The Trade Deficit is the Most Important Deficit

By Roosevelt Institute |

deficit-100Closing the budget gap will require a progressive industrial policy, not regressive spending cuts.

Between 1962 and 2009, the cumulative trade deficit of the United States almost exactly equaled the cumulative Federal budget deficit: 7,426 billion for the budget deficit, a couple of billion less for the trade deficit. That is, when you add up all the deficit numbers for those 28 years, both the trade deficits and the budget deficits have generated the same amount of red ink. The Republican House members, in particular, use fear-mongering to convince the public that the federal budget deficit is going to destroy the economy. But what about the trade deficit?

As Marshall Auerback and others have been arguing, focusing on cutting the federal budget deficit during an economic downturn can harm the economy, putting people out of work, for one thing. Our government discovered this in 1937, when a push to balance the budget led to a mini-Depression. But tanking the economy is exactly what is being discussed in Washington; every alternative on the table involves cutting spending, which will cut jobs, which will lead to even less revenues for the government, bigger deficits, and even more job losses.

We need to narrow the federal budget deficit by growing the economy, which generates wealth, part of which is then used for more revenue for the government. Narrowing the budget deficit by slashing spending will actually increase the deficit. In addition, a default on the debt, if it sent the dollar into a tailspin, would make the trade deficit much worse because we would have to pay much more for all of our imported goods, and thus, the standard of living for most Americans would go down.

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Closing the trade deficit, on the other hand, would actually create millions of jobs. In 2007, for instance, the trade deficit – that is, the difference between the goods and services we sell to the world, and the goods and services we buy – was about 700 billion dollars, according to the Economic Report of the President (Table B-24). The deficit in goods was about 800 billion. In 2007, there were 13.9 million people working in the manufacturing sector, down from 16.5 million in 2001, according to the Bureau for Labor Statistics (we are now at 11.5 million). Since the gross output of the manufacturing sector in 2007 was about $5 trillion (that is, including all the services, etc. that go into the price of manufactured goods), that means that the US could have increased manufacturing employment by about 1/6th (800 billion into 5 trillion), or about 2.25 million workers, had it made all the goods that were imported. According to the Economic Policy Institute, for each manufacturing job, the economy creates almost three more. So eliminating the trade deficit could have reduced the unemployment rate by almost 10 million – or, as of June 2011, about 70% of the 14 million officially unemployed workers in the United States.

We can close the trade deficit by engaging in a serious industrial policy, one which will pull the manufacturing sector back up by rebuilding the infrastructure to prevent the worst of global warming and wean us away from oil, as I have argued. If, for instance, the government guarantees a 20 year infrastructure rebuilding program, that might help to convince the banks and corporations that it is prudent to invest the 2 trillion dollars that they are currently sitting on. They would know that they had a market for the output of their investments, and they would be assured that American workers would have the purchasing power to buy their output.

There has been a long-running argument that federal budget deficits contribute to trade deficits, but trade deficits expanded in the 1990s when the federal budget went into surplus. I would argue that the trade deficit is caused by the decline of manufacturing in the United States, which has a variety of causes, and is only marginally affected by the increased demand caused by a budget deficit. In any case, by creating millions of jobs in the long-term, a program of job creation would lead to a lower budget deficit, in the long-term.

To put it simply, rebuilding the manufacturing sector could lift us out of the Great Recession. On the other hand, focusing on cutting the federal budget deficit at this stage will lead us to the Lesser Depression, as Paul Krugman calls it. Hopefully this news will arrive in DC soon, or we will be in big trouble.

Jon Rynn is the author of the book Manufacturing Green Prosperity: The power to rebuild the American middle class, available from Praeger Press. He holds a Ph.D. in political science and is a Visiting Scholar at the CUNY Institute for Urban Systems.

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