Fixing the Trade Deficit Will Be Easier Said than Done

​​I wrote this essay around the time of the 2004 election.  I attended a NABE meeting in Washington and sat in the back of the room.  The keynote address was by Greg Mankiw and I asked a question about the US deficit on our trade account that had reached $500 billion dollars. I'd been writing about why this was dangerous for several years without much influence. His response didn't surprise me.  At the time John Edwards was the only "populist" in the race to replace George Bush.  Donald Trump's complaint is a familiar one, but since that ill fated year the trade deficit increased reaching an apex of over $800 billion.  It should remain in the $ 700 billion range for the foreseeable fucture, but without some dramatic and very dangerous interventions, we will have to remain the global engine of growth.




Corporate Free Riders – Why John Edwards May Win in November
 
Chairman of the Council of Economic Advisors, Greg Mankiw, is the President’s key advisor on the economy.  A clueless academic and victim of Washington speak, Mankiw  will be vilified in the coming months as a “poster child” for sending high paying American jobs overseas.   If employment growth sputters, as more companies rush to send more jobs outside the country before this practice is outlawed or too costly, then Greg Mankiew will be on his way back to Boston.  Of course, Larry Summers, President of Harvard, may find it more advantageous to shift Professor Mankiew’s own job to Bangalore in order to save money and take advantage of the low cost of telecommunications.
 
Six months ago, I asked Professor Mankiw if he was at all worried about the $ 500 billion in IOUs we hand out each year.     He wasn’t worried.  In fact, he told me that the problem would take care of itself.  I think he believes in the tooth fairy, along with other well-known economists including Robert Reich and Jagdish Bhagwati.  Barring divine intervention the trade deficit will likely increase for years to come.  
 
Many economists are sticking with the conventional wisdom that free trade and outsourcing is beneficial even though they are unable to make this theory work when it comes down to dollars and cents or jobs.     There is a disconnect between outsourcing jobs, the high rate of growth in American productivity, and the fact that despite this, American companies continue to buy more than they sell to foreign buyers.   If efficiency is the goal, then how much more efficient will we have to be to re-balance world trade and create more jobs at home.    To close the gap on our foreign trade account, American exports must capture 40% of the total growth in non-US trade within ten years.      
 
Economists believe markets magically make the best choices.    This same thinking led to the Great Depression, as the “classically trained economists” waited for the self-correction to come.  It was Keynes who showed that markets do not always fully use their resources.   An efficient economy – where many of the jobs are outsourced – can be in equilibrium well below the point where all resources are fully used.    
 
Supporters of outsourcing usually cite studies, such as the one carried out by the McKinsey Institute, that suggest that gains from lower costs allow faster economic growth.  Faster growth has equated to profits and not to jobs or higher wages. According to Business Week the benefits are spread to a new “investor class”.   While this is helpful in the short-run, it will not support a rising standard of living for all Americans.   Another study by Catherine Mann suggests that outsourcing software to India leads to greater use of lower priced software and to more employment here.  Have they heard the joke about the economist stranded on a desert island with a can of beans?   He assumes he has a can-opener to open that can of beans.  Both studies assume that all the freed up labor resources find other jobs that are higher paying.
 
Let me state the obvious – if we did not have a $ 500 billion trade deficit with the world – then outsourcing and sending offshore low value production would yield a higher American standard of living.  Citing Ricardo’s theory of comparative advantage as a rational for a $ 500 billion deficit is flat wrong.   In Ricardo’s theory, labor is traded at a rate of exchange that allows both parties to benefit.      Reich and Bhagwati are tenured Professors who have recently weighed in support of the Greg Mankiw.  If they believe that Ricardo meant that we can  hand out IOUs to the world rather than trade American employment for foreign employment,  then perhaps they should take a refresher course in International Trade theory.  
 
Most  supporters of outsourcing believe we have a comparative advantage in the production of high technology products.  If this is the case,  then why did we have a surplus of $ 19 billion in this trade in 1999 and a deficit of $ 27 billion in 2003?      If we can not run a surplus in high technology products, then what is the benefit offered by free trade?  It does not matter how much  more efficient  we get, if we hollow out shell of the American economy.