The Devestating Effect of Trade Deficits

Heh, not really. Here are some excellent graphs from Mark Perry, and as they say, a picture is worth an hour long lecture from a poli sci prof.  (Click on images to go to Perry’ posts.)

First, here’s some good evidence demonstrating the theoretical claim that a trade deficit is exactly equal to a capital account surplus.  Of course if people really want to stop foreign investment in the U.S. (and some do), then there’s really no hope of persuading them through either evidence or logic (or a combination of the two).

Then there’s the evidence that U.S. exports have been on a pretty strong upward trend since at least 2000, except during recessions, not in terminal decline as some have argued.  (And by way, look at this recent post of P.K.’s, in which he looks at manufacturing ;balance as a proportion of GDP as a way of showing decline in U.S. manufacturing during through the mid-90s.  What the hell?  Krugman famously bashed trade-balance arguments and the chimera of “competitiveness.”  “Sure, we’re producing more, but they’re producing more more is not a sound argument.)

Finally, Perry has a graph demonstrating manufacturing productivity increase in the U.S.  Can you spot the evidence of “terminal decline” in the mid ’90s?  Me neither.


About J@m3z Aitch

J@m3z Aitch is a two-bit college professor who'd rather be canoeing.
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8 Responses to The Devestating Effect of Trade Deficits

  1. Dr X says:

    In fact, the flip side of this old whine is that ferriners are “buying up” everything in the United States.

    US investment in foreign countries: good for us, good for them.
    Foreign investment in the US: bad for us, good for them.

    Go figure.

  2. James Hanley says:

    Yeah, I always wondered if people thought the Japanese were actually going to move Rockefeller Center to the outskirts of Tokyo? The hilarious bit is the company that bought it had to sell it at a loss when the Japanese economy tanked. Net win plus net win for the U.S., I think.

    I’m curious to see how these graphs are received by my political economy class this fall. I’m sure I’ll have a couple of free traders in there, but I always have a few strong Democrats, too, and this being Michigan I’m not sure anyone will believe manufacturing output has grown–I don’t know with certainty, but I suspect that for our particular state it hasn’t (we’ve rarely had positive GSP growth in the past decade, and its our manufacturing sector that’s been hit hardest, I believe).

  3. DensityDuck says:

    Manufacturing output has grown, but manufacturing jobs have declined, which means that we have a bunch of rich people who’ve gotten marginally richer and a bunch of poor bastards who’ll be on the dole for the rest of their lives.

    But hey, the absolute number of dollars produced went up, and I guess that’s what’s best for America.

  4. James K says:

    Yes, because it not like a person can find a new job after they lose one. Sectoral employment shift can be unpleasant, but that’s no reason to deny that they are necessary. After all, in 1900 over 90% of American were employed in agriculture, and no wits less than 5%. Surely you don’t think it would be better if that change hadn’t happened?

  5. James Hanley says:


    Ah, the oh-so-common lump of labor fallacy. I live in Michigan, in a declining industrial town, so I am painfully aware of how hard the transition can be. It truly appears that jobs have just disappeared, because whatever new jobs are replacing the lost manufacturing jobs are not being created in my town, and our state as a whole has lost an absolute number of jobs over the last 5-8 years (although this year we’re finally expected to gain). But that doesn’t mean that the absolute number of jobs in the U.S. has declined. It just means Michigan is having a very hard transition.

    And, no, it doesn’t mean those folks will be on the dole the rest of their lives–they may have to accept lower wages, or they may have to invest in retraining, or they may–god forbid–have to move to another state where the jobs are. But you treat them as static lumps incapable of adapting–how insulting is that?

    Ultimately, the only way for a people to become better off is to be able to produce more for less. If I can farm 10 acres by myself one year, and then the next year technical gains allow me to farm 20 acres, I am better off. But I am not the only one who gains–all my customers gain as well. We are all consumers, so to that extent we all gain from greater productivity in manufacturing. And nobody has the right to demand that we pay more than necessary just to keep them in a job (I say uncomfortably as a unionized college prof).

  6. Pingback: Evidence vs. Faith in Economic Change | The Bawdy House Provisions

  7. DensityDuck says:

    “If I can farm 10 acres by myself one year, and then the next year technical gains allow me to farm 20 acres, I am better off.”

    And the guy you hired to farm those other 10 acres does…what?

    Oh, he accepts a lower wage? How nice for him that you make more money and he gets the shaft. But then I guess that’s his own damn fault for being so replaceable, right? And he could always invest in retraining, or move somewhere else, which he’ll do with the massive amounts of capital he’s built up working in a farm. Because suggesting that a career field-hand might not have hundreds of thousands of dollars in the bank (or the mental ability to learn a new skillset in a timely manner) is just indulging in the Lump Of Labor Fallacy, amirite?

  8. James Hanley says:

    Density Duck,

    The logic of your argument is that we should stifle all technological advancement, that U.S. workers would be better off now if we had never had the industrial revolution, and they were all still laboring in the fields under the hot sun.

    But let’s try to approach this analytically. By farming those other 10 acres at lower cost, I have created a net gain to society. What happens to that net gain? I either spend it, or I invest it, or I save it (i.e., stick it in the bank where somebody else borrows and invests it). Each of those actions creates jobs that otherwise wouldn’t exist.

    Sure, that particular farmhand might not benefit. The new job might be created three states away. Or it might be in electrical engineering, which he knows nothing about. So yes, he might have to settle for making less money. But are you suggesting that in order to avoid that person taking a step backward, I as the farmer should not take a step forward? That the net wealth I create for society should remain stagnant instead of increasing? In other words, you insist that I cause more hurt, just more widely dispersed, than less hurt more narrowly concentrated.

    And, by the way, what right does the farmworker have to demand that I pay him more than he is worth to me? If I was paying him $100 per acre, and a new technology allows me to do the same job for $90 per acre, then his value to me drops to no more than $90 per acre. Why do I have a duty to transfer more of my wealth to him than the value he provides to me?

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