Trade Deficits and Jobs August 2008 Russell Roberts roberts@gm u.edu George M ason University http://www.cafehayek.com http://www.econtalk.org http://www.m ercatus.org www.mercatus.org A Persistent and Growing Merchandise Trade Deficit U.S. Merchandise Trade Balance, 1960-2005 (billions of dollars) 1968 1970 1986 1972 1988 1974 1990 1960 1976 1992 1962 1978 1994 1964 1980 1996 1966 1982 1998 1984 2000 2002 2004 100 0 -100 -200 -300 -400 -500 -600 -700 -800 -900 Source: BEA, http://bea.gov/bea/di/table1.xls • Merchandise trade balance—exports of goods minus imports of goods • I have tried to make it as scary as possible: • Excludes services (America exports more services than it imports since 1971) • Not deflated by either the price level or the size of the economy • Until 1976, roughly zero—sometimes positive or sometimes negative but always somewhat small. • Beginning in 1976, U.S. has run a trade deficit every single year • Since 1976, U.S. has imported $6 TRILLION worth of goods more than it has exported. 2 proportionofthepopulationworkingisalsohigher after1976thanbefore. • Economyproducesjobsforpeoplewhowant them. Populationishigherbutthe • Tradeaffectsthekindofjobsineconomy,notnumbers tradedeficits • In2005,over40millionmorejobsthanin1976,thebeginningofpersistent,growing • Recessionsreducenumberofjobs—otherwise,steadygrowth • Noobviousimpactoftradedeficitsonemployment Source: BLS,CurrentEmploymentStatistics,SeriesId:CEU0000000001 100 120 140 160 20 40 60 80 0 1939 1941 1943 Little orNoImpactofTradeDeficitonJobs 1945 1947 1949 1951 1953 1955 U.S. TotalEmployment,1939-2005(millionsofjobs) 1957 1959 1961 1963 1965 1967 1969 3 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 • Between1965and2000,fairlystablefluctuatingbetween1620millionjobs • ManufacturingemploymentsurgedduringWWII,KoreanWarandVietnam • Noapparentdifferencebetweenpre-1976andpost-1976 Source: BLS,CurrentEmploymentStatisticsSurvey,SeriesID:CEU3000000001 10 15 20 25 0 5 1939 1941 1943 1945 1947 1949 1951 What AboutManufacturingJobs? 1953 Manufacturing Employment,1939-2005(millionsofjobs) 1955 1957 1959 1961 1963 1965 1967 1969 4 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 1976 • Manufacturingjobsasaproportionoftotalemployment Id’s: CEU0000000001andCEU3000000001 Source: BLS,TableB-1,EmployeesonNon-FarmPayrollsbyIndustrySector,fromtheCurrentEmploymentStatisticsSurvey,Series 0.05 0.15 0.25 0.1 0.2 But WhatifWeControlfortheSizeofLaborForce? 0 1976 1977 1978 1979 1980 1981 Manufacturing JobsasaProportionofTotalJobs,1976-2005 1982 1983 1984 1985 1986 1987 1988 1989 5 1990 1991 1992 1993 1994 HAVE 1995 1996 1997 fallensteadilysince 1998 1999 2000 2001 2002 2003 2004 2005 globalization. • Somethingelseiscausingthislong-termtrend,somethingthatunrelatedto deficits andthegrowthinglobalization. • Ratiopeaked Id’s: CEU0000000001andCEU3000000001 Source: BLS,TableB-1,EmployeesonNon-FarmPayrollsbyIndustrySector,fromtheCurrentEmploymentStatisticsSurvey,Series 0.05 0.15 0.25 0.35 0.1 0.2 0.3 0.4 0 1939 1941 BUT THATTRENDBEGANLONGBEFORE1976 1943 1945 in 1944 1947 1949 1951 Manufacturing JobsasaProportionofTotalJobs,1939-2005 1953 and hasbeendeclininglongbeforepersistentrunningtrade 1955 1957 1959 1961 1963 1965 1967 1969 6 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 machinery)isthedominantcauseofreduction inmanufacturingemployment • Increasedproductivity(bettereducatedworkers workingwithmoresophisticated workers produces manufacturingoutputis • Since1959,theeconomyis4.5timesbiggerasmeasuredbyrealGDP.But • Manufacturingoutputfallswithrecessionsbutotherwiserisessteadilyovertime • Americaisnotbeing“hollowedout.”Themanufacturingsectorstrong. Source: TableB-51,EconomicReportofthePresident,fromBoardGovernorsFederalReserve 100.0 120.0 20.0 40.0 60.0 80.0 0.0 1959 1960 1961 4.7 1962 1963 1964 times morestufftodaythanin1959with 1965 1966 Productivity GainsinManufacturing 1967 1968 1969 4.7 1970 Manufacturing Output,1959-2005(2002=100) 1971 1972 timesbiggeroverthesametimeperiod.America 1973 1974 1975 1976 1977 1978 1979 1980 7 1981 1982 1983 1984 1985 1986 1987 1988 FEWER 1989 1990 1991 1992 1993 manufacturing 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 • Tradesurplusesdon’tcreatejobs.Deficits destroyjobs. many peopletoproduceaparticularquantityof food. the samethingreducingmanufacturingemployment: productivity.Wedon’tneedas • Thedeclineintheimportanceofagricultureas asourceofemploymentiscausedby participation thathavedoubledtheoveralllaborforce. there werein1963,despiteincreasespopulationandlaborforce jobs. Buttherearefewerthanhalfthenumberofworkersinagriculturalsector • Ifyouarguethatdeficitscausejobloss,havetoasurplusshouldcreate surplus infood, • TheU.S.hasexportedmoredollarsworthoffoodthanitimported,atrade Source: EconomicResearchService,U.S.DepartmentofAgriculture 10 15 20 25 30 -5 0 5 1935 1937 1939 1941 1943 every year 1945 1947 Do TradeSurplusesCREATEJobs? 1949 Agricultural TradeBalance,1935-2005(billionsofdollars) 1951 1953 1955 since 1963. 1957 1959 1961 1963 1965 1967 8 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 Source: BureauofLaborStatistics,Current PopulationSurvey,TablesA-1andA5 10 12 14 0 1 2 3 4 5 6 7 8 9 0 2 4 6 8 1948 1948 1950 1950 1952 1952 1954 1954 Agricultural EmploymentasaPercentageofTotalEmployment,1948-2005 1956 1956 1958 1958 Trade SurplusesDon’tCreateJobs 1960 Agricultural Employment,1948-2005(millionsofworkers) 1960 1962 1962 1964 1964 1966 1966 1968 1968 1970 1970 1972 1972 1974 1974 9 1976 1976 1978 1978 1980 1980 1982 1982 1984 1984 1986 1986 1988 1988 1990 1990 1992 1992 1994 1994 1996 1996 1998 1998 2000 2000 2002 2002 2004 2004 Why Don’t Trade Deficits Destroy Jobs? Why would a trade deficit destroy jobs? The argument is that imports destroy jobs and exports create jobs. So if imports exceed exports, there will be net job destruction. This mechanical approach to job creation ignores the dynamic nature of the job market. Consider a world where every American wakes up to find a free car in the driveway, a gift from the Japanese auto industry. In the glove compartment is a note explaining that this gift will be repeated every year. In some way, this is the ultimate trade deficit—a set of imports with zero counterbalancing exports. What will be the impact from this gift on the number of jobs in America and on America’s standard of living? It will devastate employment in the auto industry. But will total employment fall by the number of jobs lost there? A lot of industries are going to be expanding because people no longer have to pay $25,000 for a car. People will now be able to buy things they couldn’t afford to buy before the gift. So the decrease in the demand for labor is going to be offset by an increase in demand for labor in industries outside of the car market. The American standard of living will rise in exactly the same way it would if American carmakers figured out a cheaper way to make cars. Both changes— innovation or free cars from the Japanese—make Americans richer. The same thing has happened over the last century in agriculture. As farmers have become more innovative, we get more food at lower prices using fewer workers. That creates wealth, not poverty. In 1900, agriculture employed 40% of the American work force. Today, that number is under 2%. New jobs have come along to replace the lost farming jobs. And the new jobs pay well because we don’t have to pay as much as we once did for food. It has been gloriously good for America that we don’t need as many people farming as we once did. Would it make any difference if that decrease in farm employment had come from foreigners willing to sell us food cheaply or technological change that made agriculture more efficient? Both lead to cheaper food and fewer workers necessary to grow food in the United States. Both increase the standard of living of the average American. Is this dynamic view of the job market accurate? Look at the data. Imports have surged over the last 50 years. The trade deficit has ballooned over the last 30 years. Yet employment has grown steadily. Banning imports would eliminate the trade deficit. But the number of jobs in America wouldn’t change—we’d just find ourselves trying to make all the cars and all the steel and all the watches that we used to import. Those industries would grow. Others would shrink because there wouldn’t be enough workers to go around and our demand for many goods would fall as cars and steel and watches became more expensive leaving less money for other things. America would be starkly poorer. Self-sufficiency is the road to poverty. Trade lets us cooperate and allows others to make things for us that we could only make for ourselves at greater expense. 10 attractiveplacetoinvestrelativetherestof theworld. • Atradesurplusandadeficitaresustainable aslongtheU.S.remainsan widearrayoffactors.Neitheristhecause other. • Thetradedeficitandthecapitalaccountsurplus aredeterminedsimultaneouslybya deficit • Acapitalaccountsurplusallowsanationtoconsume morethanitproduces—atrade notameasureofdebtorhowmuchAmericaowestherestworld. governmenttreasuriesbutalsocorporateequityandbonds.Thetradedeficitis • Asignoftheattractivenessdollar-denominatedassetsasastorevalue.Includes • Zeroorclosetozeroforalongtime,thenpersistentandgrowing merchandisetradebalance • Thecapitalaccountbalanceisclosetoamirrorimageofthepattern Source: BEA,TableA-1,U.S.InternationalTransactionsAccountsData