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?

Before it's here, it's on the Bloomberg Terminal.