October 04, 2014
That is perhaps an unfair headline for a comment on a generally interesting and useful piece on the sources of future job growth by Jim Tankersley, but the general pattern of reporting in the Post and elsewhere seems to demand it. Tankersley’s piece is asking what we should expect to be the drivers of job growth in the decade ahead. He notes that in the past increased consumption had been the main driver of growth. The piece argues that the consumption share of GDP is unlikely to rise further in the future (safe bet), but then says that the changing composition of consumption may be a force driving job growth. Specifically, a turn away from purchases of goods, many of which are imported, to services like education and health care may mean that more people are employed in the United States.
The essential part missing from this discussion is any mention of the trade deficit. One of the reasons that consumption grew so rapidly in the prior twenty years was that the United States had a large trade deficit. This was in turn made possible by an over-valued dollar, which was the result of explicit government policy both here (Robert Rubin touted his “high dollar” policy) and abroad (think of countries like China buying up hundreds of billions of U.S. government bonds).
For those who never had any economics or are in high level policy positions, an over-valued dollar has an enormous effect on the balance of trade. If the dollar is over-valued by 20 percent it has roughly the same impact as imposing a 20 percent tariff on all U.S. exports and providing a 20 percent subsidy on imports. There is nothing in policymakers’ bag of tricks that can come close to having the same impact on trade as a reduction in the value of the dollar. Anyone who argues otherwise (think of people pushing the TPP or TTIP) are either showing their ignorance or not telling the truth.
Furthermore, the trade deficit is the main reason the economy is below its potential and we are not at full employment. We currently have a trade deficit of more than 3 percent of GDP (@ $520 billion a year). This is money people in the United States are spending that is creating demand in other countries, not in the United States. That creates a huge gap in demand. If we count the multiplier effects, it would come to around 4.5 percent of GDP ($780 billion a year), which would translate into more than 6 million jobs. This gap can be filled with more government spending, more investment, or bubble driven housing construction, but as a practical matter it is not easy to raise these other components of demand. (The obstacle to increased government spending is political not economic.)
This is all basic national income accounting. In other words, it is definitional, it can’t be wrong. The only problem is that people don’t understand it. And it seems that many of the people who don’t understand it are in policymaking positions.
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