The Trade Deficit does not cost jobs

[sinkspur]

Derek Scissors
March 16, 2015 2:02 pm | AEIdeas

The Trade Deficit does not cost jobs

The debate over globalization is back, and will last through the 2016 election. Alex Trebek is pleased – answers in this category all feature the letter ‘T’ – such as Trade Promotion Authority (TPA), the Trans-Pacific Partnership (TPP), and the Trans-Atlantic Trade and Investment Partnership (TTIP).

The $1000 answer is the trade deficit. The correct question is:  “What has little or nothing to do with American jobs?” Some people just can’t get this one. Or don’t want to.

The term “trade deficit” sounds like it must be bad. It can be, especially for countries that don’t have the money to pay for imports. With $83 trillion in household net worth, the U.S. can afford to buy the imported cars, clothing, electronics, and pharmaceuticals Americans want.

Protectionists know this, so they instead claim the trade deficit cost jobs. They don’t even try to show it’s true, they assert it and hope everyone nods. They’ve been doing this for decades. They’ve been wrong just as long.

If trade deficits have caused job loss for decades, millions of jobs on some counts, we should see a clear and sustained relationship between trade and unemployment. We don’t. It’s never clear, much less clear for a long time. Take a look:




Does that look like trade deficits are driving jobs? Do they look related at all?

If there is a relation, it might be that trade deficits are associated with higher employment. Break the past 50 years into four periods:

1) From 1964 to 1978, the U.S. annual trade balance for goods and services deteriorated by a total of $36 billion. This is a small amount now but was equal to the 5 largest U.S. trade balances combined before 1977. From 1964-78, U.S. unemployment rose 1 point. Our largest trade surplus occurred in 1975. That same year sees the highest unemployment rate in this period, touching 9%.

2) From 1979 to 1991, annual trade deficits ebbed and flowed, ending about where they started. The unemployment rate again rose a total of 1 point. The trade deficit was $24 billion in 1982, which saw unemployment peak at 10.8%. The trade deficit then jumped to $152 billion in 1987. Yet unemployment fell five points over those years.

3) From 1992 to 2006, the annual trade deficit soared from $39 billion to $762 billion. While it did so, unemployment fell 3 points. The trade deficit was $39 billion in 1992, the year unemployment peaked at over 7%. In 2006, when we had the biggest trade deficit ever recorded, unemployment was well below 5%.

4) From 2007 to 2014, the annual trade deficit shrunk $200 billion. Unemployment soared then fell back. The smallest trade deficit in this period was recorded in 2009. The highest unemployment was also recorded in 2009.

This is only one way to split the numbers and certainly not conclusive. The reason it may seem convincing is an expanding, vibrant American economy both creates jobs and boosts spending, including spending on foreign goods and services that raises the trade deficit. When jobs are lost and buying power declines, the trade deficit falls.

It’s tempting to look at all this and say, “OK, trade deficits don’t cost jobs. But wouldn’t spending more in the U.S. still help?”

Probably not. Americans buy foreign products because they improve our lives, and government interference in that would only make us worse off. If you’re in a store but can’t buy the kind of clothes or medicine you want, you buy less. In the same way, forcing down the trade deficit would mean unhappy consumers, a worse economy, and fewer jobs.

[sinkspur]

Americans buy foreign products because they improve our lives, and government interference in that would only make us worse off. If you’re in a store but can’t buy the kind of clothes or medicine you want, you buy less. In the same way, forcing down the trade deficit would mean unhappy consumers, a worse economy, and fewer jobs.

[EdinVA]

I see your liberal and raise you a conservative...

http://www.epi.org/publication/ib244/

A wide gulf exists today in American politics. On one shore are voters increasingly anxious about globalization and its effect on their jobs and communities. On the other are economists, policy makers, and pundits who maintain that trade is good for the economy, that the wider public is simply misguided about its benefits, and that politicians who sympathize with those concerned about globalization are pandering to special interests at the expense of the wider economy. This latter group relies heavily on the suggestion that “all economists believe” globalization is good for the vast majority of American workers.

 This reliance is odd given that mainstream economics actually argues that there are plenty of reasons for concern about globalization’s effect on the majority of American workers. This primer highlights two issues in particular that should worry American workers about globalization: job losses stemming from growing trade deficits; and downward wage pressure for tens of millions of American workers. These problems are not unexpected consequences of expanded trade; quite the opposite, they are exactly what standard economic reasoning predicts.

 Trade and jobs Job loss is by far the most visible and easily understood way that international trade can affect American living standards. The effect of trade flows on American jobs is actually pretty complicated and so requires a bit of untangling. First, trade creates new jobs in exporting industries and destroys jobs when imports replace the output of domestic firms. Because trade deficits have risen over the past decade, more jobs have been displaced by imports than created by exports.

THE TRADE DEFICIT AND FUTURE AMERICAN LIVING STANDARDS
In a sense, a trade deficit is the difference between a country’s production (exports) and its consumption (imports). Each    year that the United States runs a trade deficit is a year that it must borrow from abroad to finance this excess of consumption over production. This borrowing leads to growing foreign debt that must    be paid, with interest. In 2007, U.S. borrowing was on the order of $2 billion every day.

[sinkspur]

Each    year that the United States runs a trade deficit is a year that it must borrow from abroad to finance this excess of consumption over production. This borrowing leads to growing foreign debt that must    be paid, with interest. In 2007, U.S. borrowing was on the order of $2 billion every day.

The US does not have to "borrow from abroad" to finance an "excess of consumption."  This is ridiculous.  Americans buy imported products at Wal-Mart, Target, other retailers, and pay with cash. So, we get goods we want, importing companies get paper.  This is not an "excess of consumption."  It is consumption that we want.  More expensive American-made goods will result in a deficit to families and less consumption of those goods.

The idea that the trade deficit fosters some kind of "debt that must be paid" is ludicrous. Borrowing is due to interest on the federal government's debt, not the trade deficit.

The US has been running trade deficits for years, in good economies and bad, so it's also silly to maintain that the trade deficit has a negative impact on the economy.