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The trade deficit: A 20th century measure in a 21st century economy?

? Rising Real Net Worth per capita |


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March 14, 2006

The trade deficit: A 20th century measure in a 21st century economy?

Michael Mandel

I've never met Brad Setser. But I'm sure he's a nice guy. After all, he keeps writing about me. Last week he did a post entitled Mike Mandel, Ricardo Hausmann and Federico Sturzenegger better be right (January trade data), where he said:

I sure hope that the US is exporting a lot of "intangibles" that don't show up in the trade data, and generating lots more intangible dark matter to offset all the external debt that the US is taking on.

Because the tangible deficit sure seems to be growing.

I guess I'm still not terribly worried. Partly it's because I'm not scared of booms and busts. Yes, the economy overshoots on both the up and downside, as it did during the 1990s, and as it's doing with the housing boom. But the beauty of the U.S. economy--including the regulatory and financial structure--is that it is durable enough to absorb the bumps (I've written this multiple times, most notably in my 2004 book Rational Exuberance).

But more to the point, I'm having a tough time believing an analysis of the economy which focuses so heavily on the trade deficit, which after all is a measure which depends on sharply delineating the geographical borders of the U.S. economy.

I don't see any aspect of the economy which stops at the water's edge. That's the real point of the "dark matter" concept that Brad keeps citing--that the totality of the U.S. interaction with the global economy that are not being picked up by the conventional trade statistics.

Or take another example: The labor force. The trade statistics measure the flow of goods and services, but they say nothing about the flows of human capital across national borders.

Are these flows important to the U.S. economy? Let's just consider the housing market. Between 2000 and 2004, the number of immigrant families who owned their own homes rose by 22% (according to Census data). The number of native families who owned their own homes rose by only 4.5%. All told, immigrants accounted for one-third of the rise in family home ownership between 2000 and 2004.

From there, it's not a big step to say that immigrant demand has helped drive the housing boom, and by extension the rise in consumer spending. That rise in consumer spending, of course, shows up as increased imports and a big trade deficit. But nowhere in the national accounts do we see recorded the human capital being brought to the U.S. by those same immigrants (which I estimated at $50-$200 billion per year in my cover story).

Or let's just look at consumer demand directly. Between 2000 and 2005, personal consumption rose by $1.1 trillion, imports rose by $353 billion, and the NIPA trade deficit increased by 254 billion (all in 2000 dollars).

Interestingly enough, immigrants accounted for roughly one-third of population growth over that period. So if we assume that immigrants consume at the same level as natives, then immigrants accounted for one-third of personal consumption growth, or $370 billion over that stretch. If we assume that immigrants consume at half the level of natives, then immigrants accounted for one-sixth of personal consumption growth, or $185 billion. Even in this low-ball case, immigrant spending accounted for the bulk of the increase in the trade deficit over this period.

But nowhere do the national income accounts show the added human capital--skills and education--that immigrants bring to the U.S., and that will pay off for years in the future.

I've got to turn back to my day job for a bit. More about this tomorrow or Friday. Comments?

11:53 AM


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I'm sympathetic to the need to consider immigration as a contributor to growth, and appreciate the uncounted human capital. But you make some serious flaws here.

You're assigning ALL of consumption growth to just those new Americans ... the domestic babies and the immigrants. That's wrong. Pre-existing Americans almost surely increased their own consumption too, which is an important component of the data (haven't looked that up, but it's a safe bet).

Considering that there were nearly 300 million domestic Americans vs. a few million immigrants over this period, a tiny amount of per capita "native American" growth could easily swamp the consumption growth contributed by immigrant spending. Ceteris Paribus, 300 million citizens increasing their consumption by only 1%, gives the same growth as does the total consumption of 3 million NEW people.

***Even in this low-ball case, immigrant spending accounted for the bulk of the increase in the trade deficit over this period.***

Again, a logical flaw with regard to allocating components of spending (you tend to do that).

You're trying to apply marginal analysis where it doesn't belong. You're incorrectly placing immigrants completely at the margin, and matching ALL of their consumption spending, dollar-for-dollar, to new increased imports.

That's clearly incorrect. The economy AS A WHOLE, INCLUDING non-consumer spending, increased its imports. Once immigrants step ahore, they are just an appropriate fraction of the whole economy.

You might be tempted to say, but a new immigrant's spending causes resources to be re-allocated to serve him, resulting in an equal amount of product needing to be imported. But that's not true; especially considering how most of the economy is service-based.

I personally could handle a huge increase in demand for what I produce, without importing anything at all. So could nearly everyone I know. I fact I've had immigrants buying from me in two different careers, and I certainly never needed to important anthing to handle that incremental demand. That anecdotal fact alone, I'm afraid, disproves your approach.

If you're having trouble with this, consider:

1) Obviously many immigrants have jobs, and are producing for the internal economy. You are, in effect, counting their spending, but not their production.

2) Who realistically accounts for more of the increase in imports this year: one single native-born yuppie who buys a Mercedes and a plasma TV; or a whole neighborhood of poor South Texas Mexican immigrants; or an Indian immigrant engineer who saves half his salary in the bank? (and they do).

You can't point to the Mexicans or the Indians and say they account for an increase in imports, but the Yuppie does not.

Posted by: Kevin at March 15, 2006 03:15 PM


As immigration has grown out of control wages are dropping. Legal and illegal immigrants make less than American workers. As wages decline ,entitlement cost is out of control, due to more Americans qualifying for social programs.Congress is using our tax dollars to give loan guarantees to build sweatshops oversea ,which drives American wages down and promotes illegal immigration. How does this race to the bottom ,factor in your immigration model? Thanks jk

Posted by: johnkonop at March 19, 2006 07:53 PM

Economists Are Destroying America

Economists, politicians, and executives from both parties have promised American families that “free” trade policies like NAFTA, CAFTA, and WTO/CHINA would accomplish three things:

• Increase wages

• Create trade surpluses (for the US)

• Reduce illegal immigration

Well, their trade policies have been in effect for about 15 years. Let’s review the results:

• Declining real wages for 80% of working Americans (while healthcare, education, and childcare costs skyrocket)

• A record-high 46 million Americans who don’t have health insurance (due in part to declining wages and benefits)

• Illegal immigration out of control

• Soaring trade deficits, much with countries that use slave and child labor

• Personal and national debt both out-of-control

• Global environments threatened by lax trade deal enforcement

Economists Keep Advocating Policies That Aren’t Working

Upon seeing incontrovertible evidence of these negative trade agreement results, economists continue with Pollyannish blather. Some say, “Cheer up! GDP is up and the stock market’s doing fine.” Others say, “Be patient. Stay the course. Free trade will raise all ships.”

Even those economists who acknowledge problems with trade agreements offer us only half-measures—adjusting exchange rates, improving safety nets, and providing better job retraining. None of these will close the wage gap in America—and economists know it.

Why Aren’t American Economists Shouting From Street Corners?

America needs trade deals that support American families and businesses in terms of wage, environmental, and intellectual property abuses. Why aren’t economists demanding renegotiation of our trade deals? There are three primary reasons:

• Economists are too beholden to corporations and special interests that provide them with research grants.

• Economists believe—but refuse to admit—that sacrificing the American middle class is necessary and appropriate to generate gains in third world economies.

• Economists refuse to admit they make mistakes.

Economic Ambulance Chasers

Now more than ever, Americans need their economists to speak truth and stand up to their big business clients. Instead, economists sound like lawyers caught chasing ambulances: they claim they’re “doing it for our benefit

Posted by: John Konop at October 29, 2006 11:37 AM

The Aging of Abercrombie & Fitch
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