Dean Baker, Jared Bernstein: Reduce the Trade Deficit, Not the Budget Deficit

Thursday, 07 Nov 2013 10:54 AM

By Michael Kling

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We must reduce the trade deficit — not the budget deficit, argue two leading economists.

"So-called austerity measures — lowering budget deficits while the economy is still weak — have been shown both here and in Europe to be precisely the wrong medicine," write Jared Bernstein and Dean Baker in an op-ed for The New York Times.

"Simply put, lowering the budget deficit right now leads to slower growth. But reducing the trade deficit would have the opposite effect."

Editor’s Note:
New Video: Obama Plans to Redistribute Seniors’ Wealth

Bernstein, a senior fellow at the Center on Budget and Policy Priorities, and Baker, a co-director of the Center for Economic and Policy Research, are the authors of the forthcoming book "Getting Back to Full Employment: A Better Bargain for Working People."

A trade deficit means sending U.S. income and jobs overseas. It means we're spending more than we produce. Savings rates — either private, government or both — become negative.

Cutting the trade deficit by 2 percentage points of GDP would create approximately 2.8 million jobs, most in good-paying manufacturing jobs, they say. In addition, those jobs would lead to more jobs in other sectors. And decreasing the trade deficit would lower the budget deficit by creating better jobs.

Some argue that the budget deficit can be controlled while the trade deficit, a function of free markets, cannot. But Baker and Bernstein call that view naive.

The trade deficit is now about $500 billion, or 3 percent of GDP, they note.

Normally, a country with such a large deficit would see its currency fall. But many countries — China being just one example of many — buy dollars to keep the value of their currency down and keep their exports cheaper.

In response, Baker and Bernstein suggest, the United States could hit such currency manipulators with extra tariffs or tax foreign holdings of U.S. Treasurys to discourage the tactic and demand reciprocity, or sell government bonds only to nation's that allow us to buy their bonds.

Although U.S. manufacturing will probably continue expanding, don't expect huge gains in exports or jobs, cautions Bloomberg columnist A. Gary Shilling, a financial consultant based in Springfield, N.J.

"The total trade balance has deteriorated as the revival of consumer spending favored imports," Shilling states. "Although exports are up 40 percent since 2009, they have leveled off recently and have a long way to reach the goal of doubling by 2015," the target President Obama set in 2010.

Editor’s Note: New Video: Obama Plans to Redistribute Seniors’ Wealth

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