Michael Evans
2/6/2006, 09:03 PM
The trade deficit for December will be announced later this week, and will probably be in the $68 to $70 bn range. That will push it to $730 bn for 2005. Five years ago, it was $378bn. Ten years ago, it was $96 bn. It seems fair enough to ask: just what are we getting for our money? Or to put it another way, suppose that extra $634 bn of goods and services had been produced in the U.S. instead of abroad. Would the overall economy be better or worse off?
From 1983 through 1995 the trade deficit stayed roughly constant as a proportion of GDP. During that 12 year span, the growth rate averaged 3.4%. Over the past 10 years, by a surprising coincidence, it has also averaged 3.4%. Inflation averaged 3.6% then, compared to 2.5% now. And productivity averaged 1.6% then, compared to 3.0% now. So even though real growth was identical, there was a major shift in sectoral growth. Higher productivity and lower inflation reduced interest rates, favoring housing and the financial sectors. The price was paid by manufacturing employment, which failed to rise at all during the 1995-2000 boom and since then has fallen about 3 million. In very general terms, those with substantial assets are better off, while those without many assets are worse off.
The situation is a bit more complicated than that, however. During times when the Federal government runs a huge budget deficit, someone has to pay for it. During the 1980s, it was foreign investors. During the 1990s, the deficit briefly turned into a surplus, so the extra funds went into the stock market. During the 2000s, it's back to Business as Usual in the sense that foreign investors are picking up our bills. This situation is likely to intensify during the next five years, when both the trade deficit and the Federal budget deficit will continue to rise as a porportion of GDP.
How about those 3 million mfg workers who lost their jobs -- what happened to them. The cliche answer is they all went to work at McDonalds and Wal-Mart, but in fact that's not the case. Employment in fast-food restaurants and retail stores is just about the same now as it was in 2000. Instead, virtually all the gain has occurred in health care. The burgeoning costs of health care has for the most part been picked up by the government, and is a major reason the deficit is so large and will continue to grow.
So manufacturers lose their jobs but find alternative employment in health care, which is funded by the government deficit, which in turn is funded by -- all those imports that replaced the lost manufacturing activity. Indirectly, the Chinese -- and OPEC -- are paying or medical care bills and helping to keep the economy near full employment.
Maybe that's not the way it's programmed in the economic textbooks, but that's what the future will look like. Get used to it.
From 1983 through 1995 the trade deficit stayed roughly constant as a proportion of GDP. During that 12 year span, the growth rate averaged 3.4%. Over the past 10 years, by a surprising coincidence, it has also averaged 3.4%. Inflation averaged 3.6% then, compared to 2.5% now. And productivity averaged 1.6% then, compared to 3.0% now. So even though real growth was identical, there was a major shift in sectoral growth. Higher productivity and lower inflation reduced interest rates, favoring housing and the financial sectors. The price was paid by manufacturing employment, which failed to rise at all during the 1995-2000 boom and since then has fallen about 3 million. In very general terms, those with substantial assets are better off, while those without many assets are worse off.
The situation is a bit more complicated than that, however. During times when the Federal government runs a huge budget deficit, someone has to pay for it. During the 1980s, it was foreign investors. During the 1990s, the deficit briefly turned into a surplus, so the extra funds went into the stock market. During the 2000s, it's back to Business as Usual in the sense that foreign investors are picking up our bills. This situation is likely to intensify during the next five years, when both the trade deficit and the Federal budget deficit will continue to rise as a porportion of GDP.
How about those 3 million mfg workers who lost their jobs -- what happened to them. The cliche answer is they all went to work at McDonalds and Wal-Mart, but in fact that's not the case. Employment in fast-food restaurants and retail stores is just about the same now as it was in 2000. Instead, virtually all the gain has occurred in health care. The burgeoning costs of health care has for the most part been picked up by the government, and is a major reason the deficit is so large and will continue to grow.
So manufacturers lose their jobs but find alternative employment in health care, which is funded by the government deficit, which in turn is funded by -- all those imports that replaced the lost manufacturing activity. Indirectly, the Chinese -- and OPEC -- are paying or medical care bills and helping to keep the economy near full employment.
Maybe that's not the way it's programmed in the economic textbooks, but that's what the future will look like. Get used to it.