Who Needs a Balanced Trade Policy?
It's easy to recognize that after many years of trade deficits accompanying implementation of trade agreements beginning with NAFTA the US needs to change what it's doing. Many, including Robert Borosage of the Campaign for the American Future (CAF), advocate for balanced trade and they contrast that with the so-called “free trade” policies we have now. The case for balance trade policy is summarized by Borosage this way during his discussion of the policies favored by the New Populism:
Our global trade policies have been defined by and for multinational banks and companies. They have shipped good jobs abroad and driven wages down at home, while racking up unprecedented and unsustainable trade deficits. Those imbalances, as the International Monetary Fund and former Federal Reserve Chair Ben Bernanke have noted, contributed directly to blowing up the global economy.
The new populists demand balanced trade policies. . . .
So, we need “a balanced trade policy” meaning one that reduces trade deficits because it will support lower unemployment by keeping “good jobs” here, drive wages up rather than down, be more sustainable, and won't contribute to a collapse of the global economy. But, is that the only or the best way to get these outcomes?
I raise that question because there is an important truth of macroeconomics to take account of. That truth is that: “Exports are real costs; and Imports are real benefits.”
This notion is based on the distinction between real wealth measured in accumulated products and services and nominal wealth measured in accumulated financial credits. Exports add to real wealth being sent to other nations; in return for nominal wealth received from them (financial credits). Imports add to real wealth being received from other nations; in return for nominal wealth we send to them.
So, would we rather send fiat money to other nations and add to real wealth in return, or would we rather add to their real wealth to and get their fiat money or our old fiat money back in return? My answer is that other things being equal, we'd prefer the first alternative rather than the second, meaning that trade deficits are better than trade surpluses, at least in the short run.
The problem with this answer is that other things are not equal, in the sense that if the Government does nothing to compensate for their shorter and longer-term effects, then the problems highlighted above do result from continuous "free trade" policy supporting continuous trade deficits. On the other hand, these effects of trade deficits can be avoided without implementing balanced trade as a continuous policy. How?
First, trade deficits cause aggregate demand leakages, which is what causes higher unemployment and lower wages. But, we don't have to accept that outcome. We can implement a Job Guarantee program, along with other Government spending such as State Revenue Sharing, infrastructure spending, and Social Security payroll tax holidays to replace the demand lost to trade deficits.
Of course, we'd have to pass those measures. But what's better, from a progressive point of view, doing these things or preventing Americans from buying goods and services (acquiring real wealth) from other nations that they would like to buy?
What about the lost jobs themselves? If they were “good jobs” would the new jobs produced by Government spending and SS payroll tax cuts be “good jobs” too? That depends on how the Government implements its Job Guarantee (JG) program. If the JG pays a living wage and provides Medicare access and good fringe benefits to those in the JG, then private sector people will have to better what the JG offers to get employees, and the wage floor will be raised radically over current levels and that will raise wages all along the line.
So, from the standpoint of adequacy of pay, there will be many more “good jobs” then there are today. The quality of the jobs will also improve if the JG is implemented to allow local non-profits to define jobs that will produce socially valuable outcomes for people. The role of the Federal Government would be the funder of the JG program; but local non-profits, communities, and the JG participants themselves would define the jobs in the program, exerting pressure on the private sector to increase the quality of the jobs offered in that sector.
One way to look at the situation is that trade deficits and the demand leakage they create, also provide an opportunity for the Government to employ people on social entrepreneurial projects producing public good and commons improvements of significant value; filling needs that cannot be filled by the private profit-motivated market. The purpose of the JG jobs provided is to provide a transition for displaced former employees of dying industries.
This opportunity is a good thing provided the Government takes advantage of it, because it provides not only transition jobs for individuals, but also a transition period for the private sector to develop new industries and new jobs based on new technologies while the potential labor force continues working at other jobs having social value.
Of course, the US Government hasn't been doing that, preferring instead to leave people in an unemployed buffer stock that depresses wages and increases inequality. But the truly progressive remedy for that is to implement the Job Guarantee and other Government deficit spending and middle class tax cut programs, not to pursue a policy of balanced trade.
Second, it's very popular today to say that x, or y, or z is “unsustainable” without saying what they mean by that term. From my point of view, policy unsustainability means that a policy cannot be followed forever without undermining the capacity to follow that policy sooner or later. The important thing here is to notice that the Government's policy isn't to run trade deficits forever. But just to allow trade to flow freely and let the trade deficit float. So, the issue here is whether that policy is sustainable. With exceptions to be noted below, I think it is.
The reason why it is sustainable, is that it is, in the end, self-correcting. Eventually, other nations will tire of selling the real wealth they produce in return for our nominal wealth, the electronic bits of information that eventually end up in their accounts at our Federal Reserve Banks and they will sell them instead to their own consumers. At that time, the Government's policy of letting the trade balance float will produce smaller trade deficits or even surpluses, if the US Dollar becomes sufficiently unattractive. Until that time however, having trade deficits resulting from a trade policy that allows the trade balance to float is perfectly sustainable with some exceptions I'll now consider.
Third, Robert Borosage refers to the view of the IMF and Ben Bernanke that continuous trade deficits of the United States contributed to the Great Crash. The chain of causation, according to Bernanke, is that the accumulation of US Dollar credits by Asian nations led to their investing in US and mortgage-based securities, causing a bubble in MBSs which then, in the crash of 2008 spread the US financial crisis around the world contributing a potent feedback loop to the crash. The general idea is that continuing trade deficits would, over time, concentrate the dollar assets of foreign nations in risky securities vulnerable to financial downward spirals.
This mechanism may or may not be a factor whose importance is great enough to render running continuous deficits unsustainable. But, if it is, then the remedy is easy. Pass legislation banning speculation in financial instruments that carry any systemic risk by entities with large dollar holdings. End of story and of this possible factor in promoting unsustainability.
Fourth, the remaining problem with letting trade happen and allowing the trade balance to float is that there may be industries or areas of endeavor that are vital to the defense of the United States, and/or its further economic development. Free trade in these areas cannot be allowed, since it risks destroying vital US skills and capabilities or potential for innovations. We need a US industrial policy to identify these areas, to decide how to subsidize them, and to ensure that they are maintained or developed. Once we have that, along with the other policies mentioned earlier, a policy of letting the trade balance float, even if it results in continuous trade deficits will be sustainable without causing unemployment, reduced wages, financial crashes, or making the United States dangerously dependent on other nations for political and economic sustainability.
Finally, let's review the bidding again. The new populists and writers like Borosage think that progressive trade policy is balanced trade. In contrast, I think that a policy of unrestricted trade, taking advantage of the willingness of other nations to send their real wealth to the US is better for us and also seems be what our trading partners want right now.
However, to make that work for the US, we need full employment policies including a Job Guarantee program at a living wage with full fringe benefits, as well as other policies designed to compensate for demand leakages from trade deficits and private sector savings. In addition, we need to prevent investment of dollar savings in risky financial instruments such as Mortgage-Backed Securities (MBSs) and derivatives, and lastly, we need an industrial policy.
So, which is more “progressive” and also “populist”: balanced trade policy, or unrestricted trade, modified by full employment at a living wage, strict regulation of investments in financial instruments, and industrial, policies? I think it's the second alternative and that progressives and populists ought to forget balanced trade and embrace it.
(Cross-posted from New Economic Perspectives.)