Cutting the Trade Deficit to Create Jobs and Fight Poverty

While unemployment hurts all workers, higher rates of unemployment have their largest impact on the most disadvantaged workers, denying millions the opportunity to work, or to work full-time at a decent-paying job. Getting our economy back to full employment is essential, and addressing our trade deficit an issue seemingly far removed from jobs and income can be an important part of this effort. By cutting our trade deficit, we can generate the demand necessary to lower unemployment, boost wages, and significantly reduce poverty.

In our book, Getting Back to Full Employment: A Better Bargain for Working People, Jared Bernstein and I argue that full employment benefits workers in general, but the largest gains go to those at the bottom of the wage ladder. As a rule of thumb, the unemployment rate for African Americans rises by roughly two percentage points for every one percentage point increase in the unemployment rate for whites. In the recession, the unemployment rate for whites increased by 5 percentage points from 4 percent to a peak of 9 percent. By comparison, the unemployment rate for African Americans increased by 9.3 percentage points from a low of 7.6 percent before the downturn to a peak of 16.9 percent in 2010. Hispanics also saw a disproportionate rise in their unemployment rate.

This disparity means that when the unemployment rate falls, these groups and other disadvantaged segments of society will benefit most. And it is not just through lower unemployment rates. We found that the boom of the late 1990s was associated with a 17 percent increase in hours worked by families in the bottom quintile of the income distribution. In a tight labor market, businesses went to great lengths to recruit employees for even low-paying jobs, going so far as arranging chartered busses to bring workers from inner cities to jobs at restaurants and hotels in the suburbs.
    
The economic boom also boosted wages. When the unemployment rate gets low, even workers at the bottom of the wage ladder enjoy bargaining power and are able to share in the benefits from growth. Our analysis shows that a sustained one percentage drop in the unemployment rate is associated with a 9.4 percent increase in the real hourly wage of workers in the bottom quintile of the wage distribution.
        
There should be little doubt that full employment is enormously important to the economic prospects of low-income families. The often-overlooked trade deficit is one of the major obstacles preventing us from getting back to full employment.  

We currently have an annual trade deficit of around $500 billion or 3 percent of GDP. This deficit creates a huge gap in demand, as income generated in the U.S. gets spent in other countries rather than here. It has the same impact on demand in the economy as if people just cut back their consumption by $500 billion or businesses reduced their annual investment by the same amount.

It is not easy to make up this sort of shortfall in demand. In the last decade, the demand generated by the housing bubble filled the gap, but this proved to be an unsustainable path. The government could fill the gap with stimulus spending, but for political reasons this does not seem a likely prospect.

Fortunately there is a relatively simple route to reducing the trade deficit: a lower-valued dollar. This makes domestically produced goods cheaper relative to goods produced in other countries. As a result, we will export more and import less, boosting demand for our products and creating jobs in the process.  

While the country has run trade deficits for more than three decades, they first became very large in the late 1990s when the value of the dollar soared in response to a series of international crises. We need to reverse this course, bringing the dollar down to a level that is more consistent with balanced trade. That is not an impossible task.

By negotiating agreements with other countries, for example easing pressure on China over the enforcement of drug company patents or Microsoft۪s copyrights, we can encourage them to raise the value of their currency, decreasing the value of the dollar.

This approach to fighting the trade deficit has historical precedent. The Reagan administration, for instance, famously negotiated a sharp reduction in the value of the dollar in the mid-1980s that reined in the trade deficit of that decade. The major obstacle to a lower dollar is not opposition from foreign countries but the lack of commitment to such a policy at home.
    
There is a huge amount at stake with a lower trade deficit. If we were able to balance our trade, it would lead to more than 4 million jobs directly. Including the indirect effect would take the job gains to more than 6 million.

Balancing our trade deficit would be sufficient to get us most of the way to full employment. That would mean enormous gains for the workforce as a whole, but especially for those at the bottom of the income ladder. To reduce poverty, we should cut our trade deficit.

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Dean Baker is co-director of the Center for Economic and Policy Research.

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