Since the collapse of the housing bubble in 2007, the unemployment rate has been far above almost everyone’s estimate of full employment. Economists and politicians have suggested a long list of remedies for this persistently high rate, but one factor rarely mentioned is the trade deficit. This is a major omission, because at its 2013 level of $500 billion (3 percent of gross domestic product, or GDP), the trade deficit implies a large amount of demand that is directed outside of the country rather than at home, where it could create employment.
The simple arithmetic implies that increasing exports or reducing imports enough to bring trade into balance would generate 4.2 million jobs directly and another 2.1 million jobs through multiplier effects, for a total increase of 6.3 million jobs. (This math assumes that the number of jobs associated with an additional 3 percentage points of GDP is the same on average as for GDP as a whole.) The 4.2 million jobs directly created would be disproportionately manufacturing jobs, which continue to be a source of relatively high-wage employment for the 70 percent of the workforce that lacks a college degree. This level of job creation would be a huge deal in an economy that is operating at more than 8 million jobs below its trend level of employment. Thus, trade deserves our serious attention.
This analysis has four parts. The first discusses the basics of national income accounting and explains how trade deficits amount to a loss of demand that must be offset from other sources if the economy is to sustain a full-employment level of output. The second part outlines the origins of our large recent trade deficits. The United States has run trade deficits for most of the last four decades, but they became qualitatively larger in the late 1990s, in line with a rising value of the dollar. The third section discusses how lowering the value of the dollar relative to other currencies could make U.S. goods and services more competitive internationally. The fourth section addresses some of the implications of a lower-valued dollar and balanced trade. It has often been claimed that the United States must run a trade deficit because of the dollar’s status as a reserve currency. As will be shown, this claim misunderstands both the nature of reserve currencies and the workings of the international finance system.