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Home Publications Blogs Beat the Press Has Anyone Heard of the Trade Deficit?

Has Anyone Heard of the Trade Deficit?

Saturday, 12 January 2013 09:25

It seems not, since neither the NYT nor the Washington Post seemed to think that the $6.6 billion jump in the monthly trade deficit that Census Bureau reported on Friday was worth mentioning. Fans of arithmetic (a tiny minority among DC policy types) like to point out that a large trade deficit implies negative national savings. In other words, if we have a trade deficit then by definition the United States as a whole has a negative saving rate.

This means that we either must have budget deficits (negative public savings) or negative private savings, or both. There is no way around this fact. There is now a holy jihad in progress against the budget deficit in Washington, which means that all right thinking people don't want to our negative national savings to mean negative public saving.

The implication would then be that we want negative private saving. This could come through an investment boom, but only believers in Santa Claus think that investment is likely to expand much as a share of GDP. It is not easy to produce large increases in investment and we never have in the whole post-war period. So even though Serious People in Washington might talk about some huge uptick in investment, serious people don't believe it.

This means that the only way to balance a large trade deficit is with very low household savings, as we had during the years of the stock and housing bubbles when ephemeral wealth lead to a consumption boom. That sounds like a great idea, right?

So that's where the arithmetic gets you if we have a large trade deficit as the Census Bureau reported on Friday. The public should care about this and so should the newspapers that purport to inform us.


Addendum: More on Accounting Identities

In the comments and e-mails readers have asked me about accounting identities. The answer is yes, they are incredibly important. If you don't eat, drink and sleep these identities, then you do not understand the economy, end of story. Identities are by definition true, there is no way around them.

I have heard policy types tell me that they don't like accounting identities. That's fine, I may not be very happy that I will be one year older a year from now if I am still alive. Nonetheless, both are inescapably true. If you don't understand how the identities work, then you don't understand the economy. Here's a brief primer that may be helpful. You can find a discussion in every intro textbook as well.

If you find this too complicated or not worth your time, just remember, you do not understand how the economy works. Got it?


Comments (9)Add Comment
written by Chris Engel, January 12, 2013 8:57
The teahadists are on a quest to bring harsh austerity policies that will cripple Obama's economy.

It's an election strategy for 2014/2016 -- starve the beast, force cuts which will automatically create discontent in the public and they will blame Obama, and get Republicans votes in 2014 and 16.

Of course, I dont think Republicans are THAT intelligent, but perhaps the "brains" (banksters, corporate overlords) are pushing the movement in that direction by harnessing their rabid anti-government passion for the good of the capital owners.

The press doesn't like to push the trade deficit story because it's inherently confusing to "America #1, Always" crowd. They don't want to introduce the notion that a weaker dollar would help us rebound exports and domestic industry, and that a "strong dollar" benefits the investor class interested in burgeoning foreign markets a lot more than the middle class reliant upon jobs and competitive export markets.

Instead, they push the "cliffs" and "ceilings" and other cute gimmicks that make for superficial dinner conversation, but don't serve the interests of those who want an intelligent policy discussion.
away from the papers media does report trade deficit
written by Jennifer, January 12, 2013 9:30
I heard quite a bit about the trade deficit from different media sources when the numbers were released but what I did NOT hear was any appropriate explanation of what they meant. There was no putting into context what those numbers mean for the economy, or what were reasonable policies for the government to engage in to change the trade deficit. I would venture to say that 90% of the population that heard these numbers could not follow any of the reasoning in Dean's post. This is because there is rarely any discussion of these issues in the mainstream media and the most of the general population has not taken an economics course.
Very good analysis ...
written by Benedict@Large, January 12, 2013 10:07
Very good analysis of the combined impact of a trade deficit and a push to lower the deficit on the national savings rate (ie, accumulation of net financial assets). [Very MMT.] Unfortunately, this simply yet FIRM arithmetic is entirely lost on the lobster-for-lunch crowd over at the Peterson Institute, who no doubt will still have their lobsters when they finish off erasing the America middle class.

There is however a caveat, and that is that such an analysis is generally used to attack free trade (the real one; not this monkey-junky masters of mercantilism stuff we keep trying to sluff off on weaker first-world aspirants), instead of advocating for greater deficits to move the savings rate positive. The benefit of the latter, which is generally prescribed by MMT, is that we can do it unilaterally; simply raise the deficit until the saving rate is positive, or at least until we run out of jobless people wanting to work. The harm of the former of course is that moves against trade (eg, tariffs, currency sanctions) cannot be done unilaterally; if we screw China (for example), they screw back, and we end up in a race to zero where no one wins.
Regarding the addendum...
written by Chris Engel, January 12, 2013 11:03
Nothing's better than pointing out to a TeaHadist the GDP accounting identity...and then asking them how a reduction in government spending would boost growth (and employment), given that the markets are sending no distress signals regarding our debt levels (so debt reduction won't magically produce confidence to provoke spending/investment).

They debate in slogans, pure and simple.

Not in mathematics (even basic algebra), not in specifics, not in holistic policy analysis.

Maybe we have twitter, television, internet to blame? I don't really know. But when I read back on historical debates between public officials (such as the old monetary policy debates of the 19th century), i don't see the kind of sloganeering that passes for "debate" in the 21st century.

And you would think in this era where we all have access to loads of data to back ourselves up (hell, you can almost back up any position with the amount of data and the potential for misleading that an intelligent mind can engage in) and access to all kinds of citations of other great minds' writings, that people would kick up the quality of debate a little.

Maybe my perspective is all wrong, I dont know.
Keynes Understood Accounting Identities and Much More
written by Paul Mathis, January 12, 2013 1:26
"The austere view, which would employ a high rate of interest to check at once any tendency in the level of employment to rise appreciably above the average of, say, the previous decade, is, however, more usually supported by arguments which have no foundation at all apart from confusion of mind. It flows, in some cases, from the belief that in a boom investment tends to outrun saving, and that a higher rate of interest will restore equilibrium by checking investment on the one hand and stimulating savings on the other. This implies that saving and investment can be unequal, and has, therefore, no meaning until these terms have been defined in some special sense. Or it is sometimes suggested that the increased saving which accompanies increased investment is undesirable and unjust because it is, as a rule, also associated with rising prices. But if this were so, any upward change in the existing level of output and employment is to be deprecated. For the rise in prices is not essentially due to the increase in investment; — it is due to the fact that in the short period supply price usually increases with increasing output, on account either of the physical fact of diminishing return or of the tendency of the cost-unit to rise in terms of money when output increases. If the conditions were those of constant supply-price, there would, of course, be no rise of prices; yet, all the same, increased saving would accompany increased investment. It is the increased output which produces the increased saving; and the rise of prices is, merely a by-product of the increased output, which will occur equally if there is no increased saving but, instead, an increased propensity to consume. No one has a legitimate vested interest in being able to buy at prices which are only low because output is low."

The General Theory of Employment, Interest and Money, pp. 327-328.
But Keynes Also Understood the Need to Increase Consumption
written by Paul Mathis, January 12, 2013 1:35
"If it is impracticable materially to increase investment, obviously there is no means of securing a higher level of employment except by increasing consumption.

"Moreover, I should readily concede that the wisest course is to advance on both fronts at once. Whilst aiming at a socially controlled rate of investment with a view to a progressive decline in the marginal efficiency of capital, I should support at the same time all sorts of policies for increasing the propensity to consume. For it is unlikely that full employment can be maintained, whatever we may do about investment, with the existing propensity to consume. There is room, therefore, for both policies to operate together; — to promote investment and, at the same time, to promote consumption, not merely to the level which with the existing propensity to consume would correspond to the increased investment, but to a higher level still."

The General Theory of Employment, Interest and Money, p. 325

Since it is now completely impossible to increase government investment in infrastructure due to GOP obstructionism, the ONLY way forward is to increase the propensity to consume.
written by Benjie Hiller, January 12, 2013 3:09
Is Matt Taibbi correct in his latest Rolling Stone pice about TARP and other bailouts of the big banks?
written by watermelonpunch, January 13, 2013 5:28
"23 Things they Don't Tell You about Capitalism" by Ha-Joon Chang explains the significance of the trade deficit in plain language without a lot of jargon & terminology, and logically, but without making you look at a lot of math equations.

I imagine that is in the banned book list for Republicans?
trade imbalances
written by john Yard, January 14, 2013 7:06
The US has been running trade deficits for over 30 years. The consensus through 2008 was to minimize the issue, but even the IMF and the World Bank today concede that this and other trade imbalances were - and are ! -
the driver for our new Great Depression.

Except amoung US elites. The trade imbalances have supported asset prices as the mercantilist regimes of Asia prevent currency revaluation upward through the purchase of US bonds and other assets.

The trade deficit has been a 30 year QE, and it is ending very badly. The obvious answer to chronic US unemployment is to force a balanced current account,
but this will step on too many entitled wealthy toes.

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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.