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Home Publications Blogs Beat the Press In the Real World the Trade Deficit Is More Important Than the Budget Deficit

In the Real World the Trade Deficit Is More Important Than the Budget Deficit

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Saturday, 08 March 2014 08:24

Washington politicians like to hyperventilate about the budget deficit. However changes in the budget deficit are overwhelmingly a response to economic conditions rather than the result of deliberate policy. In other words, politicians didn't have much to do with the changes. Furthermore, since the budget is responding to economic changes, it is not giving us new information about the economy.

On the other hand the trade deficit is a direct measure of the amount of demand that is going overseas rather than being spent here. This represents income generated in the United States that is not creating demand in the United States. By definition, this lost demand must be made up by other borrowing, either by the public sector (i.e. budget deficits) or the private sector. Currently the trade deficit is running at an annual rate of around $480 billion (@ 3.0 percent of GDP), which means that the sum of net borrowing in the public and private sector must be equal to $480 billion.

The impact of the trade deficit in reducing demand swamps any plausible impact from changing consumption patterns due to debt or even the upward redistribution of income that we have seen over the last three years (a trend that has been furthered by the trade deficit). Given its enormous importance for the economy it is bizarre that the media largely ignore trade figures.

Yesterday the Commerce Department reported that the trade deficit was $39.1 billion in January, about $2 billion higher than the consensus forecast from economists. The figure for December was also revised up from $38.7 billion to $39.0 billion. If this was reported by the NYT it was not easy to find. This news was a small brief in the Washington Post business section.

Politicians tend not to like to talk about the trade deficit because the leadership of both parties supports the policies that have led to large trade deficits. But serious news outlets are not supposed to report only the news that the politicians want them to report. The trade deficit matters hugely to the economy and to ordinary workers, there is no excuse for not giving it a substantial amount of coverage. 

 

Note: share of GDP added later -- Convert correctly pointed out my failure to provide context.

Comments (12)Add Comment
Hard to make informed choices if you do not know the facts
written by Jennifer, March 08, 2014 7:49
On the other hand the trade deficit is a direct measure of the amount of demand that is going overseas rather than being spent here.


I am trying to think if I have ever heard this statement on any news program. I feel that the only time trade figures are reported in mainstream news reports are when something else foreign policy-related is going on. There tends to be a bit of hand-waving about trade deals, about this or that business deal. Rarely, if ever, is a direct line drawn between the actual harm done to workers and the policies that have promoted this harm. Kind of like they would rather people not notice?
...
written by Jim, March 08, 2014 9:32
Media bias is really just a symptom of the greater problem with the media, irresponsibility. I wonder whether the bona fides of most media management and their talking heads prepares them to intelligently present the issues if they were free to put aside circulation/viewership considerations.
Net demand
written by Gerry Flaychy, March 08, 2014 10:02
If we have $480 billions going out, and that some time after, this $480 billions is coming back to buy assets from the public and private sector, then, where is the problem on the demand side?
...
written by Convert, March 08, 2014 10:17
Not to be obnoxious, but following your own criticisms, shouldn't you express $480 billion in a meaningful context? Say, 3% of GDP?
Curious how
written by Lord, March 08, 2014 11:25
when it comes to trade it is all about exchanging real goods for pieces of paper, but when it comes to deficits it is all about how onerous those pieces of paper are.
Economic Conditions
written by jonny bakho, March 08, 2014 12:15
changes in the budget deficit are overwhelmingly a response to economic conditions

This is a point that is not discussed in the media. Is it banned from TV?
The Malefactors of Great Wealth want cheap labor and are happy with current economic conditions.
Fixing the trade deficit can be done in different ways. Ways that replace imported goods with domestic labor would be best.
Nothing Escapes the Keen Eye of an Austerian ... Except the Deficit that Matters
written by Last Mover, March 08, 2014 12:46

Let's see, the huge trade deficit means America is consuming more than it is producing. Now where have we heard that before?

Hmmm, it sure sounds familiar. Damn, it was around here somewhere, it had to be because some goddamn sock puppet preaching austerity has been yelling everyday about America living beyond its means for 6 years now.

Now where could they possibly be? Somebody mentions "trade deficit" and the sock puppets scurry away like rats on a sinking ship. Like you know, the trade deficit is the holy grail of their austerity message and when they find it, they panic.

Besides, they have more important things to do don't they, like fighting the intergenerational war they made up out of thin air, singling out "entitlement freeloaders" and stringing them up for public floggings for living beyond their means and causing massive "deficits".
Not Clear Why the Trade Deficit Matters
written by Paul Mathis, March 08, 2014 1:19
Since a very large part of our trade deficit is oil that we import from various places, what would be the advantage of eliminating oil imports? Obviously we cannot get enough oil from domestic sources. Perhaps we could require vehicles to burn natural gas or alcohol but that would mean huge costs.

Further, we pay for these oil imports with dollars that we can "print" in unlimited amounts. We have been running trade deficits for decades with no particular problems, so why worry about this deficit either?
Paul Mathis
written by ifthethunderdontgetya™³²®©, March 08, 2014 7:12
.
We pay for that oil with blood, too.
~
My Two Cents
written by Shawn Wilkinson, March 09, 2014 7:58
The general criticisms Dean brings up are valid, independent of the specifics of the report. Trade deficits impact the economy, while budget deficits are the result of the economy.

As far as the specifics of the trade report, I am not too thrilled to see the trending pattern in crude oil and natural gas. Some news outlets are spinning projected smaller trade deficits due to increase availability of domestic resources. The NYT briefly (and correctly) pointed out that the decrease wouldn't be just for internal use of the resources but also exportation.

This reminds me of one of the local refineries. It purchases crude exclusively from Venezuela, despite an Alaskan pipeline terminal being located only a few miles up the river. We like to think humans are rational beings that choose not only for costs to the company but the external costs to the environment. But alas, we are completely irrational and do silly things like make binding contractual agreements for decades at a time with zero foresight.

I'll be thrilled when crude becomes near zero as we figure out how to properly recycle all the carbon we've already manufactured, instead of dumping it into a pile.
must be a 419 scam
written by Squeezed Turnip, March 09, 2014 2:21
Nothing Escapes the Keen Eye of an Austerian ... Except the Deficit that Matters
written by Last Mover, March 08, 2014 12:46

Now where could they possibly be? Somebody mentions "trade deficit" and the sock puppets scurry away like rats on a sinking ship. Like you know, the trade deficit is the holy grail of their austerity message and when they find it, they panic. …


Well, the explanation is, the 1% don't want their in essence if not blatant) 419 scams to be uncovered. For example, how do you think they get all that money into the Cayman Islands?

Meanwhile, the average American wants a strong USD because "strong", well, that's good, right? And since the strong USD is made cheaply abroad, consumers win! So, in the end this means that: in order to not live beyond your means, you have to live beyond your fellow citizens' means. But then, that's their problem, isn't it?
...
written by Benedict@Large, March 10, 2014 12:43
By definition, this lost demand must be made up by other borrowing, either by the public sector (i.e. budget deficits) or the private sector.


Which is why trying to make the federal government balance its books is nuts. Doing so simply indebts the private sector (ie, you and I) instead.

Long and short of it, you can't have free trade and balanced budgets without vacuuming the wealth right out of the middle class, and yet that is EXACTLY what the right wing economics being practiced by BOTH parties has been telling us to do for the last three-plus decades. No wonder we are in a pit that we can't climb out of. It's government policy.

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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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