April 22, 2016
Alan Blinder is a very good economist. For this reason, I am quite certain that he is familiar with the concept of “secular stagnation,” which means a persistent shortfall in aggregate demand. In fact, I suspect I could probably quickly find a few pieces he has written on the topic.
This is why it is surprising to see him assert boldly in the Wall Street Journal:
“The U.S. multilateral trade balance — its balance with all of its trading partners — has been in deficit for decades. Does that mean that our country is in some sort of trouble? Probably not. For example, people who claim that our trade deficit kills jobs need to explain how the U.S. managed to achieve 4 percent unemployment in 2000, when our trade deficit was larger, as a share of GDP, than it is today.”
If Blinder accepted the problem of secular stagnation, then as a matter of accounting identities he would have to accept that a trade deficit makes the problem worse. The whole point of secular stagnation is that the economy is not bouncing back to its full employment level of output. The standard story that economists liked to tell prior to the Great Recession was that we didn’t have to worry about unemployment created by trade deficits because the Fed would just lower interest rates and that would boost the economy back to full employment.
But if we believe that the Fed can’t lower interest rates enough to lift the economy back to full employment, in part because it is difficult to push nominal rates much below zero, then the loss of demand resulting from a trade deficit is not made up by an increase in demand from other sectors. (Actually, Blinder has elsewhere written this risk of demand loss was a very big deal, when he justified the Wall Street bailout.)
In short, if the trade deficit is 3.0 percent of GDP (@$540 billion a year) as opposed to its pre-East Asian bailout average of just over 1.0 percent of GDP, then it has an equivalent impact on the economy of cutting annual government spending by $360 billion. And, in the model that Blinder used in his analysis of the bailout and stimulus, that would cost millions of jobs.
I assume that Blinder knows there is an easy answer to his challenge to explain 4.0 percent unemployment in 2000 “when our trade deficit was larger, as a share of GDP, than it is today.” We had a huge stock bubble in 2000. This led to what was at the time a record low savings rate as people spent based on their bubble generated stock wealth. We also had a surge of tech sector investment as tech companies were directly financing investment with stock sales.
When the bubble burst, there was no easy way to make up this demand. The economy had negative job growth for two and half years and didn’t make up the jobs lost in the recession until January of 2005, the longest period without positive job growth since the Great Depression (since surpassed by the Great Recession. When job growth eventually did resume it was on the back of the housing bubble, which also did not end well.
Manufacturing was especially hard hit in this story. While the number of manufacturing jobs had remained roughly constant for three decades (it had been growing in the sixties, it fell by more than 20 percent from 1997 to 2006, as imports from China and other developing countries displaced millions of workers in the United States.
Manufacturing Employment
Source: Bureau of Labor Statistics.
Anyhow, the simple story is that insofar as we have been able to make up the lost demand from large trade deficits of post-East-Asian financial bailout period it has been through bubble generated growth. This has not provided the basis for lasting prosperity. Blinder asserts that the decision of foreign central banks to hold huge amounts of dollars as reserves, which props up the value of the dollar and sustains the trade deficit gives the United States an “exorbitant privilege.” The reality is the opposite, it means that we lose millions of jobs with no easy mechanism for replacing them.
It also worth pointing out that what gets traded is determined by trade agreements. These agreements have been quite explicitly crafted to make it as easy as possible for U.S. manufacturers to locate operations in Mexico, China, and other developing countries and then re-export back to the United States. This has the effect of putting our manufacturing workers in direct competition with low-paid workers in these countries, costing them their jobs and putting downward pressure on the wages of less-educated workers more generally.
There are tens of millions of very bright and ambitious people in China, India, and other developing countries who would be delighted to have the opportunity to work as doctors, dentists, and other high-paying professions in the United States. Just as manufacturing workers in these countries are willing to accept lower wages than their U.S. counterparts, so would these professionals. Such trade would provide enormous benefits to people in the United States in the form of lower cost health care, legal services, and other highly paid professionals services.
We can even reimburse the home country a portion of their professionals pay so that they can train two of three professionals for every one that comes here. That ensures they win as well from the deal. [This is bolded because many readers will be determined to ignore this point]
The reason that we opened up trade in manufactured goods but not professional services is that doctors are much more powerful than autoworkers. They have friends and relatives in policy positions, the media, and economics programs, so this point (which is straight trade theory) is rarely made.
One other point that Blinder neglects is that a major thrust of recent trade deals has been to impose stronger and longer patent and copyright protections in the United States and throughout the world. This is a direct transfer of money from people who buy drugs and computers to people who derive income from patents and copyrights. (And we wonder why income is being redistributed upward.) And, as a matter of accounting, if Malaysia pays Pfizer more money for its drugs, then it will have run a larger trade surplus in manufactured goods or other areas. In other words, what is good for Pfizer in these deals is generally going to be bad for everyone else.
As Blinder requests at the end of his piece, I will try to tell this to Donald Trump and Bernie Sanders.
Addendum
Here’s Jared Bernstein’s comment on the same piece.
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