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Home Publications Blogs Beat the Press Bill Clinton and the Trade Deficit: Is There Some Reason We Can't Talk About It?

Bill Clinton and the Trade Deficit: Is There Some Reason We Can't Talk About It?

Friday, 02 May 2014 05:26

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 dot.com 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.

Comments (15)Add Comment
written by djb, May 02, 2014 5:45

The trade deficit, of course, is just another way to redistribute wealth from the poor and shrinking middle class to the rich

It is no accident
Both parties like the trade deficit
written by Dave, May 02, 2014 6:35
Both parties like the trade deficit for very similar reasons. We're really talking mostly about our trade with China here, because our natural resource imports don't carry the same macro effects as imports of manufactured goods and other labor-intensive goods and services.

Executives make lots of money from the trade deficit. Business owners make lots of money from the trade deficit. Socially conscious people justify it all by rationalizing that we're helping out all of the poor workers in China, and they deserve help at the expense of these overpaid American workers. This is wrong, of course, but both parties like to talk about it. Some believe it, some use it as an excuse, and others know it is a bunch of bologna.

There's just too much money involved. Mainstream economists know that industry and the profession would come down on them if they dared to mention the negative effects of unrestricted trade, even if they know it is harming the world. Writers for papers are acutely aware of subjects that will get them in trouble, and so they just avoid it I think.
Working with the House GOP
written by Tyler, May 02, 2014 7:43
I thought the White House could work with the House GOP to make up the shortfall in demand via a tax cut for the middle class, but I guess that's not going to happen.
I guess there's not going to be any fiscal stimulus until the Dems win back the House.
America the bully
written by Peter K., May 02, 2014 8:23
The financial industry made/makes a lot off China. And as Baker points out Chinese wages have gone up. I see Krugman as agreeing with Baker (he had a few blog post agreeing) but he and DeLong don't emphasize trade because of a fear of American nationalism. They fear if politicians see trade and currency values as a free win (as the Germans and Chinese do), they'll go overboard and start bullying our trading partners.

My view is that our trading partners are already crying over monetary policy. Once America gets to full employment and closes the output gap, we'd be able to import more.

Ideally the WTO or some court could adjudicate currency values in view of countrys' demand shortfalls. But American would never give up its sovereignty on that front.
Why won't the media mention it?
written by Matt, May 02, 2014 9:06
...Because it's not in the interests of the people who run the country for easy explanations (or solutions) for unemployment to suddenly appear, and so they aren't going to appear in the MSM.

Dr. Baker, are you familiar with Noam Chomsky's and Edward Herman's propaganda model of the media, laid out in Manufacturing Consent?
Deliberately Driving Down the Dollar's Value Is Political Suicide
written by Paul Mathis, May 02, 2014 9:41
The only way to reduce the trade deficit is to drive down the value of the dollar against foreign currencies, as Dean says:
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.

Everyone in Washington understands this but NOBODY in Washington is willing to talk about driving down the value of the dollar because to do so would be political suicide, not to mention illegal under G-7 rules.

If Washington won't even agree to fix 63,000 bridges that are structurally deficient, why would it agree to drive down the dollar's value?
Chomsky and Herman
written by Dean, May 02, 2014 10:04

I've read Chomsky and Herman's work for decades and know both. I've learned a lot from them.
The Trade Deficit is a Free Lunch
written by Tom MH, May 02, 2014 10:04
So why not eat that free lunch, for as long as our trading partners are willing to offer it? Run structural deficits until we achieve domestic full employment -- via tax cuts or spending increases, take your pick -- and continue to trade pictures of dead presidents for other countries' raw materials and finished goods.
a matter of taste
written by joe, May 02, 2014 11:55
The equation is so simple to understand, you say it's in intro econ. So then why does virtually no one understand it (outside of you, and the post-keynesians)?

Everyone on tv seems to think that everyone should simultaneously earn more than they spend, and all countries should be net exporters. It's simply mathematically impossible.

What is the conceptual hurdle to understanding that for you to earn a dollar, someone else must spend a dollar?
written by AlanInAZ, May 02, 2014 12:27
the equation is valid at any point in time however the variables are not independent - change one and the others change as well. Reducing the trade deficit by lowering the dollar will impact C,I and G. It is not a slam dunk that a much lower dollar will improve general welfare by as much as claimed.
Bit o' History
written by Bagehot-by-the-Bay, May 02, 2014 5:01
Before his death, President Kennedy, in an interview, was asked what "frightened" him after becoming president. He said, apparently without hesitation, "Nuclear weapons and the trade deficit."
When was the last time another U.S. president worried about the trade deficit?
Time to return to a country that makes things -- things other people want to buy.
written by Larry Signor, May 02, 2014 6:08
Perhaps it is time for some good old fashioned tariffs, or perhaps a domestic tax on imports targeted at US consumers. The trade deficit is a policy created issue and can be eliminated with different policies.
written by Neanderthal Protectionist, May 02, 2014 7:59
You can scribble all the algebra you want about the trade deficit and the dollar, but that doesn't explain why a company would ever again hire workers in the US if they could get them overseas with minimal wages and labor protections. The only way out is to physically prevent US companies (and non-US companies that want access to our consumer market) from offshoring.
Labor is only one input!!!! If wages were all that mattered where are the Nigerian iphone factories?
written by indiana patriot, May 03, 2014 3:07
Labor is only ONE input of production.

The US could easily become more competitive.

The value of the dollar affects the relative prices of ALL factors of production: electricity costs, land, capital, skilled and unskilled labor inputs, transportation costs etc.

The US has the largest per capita production of electricity in the world by a long way - with cheap electricity we could easily outcompete E. Asia in manufacturing, if we stopped shooting ourselves in the head.
Loser Liberalism - great book that should be recommended in schools
written by Viewer II, May 03, 2014 9:49
Thanks for offering this book free of charge! In my fifties I immediately could see the obvious truths it points out regarding our lack of sustainable job creation.
Fair trade should always make sense to all trading partners, especially when governments begin to focus on the prosperity of their own people more, which is obviously missing here in the US.
Clinton missed the boat on this and so does the current administration, albeit, most expressively with the current congress that is a huge monstrous mess.
And yes, the media as you point out for the most part
ain't doing its job to inform.

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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.