CEPR - Center for Economic and Policy Research


En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press Back in the Old Days, Rich Countries Were Supposed to Run Trade Surpluses

Back in the Old Days, Rich Countries Were Supposed to Run Trade Surpluses

Wednesday, 07 May 2014 04:10

Paul Krugman outlines his story of secular stagnation in a blog post this morning. The odd part of the story is that the trade deficit is nowhere in sight. The punchline is that a slower rate of labor force growth should lead to a reduction in demand. The simple arithmetic is that if the rate of labor force growth slows by 1.0 percentage point, then this would be expected to reduce investment by 3.0 percentage points of GDP.

This is a story of a demand gap that could be hard to fill, but how does that compare to a trade deficit that peaked at just shy of 6.0 percent of GDP in 2005 and is still close to 3.0 percent of GDP today? Why are we not supposed to be worried about this cause of a shortfall in demand?

Back in the days before the United States began running persistent trade deficits, the standard theory held that rich countries like the United States should be running trade surpluses. The argument was that capital was plentiful in rich countries, therefore they should be exporting it to poor countries where capital is scarce. This would lead to both a better return on capital and also allow developing countries to grow more rapidly.

We have seen the opposite story in the United States, especially after the run-up in the dollar following the East Asian financial crisis. This has contributed in a big way to the "secular stagnation" problem, but for some reason there continues to be a reluctance to talk about it. (No, being the reserve currency does not mean we have to run a trade deficit.)

Comments (22)Add Comment
written by JSeydl, May 07, 2014 5:44
Back in the days before the United States began running persistent trade deficits, the standard theory held that rich countries like the United States should be running trade surpluses.

Will the Nobel laureate ever respond to this sentence? Dean has been saying it to him once a month for the past 5 years, but he has never once acknowledged it.
The Obama-Immelt Formula for Secular Stagnation
written by Last Mover, May 07, 2014 6:06

Back in the old days (physical) capital wasn't considered mobile, so labor tied to it in complementary fashion stayed with it in the native country, a la manufacturing in America.

After globalization the MNCs came along and capital went mobile big time with a few exceptions, along with the labor complementary to it.

To get a sense of how well the trade deficit was carefully masked and woven into public propaganda by the 1% and their sock puppets post Robert Rubin from the Clinton administration, consider the appointment in 2009 by Obama of Jeffrey Immelt of GE to the President's Economic Recovery Advisory Board.

Immelt's advice to the President was "free market competition" was the answer to recovery, as he systematically engineered trade flows designed to guarantee America consumed more than it could produce.
Krugman Did Respond to Dean
written by Robert Salzberg, May 07, 2014 6:14
For JSeydl:

I guess you missed this Krugman post from last year:


Krugman also had a column in 2008. Life Without Bubbles where he wrote about lowering the trade deficit. (Will post link in next post due to link limit.)
Life Without Bubbles by Krugman
written by Robert Salzberg, May 07, 2014 6:20
Paragraphs 9-12 from 2008 Krugman column:

"A more plausible route to sustained recovery would be a drastic reduction in the U.S. trade deficit, which soared at the same time the housing bubble was inflating. By selling more to other countries and spending more of our own income on U.S.-produced goods, we could get to full employment without a boom in either consumption or investment spending.

But it will probably be a long time before the trade deficit comes down enough to make up for the bursting of the housing bubble. For one thing, export growth, after several good years, has stalled, partly because nervous international investors, rushing into assets they still consider safe, have driven the dollar up against other currencies — making U.S. production much less cost-competitive.

Furthermore, even if the dollar falls again, where will the capacity for a surge in exports and import-competing production come from? Despite rising trade in services, most world trade is still in goods, especially manufactured goods — and the U.S. manufacturing sector, after years of neglect in favor of real estate and the financial industry, has a lot of catching up to do."

Gasoline and Cars
written by jonny bakho, May 07, 2014 6:50
About 1/5 of our imports are Crude oil, cars and car parts including tires.
Fixing inefficiencies in our infrastructure that lead to exhobitant transportation costs could have a large impact on trade deficit.

We spend large amounts on imported consumer goods that flood the Goodwilll cycle and not enough on domestic infrastructure, workforce development and education.
written by JSeydl, May 07, 2014 7:05
Robert, I certainly did not miss that post. But in it, Krugman still does not acknowledge the neocalssical trade model where developed countries are supposed to be capital exporters to the emerging world. This is a normative theory: the model says it "should" be this way, as welfare gains will be higher for both types of countries if it were this way. And not only that, but also it "would" be this way if markets were allowed to operate - the market solution is Pareto efficicent. To the extent that it's not this way, therefore, is due to intervention. The question is, what is the intervention and what can be done to remove it? I've never heard Krugman talk seriously about this.
Krugman did respond to Dean on the trade deficit...
written by LSTB, May 07, 2014 7:08
...Back in September 2013. http://krugman.blogs.nytimes.c...tagnation/

The reason I’m hesitating a bit before simply declaring trade the culprit is the issue of causation, and the related issue of whether those deficits are likely to persist. Why, exactly, did we start running persistent deficits?

After around 2000, you could argue that policies abroad were responsible: China and other developing countries were clearly keeping their currencies undervalued and accumulating large dollar reserves, and the counterpart of that accumulation had to be deficits in the rest of the world, which ended up meaning us. But the deficits began long before that, and some of the biggest surpluses out there are being run by countries that don’t do a lot of foreign exchange intervention (e.g. Germany).

So the causation could run the other way, with deregulation and rising leverage pulling in foreign capital, keeping the dollar overvalued, and producing persistent deficits. And you might therefore argue that we can avoid secular stagnation by letting low interest rates lead to a debased dollar (hi, Congressman Ryan!), more competitive U.S. manufacturing, and balanced trade.

Any response, Dean? I'd love to know what you think.
Krugman understands the impact of trade deficits
written by Dean, May 07, 2014 7:10

I know that Krugman fully understands this issue, so I am not saying anything that he doesn't know very well. What I can't understand is why he rarely (not never) mentions it in his accounts of secular stagnation.
I have always wondered
written by Dave, May 07, 2014 7:56
I have always wondered the same thing. I've come to believe that PK is generally biassed towards unrestricted trade unless there is an air-tight mechanism to balance it without sacrificing efficiency. I don't agree with that approach. Requiring 100% proof of efficacy of an alternative plan is a form of bias, because 100% proof of efficacy never exists in economics.

It wouldn't be hard to put together a good case that balanced trade is vital to the US well being and world stability, and so making that general principal a foundation for global trade agreements should be easy to sell if most economists weren't somehow gaining from the companies that benefit most from avoiding the discussion altogether.

I think PK is skeptical we can get the dollar devalued enough to balance trade with China. Given that this is the only mechanism he's willing to take seriously, I can understand the reluctance a bit better. But in general, I think economists have really messed up by avoiding discussions of creative ways to balance trade. All it takes is a belief that it is a good thing. If anyone believed that, the ideas would flow.
written by s ken brown, May 07, 2014 8:59
I'm not an economist but I make incorrect prognostications like one. Any system response to feedback is a function of the nature and efficiency of system connectivity. Only then can the system respond according to its characteristics. Our system of capital deployment is essentially self regulating because of its power to shrug off external regulation and/or innovation. You could classify this as a stickiness or an increase of the delta between static and dynamic friction and resulting stick/slip response. It's a case where American diversity creates a resistance that works against improvement toward stasis. That said, Baker is not as well connected as Krugman so while I find Baker has better conceived and supported arguments, Krugman gets away with things because connectivity is more important than technical accuracy.
written by Peter K., May 07, 2014 10:55
I think it has to do with foreign policy. DeLong doesn't emphasize trade either. Krugman unlike DeLong did go after China (and Germany I believe) over currency manipulation. Some responded that Krugman - an American - was just bullying China. I think they see trade issues as mildly nationalistic (like the Japan-bashing of the 80s), and so shy away from it even though the understand the issue.

Ideally something like WTO would adjudicate currency and trade issues which would lessen the dangers of American unilateralism and imperialism. I believe Europe is doing this with Germany with a commission report criticizing the latter for breaking trade rules.

I agree with Baker but understand where Krugman and DeLong are coming from. It is also good that Baker emphasizes how their have been wage gains in China and it won't be a low-wage haven forever. This is technocratic and internationalist. Most rightwingers don't care about wage gains in China, no matter their stance on trade.
written by joe, May 07, 2014 1:27
Why should we labor to produce stuff that we send across our border in exchange for foreign currency? Imports are a real benefit, exports a real cost.

blah blah, real rate of return in rupees, blah blah. Rupee's are useless to me, I'd have to find someone with dollars who wants rupees. Meanwhile we're not consuming what we produce.

The rest of the world wants a net accumulation of US dollars. How else would you get it other than selling stuff to us? (fx markets would require Americans with dollars willing to trade for foreign currency. We'd rather have the goods rather than foreign currency)
written by Chris E, May 07, 2014 3:18
As the world reserve currency the rest of the world demands holding our dollar assets. Our exports do not eclipse this demand so we need to run structural current account deficits to supply this demand for the dollar. I wish Dean would further elucidate what he throws away...The Triffin dilemma
Being the Reserve Currency Does not Mean We Need Trade Deficits
written by Dean, May 07, 2014 3:32
There are two points on this one. First, there is an enormous quantity of dollars already floating around overseas. There is not a fixed ratio of reserves to GDP or trade, and in fact the demand has increased enormously post-East Asian financial crisis. This means that the ratio could also fall, especially with a better working international financial system. (Think of this ratio as being like the ratio of M2 to the monetary base in the United States.)

The other reason that we don't have to run a trade deficit is that we could supply dollars through investment flows. In other words, we would be lending money to the rest of the world. That is largely what we did until the mid-1970s.

So there is no reason that having the reserve currency requires the U.S. to run trade deficits.
Dollar-denominated deposits overseas are not necessarily dollars
written by Squeezed Turnip, May 07, 2014 4:13
Chris and Joe make this same error. This should be added to Dean's response. The dollar being the international reserve doesn't impact the trade deficit.
Krugman's non-response responses on trade deficit vs TPP puzzles me.
written by jaaaaayceeeee, May 07, 2014 5:10

When Krugman says Dean Baker is right and that he needs to do more study, and then another 6 months go by with Krugman ignoring an issue, I don't worry as much in the case of TPP, as I do with our trade deficit.

In the case of TPP, it seemed straightforward to me, that the most Krugman could write in nyt is that the leaks he's seen so far on TPP, show that it isn't even about free trade. He managed, at least by omission, to condemn ongoing corporate elite rampaging, unopposed by any effective elites (Gilens and Price) http://www.newyorker.com/onlin...archy.html

In the case of the trade deficit, the last time Krugman said Baker was right that it's a big issue, but that he needs to think more, was 6 mos. ago. He questioned which way causation runs - who would be on the receiving end, if we improved our trade balance. What does this mean? How does this matter, industrial policymaking-wise?

Is Krugman deeply pessimistic about policy making worldwide, that like Stiglitz says, elites learn the price of inequality too late (goes well with Gilens and Price)? Determined to press ahead on diagnosis to make headway before prescription? Avoiding explicit supranational problems because politics, like Piketty? I just don't understand.
written by Pat MacAuley, May 07, 2014 9:56
Dean is so right to keep bringing up the international trade deficit. This is a $480 billion hole in aggregate demand (not counting multiplier effects) that goes on year after year.
How can anyone write about secular stagnation and not mention the chronic trade deficit? Especially PK, who won his Nobel for his work in international economics...
written by JSeydl, May 08, 2014 7:14
FYI, Dean, in case you haven't seen this: http://www.voxeu.org/article/c...stagnation
reserve currency has nothing to do with it
written by joe, May 08, 2014 11:52
Treasuries are dollar denominated assets. The chinese purchase these with the US dollars they receive for payment from all the real goods they send us. (I once saw a segment of fox news talking about "borrowing" from china and it showed piles of rmb. Idiots).

What's the difference between a treasury and a dollar? Basically the term structure and interest rate. They are two forms of the exact same thing, namely liabilities of the USG.

The chinese wish to have a net accumulation of the USD. They get those by selling us stuff.
lending usd to other countries
written by joe, May 08, 2014 11:58
would make them have a net negative position in USD. Which many countries do not want. They want a positive position.
written by liberal, May 08, 2014 12:04
joe wrote,
The chinese wish to have a net accumulation of the USD. They get those by selling us stuff.

That's backwards. The Chinese wish to sell us stuff. They do that by accumulating dollars to devalue their currency.
Eurodollars and sense
written by Squeezed Turnip, May 08, 2014 2:51
written by Chris E, May 07, 2014 3:18
As the world reserve currency the rest of the world demands holding our dollar assets. Our exports do not eclipse this demand so we need to run structural current account deficits to supply this demand for the dollar. …

The eurodollar market is nearly $16 trillion but US imports are about 20% of that. Users of "eurodollars": U.S. corporations funding foreign operations, foreign corporations funding foreign or domestic operations, and foreign governments funding investment projects or general balance-of-payment deficits. And foreign governments devaluing their currency.

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.


Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.