Who Needs a Balanced Trade Policy?

By Joe Firestone

It’s easy to recognize that after many years of trade deficits accompanying implementation of trade agreements beginning with NAFTA the US needs to change what it’s doing. Many, including Robert Borosage of the Campaign for the American Future (CAF), advocate for balanced trade and they contrast that with the so-called “free trade” policies we have now. The case for balance trade policy is summarized by Borosage this way during his discussion of the policies favored by the New Populism:

Our global trade policies have been defined by and for multinational banks and companies. They have shipped good jobs abroad and driven wages down at home, while racking up unprecedented and unsustainable trade deficits. Those imbalances, as the International Monetary Fund and former Federal Reserve Chair Ben Bernanke have noted, contributed directly to blowing up the global economy.

The new populists demand balanced trade policies. . . .

So, we need “a balanced trade policy” meaning one that reduces trade deficits because it will support lower unemployment by keeping “good jobs” here, drive wages up rather than down, be more sustainable, and won’t contribute to a collapse of the global economy. But, is that the only or the best way to get these outcomes?

I raise that question because there is an important truth of macroeconomics to take account of. That truth is that: “Exports are real costs; and Imports are real benefits.”

This notion is based on the distinction between real wealth measured in accumulated products and services and nominal wealth measured in accumulated financial credits. Exports add to real wealth being sent to other nations; in return for nominal wealth received from them (financial credits). Imports add to real wealth being received from other nations; in return for nominal wealth we send to them.

So, would we rather send fiat money to other nations and add to real wealth in return, or would we rather add to their real wealth to and get their fiat money or our old fiat money back in return? My answer is that other things being equal, we’d prefer the first alternative rather than the second, meaning that trade deficits are better than trade surpluses, at least in the short run.

The problem with this answer is that other things are not equal, in the sense that if the Government does nothing to compensate for their shorter and longer-term effects, then the problems highlighted above do result from continuous “free trade” policy supporting continuous trade deficits. On the other hand, these effects of trade deficits can be avoided without implementing balanced trade as a continuous policy. How?

First, trade deficits cause aggregate demand leakages, which is what causes higher unemployment and lower wages. But, we don’t have to accept that outcome. We can implement a Job Guarantee program, along with other Government spending such as State Revenue Sharing, infrastructure spending, and Social Security payroll tax holidays to replace the demand lost to trade deficits.

Of course, we’d have to pass those measures. But what’s better, from a progressive point of view, doing these things or preventing Americans from buying goods and services (acquiring real wealth) from other nations that they would like to buy?

What about the lost jobs themselves? If they were “good jobs” would the new jobs produced by Government spending and SS payroll tax cuts be “good jobs” too? That depends on how the Government implements its Job Guarantee (JG) program. If the JG pays a living wage and provides Medicare access and good fringe benefits to those in the JG, then private sector people will have to better what the JG offers to get employees, and the wage floor will be raised radically over current levels and that will raise wages all along the line.

So, from the standpoint of adequacy of pay, there will be many more “good jobs” then there are today. The quality of the jobs will also improve if the JG is implemented to allow local non-profits to define jobs that will produce socially valuable outcomes for people. The role of the Federal Government would be the funder of the JG program; but local non-profits, communities, and the JG participants themselves would define the jobs in the program, exerting pressure on the private sector to increase the quality of the jobs offered in that sector.

One way to look at the situation is that trade deficits and the demand leakage they create, also provide an opportunity for the Government to employ people on social entrepreneurial projects producing public good and commons improvements of significant value; filling needs that cannot be filled by the private profit-motivated market. The purpose of the JG jobs provided is to provide a transition for displaced former employees of dying industries.

This opportunity is a good thing provided the Government takes advantage of it, because it provides not only transition jobs for individuals, but also a transition period for the private sector to develop new industries and new jobs based on new technologies while the potential labor force continues working at other jobs having social value.

Of course, the US Government hasn’t been doing that, preferring instead to leave people in an unemployed buffer stock that depresses wages and increases inequality. But the truly progressive remedy for that is to implement the Job Guarantee and other Government deficit spending and middle class tax cut programs, not to pursue a policy of balanced trade.

Second, it’s very popular today to say that x, or y, or z is “unsustainable” without saying what they mean by that term. From my point of view, policy unsustainability means that a policy cannot be followed forever without undermining the capacity to follow that policy sooner or later. The important thing here is to notice that the Government’s policy isn’t to run trade deficits forever. But just to allow trade to flow freely and let the trade deficit float. So, the issue here is whether that policy is sustainable. With exceptions to be noted below, I think it is.

The reason why it is sustainable, is that it is, in the end, self-correcting. Eventually, other nations will tire of selling the real wealth they produce in return for our nominal wealth, the electronic bits of information that eventually end up in their accounts at our Federal Reserve Banks and they will sell them instead to their own consumers. At that time, the Government’s policy of letting the trade balance float will produce smaller trade deficits or even surpluses, if the US Dollar becomes sufficiently unattractive. Until that time however, having trade deficits resulting from a trade policy that allows the trade balance to float is perfectly sustainable with some exceptions I’ll now consider.

Third, Robert Borosage refers to the view of the IMF and Ben Bernanke that continuous trade deficits of the United States contributed to the Great Crash. The chain of causation, according to Bernanke, is that the accumulation of US Dollar credits by Asian nations led to their investing in US and mortgage-based securities, causing a bubble in MBSs which then, in the crash of 2008 spread the US financial crisis around the world contributing a potent feedback loop to the crash. The general idea is that continuing trade deficits would, over time, concentrate the dollar assets of foreign nations in risky securities vulnerable to financial downward spirals.

This mechanism may or may not be a factor whose importance is great enough to render running continuous deficits unsustainable. But, if it is, then the remedy is easy. Pass legislation banning speculation in financial instruments that carry any systemic risk by entities with large dollar holdings. End of story and of this possible factor in promoting unsustainability.

Fourth, the remaining problem with letting trade happen and allowing the trade balance to float is that there may be industries or areas of endeavor that are vital to the defense of the United States, and/or its further economic development. Free trade in these areas cannot be allowed, since it risks destroying vital US skills and capabilities or potential for innovations. We need a US industrial policy to identify these areas, to decide how to subsidize them, and to ensure that they are maintained or developed. Once we have that, along with the other policies mentioned earlier, a policy of letting the trade balance float, even if it results in continuous trade deficits will be sustainable without causing unemployment, reduced wages, financial crashes, or making the United States dangerously dependent on other nations for political and economic sustainability.

Finally, let’s review the bidding again. The new populists and writers like Borosage think that progressive trade policy is balanced trade. In contrast, I think that a policy of unrestricted trade, taking advantage of the willingness of other nations to send their real wealth to the US is better for us and also seems be what our trading partners want right now.

However, to make that work for the US, we need full employment policies including a Job Guarantee program at a living wage with full fringe benefits, as well as other policies designed to compensate for demand leakages from trade deficits and private sector savings. In addition, we need to prevent investment of dollar savings in risky financial instruments such as Mortgage-Backed Securities (MBSs) and derivatives, and lastly, we need an industrial policy.

So, which is more “progressive” and also “populist”: balanced trade policy, or unrestricted trade, modified by full employment at a living wage, strict regulation of investments in financial instruments, and industrial, policies? I think it’s the second alternative and that progressives and populists ought to forget balanced trade and embrace it.

43 responses to “Who Needs a Balanced Trade Policy?

  1. Excellent post.

    We do need to prevent our own banks from risky financial ventures, but I see no need for a world-wide ban. If a non-bank, such as Lehman, or a private citizen, wants to speculate with his own money, why stop him? As long as his activities are isolated, they can’t bring down the global financial system, only those who funded the risky investments, and knew what they were getting into. If Goldman Sachs wants to defraud their customers, then prosecute them for fraud.

    Professor Wray had a nice list of what banks should and should not be allowed to do. Mosler was more concise, saying that we should tell banks only what they can do, because whatever we tell them they can’t do, they will find a way around the prohibition. And that what they should be told is that they can take insured deposits and make loans, hold the loans on their own books and service them. Nothing else.

    “Industrial policy” sounds like a protectionist scheme. If we need certain skills and capabilities for our national defense, then government need merely purchase them from US companies. We don’t need to ban the import of steel, for fear of killing the entire domestic steel industry. Just buy some locally, and the local industry will survive.

    • Joe Firestone

      Agree on the banks. On “industrial policy” it depends on what one means by the term. I didn’t have in mind banning imports, just subsidizing certain industries, and otherwise favoring them the way Japan and China do. I do’t worry much about labels like “protectionism.” That’s just a slogan used by the neoliberals. The test is whether the country benefits by giving certain businesses an unfair advantage over foreign businesses. If it does, then do it!

  2. While I understand the advocacy of the JG/ELR relative to trade, one of the big missing pieces here is that the effects of using the US Dollar as the defacto world trade reserve currency has massively contributed to the “trade” imbalances. In parceling out the effects of the occupation of the capacities of sovereign fiat currencies, it probably contributes only partially to domestic unemployment problems. In the context of international trade the 1944 Bretton Woods Accord was a multi-level gambit of rentier economics. Quantitative and Qualitative Easing (QE#x) under the supposition of the “dis-comfort” of the ongoing domestic and international economic collapse is little more than the strategic occupation of a sovereign fiat currency for the privatized extraction of wealth on a global basis. This has been politically facilitated as well by the neo-liberal acceleration of the extractive race to the bottom. The rising of regional foreign reserve processes may change this imbalance to a degree. Since the JG/ELR is applied on a counter cyclical basis, addressing trade imbalance issues and the related international trade imbalances will only partly address the foreign trade imbalances. Ending the use of the US Dollar in favor of a Bancor model remains the preferable process to the neo-colonialism of the 1944/1971/1973 . It is hard to not believe that Harry D. White and those he represented didn’t already know that they were essentially positioning the US/Western bankster institutions to use the US Dollar to extract wealth from the rest of the world simply based upon the politically captured nature of the US Dollar. Sure, in a transition process the excess US Dollars being held as foreign reserves can be absorbed by Treasury bonds and other reserve instruments. It is also important in the overall scheme that nominal “developing” economies need to keep more of the wealth they generate at home. The Bretton Woods piece of imperial/international fiscal violence also needs to be addressed.

  3. I agree with your analysis, Joe. I think there were a lot more proximate causes of the GFC than Chinese investing in MBS s. After all, it was our rating agencies that gave these securities AAA ratings and our banks that offered and warranted them. Many of the foreign owned assets are US Treasuries anyway, which probably are AAA, unless Congress has its way, in which case all bets are off.

    • Joe Firestone

      Yes, and Bernanke has a way of avoiding discussion of some of the most important proximate causes. See no evil, hear no evil, speak no evil, anyone?

  4. Alex Seferian

    Joe, I am an avid reader of your always-excellent posts, but I have always found somewhat misleading the notion that “Exports are real costs, Imports are real benefits”… a concept I first picked up in one of W. Mosler’s books.

    We all know that international trade is most often a two-way street involving parties voluntarily agreeing to a deal. Exports are a real cost only considering the first step of what ultimately is very likely to be a 2-step process.

    The first step is, we agree, when an exporter exchanges a “real” good or service for a “nominal” asset, i.e., money. However, and as you point out, that is only the short run. In the long run, the expectation is that the importing country will sell a real good or service back (to the same country, or to another… it makes no difference in terms of the point I am making); this is the second step of the process.

    Fact is that if the first trade is never reversed, then the exporter will have given away something for nothing… an outcome that, as a point of logic, is unlikely to exist forever… In the long run we are all dead, but our children will hopefully not be… A point I come back to later.

    The above argument assumes two things: a) that we are dealing with rational and informed parties, and b) that all other variables are kept constant.

    I hear when you write that all other things need not necessarily be equal, but I find that it is helpful to assume a constant state in relation to other variables when really trying to assess the merits of a single statement (in this case “Exports are a real cost…”). If one brings other variables into play, the analysis becomes very difficult.

    With that framework in mind, take the example of China. R. Wray has written about this country eventually changing its savings’ desires. When that begins to happen, the country will start consuming more, and as of then, the US will have to begin consuming less, if inflation is to be kept in check. Increased taxes may be needed. This is not a question of “if” it will happen, but “when”… again all other things equal.

    Should a country worry about these sorts of considerations? Yes and no… Free trade has a great deal of merits, but if a trade deficit is mostly made up of consumption goods, and is “artificially” fueled for a longer period of time then would otherwise be the case, thanks to a budget deficit, then the end result may be great for us, but maybe not so great for our children; i.e., the often-referenced “future generations” may indeed be the ones bearing the brunt when the Chinese change their savings desires… and change them they will.

    The above also makes me think that short-term inflation cannot be singled out as the sole metric to gauge when determining the adequacy of a policy (as I understand MMT posits). The Chinese could be net exporting for decades, with no consequences during the period in terms of US inflation.

    • Hi Alex, What will the Chinese do when they change their savings desires? Start to consume more of their output? Raise our prices? If so, won’t this create an opening for domestic businesses here to exploit? Aren’t we capable of making things again if China is no longer interested in American demand? I think we are. I also think that the adjustment of trade over a period of time to a more equitable balance, won’t create any sudden disruptions for us, because if it did, that would hurt those nations holding dollars who want to withdraw from their dollar holdings. That is if they want to withdraw, they have to do i gradually or hurt themselves. So, they will and that will give our children and grandchildren time to adapt. If we solve the employment problems from trade, I think we’ll have, if not a free lunch, at least a very low cost one.

  5. Exports are real costs; and Imports are real benefits

    Here is a question I have always had about this slogan Joe. Consider a domestic company selling goods inside the US. Would we say that when that company sells some of its inventory for money it is experiencing some kind of net loss, because it is parting with real goods, and only getting some crappy nominal wealth in return in the form of fiat currency?

    Of course not. Money has value. Its value is instrumental – consisting in its exchange value only – rather than the intrinsic value of consumption goods or the direct productive value of capital goods. But it has value nonetheless, and it is perfectly rational for us to trade away goods and services for money if the price is right. Nobody would say that it is foolish for a business to part with inventory in exchange for mere money. Businesses exist to acquire real resources, turn them into products, trade those products for money, and keep the cycle going by building their capital wealth over time.

    Why are these considerations any different when there happens to be a national border lying between the two parties to the exchange? When we are looking at the balance of trade between two countries, we are not looking at a relationship between one government and another government. We are looking at a relationship between the consumers and firms in one country and the consumers and firms in another country. Since the entities that are doing the trading are not (for the most part) governments, they don’t have the option of acquiring money just by issuing it; they have to exchange something for that. So the fact that this money is “fiat” money produced by either the government of the country in which they happen to reside or the government of some other country is neither here nor there.

    I’m not saying we should run a surplus, or seek balanced trade. But I’m also not inclined to think deficits are better. Trade is trade, and it is valuable whenever the terms of exchange are good for the folks doing the trading. From the point of view of national policy, the key thing is to build national wealth. If there are a lot of dollars located abroad, and our people can get some of them by producing stuff and selling it for the dollars, that is just as rational as producing stuff and selling it for dollars that happen to be located in Poughkeepsie, no?

    And I don’t think it will do to say, “Well we don’t need our domestic companies to produce stuff and export it in exchange for dollars because we always have the option of just getting those dollars for free from our government without giving up anything.” The government has to maintain a monetary policy that preserves the value of dollar wealth by restraining the number of dollars that are emitted. Given that constraint, trading goods and services for monetary capital isn’t something that should be disparaged or seen as a loss of “real” wealth. There is nothing unreal or illusory about the wealth represented by money in a monetary economy.

    • I also think it is somewhat of a misleading slogan. Mosler has also written that both participants in that transaction are satisfied since they both received something they wanted. It is worth asking what it is that foreigners do with these extra dollars that they are so eager to obtain. The capital account tells us what it is they want. They buy US financial assets like MBS, Treasuries, etc. Clearly these items have value. That value can vary but so can the value of a Caterpillar tractor.

      There must be some reason foreigners want US financial assets. I’d guess it has to do with insufficiently secure financial asset markets in their home countries. As long as the US domestic financial industry has better financial products to sell than their foreign competitors, the US current account will sit in deficit. It isn’t even just a US issue, the City of London is also extremely successful at selling its financial products, enhancing a capital account surplus. That fact also shows up in the UK’s current account deficit.

    • Joe Firestone

      I didn’t say that money had no value at the micro level Dan. Nor did I imply that. Nor did I say that money doesn’t have instrumental value. Of course it has all these things. But none of that belies the statement that Exports are real costs; and imports are real benefits, where the real refers to the well-known distinction between real and other kinds of capital.

      Also, I didn’t say that Governments ought to run deficits, I said that they should let the trade balance float. To me that means that trade deficits are neither bad nor good a long as one is following the policy of letting the trade deficit float.

      Finally, there are benefits and costs to having trade deficits and to having trade surpluses. But when governments manipulate conditions to attain and safeguard either one, then I think the inter-temporal costs and benefits get distributed in particular ways that disadvantage people domestically. In those nations that are manipulating conditions to run surpluses private sector jobs are created that otherwise would not be there. But in countries following an active policy of running deficits industries are destroyed and jobs are lost. So, I think it’s better for governments not to aim for trade surpluses or deficits, but just to let the trade balance float. I think that is the MMT position, and that if it sometimes seems that MMT is saying that Governments should run deficits, then it is only because MMT writers are trying to counter the conventional wisdom that also unversally, negatively vales trade deficits when they occur.

      • Joe, you said:

        So, would we rather send fiat money to other nations and add to real wealth in return, or would we rather add to their real wealth to and get their fiat money or our old fiat money back in return? My answer is that other things being equal, we’d prefer the first alternative rather than the second, meaning that trade deficits are better than trade surpluses, at least in the short run.

        and that’s the part I’m pushing back on.

        When a US firm sells goods abroad for dollars, it relinquishes some of its inventory (that’s a cost) and in return it gets some dollars (that’s a benefit). When US firms or US consumers spend dollars to buy foreign goods, they relinquishes some dollars (that’s a cost) and in return get some goods (that’s a benefit). In both cases it is usually the case that the transaction is beneficial to both sides.

        It doesn’t matter whether the currency units exchanged in the transaction are fiat dollars manufactured by the US government or fiat Euros manufactured by a European government. Since US consumers and US firms are not themselves the branches of any government, the way they acquire dollars, euros or any other kind of currency is by exchanging goods and services for those currencies.

        I agree with you that we don’t have to worry about making these two types of trade – dollars for goods v. goods for dollars – come into “balance”. But I want to resist the suggestion that somehow the dollars for goods exchange is ceteris paribus better for the US private sector than the goods for dollars exchange.

        • Dan, I never said that the dollars for goods exchange was better for everyone in the private sector.The dollars for goods exchange is ceteris paribus better for the US private sector in the aggregate, even if it’s not better for those businesses that gain dollars by exporting goods. I think your reply is at the micro level, while my argument is at the aggregate level.

  6. Money only has value when you spend it. If the people from the other country who sell stuff to us keep the fiat dollars forever then we got the stuff and they have nothing and no “trade” has occurred. On the other hand if they buy stuff from us then we get the dollars back, they have some of our stuff and a trade has occurred; we have their stuff and they have our stuff. Then we still have the worthless fiat dollars that can be utilized to enable another trade.

  7. Viorel Teodorescu

    I suppose it depends from what point of view are we making the “exports are a real cost…” statement. For a government, it is true, as you see your real goods disappearing out of the country, whereas imports are good because you pay for them for currency hot off the presses, which does not cost you much. Probably even this will not hold forever, because if you just import forever, eventually the other countries will stop selling to you,

    From a private company point of view, exports are good, as are any sales, as Dan Kervick so insightfully pointed out above. So we have to be careful to state on whose behalf we are making the statements.

  8. Frank Lansdorp

    Great response Mr. Kervick!
    I have been annoyed by the argument “trade deficits are real benefits”.
    Of course, it is useful at some point to point the fact out: imports are “real benefits”.
    Yet, the net exporters are building up financial claims, obligations, they may expect to be honoured in a “real” future. Any implicit thought, assumption or argument about future devaluation of such obligations (IOU’s) is frauding your trading partner.
    Of course with some Machiavellistic thinking things get complicated. Real goods and services are in your possession now, whereas the trading partner only has your IOU. Your partner knows and accepts this. There is leeway. The more criminal/sociopathic the actors, the more there is. There may be war. A freely floating exchange rate should rationally balance all animal spirits.
    I don’t know. This simple line: “Exports are real costs; and Imports are real benefits.” annoys me by now.

    The JG as a macro-economic buffer stock, and a relieve for large deprived segments of the population, is a very sympathetic and serious idea.
    The coupling of a JG with trade deficits, accumulated debt, specific hegomonic position of US, including its currency, etc. confuses me.
    But thanks mr. Firestone. You made me think some more and I have enjoyed your work for multiple years.
    Honoured NEP “bloggers”: thanks to you all!

    • Frank, Please keep in mind that I advance the maxim with a ceteris paribus condition. With that condition, I don’t see what it should bother you. In any case, advancing the proposition is meant as a corrective to the simplistic view that trade deficits are always something bad. That is just not true, and the idea that trade deficits are always bad and budget deficits are too, is just ruinous for economic policy. That’s the ball we have to keep or eye on.

  9. Good clear post and comments.

    Joe:Second, it’s very popular today to say that x, or y, or z is “unsustainable” without saying what they mean by that term. If one wants to decipher these popular statements into ones that make sense, it is clear that the meaning of “unsustainable” in them is “sustainable” and vice versa. Or maybe they just mean “surplus” when they say “deficit”, “own”/”owe”, “credit”/”debt” , “plus” / “minus”. (& Up when they say down?) 🙂

    Alex Seferian: When that begins to happen, the country will start consuming more, and as of then, the US will have to begin consuming less, if inflation is to be kept in check. Increased taxes may be needed. This is not a question of “if” it will happen, but “when”… again all other things equal. This grossly exaggerates the “problem” of China reducing its savings desires. It is not a zero sum game. Wray, Mosler, Lerner etc have covered such arguments again and again. If the USA ran a full employment / JG economy – with its high “twin deficits” – then this misses the buildup of US wealth, productivity, advancement, infrastructure during the China-is-saving period (as compared to a USA following dysfunctional finance then). What would happen when China starts to dissave, starts to buy American is that US government spending would shrink, the JG would shrink, exporters would boom, while imports would decline – in other words the scenario, the problem that so many nations right now want to have! No matter how you slice it, there is never a good argument for the USA using dysfunctional finance to create unemployment. Which makes perfect sense, because the idea that the less work you do, the better off you will be – the better off your children will be! – is perfectly insane. The ONLY place that human beings indulge in such magical “thinking” is when speaking of national economies.

    Dan: Since the entities that are doing the trading are not (for the most part) governments, they don’t have the option of acquiring money just by issuing it; they have to exchange something for that. Not entirely, not if they are bank(st)ers. Then the question down the road is whether the government will refuse to make up these gamblers’ speculative losses – Iceland , or betray the nation it governs – Ireland.

    “Well we don’t need our domestic companies to produce stuff and export it in exchange for dollars because we always have the option of just getting those dollars for free from our government without giving up anything.” One should not usually be able to “get those dollars for free from our government without giving up anything.” The government should levy the taxation ( in real terms, on its people ) of the job guarantee. The JG should be the bedrock policy that “maintain[s] a monetary policy that preserves the value of dollar wealth by restraining the number of dollars that are emitted.” But of course the point is well taken. The government particularly has the responsibility to maintain productive capacity in vital sectors, e.g. food.

    There is nothing unreal or illusory about the wealth represented by money in a monetary economy.Absolutely right. That’s why I sometimes use scare quotes for “real”. In many senses credit, debt, money are “realer” than “real” wealth. If they weren’t, they would never have been used. They are nothing but social relationships, but so what? – they are damn real ones.

  10. financial matters

    Great post to try and balance domestic consumption with trade. I think it’s important for countries to develop their own industries for domestic consumption as a priority which means lots of labor participation and decent wages. With this as a starting point I think trade can happen in a more balanced way.

  11. Re: a few posts on the “real costs” terminology.

    “Real” in this context is economics jargon. It doesn’t mean “true”, as if the cost of imports is “false” or illusory. Real is the opposite of financial.

    Imports are financial costs, exports are financial benefits.

    The mercantilist policy of trying to run a trade surplus is aimed at accumulating financial assets. It’s the same thing the merchant does, buying raw materials for money, and selling finished goods for more money. That’s why they call it “mercantilist”.

    Mosler’s latest video post, http://moslereconomics.com/2014/01/17/chiaciano-presentation/ has a section about this. Mosler’s focus is on the real terms of trade.

    Let’s say we sell cars to China ($25,000 each), and they sell us ipads ($500 each). If trade is to be balanced, we’d have to give them 20 cars for 1000 ipads. If we give them only 10 cars to get 1000 ipads, that’s a better deal for us than if we trade 20 cars for 1000 ipads. The real terms of trade is not how many dollars change hands, but how many cars for how many ipads. If we send only 10 cars, we’ll have a “trade deficit”, and the Chinese will have our dollars. Who “wins”, if we give them only 10 cars instead of 20?

    And that’s all it means. It’s not a judgmental thing. Trade imbalances are not good or bad, they are the result of private sector decisions and, sometimes, government policies. MMT’s message is for policy-makers to pay as much attention to the trade deficit as to the budget deficit: none. It is not a policy goal or a measure of success or failure. (It is a bit of information that can help analysts follow what is going on.) Pay attention to unemployment and inflation, and let the deficits be what they will.

  12. Joe, you add the cet. par. qualifier but in my view don’t explore it far enough by including the range of negative externalities, of which domestic UE is only one. The objective is trade that fair and sustainable, rather than exporting negative externalities like pollution and worker exploitation and importing embedded labor at standards that undermine domestic workers. Then there is the sustainability issue wrt to the global environment and ecology. There are a whole range of issues that make “exports are cost and imports a benefit in real terms” even with the qualifier “at full employment.” For one thing, neoliberalism is simply the morphing of classical economic liberalism that involved imperialism and colonialism into neo-imperialism and neocolonialism (Chomsky, Hudson). Then there is the myth of free trade. See Ha Joon Chang, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism (2008). For progressives, these matters count morally as well as economically.

  13. This was for me a very thought provoking exchange. It has caused me to reconsider my suspicion that deficit spending by the US government was a cause of poverty in less developed countries. Reconsider but not reject the idea.
    Some years ago I saw this report showing how some people in Kenya now had good jobs because they worked on Farms that were growing roses and each day fresh roses would be cut and flown on aircraft back to the Netherlands to be sold. I thought damned it is a pity that this farmland is being used to grow the nice to have but not essential to have flowers for people a great distance away when only a short distance away there are surely people who are in dire need of tomatos. Of course those people a short distance away in dire need of tomatos will have nothing to trade to get the tomatos.
    Why was the teak furniture that gets used perhaps twice a year that sits on our redwood deck offered to us for sale rather than offered for sale in Brasil where the wood grew or in China where it was manufactured?
    Why has this state of affairs exsisted for decades? Something that this exhange has caused me to consider is that the answer may be simpler than whether imports or exports are good or bad. The answer might be as simple as economically and politically powerful people in third world countries behave just like economically and politicaly powerful people in first world coutries and make decisions that are in their short term best economic intrests and everyone else be damned.
    And part of the story might be and when a political force managed to arise in a country that might actually try to bring some sense to the country the political leadership of this force (or movement) would die… about 4 dozen times in a row.
    Of course I have not backed up my asserstions with footnotes or examples. I need to go buy some bananas.

    (When I was young it would have seemed self evident that the people of Brazil and China did not have any interest in owning teak furniture so they sent thier” garbage” to us to purchase so that they could purchase those things that they highly valued. Then when I was nine I learned about Gross National Product at the library and I learned that We had a lot more things than They did. They lived in thatch huts with dirt floors just like we lived hundreds of years ago. Then at age 15 or so I learned about purchasing power parity and decided that the disparity in wealth between US and them was perhaps not quite as great as I had been imagining. Then I traveled to Spain and Portugal back in 1981 and saw that even PPP could not really discribe the living standards of other countries because at that time Spain and Portugal had per capita GNP that woud have seemed to have caused mass starvation in the USA but they lived lives that were not at all uncomfortable. The result of these experiences is that I have a suspicion that the attempts of economists to measure things economic are not very meaningful. Which might be a relevant factor in discussing international trade.)

    • Interesting thoughts. You might also consider how a “third world” area like North America in 1500 becomes the richest (by economic measure) in the world, or how a country that once dominated its known world (several examples, pick one) becomes average, powerless, or even poor. Natural resources have something to do with it, but there are ingenious people everywhere. What influence do political and cultural institutions have?

  14. Jamie Alexander

    Perhaps I am a naive progressive out of my depth here. I can certainly see the potential for mitigating a long term trade imbalance with a jobs guarantee and I do think Joe makes a good case for not establishing “balanced trade” as a necessary bit of progressive dogma. I have made similar arguments discussing such matters with my conservative father who often rails about the “national debt” and the “threat of China”. The “exports are real costs; Imports are real benefits” argument seems invaluable against some tenants of conservative ideology.

    But I question in what sense, “it is better for us”.

    “I think that a policy of unrestricted trade, taking advantage of the willingness of other nations to send their real wealth to the US is better for us and also seems be what our trading partners want right now.”

    First of all, who is us? Should I not align my sympathies more with the poor and working class of other nations than with those nations’ governments and oligarchies?

    Dan Kervick:
    “When we are looking at the balance of trade between two countries, we are not looking at a relationship between one government and another government. We are looking at a relationship between the consumers and firms in one country and the consumers and firms in another country.”

    I was greatly influenced by reading Food First at a young age. I have trouble seeing how it is in my best interest to encourage the transfer of wealth from third world countries to our “developed” one. I do recognize the truth of Mr. Kervick’s statement. But my understanding of how the world works is that governments (through policy) and owning classes (Mr. Kervick’s “firms” above) seek to export their nations’ wealth in order to derive personal profit from the transaction. That wealth is often stolen from the citizens or robbed from indigenous peoples. If a nation turns the bulk of its farmland to producing cash crops for export when it has a large population of starving or near starving people that could be fed by that farmland under different policies, or if the natural capital of a country is sold off (out from under the citizens) by the owning classes to make a buck for their own benefit, how does encouraging (or even just accepting) such an export economy benefit me in the long run? How does accepting the unjust economic relations of foreign nations when it is to my personal advantage, help create the world I want to live in?

    • Or what right have we to demand a US-style “living wage” that is orders of magnitude higher than what workers receive elsewhere for similar productivity? Is global free trade a “race to the bottom” or is it a race to equality?

      • The really important trade is the trade here among ourselves, as it is with other nations. To understand the issue you need to go to one of these “low wage” exporting countries and meet the people and learn the system under which they live and work. I have been to many but perhaps the Philippines, 7000+ islands and appx 100 million souls, is the best example. US firms there exploit those people, paying very low wages in an environment where the local money is very scarce. The people are hired typically under contract for 6 months to avoid Philippine labor laws to provide employment benefits. These people are smart, they speak English very well and most of them thirst for education. What they need is a government that builds their internal trade, developing an infrastructure to build homes, schools and businesses to support a more equitable life style. US trade is not helping them and “works” only because of the willingness of the Philippine government to tolerate it and benefit from it at the expense of their citizens. The true horror is that the clamping down on the money supply in circulation here in the USA is driving us to become the same kind of low wage, low benefits employment society. It is not a race to the bottom but a push to the bottom by the few on top who see benefits for themselves in an economy where very little money circulates.

    • By “us” I meant the 99% here. Why shouldn’t I be concerned with the poor in other nations? I am. But I’m more concerned with the poor in the US because they’re citizens of the United States along with myself and I view us as parties to a social contract, at least metaphorically. People in other nations have their own social contracts, and their own primary responsibility to their countrymen. I don’t think I have a responsibility to prioritize their well-being more highly than the well-being of those in difficulty here. So, for me it’s a question of priorities. Let’s have a strong safety net with a Job Guarantee for everyone here first and then we can turn our attention to policies that will help our neighbors.

      • Obviously “we” need to stop imposing the Washington Consensus on other countries and negociating FTAs that make it harder for weaker countries to enact policies that are in their own interests. But I think it’s worth pointing out that the JG and responsible, democratic policies in First World countries would also set a radically different example than what “we” are currently doing.

  15. If trade were truly free, that is individuals in one country freely exchanging goods and services with individuals in other countries, I doubt trade would ever become unbalanced.
    In neo liberal land(the world we now live in), we have global markets of every type including labor which are free for exploitation most favorably by players large enough to operate at an International level.

    These transnationals which do have influence in trade policy development, do not make value judgments based on the real cost to a sovereign nation of exporting it’s resources, nor do they bear the real environmental or human costs their activities generate. Their only goal is to maximize profits to their International shareholders from the exploitation of those markets.

    Balancing the real costs doesn’t seem to be something that we can easily ignore without creating real tensions down the road.

    • Again, we don’t actively need to try to balance the real costs when the power to do so is in the hands of the Chinese, Japanese, and oil-producing nations right now.

    • John, I will give you a personal example that shows how the system is rigged. I became acquainted with some really smart, hard working people in the Philippines who had good business ideas but no capital with which to build out their ideas. I wanted to invest in their ideas not to make money but to help them and to help them without just giving money to them. I checked into the details involved and found that the Philippine government welcomes foreign investments in amounts greater that 1 million but a foreigner cannot invest/help people there who need 10 or 20k$ to get a thriving business started and become self sufficient with a descent life style. They do not want people helping people with investments that allow upward mobility of their citizens.

  16. Why do trade surpluses add to GDP and trade deficits subtract?

    • Y = C + I + G + (X-M)

      Y (GDP) is production. It’s hard to measure production, but it’s easier to measure spending (C and G). Everything bought was produced, after all. Plus things produced but not immediately consumed (I), and that’s all of production.

      But some things bought were not produced here: those are imports. Imports are included in our domestic spending (C), so to derive domestic production you have to subtract them out. And some things produced and sold were not sold here, so not counted in C: exports. So, in addition to domestic spending you have to add foreigners’ spending to buy our production.

      There’s also an adjustment for time in the I part, where some of what was invested in previous periods was consumed in this one. In business, that’s depreciation, and I is actually net investment, after depreciation has been subtracted.

      “trade surpluses add to GDP and trade deficits subtract”

      Mathematically, when you calculate GDP from spending, you do add exports and subtract imports, but the logic of it stated that way is misleading. GDP is what it is, stuff we produced. Producing stuff for export does not cause more GDP than producing the same stuff for domestic consumption. It’s just the math, because we measure spending rather than measuring production directly.

  17. Because of the way these terms are defined. I’m not being sarcastic. The conclusion follows from the definitions of the terms.

  18. Agreed fully.

    Just to play some Devil’s Advocate though, and being a realist about politics, what if a JG is simply just not possible?
    A lot of people, on both left and right, don’t like the trade deficits though. So let’s say a trade policy change is possible at some point.

    Wouldn’t a balanced trade policy (more or less, I know it can’t be maintained at literally pure balance all the time) encourage private saving? I haven’t thought about the details yet, just noting the 3 sectors balance…a balanced cap account would bring the private savings/gov deficit relationship into more balance? From 52 to the 80s this seemed to be the case. Savings seemed to be more moderate, while from the 80s on the swings are much more volatile. I know the 3 are related in a complex way and can’t be looked at in isolation, but it seems before the 80s our consumption was largely done here inside the US, while liberalizing just turned us into consumption first, leading to the role of finance perhaps? Our trade deficits seemed to help fuel the private sector spending orgy of the 90s, filling the void.

    Seems to me both Balanced Trade and JG want the same goals: keeping jobs here, stability, strengthening our country. Just a JG says let the cards fall as they do and it’ll be there to stabilize while a BT policy would encourage a bigger private sector and domestic consumption, with savings/gov deficits being more moderate. Guess this policy could also be more inflationary, and could trigger some type of trade war. Opinions?
    Regardless, I agree a free trade policy can’t be left totally hands off, some type of domestic investment is needed to go with it.

    • Joe Firestone

      Neither a trade surplus nor a JG are impossible. They are both policy choices. That said, a trade surplus would add to GDP and probably higher employment here. However, it would also mean that we are sending more real wealth overseas than we are getting from imports. Imports are real benefits; exports are real costs. So, the question is really would we rather have a gain in real benefits AND full employment, which would be the consequence of a trade deficit and a JG, higher real costs AND higher, but not necessarily FULL employment, which is what we would get from a trade surplus alone?

      • Thank you Joe.
        Is this to say a balanced trade policy, (I don’t want a Germany/Japan/China type forced export export export model) would be more inflationary?

        Couldn’t a JG still be coupled with such a trade policy? Workers could be used still to do things like “green” retro fitting buildings, environmental cleanup and infrastructure rebuilding, all of which may be even more essential with a robust private sector. The same stabilizing factors of a JG would still be present, or am I incorrect and a JG and a not free trade policy can’t really be coupled together?
        I just was curious impacts on the 3 sector balance with a more balanced trade policy. I understand when left to its own, trade balance levels simply “are”

        • golfer1john

          “[JG] Workers could be used still to do things like “green” retro fitting buildings, environmental cleanup and infrastructure rebuilding”

          If those are the agreed public policy goals, they should be done by permanent public employees (or contractors), not JG workers. You don’t want to leave the dump half cleaned up because the economy improved and your JG workers got hired away by the private sector.

          If governments were not involved, then subsidies to exporters might result in a lower trade deficit, but in today’s world I think our trade deficit is mainly determined by foreign governments’ desires to increase their holdings of dollar assets, whether as reserves or as a means of managing the exchange rate, and thus their own exports and employment levels. Tariffs or quotas on imports would seem to help, except that it would provoke retaliation, which might more than offset the effect. In a “free trade” sort of world, I don’t think it’s possible to manage it very much more than is already being done. For a small country, it’s probably different. Nobody cares as much what they do.

          JG is independent of trade policy. There’s no reason you can’t have either one, or both together, or neither.

    • golfer1john

      “BT policy would encourage a bigger private sector”

      I don’t think so. At least not bigger than the JG policy, perhaps bigger than it is today.

      The size of the private sector is determined by the number of people employed. Full employment (achievable without inflation only by JG) yields the biggest private sector. Even if there were a trade surplus (which means net saving by the two domestic sectors), there would still be unemployment unless there was a JG.