OPINION/ANALYSIS:
I almost fell out of my chair when the call came to the office last Thursday. CNBC wanted me to appear on a segment dealing with that mornings government report on the U.S.’s May trade deficit.
“The trade deficit?” I wondered as the producer and I began talking. Why was CNBC interested in that? True, the gap unexpectedly jumped 4.8 percent, to $42.3 billion — the highest level in 18 months. But the previous 17 increases had passed with virtually no media notice.
My astonishment intensified when I found out that the segment was titled, “Fixing the Trade Deficit” — like it was a problem. That’s a far cry from the standard recession-era depiction. For the past two years, the economics and business establishment has been telling us that the trade deficit is a data-point whose increase should be welcomed as a sign of reviving U.S. demand and global economic activity.
And this CNBC title was light years from the bubble-era portrayal of the deficit as a sign of American strength, revealing time and again the worlds enthusiasm for lending to (i.e., investing in) the United States. For America’s longtime pattern of consuming much more than it produced can only be paid for by inflows of foreign credit.
Yes, earlier that day, print journalists had reported dour interpretations of the trade deficit themselves (and undoubtedly attracted CNBC’s attention). As explained by some of the Wall Street economists typically tapped for commentary, the deficit’s rebound was forcing them to dial down their forecasts of U.S. economic performance, and therefore raise the odds of a double-dip recession or deepening economic stagnation.
But why were the deficit’s effects on growth so widely ignored until so recently? Partly because the U.S. government presents the data for economic growth in such a confusing way. Growth’s main measure, gross domestic product, is defined as the nation’s output of goods and services. But the most frequently presented and timeliest GDP data portrays overall growth and its components as measures of spending, not production.
Spending is shown for all the economy’s major sectors — consumers, businesses (a category that strangely includes homebuyers), and government, and toted up, and adjustments are made for spending on business inventories. Then the nation’s trade flows are added in — both economywide exports (which represent foreign spending on U.S.-origin goods and services) and imports (which represent American spending on foreign-origin goods and services).
When exports exceed imports, trade is in surplus, and the net new foreign customers buying all these exports clearly add to overall American growth. But when imports are greater, U.S.-based producers are losing more sales at home than they are gaining abroad, and net effect of trade is negative.
The problem with this spending-focused methodology is that growth’s levels are inferred, not measured directly. One result is misleading statements like “Consumers make up 70 percent of the U.S. economy.” Technically, sure — but that doesnt mean that consumers per se are somehow responsible for 70 percent of U.S. output.
More important, no one should pretend that boosting todays recessed levels of American consumption alone is going to bring back growth. When the United States supplied nearly all of the goods and services it bought, that assumption was reasonable. Large and increasing trade deficits, however, mean that consumption and growth are increasingly unrelated.
Even after they became a non-trivial share of GDP (hitting 3.5 percent as early as the mid-1980s), trade deficits were ignored because for so long the United States was so good at creating other sources of growth. Unfortunately, once the deficits became noteworthy, these growth alternatives became increasingly dubious and debt dependent — especially the tech-stock market bubble of the late 1990s and, of course, the credit-housing bubble of the past decade. It’s as if once the nation’s trade accounts began spinning out of control, generating healthy growth became more difficult — or more neglected by Washington.
All this unhealthy growth, however, masked trade’s drag on GDP. It also led to some observations by trade enthusiasts that today, with serial bubbles now burst, stand exposed as sheer quackery. My favorite — the suggestion that, since GDP kept expanding even despite a veritable explosion of the trade deficit, the deficits were (somehow) fostering growth. The reality — that the economy was growing despite the deficits — was dismissed as sour grapes or know-nothingism.
Ongoing U.S. economic weakness will start dragging America back to economic reality as soon as the nation’s foreign creditors tire of financing its profligacy. Last week’s flurry of downbeat comments may be early signs that Americans’ understanding of their growth-destroying trade deficits is already clearing up — green shoots of trade realism, as America’s professional economic optimists might call them.
*Alan Tonelson is a research fellow at the U.S. Business and Industry Council, a national business organization whose nearly 2,000 members are mainly small- and medium-sized domestic manufacturers. Author of “The Race to the Bottom,” Mr. Tonelson also is a contributor to the council’s website at www.AmericanEconomicAlert.org.
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