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The Trade Deficit and the Weak Job Market
The Trade Deficit and the Weak Job Market
Dean Baker
6/8/15
It is often said that the economy is too simple for economists to understand. This is clearly the story with the continuing weakness of the job market and the trade deficit. We are still down more than 3 million jobs from our trend level even with May's strong growth. It should be pretty obvious that losing more than $500 billion a year in demand (at 3.0 percent of GDP) to the trade deficit would be a serious drag on the economy and growth. But for some reason, economists insist on looking elsewhere for the problem.
The basic story should be familiar to anyone who has suffered through an intro economics course. There are four basic sources of demand in the economy: consumption, investment, government spending, and net exports. "Net exports" refers to the excess of exports over imports. If we export more than we import so that net exports are positive, then they add to demand in the economy. This means that in addition to the demand we generate domestically, trade is increasing demand in the economy.
However when we have a trade deficit and we import more than we export, trade is reducing demand in the economy. A portion of the demand being generated domestically is being filled by goods and services that are produced in other countries.
From the standpoint of generating demand in the U.S. economy an annual trade deficit of $500 billion has the same impact as consumers taking $500 billion out of their paychecks each year and stuffing it under their mattress.
If the economy were near full employment, then losing this demand would not be a problem. In that case, it would mean that the trade deficit is allowing us to have more consumption, investment, or government services than would be possible if we were only relying on domestic production. But in a context where the economy is below full employment, the loss of demand to imports means that the economy is producing less than its potential and workers are needlessly going unemployed.
For some reason economists are reluctant to discuss the trade deficit as being a source of the economy's weakness. ...
http://www.huffingtonpost.com/dean-baker/the-trade-deficit-and-the_b_7539710.html
Dean Baker
6/8/15
It is often said that the economy is too simple for economists to understand. This is clearly the story with the continuing weakness of the job market and the trade deficit. We are still down more than 3 million jobs from our trend level even with May's strong growth. It should be pretty obvious that losing more than $500 billion a year in demand (at 3.0 percent of GDP) to the trade deficit would be a serious drag on the economy and growth. But for some reason, economists insist on looking elsewhere for the problem.
The basic story should be familiar to anyone who has suffered through an intro economics course. There are four basic sources of demand in the economy: consumption, investment, government spending, and net exports. "Net exports" refers to the excess of exports over imports. If we export more than we import so that net exports are positive, then they add to demand in the economy. This means that in addition to the demand we generate domestically, trade is increasing demand in the economy.
However when we have a trade deficit and we import more than we export, trade is reducing demand in the economy. A portion of the demand being generated domestically is being filled by goods and services that are produced in other countries.
From the standpoint of generating demand in the U.S. economy an annual trade deficit of $500 billion has the same impact as consumers taking $500 billion out of their paychecks each year and stuffing it under their mattress.
If the economy were near full employment, then losing this demand would not be a problem. In that case, it would mean that the trade deficit is allowing us to have more consumption, investment, or government services than would be possible if we were only relying on domestic production. But in a context where the economy is below full employment, the loss of demand to imports means that the economy is producing less than its potential and workers are needlessly going unemployed.
For some reason economists are reluctant to discuss the trade deficit as being a source of the economy's weakness. ...
http://www.huffingtonpost.com/dean-baker/the-trade-deficit-and-the_b_7539710.html
12 replies
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