So, has China moved “toward a more consumer-oriented economy and away from investment and export-driven growth”? Not so much. Bloomberg News reported June 8, 2014, in “China’s Export Gains to Cushion Growth as Imports Slump“:

China’s exports rose more than analysts estimated in May, helping to cushion the world’s second-biggest economy from a deeper slowdown as an unexpected slump in imports highlighted risks to growth.

Overseas shipments gained 7 percent from a year earlier, the customs administration said yesterday in Beijing, exceeding the 6.7 percent median forecast in a Bloomberg News survey. Imports fell 1.6 percent, leaving a $35.92 billion trade surplus, the biggest in five years according to Bloomberg data.

Has China moved its currency to market rates since that meeting? Value of the Yuan in March, 2013? Around 6.21. Value today? Around 6.21. It is undervalued by as much as 30 to 40 percent, according to some estimates, which means goods made in China cost up to 30 to 40 percentless than the same goods made here. And it should be rising a few percent each year from that point if market forces were applied.

Here is another, more recent report from May 2014 in the Financial Times, “US calls on China to do more to overhaul exchange rate policy.” (Note: We want the renminbi to strengthen, not weaken.)

Jack Lew, US Treasury secretary, has called on Beijing to renew a pledge to overhaul its exchange rate policy in his first visit to the Chinese capital since the renminbi began to reverse its climb against the dollar this year.

The renminbi has weakened about 4 per cent against the dollar since January, ending four years during which the currency appreciated almost 12 per cent.

Meanwhile, the trade deficit in general? This is from June 4 – two weeks ago – Enormous, Humongous Trade Deficit Up In April: “The overall U.S. international goods and services trade deficit rose to $47.2 billion in April, from (revised) $44.2 billion in March. This is the highest since July 2012.”

Why The Trade Deficit Matters

The trade deficit represents the amount of demand in the U.S. economy that is not being translating into jobs and economic growth inside the US. We borrow money from other countries to pay for these things we buy from elsewhere. This means wealth is being drained from our country. A trade deficit cannot be sustained because eventually we run out of the ability to keep borrowing, and our trade deficit has been running around half a trillion dollars each year for a long time.

One way to think about the effect of the trade deficit is to visualize our economy with those orders coming in to companies inside the country instead of outside. Imagine an extra half-trillion dollar worth of orders coming to companies that make and do things inside the US and you can picture how we would be doing if we fixed the problem of the trade deficit.

Wall Street Journal, June 2014: “Widening U.S. Trade Gap Dims Growth Views“:

The U.S. economy is again struggling to meet lofty expectations, with a drop in exports standing as the latest obstacle to robust growth this quarter.

The nation’s trade deficit widened 7% in April from a month earlier to its highest level in two years, the Commerce Department said Wednesday. Imports rose 1.2%, but exports fell 0.2%, marking the fourth decline in five months.

The report suggests American households and firms stepped up spending after snowstorms and icy weather walloped the economy in the winter. But much of their spending—on items like cars, cellphones and machinery—flowed outside the U.S. to foreign firms, undercutting domestic growth.

Reuters, April 2014: “Wider U.S. trade deficit to weigh on first-quarter GDP“:

The U.S. trade deficit unexpectedly widened in February as exports hit a five-month low, suggesting first-quarter growth could be much weaker than initially anticipated. … Economists, who had expected the deficit to narrow to $38.5 billion, said trade could slice off as much as half a percentage point from first-quarter gross domestic product.

TheStreet, 2010: “GDP Growth Stunted by Trade Deficit“: “Growth is too slow, and unemployment is kept unacceptably high by surging imports, especially from China and Germany, which enjoy undervalued currencies.”

CNBC, October 2013: “Trade gap with China costs the US $37 billion in wages

Robert Scott, Economic Policy Institute (EPI), August 2012: “Growing U.S. trade deficit with China cost over 2.7 million jobs,” refers to, “The United States is piling up foreign debt and losing export capacity, and the growing trade deficit with China has been a prime contributor to the crisis in U.S. manufacturing employment. “

New Republic, April 2014: “We’ve Been Worrying About the Wrong Deficit

Jared Bernstein and Dean Baker, N.Y. Times, November 2013: “Taking Aim at the Wrong Deficit“,

Simply put, lowering the budget deficit right now leads to slower growth. But reducing the trade deficit would have the opposite effect. Not only that, but by increasing growth and getting more people back to work in higher-than-average value-added jobs, a lower trade deficit would itself help to reduce the budget deficit.

Running a trade deficit means that income generated in the United States is being spent elsewhere. In that situation, labor demand — jobs to produce imported goods — shifts from here to there.

… if we shift our focus from reducing the budget deficit to the trade deficit, we could make a big difference, not just in the national accounts, but in the lives of people for whom that unfavorable math has meant hardship for far too long.

Harold Meyerson, Washington Post, January 2014: “Free trade and the loss of U.S. jobs“:

There are ways that a developed nation can trade with the developing world without gutting its own economy. Germany has been able to protect its workers not only through the advantage of having the euro as its currency, but also by requiring its corporations to give their employees a major say in their companies’ investment decisions and by embracing a form of capitalism in which shareholders don’t play a major role. Were the United States to adopt this form of stakeholder capitalism, then its trade accords wouldn’t necessarily come at the expense of its workers. Absent such reforms, however, trade deals will only negate our attempts to diminish inequality.

It is the trade deficit, not the budget deficit, that is hurting our economy and killing off jobs and wage increases. In fact, it’s the trade deficit that is driving the budget deficit.

Call your House representative and your senators today and ask what they intend to do about the enormous, humongous trade deficit. This year, ask every House and Senate candidate what they intend to do about the enormous, humongous trade deficit. Because balancing trade will grow the economy and restore jobs and wages.

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