Following the NYT, the Washington Post had an article on Bill Clinton's economic legacy today. And like the NYT piece yesterday, the Post did not mention the soaring trade deficit. (See my complaint about the NYT piece here.)

This is not a small matter. The trade deficit was less 1.0 percent of GDP when Clinton took office, it was almost 4.0 percent when he left, and headed upward.This increase would be equivalent to more than $500 billion in today's economy.

And this increase was largely a result of Clinton's policy. His team pushed a high dollar policy and put muscle behind it with the bailout they designed for the East Asian financial crisis. A high dollar leads to a trade deficit in the same way that high meat prices lead to fewer hamburgers being sold. A high dollar makes our goods and services relatively more expensive in the world economy, therefore we sell less of them.

The resulting trade deficit creates a huge hole in demand. For arithmetic fans, demand is equal to consumption, investment, government spending, and net exports:

Y = C+I+G+(X-M)

If we have a big trade deficit then we have to make it up with one of the other components of demand, otherwise we have a shortfall in demand and unemployment. This is not whacko lefty thought, this is the simple economics that is taught in every intro class.

In the 1990s we made up for the trade deficit with the demand generated by the stock bubble. Consumption soared based on the stock wealth effect (people increase their consumption as they see the value of their stockholding increase) and there was also an uptick in investment as the crew could raise billions for nonsense plans by issuing stock.


In the last decade the demand gap was filled by the housing bubble. We had an even larger consumption boom based on the housing wealth effect and a building boom as record high house prices boosted construction.

With that bubble having now burst we have no easy way to fill the hole in demand. We could have larger budget deficits, but the politics won't allow it. That is partly due to Clinton Democrats like Robert Rubin who continue to scream about the evils of budget deficits. If we don't run large budget deficits, there is no easy way to make consumption or investment rise to fill the demand gap, as even former Clinton Treasury Secretary Larry Summers now acknowledges.

That leaves us with the prospect of an economy that is operating far below its potential and millions of people needlessly unemployed or underemployed. That should be a really big deal, sort of like 3 million Benghazis, but for some reason no one wants to talk about it.

The question is why? This is all basic economics, no one has a different story of how the economy works. This is an accounting identity, not a theory of economics.

So why don't people who review Clinton's economic record ever discuss the trade deficit? Don't they know about it? Do the editors put a gun to their heads threatening anyone who mentions the trade deficit?

It's long past time that adults need to talk about the trade deficit in public.