Some Economists Say that Trump Seems to Understand the Trade Deficit Better than Some Economists

April 12, 2017

NPR had a somewhat confused piece on the trade deficit this morning that was headlined "Economists Say Trump Seems To Misunderstand Significance Of Trade Deficit." The piece basically tells listeners that Trump is mistaken for claiming the trade deficit is a problem.

April 6th, 2017 [Center for Economic and Policy Research]

To make this point, the piece quotes Peterson Institute economist Chad Brown:

"Trade isn't a zero-sum endeavor. It's win-win. And I think that's a different framework than he's used to dealing with - you know, coming from the world of real estate where if I get something out of a deal, you know, it's something that you don't get."

The piece then points out that the U.S. trade deficit hit its recent low in 2008, at the start of the Great Recession. It then features a comment from Larry Kudlow:

"I don't understand it. Trade deficit is a terrible gauge of the economy. Or let me put it in reverse. If we're in a position of having a large trade deficit that means we're growing, and we're growing faster than the rest of the world."

Okay, here's the way economists familiar with economics would talk about a trade deficit. If the economy is below full employment, then the trade deficit is a drag on demand. It represents spending that could be taking place in the United States, and creating demand and employment here, which is instead created demand and employment in other countries.

Lack of demand in the U.S. economy has actually been a large problem in recent years. Some folks may have heard economists like Paul Krugman, Larry Summers, Ben Bernanke, and Olivier Blanchard talk about "secular stagnation." That means that the economy does not have enough demand to sustain full employment.

While they often recommended increased government spending to offset secular stagnation, a reduced trade deficit would have the same effect. In other words, if we reduce the annual trade deficit by $380 billion, it would have roughly the same effect on demand and employment as increasing government spending by $380 billion.

Of course, if we want to argue that lack of demand is never a problem (and these economists are wrong about secular stagnation) then we can insist that the trade deficit never costs jobs.

The other important point about the trade deficit is the composition of employment. Since we mostly trade manufactured goods, a large trade deficit means fewer manufacturing jobs. The explosion of the trade deficit following the run-up in the dollar (which began in 1997) was the reason we lost four million manufacturing jobs from 2000 to 2007 (before the Great Recession).

Since manufacturing jobs are a major source of relatively high-paid employment for workers without college degrees, a trade deficit puts downward pressure on the wages of less-educated workers more generally. This does not have to be the case. For example, if we focused on removing the barriers that protect our doctors, dentists, and other highly paid professionals from foreign competition, then a high dollar could put downward pressure on the pay of highly educated workers and reduce the cost of the services they provide for the rest of us. 

However, our politicians think doctors and other highly educated professionals lack the skills needed to compete in the global economy, so they leave the barriers in place, ensuring that the less-educated workers will suffer from an over-valued dollar and the resulting trade deficit.


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