Monday, November 3, 2014

The US Trade Imbalance And The US Labor Market

Dean Baker is pleased to see that economists like Larry Summers have made a good case for the proposition that the US economy is suffering from a lack of demand.  He takes it a step further and reminds us of the accounting identity which tells us that US trade deficits are responsible for a significant decline in US output.  His solution to this problem is to let the currency exchange market work as it is supposed to work.  That is, demand for the dollar would fall and the dollar would decline in value.  That would make US exports less expensive and it would make imports more expensive.  The trade deficit would decline and we would have a full employment level of output.

Dean shows that the US trade deficit declined as a result of the Plaza Accord which reduced the value of the dollar versus that of its trading partners.  He assumes that it would work again if we found ways to enable the currency exchange market to function.  Unfortunately, some of our trading partners are using some of the dollars they accumulate to purchase US treasuries in order to prevent a devaluation of the dollar relative to their currency.

A decline in the value of the dollar would make US exports less expensive, and it would make imports more expensive, but one wonders how much of an impact that would have on the trade deficit.  About half of our imports are made by US corporations which import intermediate and finished products from overseas producers.  They do so because labor costs are much lower abroad.  They can "purchase" those products for resale in the US, under their brand, using more valuable dollars.  They also benefit by gaining access to rapidly growing consumer markets in countries whose economic growth is fueled by exports.  Its not in the interest of many multinational corporations to produce their products domestically, or to have the dollar decline in value.  Moreover, the great bulk of world trade is in manufactured products.  We have fewer of these products to sell as we deindustrialize and transition to a services economy. 

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