Productivity, the Trade Deficit, and Dark Matter: Part II
I'm going to continue (finally) my previous post. Most commentators implicitly or explicitly assume that that the trade deficit has risen because the U.S. is consuming too much (call this the "Spendthrift America" view of the world).
I find this to be highly unconvincing. The rise in the trade deficit ($700 billion) has come at the same time that U.S. productivity has soared way above expectations (adding an additional $1.2 trillion to output). As a result, the Spendthrift America view of the world requires an absolutely astounding increase in the U.S. propensity to consume over a very short period of time--almost $2 trillion above expectations. This is very unlikely.
In addition, the real reason why the trade deficit is so large has to do with a shortfall in measured exports, rather than an excess of imports. Consider this: In May 1997, the forecasting firm DRI/MCGraw-Hill (now part of Global Insight) forecast that imports of goods and services in 2005 was going to be $1846 billion. The actual number, $1997 billion, was only 8% higher than forecast. By contrast, exports are 30% lower than forecast.
|billions of $|
|actual 2005 numbers||1271||1997|
|2005 trade as forecast in 1997||1828||1846|
So here's the real question. If productivity and output has gone up so much more than expected in the U.S., we'd expect the U.S. to be more competitive on global markets, not less. So why have measured exports fallen so far short of expectations?
There are four possible explanations for the exports shortfall:
1. Slow growth in our trading partners.
2. China has become more productive even faster than we have.
3. Exports are undermeasured (the "dark matter" hypothesis).
4. Productivity and growth in the U.S. have been overmeasured (call this the "Deluded America" hypothesis).
I think that many of the commentators on the trade deficit implicitly believe #4. I will continue this line of argument...perhaps not in my next post, but soon.