Trade Deficits and National Income Accounting for Deficit Hawks

The trade deficit jumped by $1.8 billion in December, putting the monthly deficit more than $8 billion above its year ago level. This item got almost no attention from the business press. If there were articles on the rise in the WSJ and NYT, I couldn't find them. The Post did have a somewhat respectable piece, which ran in the business digest in the print edition.

It is remarkable how little attention is given to the trade deficit by people who routinely get nearly hysterical about the budget deficit. Just to remind folks of the basic accounting identity:

This means that the trade surplus is equal to the sum of the excess of private saving over private investment (S-I) and the government surplus (T-G). Or, to take the reverse, when we have an annual trade deficit of $600 billion, as is the case now, the sum of private and public savings must be -$600 billion. This is an accounting identity, there is no way around this.

That leaves two choices. We can have large negative savings on the private side, as we did in the peak years of the housing bubble when there was a bubble driven boom in construction and the saving rate fell to zero due to a housing wealth driven surge in consumption. Alternatively, we can have large government deficits.

That is it; that is the full range of choices. This means that if the deficit hawks are upset about our large budget deficit, then they should be very concerned about the growth in the trade deficit. We should have front page stories, hysterical columns and editorials, and enraged pundits denouncing irresponsible politicians for allowing the trade deficit to explode. (Meet the over-valued dollar as the leading villain the story.)

But, we don't see this. Even people who are trying to find out about the economy by taking the time to read the major newspapers carefully will not get the fundamentals about the economy. That is sad.

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written by Bart, February 11, 2012 9:58 AM

Business scribes take one look at your formula and scream: OMG Advanced calculus! look over there - Romney made a flub!

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written by Union Member, February 11, 2012 1:05 PM

Reality is a secret.

Ode to Dean Baker
written by Robert Oak, February 11, 2012 4:01 PM

I think the question is why do people read the MSM for information generally when there are so many ecoomists around to explain the data/reports that are also publically available?

Anyway, we wrote up annual trade data as a percentage of GDP plus ...drum roll bonus, China trade data as a percentage of U.S. GDP plus the percentage of the trade deficit. With graphs of all! Graphs people! We even covered your BOP equation Mr. Baker!

http://www.economicpopulist.or...s-2-us-gdp

The Economic Populist

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written by A Populist, February 11, 2012 5:56 PM

The U.S. Trade Deficit is unacceptable. No other nation would allow their businesses to sacrifice the huge national advantage we once had, by transferring jobs and technology to China, India, etc., as we have done (and continue to do). No one is minding the store.

Some suggest re-shoring is the latest trend (citing a couple anecdotes). Nonsense. That is an excuse for inaction. We continue to lose jobs overseas.

Unrelated: Dean, what do you think about the facts of the debate between Chait and Veronique de Rugy? Is it possible her facts are correct on the progressivity? I think they might be, based on many comments. I didn't pay to see the OECD data, but if they are correct, the data on page 107 shows that for the top decile, they pay 1.35 times the overall average rate, which is among the highest among most nations (they claim).

Hey, I'm with you on the inequality thing. But if we have a chance to actually start gaining consensus on fact vs fiction, we should take it, even if "our side" is the first one to take the hit.

Even if we concede that progressivity thing, there is still the low overall tax rate which gives less total redistribution, as well as very low wages at the bottom, unemployment, lack of college assistance, no national health care, higher health care costs, etc, which are huge factors in the plight of the poor.

OTOH, if she really is wrong, that should be pounced on.

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written by Chris, February 15, 2012 2:44 AM

Dean-

Ok, so I get where the identity comes from:

0=Y-Y=I+C+G+X-M-C-S-T=(I-S)+(G-T)+(X-M).

But then when I look up the actual data it doesn't zero out - http://research.stlouisfed.org/fredgraph.png?g=51G. Why not? What does that mean, if anything?

Trade Deficits and National Income Accounting for Deficit Hawks

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