February 21, 2020
Serious people have long known the Washington Post as a pathetic propaganda organ when it comes to trade. After all, it was so shameless in its promotion of NAFTA that it ran an editorial back in 2007 claiming that NAFTA had been so great for Mexico that its GDP had quadrupled in the twenty years since 1987. The actual figure was 84.2 percent. (This has never been corrected.) It also has repeatedly run fantasy pieces about how NAFTA is creating a thriving middle class in Mexico, even though the period since NAFTA has been one of historically slow growth in Mexico.
For this reason, it was not surprising to see a piece by Fareed Zakaria touting the virtues of the trade deficit. While his point that the trade deficit has risen under Trump, contrary to his promise of a lower deficit, is correct, most of the rest of the piece is not.
Most importantly, he implies that there is no reason for anyone to be bothered by the trade deficit. As the trade deficit exploded in the years from 2000 to 2007 (before the Great Recession), the economy lost 3.4 million manufacturing jobs. That was 20 percent of total manufacturing employment. We also lost 40 percent of unionized manufacturing jobs. Anyone who gives a damn about the well-being of the country’s middle class should have been very worried about the trade deficit in these years. (There are some people who blame this massive job loss on technology. These people are known as “liars.” )
The impact of the trade deficit matters less on middle class living standards today than it did two decades ago, primarily because the effect of trade has substantially eroded manufacturing’s status as a source of relatively high-paying jobs for workers without college degrees. Manufacturing jobs actually pay slightly less than the private sector average, although if we factor in benefits and adjust for age and education, there likely is still a modest premium.
The trade deficit also matters from the standpoint of aggregate demand. Our current deficit of roughly 3.0 percent of GDP ($616.8 billion in 2019) means that we are generating demand in Europe, China, and elsewhere with our spending, not the United States. This is a large part of the story of “secular stagnation,” where we don’t have enough demand in the U.S. economy to push it to levels of output high enough to sustain full employment.
We can offset the demand lost as a result of the trade deficit with larger budget deficits, but then people, like the Washington Post editors, start hyperventilating about large budget deficits. If we did not face political obstacles to large budget deficits, secular stagnation would not be a problem, but we do.
The problems with Zakaria’s logic go much further. He implies that the fact that we have a surplus in trade in services is somehow helped by the fact that we have a deficit in goods:
“In fact, while the United States has a deficit in manufactured goods with the rest of the world, it runs a huge surplus in services (banking, insurance, consulting, etc.). And remember that 80 percent of American jobs are in the service sector. (Jobs in manufacturing as a percentage of overall jobs have been declining for 70 years at about the same pace.) The United States is also the world’s favorite destination to invest capital, by a large margin. As Martin points out, when you look at this entire picture, ‘the trade deficit should be something to brag about rather than denounce.'”
Actually, there is no logical connection between the two. If we had a stronger manufacturing sector, we would also see more demand from manufacturing for services, like computer technologies, innovations in biology and chemistry, and logistics. By implying that there is some sort of trade-off between having a strong service sector and a strong manufacturing sector, Zakaria is pushing a non sequitur.
It is also worth noting that our surplus on services was just $249.2 billion last year (1.2 percent of GDP). This surplus mattered much less to the service sector (80 percent of GDP) than the $867 billion trade deficit in goods (4.3 percent of GDP) mattered to the manufacturing sector (around 12 percent of GDP).
While Zakaria would have us believe that our service jobs are high-paying and high tech, the largest category of service exports is travel. This sector produced $214.1 billion in exports last year, more than a quarter of all service exports. These are largely jobs in hotels and restaurants, not generally thought of as high-paying high productivity employment.
One of the other major items in services was “charges for the use of intellectual property.” This earned the country $129.1 billion last year or roughly 0.6 percent of GDP. The irony of Zakaria, who is ostensibly a committed free trader, touting this export is that it is 100 percent protectionism. The U.S. gets money for the “use of intellectual property” because we give companies patent and copyright monopolies and require other countries to respect them. These monopolies raise the price of items like prescription drugs, medical equipment, and software by many thousand percent above their free market price.
Anyone who is upset by tariffs of 10 percent or 25 percent on items like imported cars or steel, should be apoplectic over what are effective government created barriers that are tens or even hundreds of times larger. Apparently Zakaria is just fine with these barriers, perhaps because he and his friends at the Washington Post are in the class of people that benefit from them, as opposed to tariffs on cars or steel.
Another major item in our service exports is financial services, which came to $113.9 billion last year (0.5 percent of GDP). This is largely money going to the folks on Wall Street. As with intellectual property, this is a major source of inequality in the U.S. economy. Again Zakaria might be happy about this (I know, we can count on hand-wringing columns decrying inequality), but there is little reason for most of us to applaud the financial industry getting even richer.
Anyhow, in the Jeff Bezos owned Washington Post, Zakaria’s column passes for a serious analysis of trade. That’s America in 2020.