I generally try to stick to my knitting here on Room 8, and write about things that I have at least some level of knowledge and expertise that the reader does not. And I am not an expert in trade economics. Yet with the Republican Presidential Primary over and the amount of immigration nonsense therefore reduced, I couldn’t help but notice the amount of foreign trade nonsense emerging from the Democratic side. It’s yet another variation of the early 1990s anti-welfare crusade — if things aren’t going well, find someone black or brown to blame. Well I have a message for all those worried about the effect of foreign trade on their economic well being. Trade cannot hurt this country, only help it, if the amount we export equals the amount we import. And how much is exported and how much is imported is not decided in a trade negotiation. It is decided in every American family. Lots of Americans have chosen to spend more than they earn, going deeper into debt to do it, and when you add them all up the United States as a whole is consuming more than it is producing. Before pointing the finger at NAFTA or the Chinese, ask yourself “what’s my trade gap?” If you have one, trade agreements aren’t the problem, your personal financial choices are.
It isn’t enough to be breaking even on your own paycheck, because the U.S. economy needs more than consumption, which according to the latest GDP figures from the U.S. Department of Commerce, Bureau of Economic Analysis only accounted for 70% of the economy in 2007. It also needs investment, which accounted for 15.4% of the economy, if we are to have an economy in the future. Someone has to pay to finance that investment. So unless you are saving 15.4% of your pre-tax paycheck, you are contributing to the trade deficit. Speaking of taxes, Americans haven’t been willing to pay enough of those to cover all the spending they expect the government to do. That means the government has to borrow from someone to cover its 19.4% of the economy. So add another 3.0% to the amount you need to be saving, for a total of 18.4% of your pre-tax paycheck. If you are saving that much, you don’t have a personal trade gap. If you are not, you do.
Notice that those three numbers — consumption, investment, and government add up to more than 100%. Wonder how? Easy — we are getting an extra 5.1% of our economy from imports, which equal 17.0% of our economy, compared with exports, which equal just 11.9%. What does that mean practically? Well, in the last year the unemployment rate has risen and the share of Americans in the labor force has fallen, as a result of the recession. But up until then Americans had been working flat out, with two-income couples, more people working, more hours worked, than perhaps any time other than World War II. And, of course, the average American is vastly more productive than 60 years ago to boot. Some argue, in fact, that Americans work too much, neglecting family and community as a result. But even with all that work, Americans consumed so much that we not only had to import an extra 5.`% from abroad, but also had to import millions of immigrants to work for us. How can it be argued, with everyone working, that trade cost American’s jobs?
But has trade cost Americans income, forcing them to go into debt to make ends meet? Americans certainly have had to go deeper and deeper into debt, at every level, to consume so much more than we produce. For individuals and families, that has meant huge student loans, homeowners owning less than half the value of their houses for the first time since the Great Depression as a result of rising mortgage debt, and higher credit card balances. For business, it means that our corporations are increasingly foreign owned, as our financial institutions go crawling to Chinese or Arab sovereign wealth funds for dollars. Dollars they got by selling us oil and other things. For our country, a soaring share of our national debt is owned by foreigners. Much of the rest is fake debt held by the Social Security “trust fund,” and at some point not all that debt can be paid off. If we don’t pay the foreigners, however, they might stop lending us more. I don’t think we can afford that. So guess who is out of luck?
And the political response to this situation? Blame the Mexicans in general, and immigrants and NAFTA in particular.
One explanation of what has happened is that as a result of NAFTA the U.S. has lost high-wage manufacturing employment to low-wage countries, enriching executives through higher profits but leaving everyone else to sell each other hamburgers in fast food places. Look, however, at the chart of U.S. manufacturing employment in the attached spreadsheet. It didn’t go down after 1993, when NAFTA came into effect. Instead, manufacturing followed its long standing pattern of staying at the same share of the economy, and having about the same number of total jobs adjusted for the business cycle, while accounting for a shrinking share total jobs (as productivity rose in manufacturing and employment grew elsewhere). Yes, many jobs went down to Mexico, but Mexicans used their additional income to buy goods and services, and some of those goods and services came from the United States. For every job lost a job, often a higher wage one, was gained.
The big downturn in manufacturing employment happened after 2000. It matched up with the acceptance of China into the World Trade Organization, the boom in Chinese imports, and the binge in American debt. Why has trade with China hurt in a way that trade with Mexico did not? Because Chinese and Americans reinforced each other’s worst tendencies — Americans spent too much, and Chinese saved too much and spent too little.
Like business executives, foreigners can only become rich at the expense of ordinary Americans if ordinary Americans are willing to spend more than they earn and go deeper and deeper into debt. Any one company can relocate a factor to China, leaving American workers to scramble for lower-wage jobs. But businesses in general, and the newly employed workers in China, will have to turn around and sell things to those very same lower-wage American workers at prices that exceed their incomes. Otherwise the Chinese can’t export and the corporations cannot earn profits. Eventually, however, all those personal debts cannot be paid. The federal government can try to keep the party going by borrowing money for people to spend if they can no longer do so themselves, but eventually it won’t be able to pay its debts either.
In the case of the Chinese, their tendency to spend so little of what they earn abroad is understandable. China remains a poor country, and Chinese people want to save and invest to create a better life for the next generation (I know that is hard for many of today’s Americans can understand, try asking someone over age 85 about it). And as a result of the one-child policy, the next Chinese generation will be smaller, meaning that older Chinese don’t expect there to be enough working Chinese to provide them with the goods and services they need in old age. So they are saving up overseas now, in the expectation of being able to import what they need later. It won’t work out so well for the Chinese, however, because we will be paying them back in a devalued currency after defaulting on many of our debts. They will have worked and sacrificed to provide us with cheap clothes and toys, but will not be repaid in kind.
In our case, our tendency to spend so much and keep going into debt is not so understandable, unless we don’t care about future generations of Americans, including our own children. The evidence suggests this is the case.
Sooner or later this entire economic situation is going to collapse, and Americans won’t be able to spend that extra 5.0% anymore, because we won’t be able to borrow anymore, and won’t even be able to repay all we owe. The trade gap will go away. It is already starting to happen. And you know what, all those people who have been “bitter” about NAFTA will suddenly have something else to be bitter about — they will be working harder and longer than ever, but will not be able to afford what they once did, now that foreigners will no longer produce more for them. You want to know what is coming to an America near you? Read this. For all those trade bashers, the phrase "be careful what you ask for you might get it" will almost certainly come into play.
Fortunately, I don’t think the coming change will affect my lifestyle much, and hopefully my values have been sufficiently transmitted to my children that they won’t feel that they are missing out either. As REM put it “it’s the end of the world as we know it, and I feel fine.”