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Related: Editorials & Other Articles, Issue Forums, Alliance Forums, Region ForumsThe 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
Awknid
(381 posts)Too bad politicians only care about financing their campaigns through corporate donors! If we got money out of politics, it would help.
1StrongBlackMan
(31,849 posts)his argument is simplistic and inaccurate to the point of being misleading.
marmar
(77,090 posts)kentuck
(111,110 posts)$500 billion trade deficit = jobs.
1StrongBlackMan
(31,849 posts)the jobs problem goes well beyond net trade. See Post #4,below.
1StrongBlackMan
(31,849 posts)So when he read the first paragraph, he paused ... especially when he got to the last sentence ...
Then, he read this, with puzzlement:
And thought, "AHHHH, I know where the good doctor is headed" ... Because this reader, having suffered through a little more than an Intro Econ course, immediately saw a mischaracterization of Aggregate Demand (AD) ... the proper (simplified) formula is:
AD= C + I + G + X- M; where,
C= Consumer spending
I = Investment
G = Government spending
X = Exports
M = Imports
The difference being the operation symbols rather than the commas.
So Good Dr. Baker, when consumer spending is (largely) flat AND Investment is down AND Government spending is significantly down, the other good doctors (and those of us that suffered through a little more than an Intro Econ course) are correct in looking beyond net trade as the source of job weakness ... Unless he wishes to argue that Net Trade is MORE influential on Aggregate Demand then Spending (which is a ridiculous proposition, on its face).
The mantra of Economics is, the conclusion model is only as good as the assumptions one makes.
RiverLover
(7,830 posts)http://ourfuture.org/20150505/enormous-humongous-march-trade-deficit-creating-jobs-elsewhere
Add in the strong dollar which Wall Street demands & the currency manipulation by other countries, which btw, the TPP DOES NOT ADDRESS, and we can kiss our economy good-bye. With the exception of the Trickle Down we get from the top tier...
We always hear Democrats saying how bad Trickle Down is, the evil Reaganomics, but sadly, the only ones trying to correct that course are Progressive Dems. The real ones, that walk the talk of their campaign speeches. We've got them in the House, where Moneyed Interests don't hold as much sway, but they're just not working for us in large enough numbers in the senate.
Bottomline, the only way to get back on track is to get money out of campaigns & lobbyists out of DC & our state govts...and then we need rules to force companies to make some or all of their products here in the US if they want to sell their crap to US consumers.
kentuck
(111,110 posts)And we have a political Party that does not believe in government spending, except on defense matters. Since wages continue on a downward slide, there will tend to be less consumer spending.
So, exports and a $500 billion trade deficit would have a huge impact on jobs.
1StrongBlackMan
(31,849 posts)not off-shoring? ... not automation?
kentuck
(111,110 posts)How many jobs do you think they took?
Yes, we get some jobs in return but nowhere near what we have lost.
The trade deficit is created when we buy more than we sell. Jobs are created when we sell, not so much when we buy.
Doctor_J
(36,392 posts)Reaganomics myth because it pays well. Since the country is now run by far right republicans and "new democrats", all one gets from speaking the truth is the comfort that comes from having principles. OTOH, spouting the "conventional wisdom" is a path to fame and fortune.