Reducing America's Trade Deficit May Be Impossible

A blog about business and economics.
June 5 2012 11:52 AM

Reducing America's Trade Deficit May Be Impossible

Containers are loaded onto an international freighter at the Tokyo port on May 23, 2012.

Photo by YOSHIKAZU TSUNO/AFP/GettyImages

Dean Baker on what would get the economy moving again:

President Obama and the Democratic leadership have refused to put forward a serious alternative path. While they have been willing to argue that rich people should have to pay some taxes, they have not come to grips with the nature of this downturn, as if hoping that, somehow, the economy will just jump back to its pre-recession level of output through some magical process. There is no magic that will allow the economy to override basic arithmetic. In the short term, only the government can provide the boost necessary to support the economy. Over the longer term, we will need to get the trade deficit down through a more competitive dollar.

I endorse the spirit of this, which is expansionary fiscal and monetary policy. But while I sometimes seem to be alone in this regard, I seriously doubt that anything we do will substantially reduce the trade deficit. The reason is that non-Americans' store of value of choice is U.S. dollars and dollar-denominated financial assets. As long as America is a new exporter of financial assets, we can't be a net exporter of goods and services and the dynamics driving foreign demand for dollar-denominated financial assets are fundamentally out of our control.

For that reason I suspect the main international impact of easier money would be foreigners investing in American real estate. Brazilians picking up Miami condos, Russians with pieds à terres in Manhattan, Chinese businessmen building Malibu Barbie dream houses for their daughters, etc. You can think of it as a competitive dollar boosting American "house exports" but it would register as domestic investment.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.



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