In normal times, the counterpart of a trade deficit is capital inflows, which reduce interest rates, and there’s no reason to believe that trade deficits reduce employment, even if they do redistribute it. But we are still living in a world awash with excess savings and inadequate demand, where interest rates can’t fall much further because they’re already near zero. That is, we’re in a liquidity trap. And in that kind of world, it’s true both that trade deficits do indeed cost jobs, and that there are basically no benefits to capital inflows - we already have more desired savings than we are managing to invest.
One indicator of how the rules differ in these circumstances: Remember all the hand-wringing about America’s dependence on Chinese financing - and about how interest rates in the United States were going to spike if China stopped buying our bonds? Well, the Chinese have stopped buying our bonds and started selling them. But interest rates in the United States remain very, very low - still under 2% on 10-year bonds.
I’m not saying that Donald Trump has any idea what he’s talking about with regard to trade deficits; he doesn’t. But we are living in a world where, for the time being - and maybe for a long time to come, if secular-stagnation theorists are right - mercantilism makes a fair bit of sense.
Realistic Growth Prospects
I can’t wait for the presidential primary to be over, one way or the other. But it does seem to me that I should talk a bit about what a progressive can reasonably say about prospects for economic growth in the United States under a better policy regime.
There are, I would argue, three numbers that are relevant. First, there’s the rate of growth of the economy’s supply-side potential - the rate it can grow at a constant rate of unemployment. Second, there’s the size of the output gap - the amount of extra output we could gain by getting up to full employment. Third, there’s the extent to which we can accelerate the rate of potential growth.
Regarding the first number, over the past five years economic growth in the United States has fluctuated around 2%, while unemployment has gradually declined. This strongly suggests a potential growth rate of under 2%. Why so slow? Productivity has been sluggish, and the working-age population is growing much more slowly than it used to as baby boomers hit retirement age.
What about the output gap? Wage growth is still weak and inflation is fairly low, suggesting that unemployment can go significantly lower from here - maybe down to 4%, or even lower. The standard Okun’s Law relationship would say that bringing the unemployment rate down another percentage point would add 2%to real gross domestic product. Maybe we could argue for an extra-large pool of discouraged workers that raises this to 3%. That’s a lot of foregone output in an absolute sense.
However, it doesn’t make a huge difference when we’re talking about longer-term growth prospects. Closing a 3-point output gap over 10 years raises the 10-year growth rate by only 0,3%. And 2016 isn’t like 1933, when the output gap was probably around 30%, making a huge growth rate over the next decade possible when wartime mobilization finally brought about full employment, and then some.
Finally, how much can we reasonably project for a rise in potential growth? A big increase in infrastructure investment would certainly help. Other progressive priorities would be at best a mixed bag in terms of their effect on measured G.D.P. For example, guaranteed prekindergarten and child care programs might free more parents to stay in the paid work force; on the other hand, better benefits would (and should) free some people to cut hours to focus on their families.
And nobody knows the secret of raising productivity growth. In general, any economist talking about potential growth should start from a position of modesty: Nothing in what we know or have experienced in the past justifies making big promises. By all means we should try everything we can think of - but our policies should make sense even if it turns out that the effects on long-run growth are modest.
What I would say is that it’s unreasonable to assume growth over the next 10 years of more than a fraction of a percentage point above 2% - say 2,5 % at the upper end. Maybe we can do better, but we shouldn’t count on it.
Let me say that the great thing about a progressive agenda is that it doesn’t require big growth promises to make it work, because the elements of that agenda are good things in their own right. Conservatives need to promise miracles to justify policies whose direct effect is to comfort the comfortable (cutting taxes on the rich) and afflict the afflicted (slashing social insurance). Progressives only need to defend themselves against the charge that doing good will somehow kill economic growth. It won’t, and that should be enough.