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Home Publications Blogs Beat the Press Could the Debt Ceiling Fight Eliminate the Trade Deficit and Create Millions of Jobs

Could the Debt Ceiling Fight Eliminate the Trade Deficit and Create Millions of Jobs

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Friday, 13 September 2013 05:23

Adam Davidson raised this possibility in his discussion of possible ramifications of the debt ceiling battle. He suggested that one possible outcome is that investors and foreign central banks cease to view the dollar as the world's reserve currency. This would lead them to switch their dollar holdings to other currencies. The result would be a decline in the value of the dollar.

This is exactly what is needed to make U.S. goods more competitive in the world economy. If the dollar were to fall by 20 percent against the currencies of our trading partners it would have roughly the same effect on the trade deficit as if we would imposed a 20 percent tariff on imports and had a 20 percent subsidy on U.S. exports.

The trade deficit is now close to $500 billion a year or 3 percent of GDP. If we had balanced trade it would add roughly $750 billion a year to GDP (@ 4.6 percent of GDP), assuming a multiplier of 1.5 on traded items. This would lead to more than 7 million additional jobs bringing the economy close to full employment.

This sounds like very good news, especially since no economist has any good story as to how the U.S. economy can get back to full employment with a trade deficit of the size that we have seen over the last 15 years. We only managed to reach levels of output close to full employment during this period when the economy was being driven by bubbles (stock and housing).

If there is an alternative route to full employment, no one has bothered to write about it. From this perspective, a flight from the dollar as a result of a battle over the debt ceiling is probably the economy's best hope for generating large numbers of jobs any time soon.

Comments (19)Add Comment
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written by Last Mover, September 13, 2013 7:50

Exactly. There's nothing better for Boehner to bring the rebelling tehadis back under the tent and go for a true Newt Gingrich shutdown of government ... than the prospect of a weak dollar to do it.
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written by Arne, September 13, 2013 9:44
"We only managed to reach levels of output close to full employment during this period when the economy was being driven by bubbles"

Is this not an indication that we were beyond "full employment" and that potential GDP is not well estimated by extrapolation?
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written by skeptonomist, September 13, 2013 10:01
The trade-weighted dollar index (FRED: TWEXBMTH) actually fell over 30% between 2002 and 2009. Rather than falling, the trade deficit was increasing rapidly during most of this time. The value of the dollar is one important thing which influences trade balance, but is obviously far from being the sole determinant.

If tariffs and subsidies affect the balance in the same way, why not use those? These things are certainly used by other countries to boost their balances. There are advantages to having the reserve currency, and there would presumably be major disadvantages to harming the credit rating of the US. However, it is doubtful if one episode of temporary default would change the monetary habits of the world (if Republicans did it every year it could get to be annoying).

However you change the values of imports and exports, it would mean considerable inflation in the US, causing at least a temporary decrease in standard of living (your dollars won't buy as much in Walmart, or you might not be able to afford a Mercedes or as much French wine). It is highly misleading to present currency revaluation as a painless alternative to internal devaluation - there must be a kind of austerity either way.
A rare miss from Dean Baker
written by Amileoj, September 13, 2013 11:34
[N]o economist has any good story as to how the U.S. economy can get back to full employment with a trade deficit of the size that we have seen over the last 15 years... If there is an alternative route to full employment, no one has bothered to write about it.


This is uncharacteristically sloppy work from you. You're surely aware that Mosler, Wray, Kelton, Mitchell, et al. have written extensively on how sufficiently large federal deficits (particularly in combination with a job guarantee) could readily restore full employment?
Gifts From Abroad
written by Ellen1910, September 13, 2013 12:35

If foreigners -- the Chinese, South Koreans, Germans -- wish to lower their standard of living and raise ours by trading goods and services for pieces of paper (0s and 1s at the FRB), we should be taking those gifts with both hands.

The USG can buy all the demand the economy at full employment requires -- and it doesn't cost a penny.
would it really work this way??
written by pjm, September 13, 2013 2:19
Dean, Reading some other blogs and skepto's recurring criticism, Ihave to ask: while it may true that going from weak to strong dollar hurts exports, the process may not be reversible, iiutc, because the backwards process can be inflationary. Any thoughts?

Of course, again this out of my depth, kicking off inflation may have some salutary benefits, isn't that the goal of QE?
Full employment with trade deficit
written by Antiderivative, September 13, 2013 2:37
Perhaps I am wrong, but we could easily get back to full employment with better fiscal policy.

If you look at the data, the lack of demand is primarily coming from the contraction of the government, particularly on the state and local level. Since President Obama took office, we have lost 752,000 public jobs.

If public employment grew at 1.6% a year (roughly the average of the last 3 1/2 decades), instead of contracting, this would have created 2,174 thousands of jobs. Barring any multiplier effect or changes in the LFPR, this alone would take the UE rate down to 5.9%.

Add some much needed spending to our $2 trillion infrastructure deficit, and we could easily get back to full employment.

Our trade deficit needs to be addressed, but that is largely a structural issue, not a cyclical one. The current cause for our high unemployment is largely cyclical.

While structural solution can help remedy our current economic problems, we should be careful to not recommend structural solutions to our cyclical problems.
Again, perhaps I am wrong and being too simplistic with my analysis, but I believe that we could get back to full employment (or close to it) with some good ol’ fashion fiscal policy. Unfortunately, we do not have the political will to carry this out.
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written by JSeydl, September 13, 2013 3:09
Supply-siders love to argue that the US manufacturing sector is so technologically advanced that few workers at home have the skills to compete. A dollar collapse from a debt-ceiling meltdown would be a great way to test their hypothesis. If the result were not full employment but rather stagflation then they would be vindicated. A test of this sort would clear up a lot of confusion.
;o)
written by watermelonpunch, September 13, 2013 5:56
Oooh... could this possibly also deter immigration? Because if so, we have a shot at getting my rep on board.
(I live in Pennsylvania's 11th congressional district.)
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written by watermelonpunch, September 13, 2013 6:29
written by JSeydl, September 13, 2013 2:09
Supply-siders love to argue that the US manufacturing sector is so technologically advanced that few workers at home have the skills to compete.


People actually say that??
Really?
Do they trot out the many complex skills held by 10 year olds in China & Bangladesh??

There are at several factories in my region which I know or have known people to work at. Most of these places these days hire people with previous factory experience (because they can). But many jobs are fairly just physical and simple, and would only require minimal on the job training. And there is no shortage of people vying for various levels of jobs at these places. Many people who have a plethora & years of experience in completely different professions!
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written by Mr. Bill, September 14, 2013 2:23
"This would lead them to switch their dollar holdings to other currencies. The result would be a decline in the value of the dollar."

Oh yea, Dean, when pigs fly. Your supposition is that there is "fwee mawket". Sorry buddy boy. We are in harvest mode. The former fwee market is a scam. What the "competitors" really want is for American policy makers to continue waiting for the academic solution to happen, any decade now.

Revisit your boundry conditions.
x6 e cigarette
written by x6 e cigarette, September 16, 2013 5:25
thanks for posting
dissenter on duty
written by ddf, September 16, 2013 1:24
Alas no such chance, the share of the dollar in global reserves is stable: it is the share of the Euro that has been eaten up by "new" reserve currencies such as the Australian or the Canadian dollar. And more importantly the US investment income surplus is rising, despite a large and growing international investment position. The exorbitant privilege is alive and well, incumbency is too formidable: which central bank would want to shoot itself in the foot by selling its USDs?. And markets are getting blase over the permanent brinkmanship between WH and Congress. Nah we'll need more than yet another debt ceiling battle
Growing the economy
written by Rodger Malcolm Mitchell, September 16, 2013 2:10
The author said, "No economist has any good story as to how the U.S. economy can get back to full employment with a trade deficit of the size that we have seen over the last 15 years."

Not true. See: "Nine Steps to Prosperity" at http://mythfighter.com/2011/10...ll-street/

The U.S. is Monetarily Sovereign, so does not need a positive balance of trade, in order to grow.
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written by Charles Yaker, September 16, 2013 8:47
Oh Please. "No economist has a good story how he US can get to full employment"

Just Randy Wray, Bill Mitchell, Stephanie Kelton, Jamie Gailbraith and Warren Mosler. O wait Warren isn't an economist but they all believe in MMT and the "JG" (job guarantee for whoever wants to work)

http://neweconomicperspectives.org/
Alternative route history
written by Calgacus, September 16, 2013 9:20
If there is an alternative route to full employment, no one has bothered to write about it.

Yes, to join the chorus, many, many thinkers have "bothered to write about" "an alternative route to full employment" - for centuries. Basically, nations can have full employment - by deciding to have full employment. FULL STOP. THE END. That's it. As William Mitchell points out in Full Employment Abandoned, no nation that has ever tried to have full employment has ever failed.

But the guy who first got this particular issue, the interaction of foreign trade and employment, completely right - and which he summed up in one sentence - was the Keynesian Abba Lerner, with his functional finance. Whose main ideas Lerner attributed to Keynes - and who Lerner eventually convinced to become a Lernerian.

The UMKC school, the MMTers, the circuitists, the Post-Keynesians following functional finance (some have forgotten it) - are today's true Keynesians. Others - e.g. New Keynesians - just aren't - what they have done with their "improvements" is twist Keynes into something unrecognizable, basically by incorporating arguments that Keynes argued against, coupled with ignorance of finance and supremely incoherent and inconsistent "logic", on top of a neoclassical "model".

That's not Keynes, whose thought was much deeper, more philosophical & more mathematical than the modern fake-mathematical economics and more revolutionary. Unfortunately Keynes himself usually dismissed or was ignorant of earlier deep, revolutionary thinkers like Marx - and Marx's teachers.
The dollar has fallen
written by Doug O'Keefe, September 17, 2013 11:08
I'd love to see a response to skeptonomist's point that the dollar fell dramatically (30%) from 2002 to 2013--did we see the desired increase in American manufacturing and exports during that time? If not, why not? And if not, why should we expect a further decline to have positive results? Thanks.
Registered Investment Advisor
written by Jim Hannley, September 17, 2013 5:21
Wouldn't raising the minimum wage go a long way towards full employment? Yesterday I read that Truman almost doubled the minimum from $.40 to $.75 / hour in 1949. By raising it to $14 / hour wouldn't we significantly reduce the amount of cash currently hoarded in corporate treasuries?
The drop in the dollar did lead to a sharp fall in the trade deficit
written by Dean, September 17, 2013 7:41
Doug,

here's the answer to your question. The fall in the dollar did lead to the predictable decline in the trade deficit -- economics works the way the textbooks say.

http://www.cepr.net/index.php/blogs/beat-the-press/trade-deficits-and-the-dollar

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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.

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