Of course, I’m grateful to Yahoo Finance’s Rick Newman for spotlighting my finding that the rising U.S. trade deficit is further hobbling an American economic recovery from the Great Recession that is quite slow enough, thank you. It’s almost unheard of for a journalist or anyone involved in economic policy to acknowledge this point. (And it was especially cool to be featured briefly in the video accompanying the post!) At the same time, much more needs to be said about the trade deficit and growth than Rick’s post suggested. So here goes.
First, Rick presented my findings as an “argument.” Actually, as readers of RealityChek know, as anyone who has taken an Economics 101 course should know, and as I know Rick knows, the growth-killing effects of rising trade deficits are not a matter of opinion – unless you have major problems with the way the U.S. government and the entire economic profession has been calculating changes in the economy’s size for decades. Not that it’s out of bounds to question the accuracy or the entire methodology of the gross domestic product (GDP) statistics. But it’s surely significant that such challenges still represent a distinctly minority viewpoint.
Second, because the methodology is not in any current-policy sense controversial, the specific numbers I provided aren’t, either. As I told Rick in an email, according to the latest data from the Commerce Department, in the fourth quarter of 2015, real GDP annualized was $16.4551 trillion. At the end of the second quarter of 2009, when the recovery began, it was $14.3556 trillion annualized. So real growth has been $2.0995 trillion.
The same data show that the real trade deficit in the fourth quarter of 2015 was $556.8 billion annualized. In the second quarter of 2009, it was $366.3 billion. So it grew by $190.5 billion annualized. That $190.5 billion figure represents the amount of inflation-adjusted growth lost due to the trade deficit’s rebound. Alternatively put, it’s slowed the recovery by a little over nine percent in real terms (190.5 billion as a share of 2.0995 trillion).
Third, looking more closely at the data reveals major implications for the subject that initially piqued Rick’s interest and my response – whether Republican presidential candidate Donald Trump’s trade policy recommendations would hurt or help the U.S. economy on net. Trump has only issued detailed trade policy proposals in one area – U.S.-China trade. But clearly he has been critical of America’s recent trade strategy across the board. Therefore, I mentioned to Rick that the official statistics conveniently enable analysts to isolate that portion of U.S. trade flows that is heavily influenced by trade deals and related measures.
That would be non-oil goods trade – which omits oil (never the subject of trade negotiations and unrelated to other trade policies until the recent decision to start permitting U.S. exports again) and services (where trade deals have achieved only modest liberalization even on paper). Even better, the Census Bureau adjusts these numbers for inflation, so it’s easy to calculate their impact on the real GDP and growth figures that attract the greatest attention.
These data show that the real non-oil goods deficit during the recovery has increased from $263.78 billion annualized in the second quarter of 2009 to $681.74 billion annualized in the fourth quarter of 2015. So it rose by $417.96 billion. As with the overall real trade deficit, that’s the amount of inflation-adjusted growth its expansion has subtracted from the recovery. As a share of recovery-era growth, it comes to 19.91 percent.
So if the real non-oil goods deficit had simply stayed at its mid-2009 level through the end of last year, rather than increase 2.5 times faster than the economy as a whole, real GDP would be nearly $420 billion greater. And as I have written repeatedly, nearly all of this growth would have come in the private sector, and none of it would have required budget deficit-inflating tax cuts or new spending.
Finally, Rick is right to point out that “There are many causes” for recent subpar American growth. In general, he’s just as right to note that it’s not easy to “establish cause-and-effect relationships in a complex economy.” But observing that a problem has many causes is no reason to ignore or belittle any one of them, all else equal. And given how the sluggish pace of recovery affects everything from job-creation to wages to tax receipts to budget balances, you’d think that American leaders and commentators would want to know about and address as many growth killers as they could.
Moreover, although the American economy’s sheer size and complexity should indeed caution everyone against simple-sounding analyses and alleged cures, if you take the GDP data and methodology seriously, you can’t avoid concluding that trade has been a major drag on the current expansion.
So it should be clear that at least slowing the trade deficit’s increase would boost growth – and magnify the manifold benefits of faster recovery. Had it been kept level since the recovery began, the economy would be even stronger. And these points pass the “fact test” – and deserve much more attention from American leaders and journalists – whatever you think of Donald Trump.