Denying Trade Deficit Problem Is Almost Like Climate Change Denial

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CEPR co-director Dean Baker explains that Trump’s attention to the link between trade deficit and loss of manufacturing jobs is legitimate, even though many pundits continue to deny it. However, Trump’s solutions probably won’t help

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GREGORY WILPERT: It’s the Real News Network. I’m Gregory Wilpert coming to you from Quito, Ecuador. Early Tuesday morning, President Trump sent out a tweet that said, “We have a massive trade deficit with Germany, plus they pay far less than they should on NATO and the military. Very bad for the U.S. This will change.” This wasn’t the first time that Trump complained about trade surpluses with other countries that have trade surpluses with the U.S. Just as on the previous occasions, major news outlets came to the defense of Germany, such as the New York Times, which headlined, “Blind spots in Trump’s tirade against Germany,” and the NPR headlined, “Trump is worried about the trade deficit with Germany. He needn’t be.”

The economist Dean Baker has compared the media’s denial of the relationship between trade deficits and manufacturing job losses to climate change denial. Joining us now from Washington, D.C. to discuss this denial of the importance of trade deficits is Dean Baker. Dean is the co-director of the Center for Economic and Policy Research, and is the author of Rigged: How Globalization and the Rules of the Modern Economy were Structured to Make the Rich Richer. Thanks for joining us again, Dean.

DEAN BAKER: Thanks for having me on.

GREGORY WILPERT: Let’s start with giving us a brief rundown as to why the relationship between the U.S. trade deficits such as with Germany have led to manufacturing job losses as Trump seems to be claiming. Some economists have pointed out to the productivity gains as being the real reason for manufacturing job losses, but you argue that this is false. Why is that?

DEAN BAKER: This really is just incredibly dishonest. We’ve had productivity gains in manufacturing basically forever. If you look at the history of manufacturing employment in the U.S., you find that it was actually quite stable. If you look from December of 1970 to December of 2000, there’s very little change. Manufacturing employment falls by 200,000 or so over that period.

Now, it falls as a share of total employment. That’s because productivity growth, automation if you like, was going on more rapidly in manufacturing than in other sectors, but it stayed relatively constant. Manufacturing employment stayed relatively constant because total demand for manufactured goods roughly offset the improvements in productivity.

Suddenly, from December of 2000 to December of 2007, this is before the recession, we lose over three million manufacturing jobs, close to 20% of all employed in manufacturing. That was when the trade deficit exploded. To argue otherwise, this is just like, as I say, I’m using global warming denialism quite deliberately, because it is a level of dishonesty equivalent to people saying that humans are not involved in global warming. It simply is nonsensical. The idea that we could have been producing another $1 trillion worth of manufactured goods, that’s roughly what our trade deficit was in those periods, we could have been producing another $1 trillion of manufactured goods and not had to employ more manufacturing workers, that is just absurd.

To have economists, people who should know something about the economy, say this should get people really angry. It is an absurd statement, and it’s really incredible that you have a lot of people no doubt listening to these economists acting like, “Oh, those stupid manufacturing workers. They don’t understand that it just was productivity growth, robots, automation, whatever you want to call it, and they want to blame trade.” They’re right to blame trade. It was trade.

GREGORY WILPERT: Another argument that I saw in some of these articles that were defending the German trade deficits was that it has something to do with the relatively cheap euro. That is, Germany can’t do much about it because the relatively low value of the euro was making German imports cheap, and that actually it’s the European Central Bank that controls that value and not Germany. What do you make of that argument, that in other words Germany is not to be blamed, basically?

DEAN BAKER: First off, I think the idea of blaming countries is a little peculiar. This is largely U.S. policies, and there are different stories with different countries. We have an overvalued dollar against China’s currency, against Korea’s, against many other countries. That’s largely U.S. policy. Not U.S. policy alone, because the other countries are big actors, but to point to China and say they’re doing bad things, no, we went along with them. It’s not a question of blaming other countries.

The story with Germany is more complex, because they are in the euro zone. Unlike China, they don’t have their own currency. They can’t control its value or influence its value against the dollar. They’re in the euro zone. What is true in this case, Germany, whether I use the word blame or not, their policies are partly responsible in the sense that Germany is absolutely obsessed with not having inflation, with running balanced budgets, or in fact they now have budget surpluses. What happens, what that means, is that Germany has a huge trade surplus not just with the United States, but with the rest of the euro zone, but the whole world. What they should be doing is be running larger budget deficits, which would increase their demand for foreign goods, imports from other countries, including the United States, and also would lead to increased demand in their own labor markets, higher wages, higher prices, and make their goods relatively less competitive.

That’s what they should be doing, but it’s not a simple story. Germany can’t unilaterally raise the value of the euro against the dollar, but they certainly could and should, really more for the European countries, the euro zone countries, than the United States, but they should be running a more expansionary fiscal policy, meaning larger budget deficits.

GREGORY WILPERT: I want to turn now to the question as to why there’s this economic climate change denial going on, that is, trade deficit denial going on. That is, why would news outlets and other pundits deny the role of trade deficits in manufacturing job losses? Why would they engage in something that you would call similar to climate change denial?

DEAN BAKER: I think we have a disaster story through much of the Midwest, the manufacturing regions of the Midwest over the last decade. I’m mentioning this plunge in employment. Some places in Ohio, in Michigan, in Pennsylvania, this was absolutely devastating. Obviously, the people lost their jobs. The communities … People are losing jobs in manufacturing that are paying them 20-25 an hour. Their alternative is going to work at the Walmart for 10 bucks an hour, convenience stores, maybe even less. There were no good opportunities there. It really did devastate those regions.

The question is, okay, do we say that was just technology? It’s like the weather. That’s bad news, but who are you going to blame for the weather? Or, was this something that we did? It was something we did. This was conscious policy. The trade deficit didn’t slip up on us. We saw it. At least anyone who was following the debt, I’m blaming the people in Washington, the economists who were influencing policy. I don’t blame the person out in the middle of the country. It was not something that was just happening. This was conscious policy. We ran a large trade deficit with much of the world, and it was easy to see it was an overvalued dollar.

It began under President Clinton, continued under President Bush, so you can be totally bipartisan in this, but the whole issue is one where you have I’ll use the term elites, more educated people, they don’t want to take responsibility. They’re just saying, “We feel bad for those stupid people in the Midwest, but if they’d just gotten a good education and worked hard like we did, then they wouldn’t be in that situation.”

GREGORY WILPERT: Now turning to the question of what could be done, in one article, you reject the idea of imposing import tariffs, which is something that Trump seems to have favored for a while. What then can the U.S. do about its massive trade deficit with the rest of the world, and thereby boost manufacturing?

DEAN BAKER: The key is getting the value of the dollar down. Trump had talked about that, but he totally abandoned it. China’s always put front and center here, and they are the biggest actor. They aren’t by any means the only one. When Trump met with President Xi from China back in April, he said, “We have a great relationship, and he’s going to help us in dealing with North Korea and the missile issues there.” He was asked about the currency, and after railing for his whole campaign about how China’s a world-class currency manipulator and they’re real bad guys, he said, “Why would I raise that issue when we’re such good friends?”

The issue is getting the value of the dollar down. That would help correct our trade deficit. I have to be honest about this. It’s not going to bring back the jobs we lost in Pennsylvania, Michigan, and Ohio. We will get jobs back. Some of them will be there, but those jobs are permanently lost, for the most part. This was devastation that cannot be easily reversed. People’s lives were ruined, and there’s not an easy story to reverse it. I could talk about policies we should be pursuing going forward, but we’re not going to correct the damage that was done.

GREGORY WILPERT: Then in the tweet that I read earlier from Trump, he makes the perhaps unconscious connection between the trade deficit and military expenditures. That is, he has also complained that NATO countries such as Germany do not spend enough on the military. That means, basically, that Germany has more of its tax revenues and GDP to spend on things such as education, healthcare, and welfare.

What do you think? Would this help explain why Germany does better in terms of its economy and its overall manufacturing? In other words, if the U.S. were to spend less on its military, and right now it spends about 3.3% of its GDP or one of the highest percentages of the world, and if it were instead to spend more on education and health, that is from the public sector instead of the private, would this help boost manufacturing and the U.S. economy and employment more generally?

DEAN BAKER: There’s two points I’d make about it. The countries, Germany’s a little over 1.2, I think, 1.2% GDP, compared to our 3.2 or 3.3. Some of the other countries, France I think is around 1.8. Most of the European countries are between one and two, so that does mean they’re less than the U.S.

If you just said, “Okay, suppose we took two percentage points of what we spent on the military,” so two percentage points of GDP, roughly two-thirds of what we’re spending on the military, and instead put it to education, infrastructure, and other purposes. I think that would be a very good thing. Would that totally change the story? I can’t say that.

The other point I’d make on that is, we could do that even without cutting the military. I’m not trying to protect the military, just to be clear. I’m just saying that it would be wrong to say, “Because we’re spending this money on the military, we can’t have good infrastructure, we can’t have good education.” We actually can, which again is not an argument for protecting military spending that doesn’t make sense, but that’s not the proximate cause.

GREGORY WILPERT: Okay. We’re talking to Dean Baker, the co-director of the Center for Economic and Policy Research. Thanks Dean, again, for joining us today.

DEAN BAKER: Thanks a lot for having me on.

GREGORY WILPERT: Thank you for watching the Real News Network.