Total Posts:14|Showing Posts:1-14
Jump to topic:

Trade Deficits *Do Not* Kill Jobs

ResponsiblyIrresponsible
Posts: 12,398
Add as Friend
Challenge to a Debate
Send a Message
6/28/2015 2:12:27 PM
Posted: 1 year ago
One of the most embarrassing arguments I've heard - from Dean Baker, actually, who is otherwise a smart guy and capable economist - is that eliminating the trade deficit would be conducive to faster job growth. A lot of people have advanced this same line of argument against the TPP, and it holds no water at all (and, mind you, I oppose the TPP, but my argument in no way invokes David Ricardo).

Now, here's the thing: the trade deficit is obviously equal to exports minus imports. All else equal, an increase in exports means that American companies are selling more, which would prompt them to produce more and thus hire more people. So, what's wrong with the argument then?

Simple: it's reasoning from a quantity change.

It's one thing to say that companies being able to export more, or becoming more competitive abroad, or more efficient and productive would be conducive to faster job growth. But that *need not* be correlated with a reduction in the trade deficit. Here's a good example: what's the mechanism by which we would boost net exports? Well, there are two: expansionary monetary policy or contractionary fiscal policy.

For the moment, let's ignore monetary offset and use straight, textbook Keynesian models. All else equal, expansionary monetary policy would mean a reduction in real interest rates. That would lead to the currency depreciating, meaning that U.S. goods are cheaper abroad and foreign goods are more expensive abroad. Therefore, foreigners buy more U.S. export goods and Americans buy fewer imports, both of which are a function of the substitution effect and apply downward pressure on the trade deficit.

But, here's the caveat: expansionary monetary policy also boosts incomes more broadly. Spending tends to rise on balance, and the income effect - people feel richer, and thus they spend more - may, and usually does, outweigh the substitution effect. In other words, people are buying more stuff at a faster frequency than they're actively substituting U.S. goods for most expensive imports (in other words, they become less price-conscious, you could even say). Sales of imports, thus, rise on net, and barring exceptional demand from abroad, the trade deficit increases. But it increased not as a function of U.S. companies falling down on the job, but of people actively spending more, and thus employment rises. The trade deficit was only a byproduct of an already-improving economy.

Now, let's take contractionary fiscal policy. Again, barring monetary offset and ignoring the zero lower bound, AD falls, inflation falls, real interest rates fall, and the exchange rate falls. People buy less generally, so sales of imports fall on net, and because the dollar fell, foreigners may buy more U.S. products. The trade deficit would fall, but note, though, that because the U.S. is such a large country, declining U.S. demand for foreign goods may cause contractions in *other* countries, such as that even demand for U.S. goods falls - in which case, the trade deficit itself could fall. But, even if it rose, as it likely will, it's a function of a deteriorating job market and horrid spending prospects. In other words, the trade deficit rose *as a function* of a failing job market.

tl;dr: Don't reason from a quantity change. Actually evaluate *why* the trade deficit moves as it does (or, even, why exchange rates or interest rates move) before attempting to assess the impact.

Another aside: The TPP is *not* about trade, so please stop making it about trade. Free trade is a good thing; corporatism is not.
~ResponsiblyIrresponsible

DDO's Economics Messiah
ResponsiblyIrresponsible
Posts: 12,398
Add as Friend
Challenge to a Debate
Send a Message
6/28/2015 5:22:59 PM
Posted: 1 year ago
One more example of why reasoning from a quantity change is wrong:

Y = C + I + G + [X - M]

Now, the implication is that an increase in exports, X, would boost GDP, whereas an increase in imports, M, would decrease GDP. However, how might we achieve a scenario where X rises and M falls (i.e., the dollar depreciates)? Again, there are two scenarios: expansionary monetary policy or contractionary fiscal policy.

I. Expansionary Monetary Policy

The basic mechanism here is:

r falls, C rises, I rises, NX rises (X rises, M falls),

where:

r = real interest rates
C = consumption
I = Investment
NX = Net Exports
X = Exports
M = Imports

Now, let's go back to the previous logic, because we know that the income effect outweighs the substitution effect in practice: in other words, X rises and M rises, but the rise in M tends to be larger than the rise in X, so NX declines.

But, the caveat: in the U.S., only 13 percent of GDP comes from the export sector. The NX sector, conventionally, contributes negatively to GDP (about -5 percent, I believe). However, consumption is about 70 percent and investment 11 percent, and a rise in both of these larger components is what *drives* the fall in NX. Which would you prefer: a declining trade deficit or a growing economy?

(Granted, this is *not* to say that reduces the trade deficit would destroy the economy or that increasing it would grow the economy. As I said, don't reason for a price change.)

II. Contractionary Fiscal Policy

So, G falls, AD falls, inflation falls, r falls (unless we're at the ZLB, in which case we're following an MP curve with a negative lambda coefficient), C falls, and I falls.

Because r fell, the exchange rate also falls, meaning that X will rise and M will fall, and the effect on M will be magnified because people are poorer, and thus cut back on their spending. NX increases, but the rest of the economy - the mechanism which increased NX - is disintegrating. Therefore, the falling economy *caused* the increase in the trade deficit.
~ResponsiblyIrresponsible

DDO's Economics Messiah
ResponsiblyIrresponsible
Posts: 12,398
Add as Friend
Challenge to a Debate
Send a Message
6/28/2015 5:25:24 PM
Posted: 1 year ago
Or we could even say:

Y = C + S + T

where Y = GDP, C = consumption, S = savings, and T = taxes.

Technically that's true, but would an increase in S necessarily raise Y? No, because C would probably fall. If the increase in S were a function of a decrease in T, that *could* increase Y, but then we run into another dilemma: what happened to G, and thus to C? If G fell, C will likely fall, meaning Y falls. If G rises, C will likely rise unless we're not at the ZLB, in which cases rates rise, I falls, and C (and S) would likely follow. In most cases, a rise in Y *causes* a rise in S.

So, yeah: don't reason from a quantity change.
~ResponsiblyIrresponsible

DDO's Economics Messiah
ColeTrain
Posts: 4,325
Add as Friend
Challenge to a Debate
Send a Message
5/4/2016 6:33:56 PM
Posted: 7 months ago
At 7/15/2015 10:47:46 AM, MisterMittens wrote:
Joey Cum Back. TAT

+1000
"The right to 360 noscope noobs shall not be infringed!!!" -- tajshar2k
"So, to start off, I've never committed suicide." -- Vaarka
"I eat glue." -- brontoraptor
"I mean, at this rate, I'd argue for a ham sandwich presidency." -- ResponsiblyIrresponsible
"Overthrow Assad, heil jihad." -- 16kadams when trolling in hangout
"Hillary Clinton is not my favorite person ... and her campaign is as inspiring as a bowl of cottage cheese." -- YYW
ResponsiblyIrresponsible
Posts: 12,398
Add as Friend
Challenge to a Debate
Send a Message
5/5/2016 12:08:56 PM
Posted: 7 months ago
At 7/15/2015 10:47:46 AM, MisterMittens wrote:
Joey Cum Back. TAT

You rang?
~ResponsiblyIrresponsible

DDO's Economics Messiah
ResponsiblyIrresponsible
Posts: 12,398
Add as Friend
Challenge to a Debate
Send a Message
5/5/2016 12:09:10 PM
Posted: 7 months ago
At 5/4/2016 6:33:56 PM, ColeTrain wrote:
At 7/15/2015 10:47:46 AM, MisterMittens wrote:
Joey Cum Back. TAT

+1000

You also rang.
~ResponsiblyIrresponsible

DDO's Economics Messiah
ResponsiblyIrresponsible
Posts: 12,398
Add as Friend
Challenge to a Debate
Send a Message
5/5/2016 12:10:09 PM
Posted: 7 months ago
I forgot I wrote this thread, lol.... The site's Trump supporters should really read this. It eviscerates a key leg of Trump's three-legged, non-Reaganesque stool: bigotry, protectionism, and TRUMP(!).
~ResponsiblyIrresponsible

DDO's Economics Messiah
ColeTrain
Posts: 4,325
Add as Friend
Challenge to a Debate
Send a Message
5/5/2016 12:27:28 PM
Posted: 7 months ago
At 5/5/2016 12:09:10 PM, ResponsiblyIrresponsible wrote:
At 5/4/2016 6:33:56 PM, ColeTrain wrote:
At 7/15/2015 10:47:46 AM, MisterMittens wrote:
Joey Cum Back. TAT

+1000

You also rang.

YOU'RE BACK!!!! :D
"The right to 360 noscope noobs shall not be infringed!!!" -- tajshar2k
"So, to start off, I've never committed suicide." -- Vaarka
"I eat glue." -- brontoraptor
"I mean, at this rate, I'd argue for a ham sandwich presidency." -- ResponsiblyIrresponsible
"Overthrow Assad, heil jihad." -- 16kadams when trolling in hangout
"Hillary Clinton is not my favorite person ... and her campaign is as inspiring as a bowl of cottage cheese." -- YYW
ResponsiblyIrresponsible
Posts: 12,398
Add as Friend
Challenge to a Debate
Send a Message
5/5/2016 12:28:02 PM
Posted: 7 months ago
At 5/5/2016 12:27:28 PM, ColeTrain wrote:
At 5/5/2016 12:09:10 PM, ResponsiblyIrresponsible wrote:
At 5/4/2016 6:33:56 PM, ColeTrain wrote:
At 7/15/2015 10:47:46 AM, MisterMittens wrote:
Joey Cum Back. TAT

+1000

You also rang.

YOU'RE BACK!!!! :D

Sort of.... lol.. we'll see how long it lasts.
~ResponsiblyIrresponsible

DDO's Economics Messiah
ColeTrain
Posts: 4,325
Add as Friend
Challenge to a Debate
Send a Message
5/5/2016 12:28:58 PM
Posted: 7 months ago
At 5/5/2016 12:28:02 PM, ResponsiblyIrresponsible wrote:
At 5/5/2016 12:27:28 PM, ColeTrain wrote:
At 5/5/2016 12:09:10 PM, ResponsiblyIrresponsible wrote:
At 5/4/2016 6:33:56 PM, ColeTrain wrote:
At 7/15/2015 10:47:46 AM, MisterMittens wrote:
Joey Cum Back. TAT

+1000

You also rang.

YOU'RE BACK!!!! :D

Sort of.... lol.. we'll see how long it lasts.

Awesome. :)
"The right to 360 noscope noobs shall not be infringed!!!" -- tajshar2k
"So, to start off, I've never committed suicide." -- Vaarka
"I eat glue." -- brontoraptor
"I mean, at this rate, I'd argue for a ham sandwich presidency." -- ResponsiblyIrresponsible
"Overthrow Assad, heil jihad." -- 16kadams when trolling in hangout
"Hillary Clinton is not my favorite person ... and her campaign is as inspiring as a bowl of cottage cheese." -- YYW
ResponsiblyIrresponsible
Posts: 12,398
Add as Friend
Challenge to a Debate
Send a Message
5/5/2016 12:29:48 PM
Posted: 7 months ago
At 5/5/2016 12:28:58 PM, ColeTrain wrote:
At 5/5/2016 12:28:02 PM, ResponsiblyIrresponsible wrote:
At 5/5/2016 12:27:28 PM, ColeTrain wrote:
At 5/5/2016 12:09:10 PM, ResponsiblyIrresponsible wrote:
At 5/4/2016 6:33:56 PM, ColeTrain wrote:
At 7/15/2015 10:47:46 AM, MisterMittens wrote:
Joey Cum Back. TAT

+1000

You also rang.

YOU'RE BACK!!!! :D

Sort of.... lol.. we'll see how long it lasts.

Awesome. :)

This was a great thread to bump, by the way, lol. Kudos.
~ResponsiblyIrresponsible

DDO's Economics Messiah
ColeTrain
Posts: 4,325
Add as Friend
Challenge to a Debate
Send a Message
5/5/2016 12:31:49 PM
Posted: 7 months ago
At 5/5/2016 12:29:48 PM, ResponsiblyIrresponsible wrote:
At 5/5/2016 12:28:58 PM, ColeTrain wrote:
At 5/5/2016 12:28:02 PM, ResponsiblyIrresponsible wrote:
At 5/5/2016 12:27:28 PM, ColeTrain wrote:
At 5/5/2016 12:09:10 PM, ResponsiblyIrresponsible wrote:
At 5/4/2016 6:33:56 PM, ColeTrain wrote:
At 7/15/2015 10:47:46 AM, MisterMittens wrote:
Joey Cum Back. TAT

+1000

You also rang.

YOU'RE BACK!!!! :D

Sort of.... lol.. we'll see how long it lasts.

Awesome. :)

This was a great thread to bump, by the way, lol. Kudos.

I know! That's what I thought. :D
"The right to 360 noscope noobs shall not be infringed!!!" -- tajshar2k
"So, to start off, I've never committed suicide." -- Vaarka
"I eat glue." -- brontoraptor
"I mean, at this rate, I'd argue for a ham sandwich presidency." -- ResponsiblyIrresponsible
"Overthrow Assad, heil jihad." -- 16kadams when trolling in hangout
"Hillary Clinton is not my favorite person ... and her campaign is as inspiring as a bowl of cottage cheese." -- YYW
ResponsiblyIrresponsible
Posts: 12,398
Add as Friend
Challenge to a Debate
Send a Message
5/6/2016 2:22:39 AM
Posted: 7 months ago
Great article by Alan Blinder on trade that supplements what I wrote in this thread:

http://www.wsj.com...
~ResponsiblyIrresponsible

DDO's Economics Messiah