Trade Deficit Figures Point to Diminished American Economic Future

If you think Pedro Martinez' numbers against the New York Yankees look bad (and they do), they're nothing compared with the government's latest monthly trade figures. Dismal as the Boston Red Sox ace's performance against the Bronx Bombers has been, he looks like a champion next to the trade numbers, which are one important measure of the U.S. economy's performance against the rest of the world.

Not that the trade surplus and deficit figures tell us everything we need to know about America's competitiveness. In particular, they compare apples and oranges – how U.S. products fare in overseas markets versus how foreign products do in U.S. markets. And even studying the trade figures industry by industry can be misleading. By definition, they can't shed light on which U.S. industries depend how heavily on exports and/or face major foreign competitors, and which U.S. industries sell mainly to the humongous U.S. market and/or face little import competition.

Still, according to mainstream economic theory, these trade balance figures say a great deal about the relative strength of America's economy, whether it is waxing or waning, and what its future composition will be. The reason? What a country trades most successfully – where it wracks up its biggest surpluses - eventually becomes what it makes most successfully and prolifically. And what it trades least successfully – where it wracks up its biggest deficits - eventually becomes what it makes least successfully and prolifically. That, in plain English, is what comparative advantage in all its forms is all about.

The deficits also show that the United States is a country that consumes far more than it produces. Although the economic price for this profligacy has appeared minor so far, anyone expecting the situation to last forever and is blasé about its worsening must believe there really are free lunches after all.

The August, 2004 trade figures released Oct. 14 by the Census Bureau show an overall U.S. deficit in goods and services of $54.04 billion, second all-time only to June´s $55.2 billion. This year´s January-August deficit level, as a result, is more than 19 percent larger than last year´s, meaning that the annual deficit figure is on its way to smashing last year´s $421 billion record total.

Even worse, the U.S. deficits keep soaring despite the soft patch recently encountered in domestic growth, and the gradual continued weakening of the dollar. The first is supposed to keep imports down and the second is supposed to buoy exports, but little of these macroeconomic effects are being felt.

Further, the closer one examines the deficit figures, the worse they look. Remember the rule that what a country trades most successfully it will wind up making most successfully? Well, by this logic, the United States doesn´t have much of a long-term future as a manufacturer. August´s manufacturing deficit was the second highest on record, and this year´s cumulative manufacturing deficit so far is more than 21 percent higher than last year´s January to August record total of $307.45 billion.

And don´t think that the problem is concentrated in so-called dinosaur, smokestack industries – which, incidentally, create most of America´s best-paying jobs on average. The $4.5 billion August deficit in advanced technology products set a new record, too.

Of course, many supporters of current U.S. trade policies see no special value in maintaining a world-class domestic manufacturing at all. But the August trade figures should scare them, too. America´s longstanding surplus in tradable services shrank by 19 percent, to $3.2 billion – the lowest surplus since the Census Bureau began tracking this trade in 1992. Since 2001, moreover, the January-August service surplus has declined a stunning 27 percent, to $33.07 billion. Still think that we can export our way out of our enormous national trade deficits and resulting debts by speeding up our shift to a service economy? Please!

Even more worrisome, much evidence indicates that the United States is also seeing its competitive edge erode in information technology and professional services – the supposed industries of the future, for which displaced manufacturing workers are supposed to reeducate and retrain themselves, and which America´s youth should target during their schooling.

The U.S. surplus in the “other private services” category, which captures trends in these sectors, did rise from $31.44 billion in the January-August, 2001 period to $33.15 billion in January-August, 2002. Since then, however, the surplus has fallen by 4.4 percent, including a fractional decrease in August, 2004, to $3.96 billion. In August, 2003, the surplus was $4.08 billion – 2.94 percent higher.

When America began losing older industries such as textile and apparel and steel, free trade cheerleaders predicted that the forces of comparative advantage would push the nation up the technology ladder to automobiles and ships and machine tools and consumer electronics. When these industries began faltering, Americans were told not to worry, for they would be freed up to concentrate on high tech goods like computers and semiconductors and aircraft and advanced telecoms equipment. When many of these industries began migrating en masse to high-income Japan and then low-income countries like China, professional services like law, engineering, and finance, and info-tech services like software writing were then declared the new economic future.

The latest trade figures show that these sectors won´t be saviors for the vast majority of America´s workforce, either – leaving two obvious alternatives. Americans´ comparative advantage will be in sales – hawking to each other the wares of other nations. Or maybe we´ll just all go back to the farm. But the only problem with that scenario is that farming is also under intensive attack from foreign competition.

The dollar pretty much goes where our government wants it to go these days, and at least since 1985's Plaza Accord. Foreign exchange isn't an efficient market simply because it's dominated by a few large players, namely the governments of the largest economies. The US, as the largest economy by far, is so influential it usually doesn't even have to intervene in the market, but give a wink as to which way the dollar is to go. Of course, it helps to follow through with a coordinated monetary policy, which Greenspan has always done. That's been his secret all these years. He follows dollar policy, while shoveling manure disguised as some kind of mystical economic wisdom to anyone who wants to listen.

A few things really pop out at me from your chart. In general our exports have increased since the collapse of the Bretton Woods foreign currency fixing scheme in the early 1970's. Second, during the Bretton Woods era between 1950 and 1972, exports and imports remained fairly flat. Third, during periods of economic recovery when the dollar was getting stronger (1981 -1985), our exports declined, which is nothing to worry about. And fourth, it doesn't look like GWB's war on the corporate boardroom, or his weak dollar policy have helped our exports very much. Though Clinton's destructive strong dollar looks to have had a far more negative impact. Look at how exports steadily gained between 1985's Plaza Accord (an agreement between the US and Japan to weaken the dollar) and the beginning of the Clinton/Rubin strong dollar in 1995.

The Heritage Foundation article that you source states:

On the facts, it is true that real wages have been "stagnant" for the last year or so, but only in the sense that they remain high and have not declined.

Looking at the above graph, this statement appears to be pretty much true. Real wages have been stagnant for about two years but are far above their January 1996 level. This view changes, however, if you take a longer view. The following graph displays all the data available from the BLS website:

As you can see, real wages peaked in the early seventies and plunged in the late seventies and early eighties. They continued to decline and reached a low in about 1995. They are currently about where they were in 1967.

In any case, you can see the data for this and a number of other BLS statistics from the payroll and household surveys at http://home.att.net/~rdavis2/jobs.html. If you want to see just the graphs, they're at http://home.att.net/~rdavis2/jobgrafs.html.

How much more can the prices rise??? They seem to be quite risen --- a car today costs more than a house did not too long ago.

Sam the Sham says that, adjusted for inflation, cars cost the same that they did 40 years ago. You disagree?

A 6 year loan for a car that loses it's value in 4 years is not smart --- but you see a lot of people with them.

People do stupid things? I thought two Clinton terms would be proof enough of that. Sam's point is that real wages are falling and so people need to get 6 year car loans. Do you think real wages are falling?

A lot of those rising taxes are to pay for the government social programs for a population that is unable to work and provide much of a living for itself. In this area you can find many "NAFTA displaced workers" --- thousands of them who will never work again --- many are only in their 40's and 50's and they're living off the many government programs which taxes must support.

How many NAFTA displaced workers are there? IIRC, NAFTA was passed in 1993, are you saying that until 1993 a high school grad could raise a family like your father did? I think the taxes rose before 1993.

I could see the free trade argument that we don't need low skilled laborers if we weren't importing so many at higher rates than ever --- and also if we would encourage those we have to leave the country to follow their jobs out.

I agree the first step we need is the enforcement of our immigration laws. If we stopped new illegals from entering and made the current illegals uncomfortable enough to go back, we could save social program $$$ and employ more of our own underemployed and lower skilled workers.

If 10,000,000 illegals enter the country and make $4 an hour, what impact does that have on average hourly earnings?

So you think that you should get more items on a car and then pay the same for it? You've gone absolutely mad.

People WANT these so-called "luxury" items on cars. They are willing to pay for them, clearly, because there are no cars that don't have them on there.

If GM made a car that didn't had a 40 hp engine and no power steering and no power brakes and no ABS and no a/c and no padded dash and no seat belts and no air bags and no automatic transmission and no front/rear crumple zones and no side impact door beams, it might sell for $5000, which would be less than your VW Beetle. But the long and the short of it is that people don't want cars without that stuff, so they pay more--which we've already established that they do.

I'm not saying that cars aren't a necessity. I'm saying cars cost more (which they DO, in terms of the percentage of income people pay for them) because they have more stuff on them than they did in the 60s. People demand it, so the price goes up. C'est la vie.

Would you buy one if it had over 100,000 miles on it? You can still see some of those old cars from the 60's and 70's still on the road --- lots around here but those imports don't look good after just a few years.

Surely you're not claiming that the reliability of cars from the 60s and 70s is better than cars today. Is that what you're saying?

which we've already established that they do.

We have established nothing of the sort. We have, in fact, established that they are paying, adjusted for inflation, what they were paying 40 years ago. SAME PRICE. What has changed is that they cannot afford to pay the same money in three years anymore. Now they need five or six years to pay the SAME PRICE.

You're trying to have your cake and eat it too.

First you say they are paying the same price, then you say that they are paying a higher percentage of their income.

Assuming, arguendo, that real incomes have dropped over the past 40 years, then these people are paying more for the car than they did in 1964. You can say that the price of the car has tracked inflation, but if people are paying a bigger percentage of their income, then they are, in no uncertain terms, paying MORE for a car than they did in 1964.

Assuming, arguendo, that real incomes have dropped over the past 40 years, perhaps we might expect the price of the car to rise faster than inflation if real incomes also rose during the same period.

The long and the short of it is that people are willing to pay a higher percentage of their income to purchase a car now than in 1964 because they get more value. The car is worth more than, say, 5% of your income--it's worth, say, 10% of your income. Why? Because YOU GET MORE! That's the end. Period. No ifs, ands, or buts.

I'm through with this. Besides, it's a moot point. Free trade is here to stay, it ain't going anywhere. For the economic luddities on this thread, better start getting used to it or getting the compound stocked up.

First you say they are paying the same price, then you say that they are paying a higher percentage of their income.

Just because you can less afford something today than 40 years ago does not mean that the price has risen. As I proved in reference to inflation rates across time, the price of the car has not changed at all. The car price is the constant in this equation. Disposable income is the variable and it is spent on a lot more than cars. Consumer electronics, for example, have gone way in the opposite direction, dropping in price across time to the point where it is no longer possible to earn a living as a TV repairman. Despite their technological overwhelming superiority they are vastly cheaper across time. A 1980 high end console 21 inch TV cost $800 then. Multiply that times 3 and you have what a 52 inch widescreen would cost now. So it is ridiculous to insist that the car of today HAS to be more expensive than the car of 40 years ago to pretend that disposable income has not dropped.

Yes since one of my cars is from the 70's and is giving no problems and I see many cars from the 70's still on the road. I wouldn't wager a lot of money on Hundais and Kias being still reliable after 150,000 miles but I wouldn't hesitate to take my old Ford cross country with over 250,000 miles on it. I wouldn't buy one of those "cheap" (they are not exactly cheap though) with over 100,000 miles or if it was over 5 years old.

Sam the Sham says that, adjusted for inflation, cars cost the same that they did 40 years ago. You disagree?

Yes I disagree --- since 40 years ago a 2 year loan was about the maximum anyone would get on a car --- it was expected that the average borrower could pay for their car within 2 years --- now it's something like 5 or 6 years and what is real common lately is that in 5 or 6 years, the loan doesn't pay off the car --- after 5 or 6 years, there is on large lump payment or the borrower is encouraged to turn in the car and start buying another --- they never will actually outright own a car. Of course once the car is 5 or 6 years old, it becomes reasonably priced and if American made and maintained will likely last another 15 years.

It means that the average car buyer cannot buy a car within the time the average car buyer in the past could. Also it means you are likely to be making a large monthly payment in 4 to 6 years for a car that isn't worth much --- in the past when you could pay off a car easily in 2 years, you weren't making big payments after it lost it's worth. Cars today are not likely to last longer than cars in the past --- with all the plastic parts, they're likely not to last nearly as long. Plus don't forget the amount of the payment that goes just toward interest on the loan --- that's all money thrown away. Interest on a 2 year loan is less than on a 6 year loan.

If 10,000,000 illegals enter the country and make $4 an hour, what impact does that have on average hourly earnings?

Probably not. I would imagine that any company that knowingly hired illegals would likely not report them on the payroll survey. That would especially be the case if the illegals were paid less than minimum wage, something that I don't believe their jobs are exempted from.

It means that the average car buyer cannot buy a car within the time the average car buyer in the past could.

Cannot. Really? You have any stats to back that up? Or is it just a feeling?

The average buyer probably carries a lot more debt than in the past. Doesn't mean his real income is lower.

I think only few people can pay $20,000 cash for a car --- back 40 years ago you would have found more people who could pay cash for their car --- or pay off the loan in 2 years of less --- it doesn't matter if incomes are comparatively lower or the costs of living are comparatively much higher --- it amounts to the same thing. To me it's crazy to take out a loan on anything that is going to lose it's worth --- a home mortgage at least makes some sense but making payments with interest on something over 6 years that in 6 years is worth practically nothing is absurd.

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