NPR had a somewhat confused piece on the trade deficit this morning that was headlined "Economists Say Trump Seems To Misunderstand Significance Of Trade Deficit." The piece basically tells listeners that Trump is mistaken for claiming the trade deficit is a problem.

To make this point, the piece quotes Peterson Institute economist Chad Brown:

"Trade isn't a zero-sum endeavor. It's win-win. And I think that's a different framework than he's used to dealing with - you know, coming from the world of real estate where if I get something out of a deal, you know, it's something that you don't get."

The piece then points out that the U.S. trade deficit hit its recent low in 2008, at the start of the Great Recession. It then features a comment from Larry Kudlow:

"I don't understand it. Trade deficit is a terrible gauge of the economy. Or let me put it in reverse. If we're in a position of having a large trade deficit that means we're growing, and we're growing faster than the rest of the world."

Okay, here's the way economists familiar with economics would talk about a trade deficit. If the economy is below full employment, then the trade deficit is a drag on demand. It represents spending that could be taking place in the United States, and creating demand and employment here, which is instead created demand and employment in other countries.

Lack of demand in the U.S. economy has actually been a large problem in recent years. Some folks may have heard economists like Paul Krugman, Larry Summers, Ben Bernanke, and Olivier Blanchard talk about "secular stagnation." That means that the economy does not have enough demand to sustain full employment.

While they often recommended increased government spending to offset secular stagnation, a reduced trade deficit would have the same effect. In other words, if we reduce the annual trade deficit by $380 billion, it would have roughly the same effect on demand and employment as increasing government spending by $380 billion.

Data from the Consumer Expenditure Survey show that the bottom 60 percent of the US population has been spending over 30 percent of their income on housing since before 1989. In 1981, the Department of Housing and Urban Development (HUD) issued a recommendation that a maximum of 30 percent of household spending go to housing costs. This clearly has not been the norm for most households over the last three decades.

For the lowest income quintile (with an average income of $10,916 in 2015), rising housing costs are an especially large burden, averaging over 40 percent of income spent on housing each year since 2007. At the other end of the income spectrum, the top income group (average income of $177,851 in 2015) spent more than recommended on housing for a majority of the years analyzed, although the most recent numbers are back below 30 percent.

The New York Times told readers that Mexico is preparing to "play the corn card" in its negotiations with Donald Trump. The piece warns:

"Now corn has taken on a new role — as a powerful lever for Mexican officials in the run-up to talks over Nafta, the North American Free Trade Agreement.

"The reason: Much of the corn that Mexico consumes comes from the United States, making it America’s top agricultural export to its southern neighbor. And even though President Trump appears to be pulling back from his vows to completely overhaul Nafta, Mexico has taken his threats to heart and has begun flexing its own muscle.

"The Mexican government is exploring buying its corn elsewhere — including Argentina or Brazil — as well as increasing domestic production. In a fit of political pique, a Mexican senator even submitted a bill to eliminate corn purchases from the United States within three years."

It then warns of the potential devastation from this threat:

"The prospect that the United States could lose its largest foreign market for corn and other key products has shaken farming communities throughout the American Midwest, where corn production is a vital part of the economy. The threat is particularly unsettling for many residents of the Corn Belt because much of the region voted overwhelmingly for Mr. Trump in the presidential election.

"'If we lose Mexico as a customer, it will be absolutely devastating to the ag economy,' said Philip Gordon, 68, who grows corn, soybeans and wheat on a farm in Saline, Mich., that has been in his family for 140 years."

Okay, I hate to spoil a good scare story with a dose of reality, but let's think this one through for a moment. According to the piece, instead of buying corn from the United States, Mexico might buy it from Argentina or Brazil. So, we'll lose our Mexican market to these two countries.

Dean Baker
The Hankyoreh, April 3, 2017

Dean Baker
Truthout, April 3, 2017

I don't like being in the position of saying Trump is right, but when it comes to trade, otherwise reasonable people often say things that are rather silly, which mean that Trump can be right. Matt O'Brien takes the silly route when he takes issue with the idea that our trade deficit in the last decade could have led to an economy-wide lost of jobs and also says that the story of the trade deficit and jobs is all history anyhow.

Before going to the woodshed, I'll give Matt credit for what he gets right. Matt acknowledges that the opening to China with its entry to the WTO had a devastating impact on millions of workers and their communities. For some reason, many economists and commentators feel a need to deny this fact. I suppose the flat earth society is larger than I imagined.

I will add one point to Matt's discussion of this issue. Matt notes that in principle, the gains to the winners from trade are larger than the losses to the losers. This means that we should be able to compensate the losers and make everyone better off.

Matt correctly points out that the compensation to the losers is invariably a joke. They don't get s**t, and then we call them names when they vote for Trump.

But there is an additional point on this compensation story that is worth throwing in. The claim that the gains exceed the losses and therefore we can have compensation to make everyone better off is only necessarily true if we have a costless compensation process.

In other words, if we can just vacuum up dollars from everyone who won and hand them out to the people who lost, then we can ensure that everyone is better off, but in the real world we don't actually have a costless process. In the real world we get money from the winners from things like income and sales taxes, which come with distortions. This means that for every dollar we collect in revenue, we are losing some amount of economic activity. 

The main economic story of the last four decades is the massive upward redistribution of income that has taken place. The top one percent's share of national income has more than doubled over this period from roughly ten percent in the late 1970s to over twenty percent today. And, this is primarily a before-tax income story, the rich have used their control over the levers of economic power to ensure that an ever larger share of the country's wealth goes into their pockets. (Yes, this is the topic of my book, Rigged [it's free].)

Anyhow, the rich don't want people paying attention to these policies (hey, they could try to change them), so they endlessly push out nonsense stories to try to divert the public's attention from how they structured the rules to advance their interests. And, since the rich own the newspapers, they can make sure that we hear these stories.

This meant that yesterday the NYT gave us the story of how robots are taking all the jobs and driving down wages. Never mind that productivity growth is at its slowest pace in the last seven decades. Facts and data don't matter in the alternative world where we try to divert folks' attention from things like the Federal Reserve Board (who are not robots, last I checked) raising interest rates to make sure that we don't have too many jobs.

One of the other big alternative facts for the diverters is the generational story. This is the one where we tell folks to ignore all those incredibly rich people with vast amounts of money, the reason most people are not seeing rising living standards is the damn baby boomers who expect to get Social Security and Medicare, just because they paid for it. The Boston Globe gave us this story with a piece by Bruce Cannon Gibney, conveniently titled "how the baby boomers destroyed everything." (Full disclosure: I am one of those baby boomers.)

There is not much confusion about the nature of the argument, only its substance. Gibney complains about:

"...the unusual prevalence of sociopathy in an unusually large generation. How does that disorder manifest? Improvidence is reflected in low levels of savings and high levels of bankruptcy. Deceit shows up as a distaste for facts, a subject on display in everything from Enron’s quarterly reports to daily press briefings. Interpersonal failures and unbridled hostility appeared in unusually high levels of divorce and crime from the 1970s to early 1990s."

Starting with the bankruptcy story, the piece to which Gibney helpfully linked noted a doubling of bankruptcy rates for those over 65 since 1991. It reported:

"Expensive health care costs from a serious illness before a patient received Medicare and the inability to work during and after a serious illness are the prime contributors to financial crises among those 55 and older."

Yes, we have clear evidence of a moral failing here.